Dossier: Supporting the Green Transition

The crucial role of the WCO in trade liberalization of climate-friendly goods

By Emilie Eriksson, legal adviser, National Board of Trade Sweden

The National Board of Trade Sweden recently published a report entitled Trade and Climate Change – Promoting climate goals with a WTO agreement, which shows that trade policy-makers can do more to contribute to the promotion of climate goals. Customs administrations, through the World Customs Organization (WCO), have a crucial role to play, writes Emilie Eriksson, legal adviser and co-author of the report.

In a report entitled Trade and Climate Change – Promoting climate goals with a WTO agreement, the National Board of Trade Sweden analysed the possibilities for the World Trade Organization (WTO) and its members to promote climate goals through a trade agreement. We examined issues specific to liberalizing trade in climate-friendly goods and services and reforming fossil fuel subsidies. As regards liberalizing trade in climate-friendly goods, the report highlights the importance of involving Customs officials in discussions, and recommends the appointment of a body of experts, including WCO Secretariat officials, to support negotiators. The report also highlights the importance of cooperation by negotiating parties in the WCO to better align the Harmonized System (HS) nomenclature to support the climate transition (for example, by developing new HS codes for the most important climate-friendly goods). This article looks at the ongoing discussions related to the liberalization of trade in environmental and climate-friendly goods, and discusses issues of special relevance for Customs and trade professionals working at and with the WCO. It also highlights challenges and opportunities for future work.

Ongoing discussions related to the trade liberalization of environmental and climate-friendly goods

Trade and the environment has been a long-standing topic in the WTO, and various – so far unsuccessful – attempts have been made to liberalize trade in environmental goods. The most recent of these related to the Environmental Goods Agreement (EGA), on which negotiations were halted in 2016. Outside the WTO, the Asia-Pacific Economic Cooperation (APEC) successfully concluded environmental goods negotiations in 2012.

The urgency of the climate crisis has given new momentum to negotiations in the WTO on environmental goods and services. In December 2021, a Ministerial Statement was launched in the context of the Trade and Environmental Sustainability Structured Discussions (TESSD). Of the WTO’s 164 members, 71 members signed up to the Statement. One of the issues that the members agreed to was to explore opportunities and possible approaches for promoting and facilitating trade in environmental goods and services to meet environmental and climate goals, including through addressing supply chain, technical and regulatory elements. TESSD members have agreed a work plan to this end. The goal is to deliver tangible outcomes by the time of the Thirteenth WTO Ministerial Conference[1]. In parallel, a smaller group of countries, including New Zealand, Costa Rica, Fiji, Iceland, Norway and Switzerland, are also negotiating the liberalization of environmental goods and services as part of the negotiations on the Agreement on Climate Change, Trade and Sustainability (the ACCTS initiative).

Definition issues – what is a climate-friendly good?

Earlier negotiations have involved negotiations on “environmental goods”. As our focus was limited to identifying actions that can contribute to a reduction in greenhouse gas emissions (i.e. climate change mitigation), we chose in our report to focus on “climate-friendly goods”, which can be considered a subset of environmental goods. The main rationale for liberalization of climate-friendly goods is that this would lower the cost of reducing greenhouse gas emissions and promote the spread of climate-friendly technology, as well as the smoother flow of goods across borders. The report therefore recommended that negotiators aim for zero tariffs and address non-tariff barriers to as many climate-friendly goods (and their production inputs) as possible.

But what is defined as a “climate-friendly good”? Indeed, the main issue in previous negotiations on environmental goods has been that of definition and selection of goods for liberalization. This would also need to be handled in any future negotiations. The APEC environmental goods negotiations utilized the OECD/Eurostat definition[2] to identify goods suitable for accelerated trade liberalization. The definition requires environmental goods to have an environmental end use in terms of environmental protection or resource management.[3] However, the end use criteria in the OECD/Eurostat definition create two main problems: first, how to manage dual use goods that have both an environmental and a non-environmental end use (such as a pipe that can be used in a wastewater plant or to transport oil[4]); second, the definition fails to include so-called “environmentally preferable products” (EPPs), which cause less environmental damage in terms of production, consumption or disposal than substitute goods.[5] Examples include recycled paper or sustainable building goods.

With no ideal definition and with a range of lists identifying environmental goods,[6] definition issues are an important part of negotiations. While a clear definition would be desirable,[7] it is not vital as the APEC and EGA negotiations overcame the challenges by identifying candidate goods under environmental categories such as “cleaner and renewable energy” and then negotiated lists based on suggestions.

Further categorization under the Harmonized System

The dual use problem can also be solved in a couple of ways. These include the use of “ex-outs”, which specify goods in more detail than is provided by the six-digit HS code of the WCO, or liberalization of the good for both environmental and non-environmental use.[8] The EGA negotiations made extensive use of ex-outs to include goods and inputs with dual uses.

As the HS is used in tariff negotiations, definitions have to align and conform to these classifications. However, there is no specific chapter for environmental or climate-friendly goods, and the level of precision for descriptions within the HS for environmental goods varies between subheadings. Some six-digit subheadings identify a specific environmental good,[9] while other subheadings contain both environmental and non-environmental goods.[10]

The creation of ex-outs thus offers an opportunity to deal with the dual use problem and to specify goods in more detail than is provided by the six-digit code. This has been done by adding further sub-categorizations at 8-, 9- and 10-digit levels in a manner similar to that of nations and trading blocs for national and regional tariff schedules.[11] The recent HS review for the 2022 tariff schedule also added several new goods that are relevant to the climate[12] and which could easily be included in a trade negotiation. The forthcoming review of the HS for 2027 also offers an opportunity to specify further climate-friendly goods. More precise codes would first and foremost facilitate more targeted liberalization, and lower administrative hurdles for trade negotiations. Moreover, more precise codes would allow for other trade policy instruments, such as rules of origin and standards, to be better aligned with climate policy. In our view, it would therefore be highly relevant for research to be conducted in collaboration with industry to identify technologies where specific HS6 codes could be developed and thus facilitate more specific liberalization. The parties to a trade agreement could also commit to cooperation in the WCO to better align the HS nomenclature to support the climate transition.

Environmentally preferable products

As mentioned above, another issue in previous negotiations has been whether to include so-called “environmentally preferable products” (EPPs). EPPs are defined in relation to alternative products, raising the question of where to draw the line on the scale from the most damaging to the most beneficial goods. Decisions can be informed by criteria such as carbon footprint or lifecycle approaches.

There are legal limitations on liberalizing certain EPPs. The non-discrimination obligations (national treatment and most-favoured nation) in the WTO’s General Agreement on Tariffs and Trade 1994 (GATT 1994) do not allow discrimination between so-called “like products”[13] (for example, products with the same physical characteristics but with differing production emissions). There are possibly long-term solutions, but political complexity makes it questionable if these are realistic in the near future. We therefore did not consider it advisable or desirable to include EPPs that are considered to be “like products”.

However, there are good climate reasons for including EPPs that can be readily identified, such as “products distinguishable by some observable or measurable difference in their chemical or physical characteristics”[14], and those with a specific HS code, which could be considered to not be “like products”. In this regard, WTO members can contribute to the development of specific HS codes for EPPs via cooperation in the WCO.

Technological advancement and review clauses

The fast pace of technological advancement and changing product features and standards means that lists can quickly become outdated. To deal with these issues, we recommend in our report that a trade agreement include review provisions so that addi­tional goods can be added, along with clauses to ensure that a review occurs every four or five years. Ideally, such a review should also be coordinated with an update to the HS nomenclature. Consequently, it would also be important to continuously involve and coordinate trade liberalization efforts with Customs and trade professionals working at and with the WCO.

Overview of existing lists which include climate-friendly goods

After reviewing the issues related to the definition and selection of climate-friendly goods for liberalization, we analysed the potential to include climate-friendly goods in negotiations, based on a selection of existing goods lists (below for an overview of the lists). The lists were selected based on their relevance to identifying goods with the potential to mitigate greenhouse gas emissions, and were drawn from previous negotiations in the WTO and APEC, as well as from the grey literature. Most of these lists are outdated and would need to be reviewed in light of the technological development that has occurred since their publication.

Even though our aim was not to present a specific list of goods, the conclusion from the analysis was that there is huge potential to identify and liberalize climate-friendly goods under a trade agreement. From the lists examined, we identified more than 450 unique HS6 codes containing over a thousand goods or production inputs which can be considered climate-relevant. Our suggestion would be to include as many climate-friendly goods as possible in any negotiations to ensure the largest climate benefits.

The assessment of new and existing goods’ greenhouse gas mitigation credentials is technical and requires specific expertise. The appointment of a body of experts to provide guidance would therefore be a suitable way to support negotiators’ assessments. Such a group could comprise experts in climate, industry and trade negoti­ation, as well as officials from Customs administrations and the WCO Secretariat to advise on HS classification and updates to the HS nomenclature.

Our report also compared the categories used for selecting relevant goods in the EGA negotiations with greenhouse gas mitigation options identified by the Intergovernmental Panel on Climate Change. We identified gaps that might be addressed with the inclusion of new categories that would broaden the scope, i.e. climate infrastructure, technologies to support behavioural change, circular economy, and agriculture, land and forest management (see diagram below).

Developing countries

In previous environmental goods negotiations, there has been limited participation by developing countries. There has been a concern that imports could disrupt home industries and employment. However, from a climate perspective, the participation of developing countries is highly desirable. The benefits are cheaper access to low carbon technologies, welfare gains from improved environmental management, and opportunities to participate in global value chains for climate-friendly goods.

Suggestions to encourage participation from developing countries include broadening the scope of negotiations to encompass, for example, more EPPs and agriculture-based prod­ucts (for which some developing countries have a comparative advantage). Other suggestions include providing support to identify and list goods of interest for developing countries and capacity building.

Going forward

To conclude, a liberalization of trade in climate-friendly goods in the WTO could contribute to the climate transition and help countries achieve the goals of the Paris Agreement. It would reduce the cost of greenhouse gas mitigation actions, and promote the spread of climate-friendly technology and the smoother flow of goods across borders.

The National Board of Trade Sweden’s report highlights the importance of including relevant WCO working bodies and HS experts in discussions on any new negotiation. One of our key recommendations in the report is to appoint a body of experts to support negotiators on technical matters. Such a group could comprise experts in climate, industry and trade negotiation, Customs officials and WCO Secretariat representatives. We also suggest parties to a trade agreement could commit to cooperation in the WCO to better align the HS nomenclature to support the climate transition. As well as facilitating liberalization of climate-friendly goods, more precise codes allow for other trade policy instruments, such as rules of origin and standards, to be better aligned with climate policy. We recommend that an agreement should ideally include clauses to ensure that a review occurs every four or five years, and that such a review be coordinated with HS code revisions so that new codes can be added to the lists. Customs, through the WCO, could make an important contribution in all these areas.

More information
emilie.eriksson@kommerskollegium.se

[1] The date for the MC13 had not been set yet by the time the magazine went to print in June 2022. The WTO Ministerial Conference usually meets every two years and the MC12 took place in June 2022.

[2] “The environmental industry consists of activities which produce goods and services to measure, prevent, limit or correct environmental damage to water, air and soil, as well as problems related to waste, noise and eco-systems. Clean technologies, processes, products and services which reduce environmental risk and minimise pollution and material use are also considered part of the environmental industry”, the Organisation for Economic Co-operation and Development (OECD) (2016), OECD Expert Workshop on Optimising Global Value Chains for Environmental Goods and Services: Summary of the Workshop. OECD Publishing, Paris.

[3] Eurostat (2009), The Environmental Goods and Services Sector. Luxembourg: Office for

Official Publications of the European Communities.

[4] World Bank (2008), International trade and Climate Change: Economic, Legal, and Institutional Perspectives.

[5] Balineau, G. & De Melo, J. (2013), Removing barriers to trade on environmental goods: An appraisal. World Trade Review. 12. 10.1017/S1474745613000074.

[6] See Sugathan, M. (2013), Lists of Environmental Goods: An Overview, ICTSD, for a review of different institutional settings in which lists have been produced. In addition, definition issues are taken up in other fora.

[7] Cosbey, A. (2015), Breathing Life into the List: Practical Suggestions for the Negotiators of the Environmental Goods Agreement.

[8] Kim, J. A. (2007), Issues of Dual Use and Reviewing Product Coverage of Environmental Goods. OECD Trade and Environment Working Papers 2007/1, OECD Publishing.

[9] For example, HS 8502.31, electric generating sets, wind powered.

[10] For example, HS 7308.20, towers and lattice masts, can be used not only for wind turbine towers, but also for oil platforms.

[11] The United Nations Environment Programme (2014), South-South trade in renewable energy: a trade flow analysis of selected environmental goods.

[12] For example, energy efficient LEDs, new heavy electric vehicles, Steenblik, R. (2020), Code Shift: The environmental significance of the 2022 amendments to the Harmonized System. International Institute for Sustainable Development.

[13] Articles I and III of the GATT 1994.

[14] Steenblik, R. (2005), Liberalising Trade in ‘Environmental Goods’: Some Practical Considerations. OECD Trade and Environment Working Papers, No. 2005/05, OECD Publishing, p. 3.