Making trade greener

For decades, the dominant view among policymakers was that trade and environmental policy should be kept out of each other’s way. Limited measures to help the environment were allowed under wto rules, but only so long as they restricted trade no more than was deemed absolutely necessary. Environmental provisions crept into trade deals, but were usually framed as a way to stop partners from gaining an unfair competitive advantage by exploiting natural resources. Trade negotiators tried to slash tariffs on greener goods, including those that measure or reduce pollution, and to agree rules to curb damaging subsidies. But this broadly supported multilateralism while eliminating distortions that they mostly wanted to get rid of anyway.

The most obvious change in recent years has been in the priority that politicians (and voters) now place on environmental goals. In 2008 41% of American adults told the Pew Research Centre, a think-tank and pollster, that protecting the environment should be a top priority for the president and Congress, but that number rose to 64% in 2020. A survey of Europeans in 2021 found nearly one in five saying that climate change was the world’s most serious problem, slightly ahead of poverty, hunger, lack of drinking water and infectious diseases. Ambition has been codified in the Paris agreement on climate change of 2015 and in the un’s sustainable development goals.

What if firms were forced to pay for frying the planet. If governments get serious, a swingeing carbon tax is almost inevitable

Many questions are on the minds of business leaders in the run up to the un’s cop26 climate summit from October 31st to November 12th. For ceos making the trip to Glasgow, they range from the mundane (travel by train? eat only plant-based food?) to the profound (why am I going in the first place?). The most important question, though, is barely asked: what would happen if governments agreed, sooner or later, to commitments serious enough to limit global warming to 1.5-2.0°C above pre-industrial levels, as stipulated in the Paris climate agreement of 2015? This question has an answer most multinationals shy away from. It would send shock waves through their entire business models.

Businesses, as a rule, do not like being forced to do anything. They prefer to make voluntary gestures—just enough to keep governments off their backs. Right now they are throwing around promises to cut carbon emissions to “net zero” like confetti, on the grounds that such vows attract investors, employees and customers. It is a step in the right direction. And yet some of those pledges are paper-thin. Of more than 4,200 firms in the g20 club of big economies that have disclosed their climate ambitions, only a fifth have committed to so-called science-based targets that would keep the world on track to meet the Paris agreement’s goal. That requires firms to start slashing emissions within years, not decades. For big emitters this poses an instant threat to profitability. It strains credulity to think that altruism is enough to convince firms to act. Governments will have to apply the thumbscrews.