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SERVICES While trade exacerbates climate change, it is also a central part of the solution because it has the potential to enhance mitigation and adaptation. This timely report explores the different ways in which trade and climate change intersect. Trade contributes to the emissions that cause global warming and is itself also affected by climate change through changing comparative advantages. The report also confronts several myths concerning trade and climate change. The Trade and Climate Change Nexus The Urgency and Opportunities for Developing Countries focuses on the impacts of, and adjustments to, climate change in developing countries and on how future trade opportunities will be affected by both the changing climate and the policy responses to address it. The report discusses how trade can provide the goods and services that drive mitigation and adaptation. It also addresses how climate change creates immense challenges for developing countries, but also new opportunities to promote trade diversification in the transition to a low-carbon world. Suitable trade and environmental policies can offer effective economic incentives to attain both sustainable growth and poverty reduction. The Trade and Climate Change Nexus The Urgency and Opportunities for Developing Countries Paul Brenton and Vicky Chemutai The Trade and Climate Change Nexus Brenton and ChemutaiTHE TRADE AND CLIMATE CHANGE NEXUSTHE TRADE AND CLIMATE CHANGE NEXUS The Urgency and Opportunities for Developing Countries Paul Brenton and Vicky Chemutai© 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone 202-473-1000; Internet www.worldbank.org Some rights reserved 1 2 3 4 24 23 22 21 This work is a product of the staff of The World Bank with external contributions. 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The Library of Congress Control Number has been requested.v Contents Foreword ix Acknowledgments xi About the Authors xiii Executive Summary xv Abbreviations xix Chapter 1 Introduction 1 Notes 5 References 5 Chapter 2 Low- and Middle-Income Countries, Carbon Emissions, and Trade 7 T rade, global value chains, and emissions 7 Understanding emissions from the developing world 9 Implications for global climate efforts and the role of trade policy 12 Examining agriculture as one of the main trade-related sectors affecting emissions from the developing world 19 Conclusions 25 Notes 26 References 26 Chapter 3 Evolving Comparative Advantages and the Impacts of Extreme Weather Events 31 The impact of a changing climate on comparative advantages 33 Extreme weather events and trade 40 Disaster response and trade restrictions Implications from a numerical model 42 Conclusions 48 Notes 49 References 50Cont Ent S vi Chapter 4 Adaptation to Climate Change Trade in Green Goods and Services and Access to Low-Carbon Technologies 53 The implications for trade of adapting to a changing climate 53 T rade in environmental goods 55 Conclusions 63 Notes 63 References 65 Chapter 5 Environmental Policies and Trade 67 The Carbon Border Adjustment Mechanism and low-income-country trade 67 Greening transport Implications for low-income-country exports 82 Conclusions 86 Notes 86 References 89 Chapter 6 Issues at the Country Level A Diagnostic Framework 93 Vietnam 93 Ethiopia 97 Notes 101 References 102 Appendix A. The 59 Countries with the Fastest-Growing Carbon Dioxide Emissions 105 Appendix B. Tariffs on Environmental Goods 109 Appendix C. Climate and Trade Policy Diagnostic Framework 113 Boxes 2.1 Modeling Postpandemic Impacts under Different T rade Scenarios 16 3.1 Numerical Model to Explore the Economic Impacts of Compound Hazards and T rade Restrictions 43 5.1 CO 2 Intensity and Carbon Competitiveness in the Steel Industry 72 5.2 Modeling the Impacts of Nationally Determined Contributions and Carbon Border Adjustments 73 5.3 Implementation Challenges for Business Carbon Management W almart’s Project Gigaton 80 Figures 1.1 Links between Climate Change and T rade 4 2.1 Changes in Annual CO 2 Emissions and GDP of the 59 Emerging Emitters, 2010–18 10Cont Ent S vii 2.2 CO 2 Emissions and GDP Growth of 59 Emerging Emitters, China, India, and the United States, 2010–18 11 2.3 Countries with Surging Emissions and Their Drivers, by Region, 2010–18 13 B2.1.1 CO 2 Emissions in Selected Countries in the Postpandemic Era under Different T rade Pattern Scenarios, 2019–40 17 B2.1.2 Poverty Rate in Selected Countries in the Postpandemic Era under Different T rade Pattern Scenarios, 2024–50 18 2.4 Categories of Exports from the Poorest Countries to the W orld Mirror Data, 2012–19 20 2.5 Cereal Production versus Yield on Harvested Land in Sub-Saharan Africa, 1960–2016 21 3.1 ND-GAIN Index V ulnerability to Climate Change in Selected Countries, by Income Level, 2019 32 3.2 Hunger with and without Climate Change in 2030 and 2050, by Region 37 3.3 W eekly Changes in Regional Gross V alue Added Relative to Predisaster Levels, When Multiscale Floods Collide with Pandemic Control and Export Restrictions 46 3.4 W eekly Changes in Regional GV A, Relative to Predisaster Levels, When Multiscale Floods Collide with Pandemic Control and Production Specialization 47 4.1 Number of Environmental Goods with T ariffs above 5 Percent, 2018 58 B5.1.1 CO 2 Intensity V alues for Steel 72 5.1 Change in Real Income and Carbon Prices Associated with Achievement of Nationally Determined Contribution T argets in a Post-COVID Scenario, by Region, 2030 74 5.2 Impacts of the European Green Deal and CBAM on GDP per Capita, by EU T rading Region, 2030 76 5.3 Impacts of CBAM on Income per Capita and Carbon Intensity of Exports to the European Union, by EU T rading Region, 2030 77 6.1 Evolution of Vietnam’s T op Five Export Products, 2007–19 95 B.1 Average Most-Favored-Nation T ariffs on Environmental Goods APEC List, by Economy , 2018 110 B.2 Average Most-Favored-Nation T ariffs on Environmentally Preferable Products, by Economy , 2018 111 Map 2.1 Rate of Growth of CO 2 Emissions, 2010–18, and GDP per Capita 11 Tables ES.1 The T rade and Climate Change Myth Buster xvi 3.1 Factors Affected by Climate Change and Impact on Crop Productivity 34 3.2 Impact of Climate Change on Crop Yields, Accounting for CO 2 Fertilization, by Region 35 3.3 Estimated Changes in Aggregate Productivity due to the Impact of Climate Change on Crop Production in Selected Countries, at the 2080 Horizon 36Cont Ent S viii 3.4 Average Most-Favored-Nation Unweighted T ariffs on Agricultural Products in Selected Countries and Regions, 2019 38 3.5 Indirect Impacts on Global GDP of a “Perfect Storm” under Different Export Restriction Scenarios 44 3.6 Indirect Impacts on Global GDP of a “Perfect Storm” under Different Production Specialization and Export Restriction Scenarios, Relative to Predisaster Levels 47 4.1 GATS Commitments for Environmental Services, by Supply Mode 62 5.1 Changes in Output Following the Implementation of Nationally Determined Contributions, by Sector and Region 75 5.2 Impact of the European Green Deal and CBAM on Selected Sectors of EU T rading Partners 77 5.3 Carbon Footprint of 1 Kilogram of Green Coffee 84 A.1 Emerging Emitters, by Stage of Economic Development 106ix Foreword All human and economic activities have an impact on the environment. Trade is no different. The production, movement, and consumption of goods and serviceswithin and across bordersis the foundation of modern society. This process brings us the energy that powers our homes and gets us to work each day. It delivers the food we need, the appliances we have come to depend on, and the medical supplies that help make us safer. Yet each stage of the process entails a fresh contribution to greenhouse gas emissions trade undeniably exacerbates climate change. It is equally true that trade is disrupted by climate change. Extreme weather events often devastate transport and logistics infrastructure. These events erode capital stock, debilitate export capac- ity, damage agriculture, and disrupt food securityall with adverse consequences for long-term development outcomes. T rade, in short, is a critical node to mobilize if the world is to achieve green, resilient, and inclusive development in the coming years. As this report demonstrates, it is a central element of the solution to climate changebecause it has the potential to enhance mitiga- tion as well as adaptation efforts. First, trade can help shift production to areas with cleaner production techniques as the world makes the transition to a low-carbon econ- omy , export comparative advantages will change, compelling countries to adapt and seize new opportunities. Second, trade promotes the spread of critical environmental goods and services that can help reduce emissions and improve environmental management today , global trade in environmental goods is estimated at more than US1 trillion annu- ally and is rising. Third, imports are critical to immediate recovery from a natural disaster, when essential items such as food and medicines are in short supply . In a world increas- ingly shaped by climate change, trade will be a crucial mechanism to address food inse- curity , support adaptation, and enable recovery from natural disasters. In the last decade, some developing countries have emerged as fast-growing emit- ters of greenhouse gases. The poorest countries, however, remain the smallest con- tributors to emissions. Yet they often suffer the most from climate change. Natural disasters disproportionately affect the most vulnerable people and the smallest firms. All developing countries therefore have an important stake in adapting to climate changeespecially in agriculture, which is central to food security, employment, and trade and is also the most sensitive to climate change. Tourism, the mainstay of the economy of many small island developing states, is also particularly sensitive to climate change. Diversifying away from sectors that are the most vulnerable to climate shocks will allow these economies to become more resilient over the long term.For Eword x The global community has an important role to play in greening trade. This report identifies several immediate trade policy measures that offer quick wins. Correcting the current bias in many countries’ tariff schedules toward imports of carbon-intensive “dirty” goods is one of them. Advanced economies can also support green trade liberal- ization of goods and services of high-priority interest to exporters in developing coun- tries. Multilateral negotiations should focus not only on tariffs on environmental goods but also on nontariff measures and regulations affecting servicesaccess to which is often vital for implementing the new technologies embodied in environmental goods. Enforceable rules should be created to ensure global discipline in the use of trade mea- sures that impede crisis responsesuch as export restrictions on food or medicine or restrictive intellectual property rights that prevent the diffusion of clean technologies to developing countries. The need for transparency and predictability in policies affecting trade is always pressing, but it is particularly urgent during a crisis. The least-developed countries also need to be at the multilateral negotiating table for matters involving trade and the environment. Policy makers in these countries have not paid much attention to trade policy as a tool for achieving environmental objectives. By contributing to the rules governing environmental trade, they can ensure that their interestsespecially regarding capacity building and data collection