Analysis by Mathew Carr

Nov. 23, 2021 (LONDON): The world is struggling to keep temperature rises to less than 1.5C above pre-industrial levels.

One of the few ways left to achieve that goal, the most ambitious scenario in the Paris Climate deal, would be for most of the G20 nations to join a huge climate-friendly trade group that already exists.

The U.K. and China are already seeking to become part of the Comprehensive and Progressive Trans Pacific Partnership. Taiwan is also interested.

These and other membership bids would double its size to the equivalent of more than one third of world gross domestic product. Membership by the G20 would cover almost all of the global economy.

The agreement already ranks one of the biggest trade deals, with membership of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam and about $13.5 trillion of GDP, according to Wikipedia. 

Why the U.S.’s membership is possible, or even likely, is the joint Glasgow declaration made between America and China at the UN climate talks earlier this month.

This declaration, and the probable expansion of the CPTPP, is highly relevant today because trade ministers are meeting at the World Trade Organization, where they are trying to make trade better and more sustainable after the global pandemic exposed the dire consequences of rampant nationalism during the past decade.

Global collaboration is not only needed, everyone’s climate is screwed without it. The slight thawing of U.S. China relations since the Biden-Harris administration took office and the Glasgow decisions at COP26 show global collaboration is now more possible — despite continuing geopolitical tensions.

Cooperation between nations may also help deal with self-interested behavior by uncooperative countries. On the surface at least, it seems OPEC countries and Russia are keeping fossil-fuel prices too high — and now several countries are potentially getting together to sell from their “strategic” crude supplies.

I note this may be doubly damaging for OPEC nations — it makes sense for rich-nation taxpayers to offload oil at these high prices, while they can. It’s uncertain such toppy crude prices are sustainable because demand is already falling in places such as Germany because of the climate transition (looking at long-term trends rather than pandemic recovery by itself). So, as OPEC pushes the rich countries to use their strategic reserves, it’s hurting other oil producers that will probably need to suffer lower prices in the future.

Why the CPTPP deal might be attractive to the U.S. now is because it potentially frees up trade in the green tech needed for rapid emission cuts. It would also allow for the use of carbon markets agreed under the Paris climate deal “rulebook” in Glasgow. Those markets can allow for a more cost-efficient climate transition, according this earlier analysis here.

See this section of the CPTPP text:

1. The objectives of this Chapter are to promote mutually supportive trade
   and environmental policies; promote high levels of environmental protection and
   effective enforcement of environmental laws; and enhance the capacities of the
   Parties to address trade-related environmental issues, including through
   cooperation.
2. Taking account of their respective national priorities and circumstances,
   the Parties recognise that enhanced cooperation to protect and conserve the
   environment and sustainably manage their natural resources brings benefits that
   can contribute to sustainable development, strengthen their environmental
   governance and complement the objectives of this Agreement.
3. The Parties further recognise that it is inappropriate to establish or use
   their environmental laws or other measures in a manner which would constitute a
   disguised restriction on trade or investment between the Parties.

I added some emphasis.

This CPTPP also may help overcome geopolitical tension caused by the EU’s plan to introduce carbon border adjustments from 2023.

Countries are already worried this EU plan is exactly a “disguised restriction on trade or investment.”

See this from a document published by the WTO last week. It’s republished in full below in note 2 and some relevant parts are repeated immediately here:

The EU’s Carbon Border Adjustment Mechanism means “imports will need to pay a carbon adjustment, corresponding to the price they would have paid if the goods had been produced under the EU’s carbon pricing rules (i.e. the EU emissions trading system). Any differences between the CBAM and the EU ETS will remain minor and duly justified.

“Moreover, the CBAM is designed to avoid any ‘double pricing’. Thus, if a non-EU producer can show that it has already paid a carbon price for the production of the imported goods in a third country, that amount can be deducted for the EU importer. In terms of sectoral coverage, the first phase of implementation would focus on a few carbon intensive sectors with high risk of carbon leakage (i.e. cement, iron and steel, aluminium, fertilizer, and electricity). In a second phase, authorities would consider expanding the scope to other sectors and indirect emissions.

“The CBAM will be phased in gradually starting in 2023 with a transitional phase during which only information on actual emissions would be collected. From 2026 onwards, CBAM would gradually replace the free allowances under the EU ETS (being handed out to factories and oil refineries by EU governments, for instance).”

So, this timing for the EU’s carbon adjustment at the border is key. During this time — ie the next few years — countries can use the Article 6 markets under Paris and CPTPP to dissuade the EU that it needs to even implement the measure.

Indeed, ascension to CPTPP would probably take a few years. The U.K., a relatively small country, is trying to get into the club by next year.

What’s important about the Article 6 markets are their contribution to regulation certainty and the related investment certainty for companies, which are otherwise struggling to navigate the climate crisis.

For instance, the world now knows that if countries import carbon credits for use to comply with a Paris climate target, the nation selling the credit needs to “adjust” its Paris target for 2030 — that is, they need to make the target looser by the volume of the trade. This ensures that the emission credit trades don’t result in double counting of greenhouse gas cuts.

“That clarity needed to come through,” said Guy Turner, CEO of Trove Research, on this “Cleaning Up” podcast. “That was a big success in Glasgow.”

I asked the U.S. State Dept. to comment on its interest in CPTPP. I will publish any response here.

One of the cool things about the CPTPP (other than the super cool name) is the accession process for various countries could be COMBINED.

The CPTCC Commission “can take a decision as to whether separate Accession Working Groups are needed for individual aspirant economies or the processes can be combined into a single Accession Working Group. The Accession Working Group may request guidance from the Commission.” See note three.

I’m reading this as meaning that the U.K. accession process could be turned into something much more powerful. Add China and Taiwan (a complicated mix already, for sure). But, why stop there? USA, India, the EU, Brazil, hey, Russia, too?

Some of these countries are not in the Pacific …but clearly in a world of atificial intelligence and blockchain, that’s not crucial.

Post-Brexit U.K. — that’s not in the Pacific, either.

And there you have it. A ready made carbon club that saves the climate and helps fix global injustice.

There’s a few years to do it, before the EU carbon border adjustment hits.

U.S. Trade Representative Katherine Tai on Nov. 10 expressed no appetite for having the United States rejoin the trade deal now known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), according to Asahi.

Yet, that was before the end of Glasgow climate talks.

See this with Australia Trade Minister Dan Tehan and NZ Trade Minister Damien O’Connor on Nov. 19, 2021:

“Journalist: And, ministers, do you think the US has an appetite for joining the CPTPP?

Dan Tehan: Look, I think in first instance their focus is very much on their Indo-Pacific framework (a President Trump plan which is not well explained but I did find a document online from the Trump archives from January [CarrZee, note four below]). And I think that’s a good and welcome focus to see them down in the Indo-Pacific engaging, working with like-minded countries, to shape their future economic engagement in the region is very welcome and I can understand why this very much is their focus.

There are a lot of areas, sort of areas of the new economy, that we can work in partnership with the US on, and the countries of the Indo-Pacific can work with the US on, whether it be digital, whether it be the green economy, whether it be supply chains. These are all issues which we can seek to explore and advance. So, I think, they’re rightly focused on the idea of this framework and that’s something that we’re happy to really put a focus on.

Damien O’Connor: I think it’s fair to say never say never, but the US has indicated on numerous occasions that it’s not focused on CPTPP as a trade agreement they want to re-engage with. But there are other avenues, as I say, through the framework, that they want to, you know, work with us in an area of growth and trade and opportunity.

Journalist: And have either of you spoken to Taiwan about its bid to join the partnership?

Dan Tehan: Look, I’ve had discussions with Taiwan throughout this year. I haven’t had one since they asked to accede to CPTPP. I’m sure I will have future discussions with the Taiwanese but at this stage I haven’t had a discussion post their seeking accession to CPTPP.

Damien O’Connor: And no, we haven’t either. And [indistinct] of course under application would mean that they would have to reach out and connect with all members of CPTPP and I’m not aware, you know, of their engagement with other members. I haven’t spoken to them.”

So the future of the CPTPP does seems bound up to some degree in the Taiwan-China-US nexus – let’s hope those three don’t ruin everyone’s climate.

(Adds Australia and NZ ministers; Trump document; joint assession; assession document; WTO trade and environment document; Trove; importance of cost efficiency; more to come)

NOTES

Note one:

See my February story on CPTCC below for Foresight Climate & Energy in Denmark, before China and Taiwan said they were interested in that trade deal. Link: https://foresightdk.com/brexit-may-boost-global-cooperation-on-carbon-trading-clubs/?token=CARBON_CLUBS

READOUT – 26/FEBRUARY/2021

Brexit may boost global cooperation on carbon trading clubs

Brexit, by excluding the UK from Europe’s carbon emissions trading system, has stripped British industry of the value of its carbon credits. Rescue options being considered by the UK government include linking back to the EU market, but also taking the risk of joining an immature multinational carbon trade cooperation

Brexit may boost global cooperation on carbon trading clubs

Thrown out of the European carbon trading system, UK emitters of greenhouse gas are in climate-policy limbo

SHAMBOLIC Without knowing the price of carbon over the next few years, British industry and energy providers are unable to price their own products effectively

CLUBBING Should the CPTPP trans-Pacific partnership become a club of emissions-trading countries with British membership sparked by Brexit, the EU may ultimately decide to join as well, benefitting the global energy transition

SMALL WORLD EFFICIENCIES As carbon markets and the world of trade are increasingly digitised, geographic proximity might not be quite so important; countries can cut more emissions for each dollar or euro spent if they work together on carbon pricing and trade deals

KEY QUOTE If the EU ultimately rejects the UK as an emissions-trading partner, other countries may find a partnership with Britain attractive as they seek a low-cost transition underpinned by lots of GDP-enhancing trade

With several weeks still remaining before UK industry can buy and sell emission allowances in a new post-Brexit British carbon market, the country’s factories and power stations are striking contracts to sell their manufactured products or electricity without knowing a key element of their costs—carbon. Meantime, European emission allowances are surging to previously unseen levels. Prices for the credits reached above €37 a tonne of CO2 towards the end of February 2021 more than double their value a year earlier after taking a plunge at the beginning of the global coronavirus pandemic in early 2020.

Carbon markets are used to reduce greenhouse gas or carbon emissions by regulating limits and allowing for the trading of these units between entities. The EU’s Emissions Trading System (ETS) was introduced in 2005. Participating installations must surrender emission allowances to match the emissions they produce. Those who can easily reduce their emissions at a lower cost can sell their extra allowances to other entities which find it more difficult or expensive. Balancing the supply and demand of allowances creates a traded price for carbon.

Being unable to predict the cost of carbon makes it difficult for British emitters to put a price on their products and might leave them exposed to market forces because they have no way of using forward carbon markets to hedge against sky-high levels of CO2, says Lawson Steele, an analyst with merchant bank Berenberg. “There’s a limbo out there at the moment.”

Ideally, a European company holds enough carbon allowances to cover any contract to sell its products so it can be sure it is locking in the profit margin. Without knowing the price of carbon over the next few years, manufacturers and energy providers are unable to price their own products effectively. Carbon allowances now make up more than half of Europe’s wholesale power costs. “It’s a shambles,” says Louis Redshaw, founder of Redshaw Advisors, a carbon risk management and procurement firm in London.

Intercontinental Exchange (ICE), a global exchange group and provider of marketplace infrastructure, won a deal to hold auctions of UK carbon allowances starting in the second quarter of 2021. The sales of the allowances would start by the middle of the year and ICE plans to offer futures in the same time frame, giving UK emitters the ability to manage the risks of their exposure.

ON THE OUTSIDE

Linking back into the EU ETS system seems to be the British government’s Plan A. It is the most natural way to go, Steele says. Meantime, the UK’s carbon emitters could use the EU market as a proxy to hedge risks, he adds. Many generators in the UK which have exposure across Europe may be holding on to their existing cache of EU allowances instead of selling them to deal with the possibility of a drastically different UK carbon price.

Once the first UK auctions have occurred to provide a price signal and free allowances have been distributed, a secondary market will be established and the new market may settle down, says Guy Buckenham at EDF Energy, a French-owned multinational. The UK should consider “front-loading” the volumes to be auctioned to ensure adequate liquidity in the market as soon as possible, Buckenham adds.

When the UK programme could link back into the EU market is unknown. “Both sides have been through a long and difficult negotiation and they’re probably getting their breath back. We certainly hope and expect to see that linkage. The EU emissions trading system has to be the most obvious candidate for the UK to link with,” says Buckenham.

RISKIER ALTERNATIVES

Linking to other carbon markets that are less robust and less mature, perhaps with lower ambition in terms of what they are trying to achieve, may be riskier. Such markets may also not be as effective in reducing global emissions, Buckenham says. Even so, the UK is exploring a range of alternative deals from Asia to Africa. It may not necessarily need to link with the EU market immediately. As carbon markets and the world of trade are increasingly digitised, geographic proximity is less important than it once was for climate cooperation and trade alignments.

The UK’s international trade secretary Liz Truss has applied for the country to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). The $12 trillion partnership will reduce tariffs on exports by UK industries to member nations, including on food and cars, while also creating new opportunities for cutting the cost of the climate transition and selling services linked to the shift, such as legal advice and finance.

The members of CPTPP are interested in carbon pricing, which could be of benefit to the UK. Canada and New Zealand already have carbon markets. Singapore, another member of the partnership, wants to be Asia’s carbon-market trading hub, should one evolve. South Korea, also hoping to join the partnership, has Asia’s biggest carbon market after China. There is speculation the US and China could also be interested in joining the partnership.

COOPERATION CUTS COSTS

UK government intentions are to align new trade agreements with trade policy that supports national ambitions to build back greener and lead the global green industrial revolution. Officially that includes promoting clean growth, reaffirming the UK’s commitment to international standards, increasing trade in goods and services that can help to reduce emissions, while encouraging other countries not to sacrifice their environmental protections to gain a trade advantage. The UK has trade deals with most of the CPTPP members which could ease a path to membership of the partnership.

Countries can cut more emissions for each dollar or euro spent if they work together on carbon pricing, trade deals, agreed energy efficiency standards and green finance. Climate disclosure regimes could help that cooperation. Even if the UK is ultimately rejected as an emissions-trading partner by the EU, other countries may still find it attractive to link with Britain as they seek a low-cost transition underpinned by lots of GDP-enhancing trade.

Should the CPTPP become a club of emissions-trading countries, the EU also may ultimately decide to join as well. The EU’s biggest economy, Germany, was part of a group of countries seeking ambitious global carbon markets immediately after the 2015 Paris climate deal was struck. Many of the other countries that were involved at the time are now members of the CPTPP.

BRILLIANT BORDER TACTIC

Whether the EU’s carbon market remains separate or not, the bloc’s policies are having an impact globally. The plan for a carbon border adjustment mechanism to protect the EU’s industry from dirtier external competition is seeing other countries become more ambitious in rescuing our climate.

Under the plan, products exported to the EU would be disadvantaged at the border if the climate policy of the originating country is deemed insufficiently ambitious. UK prime minister Boris Johnson is reportedly considering using his G7 presidency to try and forge an alliance on carbon border taxes, adopting the EU’s idea for the UK and potentially other nations. Any action in this direction would make corporations with factories in the EU and UK think twice about increasing production in other countries with less-ambitious climate policy.

The EU’s border mechanism plan is particularly spurring a green shift in China, the US, and more broadly across Asia, the Americas and Africa. “The carbon border adjustment mechanism by the EU is a brilliant tactic,” says Ken Schneider, founder of Grey Epoch Trading, a US firm that handles carbon options trading. “It’s a great weapon on many fronts.” Faced with the real possibility of border carbon adjustments making trade with the EU more expensive, word is that the CPTPP has not ruled out making carbon prices or carbon markets mandatory among its members. That would require a way to determine whether a country’s climate policy is sufficiently ambitious to become a member of a CPTPP—or G7—carbon club without triggering a border adjustment at the door of the huge EU market.

Other options for determining whether a country is ambitious enough to join any international carbon club might include the emissions intensity of its economy—CO2 output per unit of GDP—or the emissions intensity of a country’s power grid, says Ashutosh Shastri of London-based EnerStrat Consulting. “All future trade deals will have an underpinning of climate protection. That’s the only way these deals can be sold, given domestic politics,” says Shastri.

Still, setting up carbon markets for industries such as offices and buildings may not work. The risk is that it may lead to fuel switching from coal to natural gas instead of cutting energy demand, says Susanne Dyrbøl, from Rockwool Group, a Danish manufacturer of building insulation material operating in 22 countries. “The people living in fuel poverty will be the ones being hardest hit by carbon pricing.”

Joined-up energy efficiency policies will be a better way than carbon trading to get the dramatic reductions in emissions from buildings that are required in the next ten years and beyond, Dyrbøl says. Direct industry-based measures could become another element of a carbon club such as the CPTPP or G7, alongside environment and social governance rules, green finance measures and climate disclosure standards.

GLOBAL CARBON TRADE

The timing of when a global carbon market could form is potentially coming into focus. The UK and Canada both want to start making climate risk disclosure mandatory by 2023, which could potentially underpin a market forming about 2024. That would also be the first year after the pilot phase of a carbon offsetting trading programme for the aviation industry and gives the US and China a chance to finalise their climate plans.

The world needs to cut emissions by about three billion tons a year through 2030 to stay within reach of hitting the Paris accord’s target for stopping global climate temperatures from rising more than 1.5C above pre-industrial levels. “What the private sector needs is really this clear signal and commitment from governments,” Rockwool’s Dyrbøl says.

TEXT Mathew Carr

Note two:

WTO Document – trade and environment:

PHOTO:

Note three:

Link: https://www.mfat.govt.nz/assets/Trade-agreements/CPTPP/Accession-Process.pdf

Note four — Indo Pacific “plan”:

Link: https://trumpwhitehouse.archives.gov/wp-content/uploads/2021/01/IPS-Final-Declass.pdf