Tough questions for the World Trade Organization at COP27

The World Trade Organization (WTO) has a message for COP27: Free trade can help green the global economy. Unfortunately for the WTO, the quote making all the headlines is that “[w]e do not want a subsidy war.”

In an interview with Bloomberg at the United Nations’s Conference on Climate Change, Ngozi Okonjo-Iweala, the WTO’s director-general, insisted that free trade in environmental goods and services is one of the keys to achieving net zero by 2050. This theme is the centerpiece of the WTO’s 2022 World Trade Report, titled “Climate Change and International Trade,” and it was expected to sell well at COP27.

But the Okonjo-Iweala fielded some tough questions. Will countries race to the bottom over subsidies on domestically-produced renewables? Is Europe’s recent carbon border adjustment mechanism (CBAM) kosher under WTO law? And is the well-being of cobalt miners in the Democratic Republic of Congo a trade issue?

These were timely, if inconvenient, questions. The day after COP27 started, the European Union (EU) complained about the U.S.’ Inflation Reduction Act, raising “serious concerns regarding the way that the financial incentives under the Act are designed…” Consider the electric vehicle tax credits. The EU insists the local content provisions run afoul of WTO rules. Japan and Korea agree. Okonjo-Iweala warns that governments should avoid writing provisions favoring domestic over foreign content, but politically speaking, this is a lot easier said than done.

Next up, Okonjo-Iweala was asked if there should be a “free pass to help climate change?” That’s right, a free pass. Okonjo-Iweala replied that “there are subsidies that are helpful.” Maybe, but given how the WTO’s subsidies agreement works, it’s unlikely this answer will go over well in Sharm el-Sheikh.

Subsidies on green technologies often require that domestic content be used over foreign content. An ever-expanding list of WTO cases, from Canada-Renewable Energy, U.S.-Renewable Energy to UK-CfD (EU), show this temptation to be irresistible, no matter how many times these provisions have been struck down as being WTO-illegal.

Finally, Okonjo-Iweala was asked whether the EU’s CBAM is WTO legal? She said the “devil is in the detail” of how it gets implemented. What about cobalt miners in the Democratic Republic of Congo? The director-general vowed that their well-being goes to the very purpose of the WTO and its predecessor, the General Agreement on Tariffs and Trade.

Free trade in environmental goods and services can help fight climate change. Getting an expanded Environmental Goods Agreement should be a priority in this regard, zeroing out tariffs on clean tech and opening markets to exports of related services. The WTO is also the right place in which to discuss any unique challenges that governments will confront in getting to net zero.

That said, the WTO is a trade institution, not a second-best environment (or labor) accord. Okonjo-Iweala is careful to say that she doesn’t want to see a lot of litigation over climate change measures. Yet, this is exactly what will happen unless governments take up the environment (and labor) directly, rather than indirectly through trade.

The truth is that we already have a subsidy war, and the more impassioned pleas at COP27 will only add fuel to the fire.

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University, Follow him on Twitter @marclbusch.