Will trade and climate clash or align? 4 future scenarios played out

Climate change urgently requires countries and companies to strengthen their efforts in accelerating emissions mitigation measures. Trade in the products and services needed to drive decarbonization will increase, and associated production and consumption flows will shift. Domestic measures being put forward by countries to deliver on their net-zero goals, such as carbon pricing, subsidies, renewable mandates, energy efficiency standards and public procurement commitments will also increasingly have an impact far beyond borders of the jurisdictions implementing them.

For example, 79 carbon pricing initiatives are in place today across national and subnational jurisdictions, covering 23% of global greenhouse gas emissions. That’s up from seven initiatives 20 years ago.

We call this interaction between climate efforts and their impact on traded products and services in the global economy “carbon competitiveness”. Carbon competitiveness will affect opportunities, risks, and trade-offs inherent in the effort to meet net-zero.

Several recent policy developments have accelerated the trend towards global, rather than simply local impact, throwing “carbon competitiveness” questions into the headlines. Some examples include the EU’s Carbon Border Adjustment Mechanism (CBAM), which for the first time plans a carbon price on certain imports into the region, the US Inflation Reduction Act (IRA) that links local content requirements to green subsidies, and an EU-US effort to cut a bilateral deal on green steel and aluminium trade. All of these will have consequences for governments and businesses worldwide.

To help stakeholders understand the dynamic “carbon competitiveness” landscape, the World Economic Forum and Boston Consulting Group (BCG) consulted with experts, industry leaders and governments to generate possible, fictional futures for the relationship between action on climate change, trade flows and trade policies. We have created four scenarios based on the interaction of two key variables: the degree of trade-related collaboration among countries; and the extent to which countries’ climate mitigation measures are in line with the Paris Agreement and accompanied by adequate adaptation measures. Our timeframe is 2023-2030.

In this future, international cooperation on climate measures and trade competitiveness topics has avoided destructive commercial disputes, which could have threatened key climate action supply chains. Trade in green goods and services has surged. Development banks have teamed up with corporate alliances to improve supply-chain decarbonization in emerging and climate-vulnerable economies. We see global emissions decline by 43% from 2019 levels in line with the pathway to meet Paris Agreement goals.

In this this future, protectionism is rising as countries seek to shield domestic companies from carbon leakage, but in a non-collaborative way. Non-inclusive “climate clubs” – green trade deals or resource access arrangements, but with high barriers to entry, or geopolitically-linked – are deployed, creating a complex landscape for business to navigate. Relative differences in green subsidies lead to unbalanced green investment, and the poorest nations suffer the consequences. Emissions decline by 30% from 2019 levels, which is not enough to curb the worst impacts of climate change.

In this future, there is increasing conflict over critical materials, which is slowing down climate efforts and encouraging protectionism. Powerful nations also seek to control the supply chains most threatened by climate change, including food, and poverty rates are on the rise. Investment is focused on adapting to climate change, pulling resources from mitigation, and we see global emissions increase significantly to 125% of 2019 levels.

In this future, international talks on climate mitigation and trade competitiveness are surface level. Governments have pushed back emissions-reduction targets, and negotiations on green goods and services trade also falter. Efforts to deal with key supply-chain risks in the face of growing climate impacts produce little action, and global growth slows. Emissions are up to 115% of 2019 levels.

These scenarios have been deliberately drawn in bold terms, and it is important to remember that none of the scenarios is likely to develop exactly as described. Still, the goal is to stimulate thinking about their strategic implications. Given these futures, what should stakeholders do today to best manage their carbon competitiveness risks and opportunities?

Following community discussions, we have generated five recommendations for governments, and five recommendations for business. While it is unrealistic to expect the world to move seamlessly to a unified global effort to tackle climate change in less than a decade, there are certainly steps the public and private sectors can take to have the best change to leverage trade for climate action.