Can the Environmental Goods Agreement trade talks boost energy efficiency?

This article first appeared in BioRes, Volume 9, Number 2 (ICTSD)

Energy efficiency measures are sometimes described as the “hidden fuel” in today’s energy mix. This article explains how a trade liberalising agreement could help scale up products related to energy efficiency.

WTO members of an initiative geared towards concluding an Environmental Goods Agreement (EGA) held a fourth discussion round at the end of January. The talks focused on possible goods related to cleaner and renewable energy as well as energy efficiency to include in an eventual deal. Several EGA participants put forward indicative product nominations along these lines, including products related to hydro-electric equipment, methanol, and hybrid vehicles. EGA participants kick off their next discussion round today focusing this time on goods related to environmental monitoring, analysis, and assessment, environmentally-preferable products, and resource efficiency.

In each round so far, EGA participants have discussed products related to one or more categories of environmental goods, in a bid to ensure the environmental credibility of an eventual list slated for tariff cuts. However, not all EGA participants have yet come forward with indicative product proposals, and EGA participants are only expected to provide their initial product nominations around the beginning of April. After that date tougher talks on the EGA’s scope, tariffs, timeframes, and overall shape are expected to begin. Participants have said that they hope to have made progress on these negotiations in time for the WTO's tenth ministerial conference scheduled from 15-18 December in Nairobi, Kenya.

The current fossil fuel dependent energy supply sector is the largest contributor to global greenhouse gas (GHG) emissions, responsible for driving planetary atmospheric warming, according to UN climate scientists. Conventional energy sources still account for some 80 percent of the world’s energy supply.

The EGA talks, given the consideration of cleaner energy as well as energy efficiency products, represent an excellent opportunity for trade policymakers to complement emissions abatement and climate change mitigation efforts. Energy efficiency measures, in particular, are often considered to be low-hanging fruit in the fight against climate-warming emissions. Such measures could be further advanced by the inclusion of relevant energy efficiency technologies in a final EGA list.

Energy efficiency to tackle climate change

The International Energy Agency (IEA) expects that by 2050, energy efficiency alone will account for 38 percent of cumulative emissions reductions required to limit global warming below a two degree Celsius rise from pre-industrial levels, with the rest being made up by renewables deployment at 30 percent, carbon-capture and storage at 14 percent, and fuel-switching and nuclear energy at 18 percent. A paper prepared by the World Energy Council has also found that without past energy efficiency improvements G20 countries would be consuming 32 percent more energy today.

In certain cases the use of specific technologies or products can have a major impact on energy consumption and consequently GHG emissions. For instance, motor-driven equipment accounts for around 54 percent of electricity use in manufacturing. The deployment of more efficient electric motors and drives alone is estimated to save between 20-30 percent of global electric motor demand or 10 percent of all global electricity consumption.

Trade to boost energy efficiency technologies

Trade liberalisation can enable energy efficiency technologies such as solar water-heaters, light-emitting diodes (LEDs), and lighting fittings to circulate more freely in world markets unhindered. The removal of trade barriers lowers the costs of purchasing and deploying such goods for industries, governments, and individuals alike.

Keeping markets open for the highest efficiency class of motors and LEDs, for example, could help in their wider dissemination and reduce the costs of improving industrial and residential energy efficiency. Such high-impact energy efficiency products represent promising sweet spots between trade and environment interests and could be a useful focus area for EGA negotiators.

Trade liberalisation efforts will of course need to be complemented by domestic energy-efficiency policies, regulations, and incentives (PRIs) that constitute major drivers for national market transformation. Such PRIs include minimum energy performance standards (MEPS) and comparable labels for products. However, keeping markets open for energy efficiency technologies by lowering or eliminating import duties represent a policy measure that governments can easily adopt and implement, whereas many domestic PRIs may take time to put in place.

While the case for including energy efficiency products in the EGA is clear, attempts to do so will likely throw up both challenges as well as opportunities, which should be taken into account by policymakers.

Which energy efficiency goods to include in the EGA?

The ease of identifying energy efficiency technologies is an important consideration. Energy efficiency technologies can be conceptualised in terms of both energy efficient products in a performance-based sense relative to other products with the same end-use, as well as energy savings products such as LEDs or plug-in hybrid electric vehicles that minimise system-wide or economy-wide energy consumption – particularly fossil fuel based – when deployed.

From a trade liberalisation perspective it is more challenging to include the former category of products. An energy efficient product such as a highly-efficient air-conditioner, for example, may not be easily identifiable in the absence of internationally accepted certification and labelling. This makes it difficult for trade policymakers to extend zero duties based on the World Customs Organization’s Harmonised System (HS) of product customs classifications that rests on the physical description of products.

On the other hand, however, a large number of energy savings products such as LEDs and smart electricity meters or gas meters, may be more easily physically identifiable. Submissions made by WTO members during earlier Doha Round attempts to liberalise environmental goods and services included a large number of energy savings goods rather than energy-efficient products per se. This is also the case for the list of 54 HS subheadings selected by the Asia-Pacific Economic Cooperation (APEC) alliance for applied tariff cuts to five percent or less by the end of this year. EGA participants have said they plan to build on and add to the APEC list.

However, even in the case of energy savings goods, many of these may be grouped together with unrelated products under the same HS subheading at the 6-digit level. For instance, plug-in hybrid electric vehicles are grouped together with gasoline vehicles of the same class under the same HS-6 digit code. The HS covers around 5,000 separate groups of goods identified by a 6-digit code and only few HS subheadings exclusively or predominantly include environmental goods. While zero duties could be applied to the entire 6-digit subheading this would mean that unrelated products would also benefit from tariff concessions.

In addition a large number of technologies and components, such as boilers and pipes, may enable energy savings gains only when deployed as part of a system and so individually it may sometimes be difficult to identify such products as being energy-efficient in and of themselves. Other products may have uses in both energy efficiency as well as non-energy efficiency contexts.

EGA delegates and capitals will need to address these considerations as they prepare to submit their initial lists in April. The scope and ambition of the EGA import tariff liberalisation will then depend on modalities hammered out between participants in the coming months.

The final list will ultimately be shaped by how ambitious EGA members want to be, whether they have strong sensitivities for specific products or HS 6-digit subheadings, and practical considerations such as the sunk administrative costs associated with narrow or selective implementation of zero duties. In the latter case, consideration should be given to the fact that the benefits of a selective product liberalisation may be eroded over time, due to broader multilateral or regional trade liberalisation initiatives on all products.

Can the EGA keep up with technology?

An important consideration for EGA negotiators will be whether newer energy efficiency technologies that emerge in time will automatically benefit from import duty concessions extended under the agreement.

This could be the case if the newer technology – potentially representing either a marginal or a dramatic improvement on the old product – falls under an HS subheading that enjoys the tariff concession. In other cases, if the new technology is significantly different and does not fall under the same HS subheadings as the older product or does not yet have an HS subheading assigned to it, EGA members might need to reflect on how best to include it.

To cope with such scenarios delegates should come up with a review mechanism or a similar system to take stock of product developments and ensure that any new energy efficiency technologies left out and deserving of low or zero tariffs are brought into the agreement in years to come.

Moving ahead

While it may be impractical and unwise to raise import duties on products with a low energy efficiency, trade policy can provide at least a competitive leg-up for the most efficient products, initially by ensuring zero tariffs and keeping markets open. Import tariffs may be less of a market access barrier for energy efficiency technologies, however, as compared to non-tariff measures like standards and certification requirements. Import tariffs are nonetheless readily quantifiable and the easiest trade barrier to address initially.

EGA negotiators should seize the opportunity to move forward on import tariff liberalisation on energy efficiency technologies and explore various options for doing so. One of these could involve the categorising of possible energy efficiency product groups into various tiers based on their ease of identification within the HS system as well as their relevance to energy savings in a broader economy-wide context. A first tier of products could comprise those easily identifiable as relevant to energy savings such as LEDs and various types of insulation material.

A second tier would include energy savings products that are easily identifiable physically but are grouped together with non-related products under the same tariff HS subheading including hybrid vehicles.

A third tier of products would be those that are relevant to energy savings but which also have other cross-cutting applications, for example, monitoring and control equipment including switchboards and control panels relevant to energy-efficiency applications.

A fourth tier of products could include spare parts essential for the smooth functioning of energy efficiency technologies but which may also be relevant for non-energy efficiency technologies as well. An important aspect of including this tier would be the possible export opportunities for many developing countries that may be producing such parts and components and which are usually less technology intensive compared to final equipment.

A fifth, and possibly the most challenging, tier to consider would be certain types of energy efficient products based on performance whose diffusion would have a relatively high impact on end-use efficiency. Given that such products can be identified only on the basis of certification and labelling, the best candidates would be products where standards developed by international standard-setting bodies already exist, and for which most or all WTO members are likely to use as the basis for their domestic minimum energy performance standards (MEPS).

A strong candidate in this regard are industrial motors for which the International Electrotechnical Commission (IEC) has developed efficiency classes one to four, with the latter being the highest-efficiency class. EGA members could consider permanently reserving zero-duties for the highest efficiency class of motors. In other words, as more efficient classes are developed, these would automatically benefit from zero tariffs without the need for new negotiations.

A meaningful EGA outcome that promotes the diffusion of energy efficiency products would send a positive signal to the global economy that trade policy can support emissions abatement efforts and systemic long-term decarbonisation.

EGA members could also consider providing duty-free access to whichever product meets their domestic MEPS, even if it does not meet the requirements of an international standard, or if a commonly accepted international standard does not exist. However, while that route might offer negotiators some flexibility to include a wider range of products for import tariff liberalisation such as household appliances, it may not particularly reward the most efficient product in a category.

Trade policy incentives based on zero import tariffs alone might not provide a long-lasting leg-up for energy efficiency technologies. A second phase of EGA negotiations may need to address non-tariff measures and facilitate trade in energy efficiency products through recognition of measures that will need to be pursued outside the trade realm, such as the standardisation of energy performance standards, mutual recognition initiatives, and harmonisation of test procedures for energy efficient products.

Addressing energy efficiency technologies as part of an EGA could also offer benefits for developing countries. As highlighted earlier, EGA members could include energy efficiency related components and other products of export interest, with a view to boosting developing country trade. Ideally trade liberalisation and subsequent diffusion – alongside adequate domestic enabling frameworks – of energy efficiency technologies should help all economies and sectors scale up the use of such technologies.

A meaningful EGA outcome that promotes the diffusion of energy efficiency products would send a positive signal to the global economy that trade policy can support emissions abatement efforts and systemic long-term decarbonisation. This is particularly important given that climate change negotiators are in the process of hammering out a pivotal global emissions-cutting deal under the UN Framework Convention on Climate Change (UNFCCC) in time for a meeting in Paris, France at the beginning of December.

Mahesh Sugathan, Research Fellow, International Centre for Trade and Sustainable Development (ICTSD). Sugathan is also a member of the E15Initiative Expert Group on Clean Energy Technologies.