The Role of Trade in Asia and the Pacific’s Net Zero Pathways: Overview and Policy Implications

NO.274 NOVEMBER2023 KEYPOINTS •Trade-relatedactionswillbeinstrumentalinmovingtheworldtowardnetzero emissions.Tradeoffersmanysolutionsviafacilitatingexchangeofenvironmentalgoodsandservices, ADBBRIEFS TheRoleofTradeinAsiaandthePacific’sNetZeroPathways: OverviewandPolicyImplications technologytransfer,andinvestmentingreensectorsandlow-carbontechnologies. •MainstreamtradeandtradepolicyintoNationallyDeterminedContributions.GovernmentsinAsiaandthePacificmustdevise andimplementambitious,creative,andeffectivestrategies,fromcarbonpricingandregulationtofinancingthegreentransition. •Reducetariffsandtraderestrictionsonenvironmentalgoodsandservicestopromoteefficientallocationofresourcestomorecarbon-efficientproductionandinvestment. KijinKim SeniorEconomist RegionalCooperationandIntegrationDivision,EconomicResearchandDevelopmentImpactDepartment AsianDevelopmentBank Cyn-YoungPark Director RegionalCooperationandIntegrationandTradeDivision,ClimateChangeandSustainableDevelopmentDepartment AsianDevelopmentBank INTRODUCTION PeterA.Petri CarlShapiroProfessorofInternationalFinance TheBrandeisInternationalBusinessSchool MichaelG.Plummer EniProfessorofInternationalEconomics JohnHopkinsUniversity,SAISandEast–WestCenter •Acceleratetradefacilitationandlogisticsreformstoreducedelaysatbordersandremovebottlenecksalongthesupplychain. •Developnationalcarbon-pricingstrategiesandstrengthenregionalcarbonmarketcooperation. •Strengtheninternationalcooperationtomaximizeeffectivenessandminimizecostsofgreentransition. CountriesinAsiaandthePacificplaycriticalrolesinthebattleagainstclimatechange.Theygenerateabouthalfofglobalgreenhousegasesannuallyandarehighlyvulnerabletoitseffects.ADB(2023a)calculatesthatfailuretotackleclimatechangewouldresultinastaggering$210trillionineconomiclossestotheregionover2020–2100,1farmorethananyother,withdevelopingAsialosing24%ofitsgrossdomesticproduct(GDP)by2100.2 Decisivepolicyactionsareneeded,withnolessthanthefutureoftheregion,andtheworld,atstake.Countriesjointlyproducing80%oftheemissionsofAsiaandthePacifichaveannouncedorareconsideringtargetsfornetzeroemissions(ADB2023a),butsofaronly afewhaveeitherincludedthemindevelopmentplans,framedinitiativestoimplement,codifiedtheminlaw,oranalyzedtheirimplications(ADB2023a).Themagnitudeofnecessarychangesmeansthatextensivepreparationisneededbeforechartingaspecificnetzeropathway,supportedbysolidandinnovativescientific,economic,financial,andsocialresearch.Sinceclimatechangetranscendsborders,meetingthiscommonchallenge ISBN978-92-9270-449-0(print) ISBN978-92-9270-450-6(electronic) ISSN2071-7202(print) ISSN2218-2675(electronic)PublicationStockNo.BRF230529-2 DOI:http://dx.doi.org/10.22617/BRF230529-2 Note:Inthispublication,$referstoUnitedStatesdollars. 1Onapurchasingpowerparitybasisatnetpresentvalue,notincludingtheRepublicofKorea(ROK)andthePacific.ADB(2023a,8). 2ADB(2023a,10). alsorequiresunprecedentedcooperation.National,regional,andinternationalplanning,dialogue,andcooperationaretime- consuming.However,extremeweathereventsarebecomingmorefrequentandsevere,andclimate-relateddisastersareincreasing,whereasresearchsupportsthepropositionthatthecostsofemissionsmitigationarelower—andpotentialbenefitshigher—whenactionistakenearlier.3 Tradeandtradepolicycanplayavitalroleinthetransitiontonetzero.EconomiesinAsiaandthePacificareamongthemostopenintheworld,withtradeingoodsreachingalmost100%ofGDPfortheAssociationofSoutheastAsianNations(ASEAN)economies.4AsiaandthePacificaccountedfor37%ofworldtradein2021,upfrom32%adecadeearlier.5Itisclearthatinternationaltradewillcontinuetobeacriticalsourceofregionalgrowthandpovertyreduction.However,internationaltradeposesbothchallengesandsolutionsforthegreentransitiongiventheimportanceofcarbonemissionsassociatedwithtrade-relatedeconomicactivities. Trade-relatedactionsamongAsiaandthePacificeconomieswillbeinstrumentalinmovingtheworldtowardnetzero. Besidestakingstockoftheproblem,thisbriefaimstohighlighttheroleoftradeinthenetzerotransitionandevaluatevariousmodellingscenariosthatreachnetzeroby2050intheextantliterature. Thenextsectionprovidesanoverviewoftheglobalandregionalclimatesituationsince1995andunderscorestheimportanceoftradeinclimatechangemitigationfromtheoreticalandempiricalperspectives,withafocusondevelopmentsinAsiaandthePacificandfuturepolicychallenges.Inthefollowingsection,theroleofcarbonmarketsinthetransitionisdiscussed.Evenascoordinatedcarbonpricingcanbeaneffectivetooltomeetclimategoals,globalcooperationcontinuestobelacking,whileindividualcarbon-pricingprogramsarelesseffectiveandcancreateundesirableeffects.ThebriefthenevaluatestheimplicationsoftheEuropeanUnion(EU)CarbonBorderAdjustmentMechanism(CBAM)forAsiaandthePacificasaregionalcasestudy.Italsolooksatsomeinfluentialquantitativestudiesmodellingscenariosthatestimatetheimplicationsofpathwaystowardnetzero,andtradeandclimatechangescenarios.Thefinalsectionprovidestrade-relatedpolicyrecommendationsforregionalgovernments. THEPOLICYCHALLENGEFORCLIMATEAMBITIONS ItcomesasnosurprisethattherapidincreaseinAsianeconom