Net-Zero Policies and Trade: Threat or Opportunity for Low-Income Economies?

Environmental policies are without the slightest doubt one of the hottest topics in almost every debate nowadays. The reason, clearly, is beyond obvious. Following the guidance and the recent ultimatum of the Intergovernmental Panel on Climate Change (IPCC), many countries – mostly OECD ones – have enacted or at least discussed and proposed policies and legislative reforms aimed at promoting circular economy and at ultimately achieving the net-zero goal by 2050 as set out by the Paris Agreement. Together, these developed economies make up for almost 70% of global GDP and for over 55% of the global population, without even considering sub-national entities with environmental goals such as California, or independent private sector efforts.

Keeping this in mind, it is clear that the potential impact of these policies is massive; a global net-zero transition, no matter its pace, would entail substantially different dynamics between various economic and trade sectors. This is especially true considering the shift that net-zero efforts require with regard to primary resources: the reduction of fossil fuels use in favor of technologies that will require minerals and metals, on the one hand, and circular efforts to reduce the use of primary raw materials used in the first place, on the other.

In one of their studies, the International Institute for Sustainable Development (IISD) analyzes what these policies could represent for low-income economies, being resource exports by far the largest share of exports of developing countries (83% of total exports in sub-Saharan Africa, for instance).

The IISD study gathers trends and estimates in order to build different scenarios for the future of international trade between climate-committed countries and developing economies. First of all, it analyses the prospect of a decrease in fossil fuel consumption, a tenet of most climate policies. Depending on the ambitiousness and decree of practical implementation of policies, oil demand is set to either decline drastically (in order to meet the 2050 net-zero goal) or to continue rising to then stagnate around 2030. In both scenarios, as international supply competition will increase due to market tightening, developing countries risk being outcompeted by lower-cost competitors, especially from the Middle East. Similarly, the demand for natural gas is set to concentrate mostly in South and East Asia, not quite the market that African countries could sell to. Coal demand, finally, is also estimated to fall, especially in the EU, thus coal supply is likely to be captured only by low-cost competitors, as in the case of oil. As shown, markets are expected to tighten in all three fossil fuel sectors, posing serious threats to the exports of developing countries, in particular those that rely more heavily on these kinds of revenues, such as South Sudan, Nigeria and Congo.

However, the net-zero transition will also require – especially in the energy field – increased supply of minerals and metals, necessary for resource-intensive renewable energy technologies and for electricity storage devices such as batteries. No matter the scenario, there is significant potential for growth in these markets, especially for most developing countries which already have minerals and metals – non-ferrous ones in particular – as their second largest share of exports, right after fossil fuels. IISD experts, however, correctly highlight some “supply-side challenges”, mostly related to investments, that developing countries could face when trying to exploit the aforesaid potential. These challenges regard mostly the capital-intensive nature of investments in resource extraction – which rely on assumptions about the longevity of their use, and the doubts regarding the capacity of low-income countries to effectively capture and exploit the growth in demand. Further measures would also be needed to ensure that in those countries eventual gains reflect positive domestic developmental outcomes and to prevent illegal or unethical practices. Although extremely relevant in international trade and development, this discussion would exceed the realm and the limits of this article.

Besides the potential of minerals and metals markets, there’s even more opportunities on the horizon for developing countries. As circular economy policies and regulations start being enacted and followed, waste regulations and the market for waste will gain considerable importance. With the exception of e-waste regulations – whose prospect currently appears rather weak, thus reinforcing the argument for the potential of virgin minerals and metals – waste trade can open up interesting possibilities for developing countries. For instance, they could open up markets for labor-intensive repairs with export-reimport schemes, even though as it was the case for minerals and metals, this too would present challenges that can’t be ignored such as the need for capacity building in the repair industries of developing countries. If done right, says Van Der Ven (2020), this could eventually result in a circular transformation of waste trade itself, with developing countries becoming the main secondary raw materials suppliers.

Another sector which shows great potential for opportunities is the agricultural one, which both by virtue of its own nature and because of the already advanced state of South-South trade of its products, is less likely to be impacted by net-zero and circular economy policies of OECD and other developed countries, exception made for those that would imply standard-setting of greenhouse gas intensity of imports (for instance, carbon border adjustment mechanisms being developed by the EU).

Following these trends and results emerging from the IISD analysis, a few remarks appear necessary. All these impacts that environmental net-zero policies are likely to have on international trade and low-income countries’ export markets will ultimately depend first of all on the effectiveness of the policies themselves, as at the moment the huge majority of countries are far from being on schedule with their climate commitments and claims. Secondly, they will also depend on how well developing countries will diversify their exports. With regard to this last point, it is worth noticing how export destinations also matter in identifying possible opportunities. Intra-African trade, for example, already appears more differentiated and rapidly growing than African global trade. This could be a good starting point for further developments and larger economic diversification of developing countries, taking into account also the fact that intra-African and South-South trade are less likely to incur in obstacles related to developed countries’ net-zero efforts.

In conclusion, therefore, the study carried out by the IISD portrays some insightful guidelines for the future of low-income economies international trade. Hoping that climate-ambitious countries will soon act to respect their claims and promises regarding much needed environmental policies, it appears that in order to avoid negative consequences on the economies of most developing countries a series of factors deserve attention. These factors are precisely the prospect of a general demand boom for minerals and metals, technical assistance and capacity-building under initiatives such as Aid For Trade in order for developing countries to effectively respond to growing demand and possibly comply with import requirements of developed countries, and finally the potential of regional integration through intra-African trade to boost economic diversification of African countries’ exports. All this, nowadays, is all the most necessary, in order to strive for a better planet through much needed environmental policies while also building stronger international trade networks for all countries, especially the ones most in need.

Simone Cimadomo.

For more info:

International Institute for Sustainable Development. (2021). “Impacts of Climate Change Policies on Developing Country Export Markets”. https://www.iisd.org/system/files/2021-07/climate-change-developing-country-export-markets.pdf 

Moerenhout, T. (2021). “Net-Zero Should Not Be a Net Loss for Low-Income Economies”. IISD.org. https://www.iisd.org/articles/net-zero-international-trade

Van Der Ven, C. (2020). “The Circular Economy, Trade, and Development: Addressing Spillovers and Leveraging Opportunities.” Tulip. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3759786 

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