Trade Tools for Climate Action: Green Goods

Global trade in green goods is booming—reaching $1.9 trillion in 2022, a $100 billion increase from 2021. The World Trade Organization (WTO) estimates that trade in a list of select environmental products grew by 243 percent from 2000 to 2020. This list includes products used for pollution control, wastewater management, noise abatement, tracking pollutants, and energy management, among others. Green goods are so ubiquitous—with many existing in homes, offices, factories, and farms—that consumers often encounter them without even knowing.

Green goods contribute to a cleaner planet and can also support significant energy-cost savings. Moreover, the United States can be a leader in the development and diffusion of green technologies. But as the volume of trade in those goods continues to expand, there will be an increasing need to address the trade barriers that stand in its way. For the United States to benefit from the growth in this rapidly expanding basket of technologies, it needs to focus on three areas of activity: identifying the goods that best contribute to global climate goals, investing in the development of technology where the United States can have a competitive advantage, and creating fair rules for trade in those products.

What Is at Stake

Environmental technologies are a fast-growing industry, currently supporting 1.6 million jobs in the United States. Exports have steadily increased, reaching over $38 billion in 2023, with the water and wastewater management sector making up about 60 percent. (See figure 1.)

Canada and Mexico were the United States’ largest export markets, accounting for 35 percent of the value of environmental technology exports on average from 2004 to 2023, with other top markets including (by size) China, Germany, France, the United Kingdom, Japan, Brazil, the Netherlands, and South Korea. (See figure 2.) As the United States also imports goods from those trading partners, there is a clear opportunity to capture a greater share of this market by producing and exporting innovative green products while simultaneously expanding global demand for them.

The environmental technology industry has seen notable growth globally for several reasons: First, as more countries have increased their domestic and global environmental commitments, they have looked to acquire or develop environmental technologies to support them. Second, extreme-weather events have focused government attention on risk management and disaster-resilience strategies, which often require those technologies. Third, countries around the world are working to create more efficient utilities, for instance, to address issues of water leakage with the help of digital tools. Fourth, private businesses are actively seeking methods for carbon capture and storage, as well as other carbon-mitigation strategies, to support cleaner production.

The increasing interest in this industry and the jobs it supports have found strong bipartisan support in the United States. In 2021, Representative Suzan DelBene (D-WA) and six additional House Democrats sponsored a bill calling on the U.S. Trade Representative (USTR) to resume negotiations on the Environmental Goods Agreement (EGA) at the WTO. A year later, on Earth Day, eighteen Republican members of the House Ways and Means Committee called for the same, urging USTR to seize the “opportunity to open foreign markets to green goods manufactured by U.S. workers.” Forty-six WTO members were engaged in those talks, which broke down in late 2016. (See figure 3.)

Some countries retain significantly higher tariff barriers on EGA products than others. For example, India applies an average 14.7 percent tariff rate on environmental goods for WTO members, largely due to protectionist barriers on building materials and solar panels. (See figure 4.)

On the other hand, the United States has some of the lowest barriers for environmental goods. By maintaining those low average tariff barriers, the United States is in a unique position to encourage other countries to reduce tariffs on those products, securing greater market access for U.S. exports.

Key Issues for Consideration

On November 20, 2001, WTO members issued the Doha Ministerial Declaration, calling for the “reduction, or as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services.” Since then, the imperative to combat climate change has only intensified. Eliminating trade barriers on environmental goods can kickstart this process by helping to decarbonize supply chains and encouraging the purchase of green goods through reduced costs.

Unfortunately, removing barriers to trade for those products is not straightforward. For one, it requires establishing a list of products that would qualify for market access, on which there is little agreement. Prior efforts to establish a comprehensive list of environmental goods have faced significant hurdles, including intense disagreements over specific products, such as bicycles, which led to failed negotiations at the WTO; a narrow range of qualifying environmental goods at the Asia Pacific Economic Cooperation (APEC) forum; or agreement on a broad list with only a handful of countries with limited geographic reach, such as the Agreement on Climate Change Trade and Sustainability (ACCTS), signed between Costa Rica, Iceland, New Zealand, and Switzerland. To succeed where those previous attempts have failed, countries will need to agree upon a list of environmental goods that includes mechanisms to accommodate technological innovation.

Defining Environmental Goods

Unlike traditional sectors such as mining, agriculture, and automobiles, the environmental goods sector lacks a clear, predefined set of associated products. This creates a major roadblock in developing a definitive list of environmental goods on which to structure discussions. While some products such as solar panels and electric vehicles carry obvious environmental benefits, many do not, despite being essential for increasing energy efficiency and sustainability.

This raises the first main challenge of defining environmental goods: accounting for dual-use products. Dual-use products are those that could serve an environmental purpose but are not necessarily destined for that application. For example, while engineering equipment is essential for building sustainable infrastructure, it could also be used in the construction of energy-intensive projects.

To maximize the benefits of enhanced market access for environmental goods, it is crucial to include dual-use products in the list. The list should not extend preferences to products with little relation to environmental benefits, but it should be sufficiently broad to capture items that make a legitimate positive contribution to environmental goals. A comprehensive framework liberalizing trade in environmental goods would thus need to have a way to identify the end use, that is, the final application of the product. Such a framework could also set a threshold for permitted embedded emissions (the carbon footprint of a good’s production) or outline specific environmental benefits that would qualify the good for inclusion on the products list.

Although some countries have differentiated products according to end use in trade agreements—as in the 1973 Agreement on Trade in Civil Aircraft—determining how imported products will eventually be used poses significant administrative challenges. One way that countries could address this issue is through ex-outs, which identify specific products for certain end uses in their tariff schedules and set a specialized rate for those ex-outs. The challenge is that each country would need to agree on those specialized classifications.

Beyond the dual-use nature of many environmental goods, they are also often highly specific. Under the Harmonized Tariff Schedule, products are assigned a nine-to-ten-digit code, with each digit adding further details to a product’s characterization. Traditionally, trade agreements are negotiated to the sixth digit (the HS-6 level), to the effect of covering broader product categories, rather than identifying specialized goods within those categories. However, such categorization is overly broad for many environmental goods. For example, while energy-efficient home appliances reasonably qualify as an environmental good, incorporating them into a list requires separating them from other appliances. This could be achieved, for instance, through a labeling standard such as “Energy Star” that allows them to be treated differently.

Keeping Up With Technological Change and Innovation

Environmental technologies are rapidly evolving, presenting another set of challenges. Predicting which new inventions will enter the market, or which preexisting products will become integral for climate mitigation or adaptation, is nearly impossible. Ensuring that an environmental goods list does not become outdated—thereby dampening its effectiveness—requires a living list that would evolve over time.

The difficulty with a living list is that it requires frequent updates to keep pace with technological innovation, along with an agreement among participating countries to regularly adopt changes. Previous attempts to introduce review periods cast doubt over the feasibility of this approach. For instance, the 1996 Information Technology Agreement (ITA) went nearly two decades without

updating its list of qualifying goods, despite having a mandated three-year review cycle. And, even when thirty-three signatories initiated an informal process to launch negotiations to expand product coverage under the ITA in 2012, they took 3 years to add just 201 new products to the list. So, while the development of a living list offers an ideal solution to keeping environmental goods lists current and thus effective, the practicalities behind implementation pose significant hurdles to its success.

A Mismatch of Goals

A third challenge, in addition to defining environmental goods and staying abreast of their development, stems from the tension between domestic trade interests, industrial policies, and climate mitigation and adaptation priorities. For instance, some countries could primarily focus on expanding export markets for environmental goods while limiting imports, being selective to include only products for which they hold a comparative advantage; others could be more accepting of imports at tariff levels that are high enough to meet their needs either for revenue or for modest protection for their domestic industries.

Moreover, countries around the world have implemented subsidies for fueling the growth of green industrialization and environmental goods, leading to an increase in anti-dumping and countervailing duties in response. For example, U.S. safeguards on solar panels from Southeast Asia remain high, at roughly 14 percent. Meanwhile, the European Union and other countries have filed disputes at the WTO over the U.S. Inflation Reduction Act, claiming that it provides unfair subsidies. As a result, any future agreement on environmental goods will need to ensure that market access is not exploited through unfair industrial policies. In general, tariff barriers, in addition to non-tariff measures that discriminate against foreign products, such as local content requirements, limit opportunities for trade in green tech and make it difficult to pursue cooperative solutions.

Opportunities for Action

Despite those challenges, governments around the world, including the United States, have been working toward defining green goods and increasing market opportunities. For example, from 2012 to 2019, the APEC List of Environmental Goods included fifty-four products, with intra-APEC trade in those products growing by 7 percent and global trade increasing by 6.4 percent. Most recently, the ACCTS between Costa Rica, Iceland, New Zealand, and Switzerland introduce a comprehensive list of environmental goods with a 123-page-long appendix with detailed descriptions of a product’s environmental benefits and purposes, and a forty-two-page-long appendix identifying a list of green services.

Those efforts, and many others, show that there is an appetite for action. However, although the United States should help steer this dialogue into a global initiative that would reap even greater rewards for U.S. businesses and consumers, U.S. leadership should also keep in mind lessons learned from previous global efforts. As Maureen Hinman and Sarah Stewart identify, the WTO EGA negotiations were undermined by three major structural faults. First, unlike previous technical negotiations, the EGA talks did not bring in scientific and technological experts to help identify products, therefore producing a list that was not meaningfully linked to the WTO’s environmental objectives. Second, the absence of common criteria to identify goods across participating countries degraded their ability to neutrally classify products as environmental where common preexisting standards did not exist. Third, negotiators did not consider how tariff reductions can change trade patterns and thereby environmental impacts, potentially undermining the agreement’s credibility by failing to assess broader environmental outcomes.

With those central issues and challenges in mind, the United States should do the following:

• Develop clear criteria for identifying which environmental goods should be prioritized for enhanced market access. The approach should take into account different factors, including the environmental impact (embedded greenhouse gas [GHG] emissions as well as environmental benefits), the good’s functions (dual-use and whether the goods contribute to mitigation or adaptation efforts), preferences reflected in domestic legislation and regulation, and the U.S. competitive advantage in the industry, in order to allow efforts to be channeled to innovative goods rather than those where competitors are much further ahead (e.g., hydrogen energy instead of solar panels).
• Assess how green goods should be categorized based on their functions, considering their mitigation or adaptation purposes, and the implications of this categorization for setting trade policy priorities.
• Evaluate the potential benefits of developing an agreed-upon formula to distinguish between green and dirty goods using a general estimate for embedded GHG emissions in products based on global production averages.
• Relaunch talks at the WTO, which should also include disciplines to address overcapacity in this sector, including limits on market access.

Overall, green goods provide a unique opportunity for the United States to become a leader in the development and diffusion of green technologies and an important trade tool to advance climate action. While there are several obstacles to achieving a comprehensive agreement on trade in green goods, the United States is well placed to lead in those discussions.