Trade Tools for Climate Action: Agreement on Climate Change, Trade, and Sustainability

Problems at the intersection of trade and climate often benefit most from broad engagement with as many countries as possible; rule innovation, however, tends to happen within smaller groupings of states. Trade agreements among a like-minded set of countries allow for experimentation that can be instructive for larger efforts. A recent example of such trailblazing work is the Agreement on Climate Change, Trade, and Sustainability (ACCTS) between Costa Rica, Iceland, New Zealand, and Switzerland, which was signed on November 15, 2024. The ACCTS presents a novel approach for leveraging trade policy for climate mitigation, emphasizing how progressing toward a green transition can also unlock important commercial opportunities. 

The ACCTS is an open plurilateral agreement, meaning that it welcomes other countries to join if they can meet its high standards, and it also extends the benefits of the trade agreement to nonmembers. Therefore, even if many more countries do not join, the agreement still offers opportunities to expand trade beyond the immediate membership and an important blueprint for how disciplines in this area can be developed in future pacts.

Why a Small Agreement Is a Big Deal

The ACCTS strikes a balance between ambitious environmental targets and domestic economic considerations, linking some goals to future engagements at the World Trade Organization (WTO) or other institutions. Even accounting for the exceptions strewn throughout the text, the ACCTS stands out as one of the most innovative and expansive agreements yet on trade and climate. The topics covered are crucial pillars of the trade and climate agenda, and the ACCTS breaks ground in some areas that have been obstacles in other negotiations. It lays out rules in three core areas: trade in environmental goods and services, fossil fuel subsidies, and standards around eco-labelling.

Creating Trade Opportunities for Green Goods and Services

One of the most prominent features of the ACCTS is the commitment to reduce barriers to trade on a list of 360 green goods and 114 green services. Past efforts to identify goods and services for inclusion on such a list faced many challenges. For example, in discussions on environmental goods at the WTO, talks broke down over a debate on the content of the list, in particular, whether a bicycle qualified as an environmental good. Other organizations, such as the Asia-Pacific Economic Cooperation, have been more successful at identifying lists of environmental products and services, though in recent years that work has stalled. That said, the initial list of environmental goods developed under APEC was just fifty-two; the ACCTS list is nearly seven times that.

The ACCTS achieves a broader list by clearly outlining what constitutes an environmental good or service. Environmental goods are defined [PDF] as those that “substantially contribute to” climate change adaptation and mitigation; pollution prevention and control; the sustainable use, protection, or restoration of natural resources, biodiversity, and ecosystems; the transition to a circular economy; sustainable development objectives; or other wider environmental goals. Likewise, liberalization of services is guided by a set of “environmental protection purposes [PDF], which are the prevention, reduction, control, and elimination of pollution and other forms of degradation of the environment.” Those purposes are further delineated into specific activities, such as the protection of ambient air, wastewater management, and research and development for environmental protection.

Taken together, the range of goods and services liberalized under the ACCTS provides an ambitious framework that could support the diffusion of clean technologies among its partners.

Phasing Out Fossil Fuel Subsidies

Fossil fuel subsidies constitute a large portion of government spending globally. The Organization for Economic Cooperation and Development estimates that in 2023 fossil fuel subsidies totaled $1.1 trillion. That is concerning because those subsidies not only support higher greenhouse gas emissions, but detract from capital that could instead fund clean energy development.

The ACCTS complements other efforts by New Zealand to clearly define fossil fuel subsidies and make serious commitments to reduce them. Importantly, ACCTS stands out as the most comprehensive legally binding framework in existence today that aims to eliminate most fossil fuel subsidies. For example, the agreement outlines a prohibition on coal subsidies, along with a schedule to phase out other subsidies. Although the signatories have retained the right to certain exceptions to phase out disciplines—such as support for decommissioning fossil fuel infrastructure or support to low-income, remote, or vulnerable communities—the agreement is still the highest level of commitments on fossil fuel subsidies that currently exists.

In addition, the ACCTS creates an innovative voluntary carbon accounting system, which effectively sets a price floor for CO2 emissions and takes into account policies that can impact measurement of CO2 prices such as carbon taxes or other energy taxes. The idea behind this is to consider the net effect of various policies on pricing CO2 by creating a voluntary standard for measuring the cost of those emissions. 

Overall, those are important developments in reining in fossil fuel subsidies and provide a framework for other countries looking to scale up their own efforts.

Guidelines for Voluntary Eco-Labelling

The proliferation of eco-labelling has helped consumers navigate a diverse landscape of environmentally friendly or sustainable products, but it can also lead to confusion. Not only are those schemes largely voluntary, there is no single set of rules that helps to guide their development. Various international organizations, government agencies, nongovernmental organizations, and other third parties can play a role. However, the diversity of efforts and certifications means that understanding what one label means compared to another can be a challenge for shoppers looking to reduce their environmental impact or to make more energy-efficient choices. It also can make it challenging for companies to decide which label best fits their goals and sends the right signal to consumers.

The ACCTS takes an important step by first defining [PDF] what an ecolabel is: “A written or pictorial statement or claim attached to or provided with a good or service including by producers, traders, manufacturers, retailers or service providers relating to its environmental impact or aspects.” The agreement also provides a set of guidelines for developing eco-labels, such as providing “truthful, not misleading, reliable, comparable, substantiated and verifiable information,” and avoiding labels that are disguised trade restrictions. The agreement also encourages cooperation between countries through peer-evaluation and capacity-building efforts, for instance. Importantly, this chapter of the agreement outlines a clear roadmap for future discussions on this issue.

How ACCTS Supports Future Climate Action

The ACCTS comes at a time when progress toward global climate goals has significantly slowed amid rising geopolitical tensions and skepticism toward climate science. The potential for the agreement to grow is also significant, with the ACCTS allowing WTO members to submit an accession request at any time. By permitting deferred tariff elimination for products sensitive to new members, the ACCTS incentivizes participation and lowers barriers to entry. Having been involved in the ACCTS negotiation process since its inception, Fiji and Norway are top contenders as future members.

Though the need for progress is urgent, the ACCTS is well positioned to play a pivotal role at the intersection of trade and climate. In addition to attracting new members, it has the potential to inspire similar efforts among different groupings of states and also to serve as a template for multilateral efforts.