Agreement on Climate Change, Trade and Sustainability: A landmark pact for trade and sustainability
The Agreement on Climate Change, Trade and Sustainability (ACCTS) is a path-finding international pact aimed at integrating environmental and trade policies. Signed by Costa Rica, Iceland, New Zealand, and Switzerland, ACCTS tackles fossil fuel subsidies, promotes trade in environmental goods and services, and establishes innovative eco-labelling standards. While it sets a new benchmark for sustainability in trade, IISD experts highlight its strengths, limitations, and potential for global impact.
Context
On November 15, Costa Rica, Iceland, New Zealand, and Switzerland signed the Agreement on Climate Change, Trade and Sustainability (ACCTS). ACCTS is a first-of-its-kind pathfinder agreement that aims to achieve environmental policy objectives through legally binding trade rules. The rules cover three main areas: controls on certain types of fossil fuel subsidies, liberalization of trade in 360 kinds of environmental goods and 114 types of services, and guidelines for voluntary eco-labelling systems. While the agreement shows how trade rules can help drive sustainable development, there are a worrying number of exceptions in the final text that could undermine the treaty’s effectiveness. On the positive side, the agreement is designed to develop over time through its review mechanism that allows for changes in scope and the addition of new members.
What Progress Does ACCTS Make on Fossil Fuel Subsidies?
After more than a decade of toothless reform commitments in G7, G20, Sustainable Development Goal, and United Nations Framework Convention on Climate Change documents, the ACCTS is the first legally binding international agreement to contain specific prohibitions of fossil fuel subsidies.
ACCTS is the first legally binding international agreement to contain specific prohibitions on fossil fuel subsidies, marking a crucial step toward sustainable development.
In 2023, these subsidies were at least USD 1.1 trillion globally and USD 3.8 billion in ACCTS signatories. ACCTS is the first legally binding set of commitments to emerge from among the range of existing coalitions that aim to drive ambition on fossil fuel subsidy reform: the Friends of Fossil Fuel Subsidy Reform, the World Trade Organization (WTO) members Fossil Fuel Subsidy Reform joint statement initiative, and the Coalition on Fossil Fuel Incentives Including Subsidies (COFFIS). Costa Rica, New Zealand, and Switzerland are members of all four.
The ACCTS has good foundations on subsidies.
First, the ACCTS definition of subsidies is based on the WTO Agreement on Subsidies and Countervailing Measures. Consistent with this definition, the ACCTS recognizes tax exemptions for exploration and extraction as subsidies. This is important because tax exemptions confer a benefit to the industry or consumers in the form of “revenue foregone” and account for a large share of subsidies to fossil fuels. Despite the WTO definition, some countries and industry bodies have argued otherwise and claimed these measures should not be disciplined. The ACCTS clearly includes tax exemptions within its scope.
Second, the ACCTS provides an innovative mechanism for members to commit to a minimum net pricing on fossil fuels that takes into account carbon pricing, some energy taxes, and subsidies (the “Standardised Carbon Rate Measurement” or SCRM).¹ This is important because a lot of countries have carbon pricing (e.g., via the European Union Emissions Trading Scheme) but also provide exemptions for some sectors that can look like large subsidies in nominal terms. It is the net effect of policies that determine consumer prices (therefore demand), investment decisions, and government revenues, and this net effect is captured under the SCRM. For the ACCTS countries that choose to use the SCRM mechanism—currently Iceland and Switzerland—a subsidy only needs to be eliminated if it causes the SCRM to fall below the committed value. It is a positive development because the SCRM removes some hard-argued methodological hurdles in the way of measuring and reforming fossil fuel subsidies—an issue that the COFFIS Ministerial Statement also seeks to address.
Third, all types of coal subsidies are prohibited. None of the current signatories are major coal producers or users, so the value of the disciplines on coal has potential if countries with a larger coal profile join ACCTS in the future, a scenario that unfolded under the Powering Past Coal Alliance.
Fourth, ACCTS allows parties to list any subsidies they do not want to currently eliminate, but these are relatively small in amount, totalling USD 83 million in 2023. A standstill commitment means members cannot expand the scope or range of these subsidies. Parties can introduce only very small new subsidies because they are restricted to a maximum of USD 1.3 million a year (at current exchange rates).
Fifth, the ACCTS commits governments to eliminating existing subsidies under its scope and not introducing new measures. This commitment has numerous exemptions, which are discussed below.
What the ACCTS Does Not Act on in Relation to Subsidies
ACCTS’s major carve-outs could allow many harmful fossil fuel subsidies to persist or even be introduced.
Importantly, ACCTS does not apply to all tax and royalty exemptions for oil and gas production, which is the largest category of production subsidies in many countries. Government disclosure is poor, but where it exists, it suggests as much as 67% of oil and gas production subsidies were tax and royalty write-offs. These are problematic because they incentivize producers to drill more new wells than they would otherwise, locking in higher future production and emissions.
Assessment of all credible and authoritative energy and climate scenarios shows that there is more than enough oil and gas in fields already in production or under development to meet 1.5°C-aligned demand. The ACCTS may also exclude subsidies for some electricity generated from unabated fossil gas. First, the agreement only counts energy products as fossil fuels if their emissions exceed a certain threshold. Fossil gas power stations might fall below the threshold depending on how emissions are estimated.² Second, ACCTS also includes a loophole for “time-limited” electricity-related fossil fuel subsidies “to ensure the security of the domestic energy supply of that Party as part of its transition to increased use of renewable energy.” This is most likely aimed at fossil gas, given that current signatories are not coal producers or users. The expansion of unabated gas power is not in line with climate science, and governments could clarify what they mean by “time-limited.”
Some subsidies are shielded by international agreements, particularly in the aviation and shipping sectors. Reforming these subsidies is a key objective of coalitions such as COFFIS. ACCTS members who are also members of COFFIS can push for broader reform and set a high bar for others to follow. The ACCTS already indicates that its exemption for subsidies to maritime shipping fuel exists only until their reform at the international level, and maritime emissions pricing is currently under discussion in the International Maritime Organization.
A further sector-specific exception is given for fuel subsidies to fishing, which are the subject of multilateral reform efforts at the WTO. Echoing the exceptions under negotiation in Geneva, parties are allowed to subsidize fuel to fishing, but only if the fishing is “biologically sustainable” and if the sector’s contribution to global catch and domestic fossil fuel consumption remains low.
A range of other exemptions exist for decommissioning, emergency response measures, social protection, and support to reduce greenhouse gas emissions from fossil fuels. These exemptions recognize the costs of transition but can be used as loopholes to continue to fund the fossil fuel industry instead of putting in place alternative policies. Subsidies to costly, unproven technologies, such as carbon capture and storage and fossil fuel-based hydrogen, are one such example.
Finally, the net carbon tax rates notified by ACCTS members using the SCRM mechanism appear to be insufficient to guarantee meaningful levels of taxation or subsidy reform. Iceland’s SCRM for motor spirits, for example, is around USD 35 per tonne of CO2. This is considerably lower than the suggested minimum carbon tax floor recommended by the International Monetary Fund for developed countries (USD 75 per tonne) or by eminent climate economists Nicolas Stern and Joseph Stiglitz (USD 100 per tonne by 2030).
All signatories of ACCTS commit to notifying each other of their fossil fuel subsidies. These inventories should be made available to the public, especially given that Costa Rica, New Zealand, and Switzerland are members of COFFIS, a coalition that requires such disclosure within a year of joining.
Transparency of parties’ existing and new subsidies will reveal how much the ACCTS disciplines actually achieve.
How Does ACCTS Address Environmental Goods and Services?
Chapters 2 and 3 of the ACCTS deal with trade in environmental goods and services.
Under Chapter 2 and its annexes, the parties commit to eliminating import and export duties on 360 kinds of environmental goods in order to foster a low-emission, climate-resilient, circular, and sustainable economy. The listed environmental goods serve a range of environmental purposes, including resource management, climate change adaptation and mitigation, and environmental protection, including pollution prevention and control. In comparison, the 2012 Asia-Pacific Economic Cooperation (APEC) list of environmental goods covered just 54 goods.
By fostering trade in 360 environmental goods and 114 services, ACCTS aims to build a low-emission, climate-resilient, and sustainable global economy.
The agreement is designed to enable other countries to join it. In the environmental goods context, this is reflected in the fact that some economies may require a longer transition period before they eliminate their tariffs as they wait for a critical mass of international trade in specific environmental goods to take place under no or very low tariffs. Until this point, larger economies might be reluctant to reduce their tariffs and risk losing competitiveness in the global market. The agreement, therefore, allows temporary delays in removing duties: import duties can be postponed for up to 8% of items for 6 years and up to 4% of items for up to an additional 6 years, while export duty removal can be postponed for up to 5 years.
Similarly, Chapter 3 of the agreement seeks to promote trade liberalization in environmental and environmentally related services that support climate change mitigation and adaptation, circular economy, pollution prevention and control, or the sustainable use, protection, or restoration of biodiversity. The reference list of 114 environmental and environmentally related services against which parties take commitments includes services defined in relation to their substantial contribution to the established environmental goals and minimal harm to the purposes listed in the agreement. These services can be grouped into broad categories like business services, transport services, construction and engineering services, distribution services, environmental, and financial services. Within these, the agreement identifies sub-categories such as sanitation, construction, refuse disposal, and research and development. Pertinently, any service supplied in relation to unsustainable logging, mining, or oil, gas and coal exploration and extraction is excluded. In contrast, APEC's reference list focuses on 62 services classified into two groups: those directly related to environmental conditions, like urban planning and recycling, and those indirectly beneficial, such as energy efficiency services and environmentally focused construction projects.
Similar to the WTO’s General Agreement on Trade in Services, the chapter on services requires parties to grant market access through the four modes of supply (cross-border supply, consumption abroad, commercial presence, or movement of natural persons) and to not discriminate between foreign and domestic suppliers of environmental services, subject to any conditions and qualifications set out in the respective schedule of commitment of parties.
Certain commonalities exist for both environmental goods and services. For example, while the listed environmental goods are subject to periodic reviews to reflect technological innovation, environmental changes, and alignment with amendments to the classification of goods under the Harmonized System for the application of the list of current environmental goods, the listed environmental purposes and environmental services, along with existing commitments under the schedules, can be reviewed to reflect evolving priorities of parties and the ongoing work under the WTO and other forums.
What Is the Role of Eco-labels in ACCTS?
The ACCTS agreement highlights a broader trend of incorporating voluntary sustainability standards (VSSs) into trade policy. Notably, it includes a chapter on eco-labelling (Chapter 5), offering 13 non-binding guidelines to enhance the integrity and transparency of these programs. The chapter limits its scope and application to “voluntary” eco-labelling programs. It defines an eco-label as “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.” According to our research, this marks the first trade agreement to define eco-labelling—clarifying its scope and addressing past ambiguities in VSS application.
Our research identifies five common rationales used for integrating VSSs into free trade agreements (FTAs): promotion, recognition, cooperation, guidelines, and support. The ACCTS references recognition, cooperation, and guidelines.
Recognition
In other FTAs, parties recognize that VSSs can contribute to the achievement and maintenance of a high level of environmental protection. Article 5.3 of the ACCTS follows this trend, stating that the parties recognize that high-integrity and high-quality voluntary eco-labelling programs can
- encourage good environmental performance throughout supply chains by facilitating the demand for and supply of sustainable goods and services
- enhance the potential commercial benefits and competitive advantage of leveraging environmental performance in marketing
- empower consumers and other stakeholders to make sustainable choices through reliable environmental information about goods and services.
Guidelines
While some existing agreements—such as the 2020 Chile–Ecuador Economic Complementarity Agreement—encourage the private sector to adopt credible voluntary mechanisms, ACCTS goes further by introducing more elaborated, yet still broad, non-binding guidelines. These guidelines aim to improve the quality of voluntary eco-labels, prevent false information regarding their use, reduce unnecessary trade barriers, and manage implementation costs. These guidelines (Article 5.4) state that voluntary eco-labels need to be
- truthful, reliable, and contain verifiable information on environmental aspects
- transparent and based on robust scientific and technical methods
- developed through fair processes with stakeholder participation
- account for the most significant environmental impacts across a product’s life cycle and may also consider additional non-environmental aspects
- avoid creating unnecessary trade barriers and discrimination between goods or services based on their origin
- aligned with international standards and promote harmonization of best practices
- constantly improved in terms of environmental performance and minimize compliance costs
- certified by independent third parties when required.
By codifying these principles, the ACCTS supports the development and use of voluntary eco-labels that promote sustainable consumption, enabling consumers to make informed decisions while also incentivizing producers to showcase their products’ environmental benefits.
Cooperation
The ACCTS emphasizes cooperation between parties on VSSs (Article 5.6), encouraging bilateral and plurilateral efforts, such as capacity-building and training initiatives, peer evaluations, and leveraging relevant work from regional and international organizations. Importantly, national contact points are established (Article 5.5) to facilitate communication and cooperation. Each party shall designate a national contact point, and they will convene annually.
The ACCTS sets a new standard by incorporating innovative eco-labelling guidelines, empowering consumers to make sustainable choices and incentivizing producers to prioritize environmental performance.
Looking Ahead: How to strengthen ACCTS and its global influence
The ACCTS has established a new standard for incorporating sustainability into trade frameworks by tackling subsidies for fossil fuels, encouraging trade in environmentally friendly products and services, and creating useful eco-labelling requirements. Although the agreement's advantages demonstrate that governments can use trade agreements to advance environmental objectives, its lingering flaws and carve-outs underscore the necessity for continued development, including through its review mechanism. The ACCTS has the potential to develop into a more extensive and significant model if current members deepen their commitments and more nations join. The agreement is a call to action for all stakeholders to ensure trade supports a sustainable, low-carbon future, and it is a promising start in efforts to balance environmental stewardship and economic growth.
¹ The SCRM is the net total price applying to carbon dioxide (CO2) emissions from a given fossil fuel considering subsidies, carbon pricing, and some energy taxes. It is similar to the OECD’s Net Effective Carbon Rate. For example, a country might commit to an average SCRM of USD 50 per tonne CO2 on gasoline comprised of excise tax, carbon tax, and Emissions Trading Scheme price, minus any exemptions for specific users.
² Annex VIII defines as a fossil fuel all electrical energy emitting more than 380 grams of CO2 equivalent of fossil fuel origin per kilowatt-hour of electricity (gCO2e/kWh). Direct emissions from combined cycle fossil gas power range from 350–490 gCO2e/kWh and life-cycle emissions from 410 to 650 gCO2e/kWh. Gas with abatement ranges from 30–98 gCO2e/kWh (direct emissions) to 94–340 gCO2e/kWh (life-cycle emissions).
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