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IF Insights: Challenge for global trade to go green or crumble

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Every year, over 11 billion tons of commodities, or 85% of all trade, are transported by sea

We are already experiencing climate change. People’s lives are severely impacted, and they are becoming increasingly concerned about it, at least that’s the mood being reflected in Allianz Trade’s most recent poll on climate literacy, which found that 75% of participants in eight different nations were “very concerned” about climate change.

Global trade is being impacted by climate change as well. A vital canal’s capacity has been cut in half due to the drought at the Panama Canal. As per the reports, the Panama Canal will need at least the rest of 2024 to fully recover from the 2023 drought that depleted water levels, choked vessel traffic and cost shippers millions of dollars.

Argelis Moreno Lopez, senior forecast and market analysis specialist in the Panama Canal Authority’s strategic planning division, told Bloomberg recently that La Nina (the periodic cooling of ocean surface temperatures in the central and east-central equatorial Pacific) was expected to usher in rains during April 2024, providing relief after record dryness afflicted the key transit channel in 2023.

Since trade accounts for around one-third of greenhouse gas emissions worldwide, trade is only beginning to feel the effects of its own medicine. In actuality, greening commerce is not only necessary to ensure that everyone has a sustainable future. For international trade, it is also an existential requirement.

Green Shipping: A Must

Every year, over 11 billion tons of commodities, or 85% of all trade, are transported by sea. By 2050, this number is expected to quadruple. Even while the maritime industry presently contributes only 3% of greenhouse gas emissions worldwide, if nothing is done now, this percentage might rise to 17% by the middle of the century. Given the recent Red Sea interruptions that pushed for longer routes, the share could be considerably greater shortly. In actuality, the maritime sector has contributed to a +42% increase in worldwide CO2 emissions since 2000.

According to C40 Cities Climate Leadership Group, a green shipping corridor is a maritime commerce route on which zero-carbon emissions ships and other emissions reduction programmes are deployed, and emissions reductions are measured and enabled through actions and policies.

Green shipping corridors first came to prominence in Glasgow at 2021’s COP26 Climate Summit, as 19 countries joined the first-ever framework to create zero-emission ocean shipping corridors, with the signing of the Clydebank Declaration for clean shipping corridors.

As per Aylin Somersan Coqui, CEO of Allianz Trade, decarbonising maritime transportation will thus be crucial to making international trade more environmentally friendly. It’s also a pressing race against the clock: In the maritime shipping industry, emissions must stabilise by about 2025 despite projected increases in activity, and then decline until 2030 to reach net-zero emissions by 2050.

“Greening fleets have emerged as the industry’s top concern. Thirteen of the top 30 shipping corporations globally have already established a net-zero aim for the years 2040 to 2060. Naturally, there is a cost associated with these lofty objectives: our projections indicate that the industry must invest a minimum of USD23 billion per year to meet its climate ambitions,” Coqui remarked in her opinion piece for the Global Banking and Finance Review.

And it seems that “Green Shipping Corridors” are actually mushrooming around the world now, after the much-needed consensus at the London headquarters of the International Maritime Organisation (IMO), as industry leaders pitched for the need of turbocharging commercial shipping’s green targets.

As per the latest data from the classification society DNV, the number of green shipping corridor initiatives doubled in 2023 and, as of February 2024, stands at 57 with Los Angeles, Singapore, Antwerp, Rotterdam, the Baltic Sea and southern Japan leading the tally, in terms of fostering dedicated green fuel shipping channels.

More Green Goods Commerce

Only if green products and technologies—from biofuels and mercury-free batteries to vehicle catalytic converters and septic tanks—are created, implemented, and dispersed at a never-before-seen rate will the shift to a low-carbon economy be feasible. The trend is really good in this regard. The percentage of green goods exported worldwide increased by around +5% between 2000 and 2022, Coqui noted.

Europe is leading the way in the trading of green commodities. The United States is now the largest importer of green products and technologies outside of the EU27 as a whole, while Germany alone leads the US in green exports.

The competitive advantage of 19 out of 27 European Union economies in low-carbon economies has been preserved or even increased. Green products made up over 15% of Germany’s total exports in 2022. The nation has also had the most increase in exports of environmental goods as a percentage of GDP (+6.9pps) between 2000 and 2022, trailed only by South Korea and China.

By concentrating on the manufacturing and export of environmentally friendly products, Europe can further penetrate the expanding worldwide markets for clean technology. This has the potential to spur economic expansion and more funding for the green transition. Eliminating tariffs on these products may have a significant impact.

Trade barriers for environmental items remain high, with tariffs standing at a hefty 5.4%, while the overall tariff rate is 8.6%. Lowering the cost of importing green products would increase their accessibility and affordability for both businesses and consumers.

It would also encourage producer rivalry, which would spur innovation both locally and internationally. According to the Allianz Trade’s estimates, the removal of tariffs on environmentally friendly products might increase export volumes by more than 10% annually, or USD 184 billion.

Make The Overall Economy Green

To expand the supply and decrease the price of green technologies, we must first pull on five major levers to make commerce more environmentally friendly. First, the world’s most powerful economies should re-engage in promoting and supporting green trade. The second requirement is consensus among all parties regarding what constitutes a green product. Third, through proper labelling and public price subsidies, governments should establish clear norms and standards for sustainable production and consumption. Fourth, to lower the cost of green products for consumers, customs tariffs should be further cut or eliminated. Lastly, governments should establish extra tax advantages for green enterprises and reroute excess savings into supporting those companies.

Nonetheless, to lower the carbon footprint of every produced commodity that is traded internationally, we also need to step up our efforts to green every industry. Businesses will therefore require incentives from the government and other sources in several areas. Regarding borrowing and lowering investment uncertainty through instruments such as contracts of difference; utilising subsidies to make environmentally friendly investments profitable and scalable; tackling climate-related issues through creative jobless plans; transferring to safe and secure supply chains through comprehensive risk management; and advancing a truly circular economy by instituting quotas to allay financial worries.

“We must employ all available technologies and policy alternatives to promote green commerce since it is no longer a choice. Global commerce has significantly aided in the development and decrease of poverty over the past few decades, and it is our responsibility to encourage businesses and pressure policymakers to make it more sustainable going forward,” Coqui concluded.

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