Extreme weather events such as the recent heatwaves in France and flooding in Pakistan have forced policymakers to almost unilaterally accept that climate change is beginning to impact the world. Many experts say that these events, along with rising sea levels, increased temperatures, and changes in water supply will have an especially severe impact on Asia (McKinsey, 2020). Therefore, New Southbound partner countries are taking steps to address the growing effects of climate change.
In general, the two ways of combating climate change are developing green technology and implementing relevant regulations or policies. This first of three articles will focus on five current international trends in sustainable development and carbon reduction policy, which include: the UN Sustainable Development Goals (UN SDGs), net-zero emissions, climate-related financial disclosures, carbon border adjustment mechanisms (CBAM), and emissions trading. The subsequent two articles will explain how individual New Southbound partner countries are responding to these policy trends and future opportunities for Taiwan to collaborate with international partners to mitigate the impacts of climate change.
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UN Sustainable Development Goals
For years, public and private entities have placed an emphasis on being “sustainable” and “environmentally friendly.” In the past, sustainability was a vague concept with many interpretations, which made it difficult to define and address global issues. Therefore, in recent years, international bodies have been creating frameworks, with measurable outcomes, that can define and track sustainability.
One way the international community has defined sustainability outcomes is through the UN’s Sustainable Development Goals (UN SDGs). Announced in 2015, the UN SDGs formulated 17 goals with various standards and indicators to achieve global sustainability. Ho Ching-jen from Taiwan's National Council of Sustainable Development said, “The SDGs are like a common language we can use to communicate with the world about our sustainability efforts” (2021, Oung).
This common language is attempting to make an abstract concept like sustainability concrete. The UN SDGs define sustainability as achieving its 17 goals on a global scale. To do so, each SDG also includes measurable targets and indicators that remove the ambiguity of abstract concepts like Quality Education (Goal 4) and Decent Work and Economic Growth (Goal 8).
For instance, the UN measures progress by the degree to which a country has fulfilled an SDG’s targets and indicators. In terms of Gender Equality (Goal 5), progress includes increasing the number of women in national parliamentary seats and decreasing the number of victims of domestic abuse (UNDP, n.d.). As per the UN SDGs, Gender Equality will be achieved once every country worldwide has reached the 9 targets and 14 indicators of Goal 5.
After all the measures and indicators of all 17 goals are achieved, the world is measurably sustainable as stipulated by the UN SDGs.
In terms of assessment, the UN encourages countries to file voluntary national reviews (VNRs). VNRs are huge projects that involve gathering data across a multitude of government ministries and agencies. Due to the large amount of time, effort, and coordination required to produce a VNR, most countries have only filed one or two assessments since the UN initiated the Sustainable Development Goals in 2015. Despite this, VNRs have been the best way to assess whether measurable progress has been made toward the various indicators found within the 17 UN SDGs.
Traditionally, the public sector has been in charge of sustainability efforts by enacting and enforcing laws and regulations. While this is still true to a large degree, industry has also started to get involved due to the potential financial rewards of developing green sectors.
BlackRock, one of the world’s largest private financial institutions, is now advising its clients to invest in companies that align with the UN SDGs. According to BlackRock, the UN SDGs will create US$12 trillion in four sectors: food and agriculture, cities, energy and materials, and health and well-being (Hildebrand, 2021).
Certain investors now think that companies aligned with UN SDGs reduce exposure to regulatory, reputational, and financial risks. Moreover, some believe certain UN SDGs are more related to financial materiality, which are intangible factors that affect growth. UN SDGs relevant to financial materiality include: Goal 6, Clean Water and Sanitation, Goal 7, Affordable and Clean Energy, Goal 12, Responsible Consumption and Production, and Goal 13, Climate Action (Hildebrand, 2021).
Climate-Related Financial Disclosures
In this vein, the Task Force on Climate-related Financial Disclosures (TCFD) was established in 2017 to promote sustainable investment. The TCFD provides a framework for disclosing climate-related information so investors, lenders, and insurance underwriters can better understand a company’s material risk (TCFD, 2017). Due to a growing interest in sustainable investing, cooperation with the TCFD has increased from 513 organizations in 2018 to 2616 in 2020 (TCFD, 2021).
Like the UN SDGs, the TCFD emphasizes measurable indicators. The TCFD utilizes 11 targets to analyze a company’s climate-related information in terms of governance, strategy, risk management, and metrics. Every year, the TCFD then uses artificial intelligence (AI) to assess whether the reports filed by a company fulfill those 11 targets (TCFD, 2021).
In the past, companies voluntarily filed these reports. However, in recent years, more and more countries, such as Taiwan, have realized, “Investors worldwide and industrial supply chains are paying more attention to ESG (environment, social, government) issues" (SFB, 2020). Therefore, an ever-increasing number of countries are making TCFD filings mandatory for publicly traded companies above a certain size.
The UN SDGs and the TCFD help achieve another ambitious global initiative, net zero greenhouse gas emissions by 2050. Since the Intergovernmental Panel on Climate Change’s (IPCC) landmark report in 2018, countries around the world have made concrete pledges and plans to reduce emissions. Most of these pledges were made at the 2018 United Nations Climate Change Conference, when 200 countries agreed to reach net-zero emissions by the second half of the 21st century (Vaughan, n.d.).
As of 2021, “90% of the global GDP is under Net Zero target, up from 30% in 2019” (WWFM, n.d.). Thanks to the IPCC’s report, most public institutions understand the only way to guarantee that the planet will remain under catastrophic levels of warming, which have been defined as more than 1.5 degrees Celsius above pre-industrial levels, is by achieving net zero emissions by 2050 (2018, IPCC).
Most governments are facilitating net zero by 2050 through emission trading schemes and carbon taxes. Under a domestic emission trading scheme, a government sets the total amount of greenhouse emissions and gives individual companies carbon allowances. At the end of the year, these companies must either pay levies for emitting over their allowance or can sell their remaining allowances back to the government. Carbon taxes, on the other hand, are more straightforward levies for the carbon content of fossil fuels that a company emits over a certain time period (PM, 2021). Despite the potential environmental benefits, not all countries have adopted carbon pricing mechanisms due to technical limitations and available public resources.
Carbon Border Adjustment Mechanisms
However, there is still a high risk of "carbon leaking" even when countries adopt domestic carbon pricing. Carbon leaking is a process in which buyers seek cheap goods produced in markets with more lenient carbon reduction policies. For instance, the EU produces 40% of its steel in electric arc furnaces (ESA, n.d.) while China still produces 91% of its steel in cheaper, but more polluting coal-consuming blast furnaces (Nicholas, 2022). Even though EU steel produces fewer carbon emissions, steel buyers have an economic incentive to acquire steel from China.
Therefore, certain economic entities such as the EU have introduced "carbon border adjustment mechanism" (CBAM) policies to equalize the price of imports manufactured under different levels of climate regulation. Basically, CBAM is a system of tariff-like costs based on carbon emissions. A country imposes CBAM on imported goods when a domestic equivalent is more expensive due to the added cost of carbon related-regulations. In terms of the above example, the EU would tax imported Chinese steel under CBAM because EU environmental regulations make domestic steel more expensive (EC, 2021).
CBAM has created certain political concerns between relevant stakeholders even though the policy could reduce global emissions due to carbon leaking. In the past, developed countries have avoided enacting CBAM due to creating potential trade disputes. Despite this, the EU has gone forth with plans to enact CBAM in the near future. Member countries at last year’s BRICS Summit, which included Brazil, Russia, India, China, and South Africa, unilaterally rejected the EU’s proposed policy. They stated that CBAM, “must not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade” (Mishra, 2021). Developing economies fear that economic protectionism veiled as environmental policy will price them out of essential markets.
Dialogue between affected parties is still taking place before the European Union launches its first round of CBAM. Despite the potential conflict, the European Commission plans to enact some form of CBAM in 2023 (2021, Bernasconi-Osterwalder). The first CBAM will only apply to goods heavily prone to carbon leaking, such as iron, steel, cement, fertilizer, aluminum, and electric generation. In 2023, importers will only file information on emissions, but won’t pay any related fees. By 2026, the EU will refine the system and start making importers pay fees based on carbon emissions (Galharague, 2022). This will give manufacturers the time to adjust their manufacturing, data collection, and reporting processes.
The international community now sees the growing importance of taking concrete action toward sustainable development and curbing carbon emissions. The UN SDGs have served as the main pathway for sustainable development by clearly defining relevant standards and norms. For carbon emissions, countries around the world have adopted net-zero emissions policies, mandatory climate-related financial disclosure, carbon border adjustment mechanisms, and emission trading policies. These policies have the aim of reducing the risk of climate-related disasters while providing all people, regardless of race, class, or caste, an equitable and fulfilling life. The following article will be a description of how individual New Southbound countries are responding to these policy trends in carbon reduction and sustainable development.