International trade and climate change. Part of the problem or part of the solution?

The relationship between trade and climate change is very complex and linkages occur in several directions. There are both direct and indirect mechanisms and the global characteristic of climate-related impacts and responsibilities improves such complexity within the political debate. To this purpose, a deep knowledge of linkages across sectors and regions as well as within different policy spaces is a requirement for assessment exercises of climate and/or trade-related policies. The aim of this literature review is to present an overview of the different impacts and channels that should be addressed in policy evaluation from both a theoretical and practical point of view. The analysis is divided in three parts. The first one (Sections 1-2-3) is dedicated to describing a taxonomy of the different impacts, linkages and transmission channels that could be traced both in a global or more local perspective. The second part (Sections 4-5-6) investigates those quantitative models that are commonly used for economic analyses when the climate and trade- related aspects are jointly included. The description of practical cases studies as applications of the different models provides some guidelines for detecting the best computational solution according to the nature of the problem under investigation. The third part presents some specific issues that are currently debated in policy negotiations, especially within the European Union, including the introduction of counterbalancing measures as a border tax adjustment (Section 7), the role of innovation trajectories and technology transfer (Section 8) and the most recent developments in the political analysis of the interactions between the rules settled by the international climate policy agenda as the Paris Agreement and the world trade policy framework represented by WTO rules (Section 9). Given the vast literature today available on this topic, while considering the multiple linkages from a comprehensive perspective is needed to have a full picture of all potential impacts, it is of primary relevance the choice of the point from which the policy impact evaluation exercise should start, that in turn depends on the objectives of the policy itself. If a trade policy is under scrutiny, the quantitative analysis should start from the multilateral and/or bilateral economic relationships and then assessing the indirect impact on climate change. On the opposite, if the reduction of damages related to climate change is the primary policy goal, the effectiveness of mitigation or adaptation policies should be weighted by the relative economic impacts associated to trade linkages. To this purpose, the document ends with four tables with different taxonomies of scientific contributions dealing with the climate and trade- related policy nexus with different quantitative methodologies and temporal perspectives, including ex-post and ex-ante analyses and also trade flows decomposition under a global value chain approach.