The State of Agricultural Commodity Markets 2022

The effects of environment-related provisions in RTAs on environmental outcomes are difficult to assess, as empirical evidence is limited. Most studies focus on two measurable indicators: the reduction in greenhouse gas (GHG) emissions and the net annual changes in deforestation. For the first indicator, the evidence suggests that, while not limiting the export capacities of countries, ERPs can play an important role in promoting environmental sustainability and lowering GHG emissions.²²² Research shows that CO2 emissions in countries that are parties to an RTA with ERPs tend to be lower than in countries that are parties to RTAs without such provisions.²²³

For the second indicator, the analysis shows that, following the implementation of RTAs with ERPs that aim to protect forests and biodiversity, no changes in net annual deforestation were recorded.²²⁴ At the same time, signatories to RTAs that lack ERPs saw substantial increases in net forest loss. However, the global impact of such measures remains unclear, as deforestation could shift to countries not covered by such provisions.²²⁵

Another study notes that environmental provisions can help reduce exports, including agricultural exports that have negative environmental impacts and increase sustainably produced exports from developing countries.²²⁶ This effect is more prominent in developing countries with stringent environmental regulations.

Although trade offers opportunities for greater prosperity and development, trade agreements need to be equipped with a robust political and legal framework addressing environmental externalities. If such a framework is not embedded in trade policies and agreements, trade can spur negative impacts on the environment. Recent studies analysed whether RTAs with ERPs are equipped with effective mechanisms that are in line with global environmental goals to avoid negative effects on climate and biodiversity.²²⁷

The analysis shows that, while some mandatory standards regarding deforestation and biodiversity loss, for example have been established, overall, agreements lack a comprehensive legal framework to enhance environmental protection. Dispute settlement mechanisms provide a means to enforce commitments and together with mechanisms for regulatory cooperation can enhance the effectiveness of ERPs. Indeed, the analysis suggests that dispute settlement mechanisms covering the entire agreement were effective in mitigating forest loss.^{ao, 228}

Another study analysing the effectiveness of ERPs in RTAs, established 14 different climate-relevant provision types found in several agreements and the level of cooperation put forward by the signatories for climate action measures. It focused on four conceptual levels of cooperation: i) optional, where parties do not expressly commit to cooperate on climate action but rather leave it optional, often using conditional language; ii) intentional, where agreements include statements of intent to cooperate, often with climate-relevant issues identified, but lacking detail on actions, methods and objectives; iii) action-structured, where specific cooperative actions are outlined in detail within an action framework or loose governance structure but with no set targets or schedules; and, iv) programmatic, where the agreement contains a programmatic plan of specified actions, targets and schedules for cooperation in a well-defined governance structure.

The study showed that non-institutionalized cooperation, such as optional or intentional, is likely to result in limited impacts and additional contributions to these may be insignificant or not easily determined.^ap More action-structured and programmatic cooperation may anticipate additional positive impacts to develop, depending on the effectiveness of governance structure arrangements. For example, the approach by the European Union is especially significant, with the 27 members being involved in approximately one-third of the RTAs and oriented towards greater cooperation. Legally binding commitments within an RTA to undertake specified and time-bound actions are likely to have more defined and quantifiable impacts on trade-related behaviours, and, in turn, climate-relevant cooperation would lead to more substantive results.²²⁹

Trade agreements and third-party voluntary sustainability certification schemes

Third-party voluntary sustainability certification schemes are alternative mechanisms to foster environmental protection. They are gaining importance in global markets, especially for high-value products with established links to global value chains. For example, one-quarter of the global coffee and cocoa areas are certified through sustainability standards developed by both non-governmental organizations and the private sector.²³⁰

Such sustainability certification schemes put forward private standards that aim to address environmental, social or economic challenges in agricultural markets and respond to consumer concerns. They do so by using market incentives to encourage the adoption of improved practices. For example, organic standards incentivize producing crops without synthetic fertilizers and pesticides. Other schemes, such as the Rainforest Alliance’s Roundtable on Sustainable Palm Oil (RSPO), include a range of requirements for environmentally friendly farm practices to promote agroforestry, the use of organic fertilizers and pesticides, and safer treatment and disposal of waste.

For consumers, sustainability certification schemes provide information on both the quality and safety of food, environmental sustainability, and such social norms as child labour, gender equality and the welfare of the producers.²³¹ However, compliance with standards often requires significant trade-offs. For example, organic farming or other improved environmental practices tend to increase production costs.²³² For farmers, purchase guarantees or price premiums for certified products can secure market access and provide the incentive to adopt practices that protect the environment. Often, higher prices compensate for the increased costs of production and farm management that are necessary to comply with sustainability standards.

Sustainability certification schemes can complement existing policies in multiple ways and blend purposefully into different arrangements and policy mixes. Governments can play a significant role in third-party voluntary sustainability certification schemes as supporters, facilitators and users.²³³ The complementary role of these initiatives to inter-governmental regulatory frameworks and the success of some of these labelling initiatives is gaining in importance.²³⁴

Evidence on the effectiveness of these schemes differs between countries and products, but in general, sustainability certification schemes are found to improve environmental practices.²³⁵ For example, in Brazil, Colombia, Costa Rica, Guatemala and Mexico, standards set by a multinational corporation were seen to improve the environmental conduct of certified smallholder coffee producers compared with their non-certified counterparts. In the Tapi River basin in Thailand, an area that produces up to 60 percent of palm oil in the country, crude oil palm producers certified by RSPO were found to produce the lowest environmental impacts, especially for global warming and photochemical ozone formation.²³⁶ In Ethiopia, shade-grown coffee Rainforest Alliance certification programmes effectively alleviated forest degradation. As a result, sustainability certification schemes have been recognized as a valuable tool and are increasingly implanted in trade agreements.²³⁷

Certification schemes have become an important transnational tool in the context of sustainable development, as they provide incentives to embed a range of social and environmental issues on economic activities.²³⁸ An increasing number of trade agreements contain references to such sustainability standards. Language in these agreements often refers to the commitment of countries to adopt or encourage the adoption of third-party voluntary sustainability certification schemes, with the strength of the language varying between agreements.²³⁹ These provisions promote the use of sustainability certification schemes but do not condition trade to them.²⁴⁰ A non-exhaustive overview of the trade agreements with embedded references to voluntary sustainability certification schemes is provided in Table 3.2.

TABLE 3.2SELECTED EXAMPLES OF REGIONAL TRADE AGREEMENTS WITH EMBEDDED REFERENCES TO VOLUNTARY CERTIFICATION SCHEMES

SOURCE: Compiled by FAO based on the original trade agreements.

An interesting case of an RTA that deepens this approach by explicitly using third-party voluntary sustainability certification schemes is the EFTA-CEPA Agreement, which entered into force in 2021 (see Table 3.2).^aq Article 8.10 of the agreement notes that trade in vegetable oils should support the dissemination and use of sustainable standards, practices and guidelines for sustainably produced vegetable oils.^ar Switzerland, which is the largest consumer market within EFTA, requires that all palm oil imports comply with one of the three globally recognized certifications: RSPO, the International Sustainability and Carbon Certification Plus (ISCC Plus) and the Palm Oil Innovation Group.^as In order to facilitate traceability, palm oil should be imported in 22-tonne tanks to ensure that the origin of the palm oil can be traced back along the supply chain.^at These conditions of Article 8.10 of the agreement are specified in national law with the Swiss Federal Council adopting this specific implementation of sustainability certificates. The details are regulated in the federal ordinance on the importation of sustainably produced palm oil from Indonesia, which entered into force at the same time as CEPA in August of 2021.^au

What makes this case unique is that, taken together, the trade agreement and the national legislation effectively make imports of palm oil and its derivatives into Switzerland conditional upon a specific set of sustainability certification schemes, compared to simply encouraging the adoption of such schemes, and in a way it defers the enforcement of sustainable production to a foreign country. In line with this trend, negotiations started in 2020 between Costa Rica, Fiji, Iceland, New Zealand, Norway and Switzerland on an Agreement on Climate Change, Trade and Sustainability (ACCTS), which would also encourage the adoption of such voluntary sustainability standards. Early information indicates that under this agreement, work is underway to develop “principles-based guidelines for voluntary eco-labelling programmes, alongside institutional mechanisms to support their implementation.”²⁴¹ This could indicate that voluntary sustainability certification schemes are becoming more deeply embedded.