Working Paper

Beyond non-regression: Mainstreaming climate action into FTAs

Published 1 February 2023

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Emily Lydgate 1


While integrating climate objectives into FTAs remains unusual, it is an area of rapid innovation. This chapter focuses on EU and New Zealand, both of whom have used FTAs to support climate-related goals. The EU has increased the enforceability of requirements to uphold the Paris Agreement and domestic climate regulation, while New Zealand has used FTAs to further regulatory cooperation, emphasizing fossil fuel subsidy reform. The UK also features in the analysis as a country that has completed recent FTAs with both. Innovative FTA provisions between countries who self-identify as climate leaders may appear limited in their scope and influence: outliers rather than frontrunners. However there is evidence to suggest they have already contributed to broader climate cooperation, and can do so further, by: propelling discussion other fora, including the WTO and Paris Agreement; addressing technical challenges for climate cooperation across different regulatory systems; breaking down silos between trade and climate agreements; and furthering a learning process about effective models for achieving climate cooperation through trade.

Reforms to EU strategy

The EU has indicated that it will strengthen the role of sustainability in its FTAs, including stronger integration of climate aims. In June 2022 the Commission produced a Communication, ‘The power of trade partnership: together for green and just economic growth’, which presents a new FTA strategy.17 The EU’s strategy elevates the importance of climate action. Most significantly, it further develops the proposal set out in the Commission’s Green Deal18 to impose sanctions on FTA parties for non-compliance with the Paris Agreement:

The Commission now proposes the possibility of trade sanctions as a matter of last resort, in instances of serious violations of core TSD commitments, namely the ILO fundamental principles and rights at work, and of the Paris Agreement on Climate Change. In such instances, trade sanctions would be appropriate as a means to foster
compliance. In the case of the Paris Agreement, the intention would be to capture failure to comply with obligations that materially defeats the object and purpose of the agreement….This approach will build on and reinforce the respect of core labour rights and of the Paris Agreement as essential elements of our trade agreements.

The Paris Agreement relies upon participating countries to define their own contribution to reducing emissions. In this sense, the likelihood of being able to establish that either Party took actions that would ‘materially defeat the object and purpose of the Paris Agreement’, short of withdrawal from the Agreement itself, seems unlikely.


Though negotiated before the Commission’s new FTA strategy was published, the TCA, which came into force in May 2021, has already put into practice some of the recommendations above. Like past FTAs, the TCA relies upon non-regression as a mechanism to guarantee that Parties will maintain environmental protection. But it departs from existing FTA non-regression requirements, which remain thematically open-ended. Instead, it specifies quantitative climate-related regulatory commitments which must be maintained, and which take reference in shared domestic (rather than international) commitments. It also has much stronger enforcement mechanisms, which uphold the non-regression commitments, but also a shared commitment to the Paris Agreement. These changes take the form of five distinct innovations.

Innovation 1: ‘Fight against climate change’: an essential element of the Agreement

In keeping with the new EU FTA strategy, the very first sentence in the TCA Preamble affirms that the ‘fight against climate change’ is an essential element of the agreement, acting as a guiding principle for the whole agreement. The chapter establishing the ‘Basis for Cooperation’ for the TCA also affirms that ‘climate change represents an existential threat to humanity’, and gives this ‘fight’ a material form as a requirement to ‘respect the Paris Agreement and the process set up by the UNFCCC and refrain from acts or omissions that would materially defeat the object and purpose of the Paris Agreement.’21

The TCA reaffirms both Parties’ ambition for ‘economy-wide climate neutrality by 2050,’22
the first time that a shared net-zero emissions commitment was integrated into an FTA. This commitment is phrased as an ‘ambition’ rather than a target or objective, and there is no specific outcome duty attached to it. While either Party can initiate a dispute for non-compliance with this requirement, there is no option for sanctions.23 Instead, the enforcement process parallels the EU’s standard FTA enforcement model, as described above in the example of CETA However, it establishes an expectation for climate planning and action that is quantitative, measurable and long term as one of the ‘principles and objectives’ of the Level Playing Field requirements of the TCA.

Innovation 3: the inclusion of interim climate reduction targets

As well as the general objective of maintaining a climate neutrality ambition, the TCA includes a commitment to uphold both Parties’ ‘climate level of protection’ as set out in interim greenhouse gas reduction targets. This includes specific quantitative interim targets that both Parties have committed to in domestic legislation. These targets do not reflect both sides’ increased climate ambition after committing to net-zero targets. Thus the 40% reduction by 2030 target has been revised up to 55% in EU and 68% in UK. However integrating quantitative climate benchmarks into an FTA is novel, and the targets are covered by the non-regression requirement, such that, if an arbitral tribunal agrees that regression has occurred, either Party can apply sanctions.24

Innovation 4: commitment to effective carbon pricing

The Parties also commit to non-regression on upholding an ‘effective system of carbon pricing’. This requirement is also linked to binding dispute settlement. Parties shall ‘give serious consideration’ to pursuing linked ETS schemes.25 This situates dialogue on carbon pricing effectiveness within the institutional framework of an FTA and its implementing committees, notably the Trade Specialised Committee on Level Playing Field for Open and Fair Competition and Sustainable Development.

Innovation 5: Rebalancing mechanism

The TCA outlines a so-called ‘rebalancing’ mechanism, which specifies that ‘significant divergences in [climate protection] can be capable of impacting trade or investment between the Parties in a manner that changes the circumstances that have formed the basis for the conclusion of this Agreement….If material impacts on trade or investment between the Parties are arising as a result of significant divergences … either Party may take appropriate rebalancing measures to address the situation.26 Like the essential elements clause, this invokes VCLT, under which a fundamental change of circumstances is a grounds for terminating or withdrawing from a treaty.27

Analysis: Convergence without harmonisation: an outcome benchmarking approach

The overall approach of the TCA might be described as outcome benchmarking.28 It combines high-level ambitions with specific quantitative targets underpinned by strong enforcement mechanisms, with the potential for sanctions from to the failure to keep pace with future levels of climate protection. This provides a hybrid between the alignment with environmental legislation required in ‘deep’ EU Association Agreements and the EEA Agreement, and non-regression requirements that the EU has negotiated in its ‘shallow’ trade agreements with countries such as Canada and Korea.
These innovations are significant. In contrast with ‘shallow’ FTA Trade and Environment chapters described above, it moves beyond the dual approach of reaffirming international standards and existing domestic regulation as benchmarks. Instead it embeds a small number of specific benchmarks. These are mostly quantitative in nature, or in the case of carbon pricing have a quantitative result (ETS price), making compliance assessment relatively concrete and objective, though the carbon pricing commitment to ‘effectiveness’ retains significant interpretative complexity.
The inclusion of a keeping pace requirement is also innovative, both from an international trade perspective and also an international environmental law one. Broadly defined, non-regression in international law encompasses any commitment not to lower existing levels of protection. It is not a widely-recognized principle of international law.

However, based on its inclusion in the Paris Agreement and the Rio + 20 Declaration, a growing movement of academics and international lawyers have argued that there is a sufficient basis for it to comprise an emerging principle of international environmental law.29

New Zealand: Climate and trade agreements, and fossil fuel subsidies


Like the EU, New Zealand has also elevated the importance of climate objectives in recent FTAs. Indeed, New Zealand has gone further than the EU, by leading negotiations for the first FTA that explicitly defines its objective as climate-related: the Agreement on Climate Change, Trade and Sustainability (ACCTS), announced in September 2019, in partnership with Fiji, Iceland, Norway and Costa Rica.
The centrality of climate-related objectives is clear not only from the name of the FTA itself, but also in the Joint Leaders’ Statement on its launch, in which the Prime Ministers of ACCTS countries made clear that its purpose is to aid in achieving the aims of the Paris Agreement.30 In subordinating trade aims to climate aims, the ACCTS has flipped the hierarchy of traditional FTAs, in which climate or environmental aims are included as flanking measures. In so doing, regardless of its ultimate success in facilitating the low-carbon transition, the ACCTS has provided an innovative model which goes beyond any existing FTA in mainstreaming climate objectives into a trade agreement. Uniquely among the FTAs considered in this chapter, the ACCTS also includes signatories from both developed and developing countries.
The ACCTS aims to support the Paris Agreement through identifying areas in which trade-related measures can reinforce climate action. These include three core objectives: removal of tariffs on environmental goods and new binding commitments for environmental services, introducing disciplines to eliminate harmful fossil fuel subsidies, and developing guidelines on voluntary eco-labelling programmes.’31

The UK-New Zealand and EU-New Zealand FTA

New Zealand’s FTAs with the UK and the EU reveal its approach to climate cooperation through more traditional FTAs. The UK-New Zealand FTA contains a few climate-related firsts. These include the most comprehensive list of environmental goods being liberalised of any FTA to date32 (a less notable achievement given that the FTA eliminates all tariffs between the parties, though some on a slower timescale).33
Also, like the UK-EU TCA, the FTA is also one of the first to reference Parties’ net-zero by 2050 ambition, and sets out that they will pursue efforts to limit warming to 1.5 degrees C above pre-industrial levels.34 Unlike the TCA, this is a high-level commitment not tied to dispute settlement.
Most notably, the FTA contains unprecedented commitments on fossil fuel subsidy reform, including through a dedicated article, in which Parties agree to ‘take steps to eliminate harmful fossil fuel subsidies where they exist, with limited exceptions in support of legitimate public policy objectives’. It affirms both sides’ commitment to the Powering Past Coal Alliance, and commits both to ending new direct financial support and export credits for fossil fuel energy, except in narrow circumstances.35
The EU-New Zealand FTA, signed less than a year later, also contains commitments on fossil fuel subsidy reform, but the language is weaker: rather than eliminating, it commits both Parties to ‘progressively reducing fossil fuel subsidies.’ They also ‘reaffirm their commitment to work to meet this objective in accordance with national circumstances, while taking fully into account the specific needs of populations affected.’ The EU-New Zealand FTA also affirms the Parties’ commitments to the Paris Agreement, which is included as an essential element of the FTA, but does not reiterate their ambition to net-zero emissions by 2050.36

Analysis: The scope and force of FTA obligations on fossil fuel subsidies

As part of the Cairns Group of agricultural exporters, New Zealand has long been an advocate of the elimination of trade-distorting domestic agricultural subsidies, and more recently has become an international leader advocating reduction of fossil fuel subsidies, as discussed further in the conclusion.37 The novel nature of these FTA obligations on fossil fuel subsidies, and the differences in phrasing between the EU-New Zealand FTA and UK-New Zealand FTA, prompt further reflection on their interpretation and legal weight.

Conclusion: The influence of FTA innovation on broader trade and climate cooperation

There is common ground between the FTAs examined in this chapter; all include elements of regulatory cooperation as well as liberalisation of environmental goods and services, but the EU has amplified obligations on levelling the playing field for climate regulation, and New Zealand has focused on commitments to fossil fuel subsidy reform. The innovations documented above are limited to a few countries, and could be dismissed as unrepresentative of overall trends. However, they likely influence cooperation on trade and climate more broadly, through at least four different means, detailed below.

Propelling discussion other fora, including the WTO and Paris Agreement

First, they help inform and propel plurilateral/multilateral initiatives. The clearest example is New Zealand’s advocacy of elimination of fossil fuel subsidies. As well as emphasizing fossil fuel subsidy reform as an objective of the ACCTS and in its FTAs with the UK and EU, it has led the Friends of Fossil Fuel Subsidies Reform, which, together with the UK as host of the COP26 in 2021, issued a statement calling for ‘support for accelerated action to eliminate fossil fuel subsidies.’43 In November 2021 at COP 26, the Glasgow Climate Pact, pursuant to the Paris Agreement, called upon Parties to ‘accelerate efforts towards the phasedown of unabated coal power and the phase out of inefficient fossil fuels subsidies.’44 In December 2021, a group of 45 WTO Members proposed a Fossil Fuel Subsidies Ministerial Statement ‘seeking the rationalisation and phase out of inefficient fossil fuel subsidies that encourage wasteful consumption along a clear timeline.’45 Through these initiatives, fossil fuel subsidies reform has become a part of the negotiating agendas of the WTO and Paris Agreement. Inclusion in the Glasgow Climate Pact is particularly significant due to its multilateral scope, with almost 200 signatories, and was considered one of the COP 26’s most significant accomplishments.46
While the causal relationship between FTA and pluri- or multilateral action is difficult to pin down precisely, New Zealand’s efforts to promote fossil fuel subsidies reform through multiple channels likely mutually reinforce each other. It sets out a strategy for how the two interact; with respect to the ACCTS, it writes:

We consider that there is an important role for plurilateral agreements like ACCTS to play as a pathfinder and template for action. Our vision is that ACCTS will demonstrate in practical terms how trade rules can support climate and broader environmental objectives while generating momentum towards an eventual multilateral set of solutions.47

Addressing technical challenges for climate cooperation across different regulatory systems

Another way in which FTA climate provisions can influence pluri- or multilateral action is by helping to bridge the divide between distinct approaches to national regulation. As set out above, fossil fuel subsidies are to some extent in the eye of the beholder. Establishing a shared definition would aid greatly in efforts to benchmark meaningful national action. At the time of writing, the most recent round of negotiations for the ACCTS aims to address this issue, and included presentations from the OECD and IEA on how to define fossil fuel subsidies.49 Achieving progress between smaller groups of countries may have a demonstration effect which can help unlock wider cooperation and add to greater transparency on global fossil fuel subsidy use. (Certainly, as the UK-New Zealand FTA demonstrates, the absence of an agreed definition may permit a relatively unambitious approach to self-declaration of such subsidies, a general risk with international climate cooperation.)
Technical cooperation under the remaining two pillars of the ACCTS may play a similar role. While most countries have now agreed to decarbonise, under the Paris Agreement, each determines the policy tools they employ to achieve their self-determined domestic targets. This can lead to unnecessary trade barriers when countries attempt to achieve the same or similar goals in different ways. Eco-labelling is an example: different standards across countries can act as non-tariff barriers that hinder trade of green goods and services. The OECD estimates that there are over 400 different eco-label schemes across 200 countries in 25 industry sectors.50 The ACCTS eco-labelling group is attempting to define guidelines for eco-labels to reduce these barriers. Such guidelines could prove useful more broadly. Also, negotiations on environmental goods and services have long been stalled at the WTO, in part because of difficulties with drawing boundaries around the categories.51 The ACCTS negotiations include environmental goods and services working groups identifying a common set of environmental goods and environmental services criteria.52 Breakthroughs in the ACCTS may propel new proposals in other FTAs or at the WTO.

This chapter began by identifying a failure among many FTAs to integrate climate change objectives, but the lack of integration is also evident in international climate agreements. The Paris Agreement has a voluntary, bottom-up approach whereby countries determine their own national contributions to mitigating climate change. It lacks guidance on how to address the trade implications of decarbonisation. These include the need to cooperate in order to facilitate trade and investment in low carbon goods and services, but also the need to address competitiveness concerns that arise when countries with high climate ambitions introduce costly regulation on their domestic industry. This gives rise to potential for trade conflict and unilateral trade restriction.53
The FTAs documented above break down existing international law silos between trade and climate agreements. An increase in such agreements is likely as countries seek to address competitiveness concerns and promote climate cooperation through trade, evident through new agreements not considered in this chapter, including the Singapore-Australia Green Economy Agreement,54 and the Indo-Pacific Framework for Economic Prosperity, which contains ‘Clean Economy’, including decarbonisation, as one of four pillars,55 and the proposed ‘Global Arrangement on Sustainable Steel and Aluminium’ (GASSA).56 While it is very unlikely that the FTAs examined above directly inspired these agreements, they show that the EU and New Zealand are at the forefront of a broader trend.

Learning about effective models and methods for climate cooperation through trade

A final way in which these FTAs contribute to broader climate and trade action is through testing new models of international treatymaking and cooperation. With respect to the TCA, at first glance, it’s not surprising that countries that consider themselves to be climate leaders have agreed ground-breaking FTA climate cooperation provisions. But in practice, the so-called level playing field, of which the climate provisions form a part, was one of the most contentious areas in EU-UK negotiations.57 Unlike most FTA negotiations, the TCA formalises the UK’s divergence from existing EU regulation, rather than attempting to increase alignment. The UK’s geographic proximity, importance as a trade partner, and historic integration, led to concerns in the EU about UK competitive environmental deregulation. These concerns encompassed climate-related deregulation.58
Thus, while the TCA arose in response to the unique circumstances of the EU-UK negotiation, it is an experiment with wider significance. The untested nature of its provisions makes its impacts difficult to predict, and the balance it strikes between cooperative and competitive aims skews toward the latter through the emphasis on multiple enforcement mechanisms. But it goes beyond the multilateral and self-determined approach of the Paris Agreement by embedding long-term coordination of high-level domestic climate policy aims, and also departs from the traditional FTA focus on harmonisation or mutual recognition of product standards more narrowly.