Cooperation on climate and trade is accelerating, but there’s an elephant in the room

By Michael Mehling, Harro van Asselt, Kasturi Das and Susanne Droege - 03 July 2023
Cooperation on climate and trade is accelerating, but there’s an elephant in the room

Recent advances in international coordination of climate and trade policies conceal gridlock on an emerging and highly controversial policy option: border carbon adjustments. Michael Mehling, Harro van Asselt, Kasturi Das and Susanne Droege trace recent developments to explain this impasse, and formulate suggestions for future progress.

International cooperation on climate change and trade is intensifying. Last month, G7 leaders in Hiroshima, Japan, agreed on a Clean Energy Economy Action Plan that highlights the role of trade and trade policies in accelerating decarbonisation and clean energy transition globally . This comes on top of existing plans to launch a G7 Climate Club on the side-lines of the UN Climate Conference (COP28) in the United Arab Emirates (UAE) later this year.

In the meantime, EU and US ministers have agreed on a work programme for the Transatlantic Initiative on Sustainable Trade as part of the regular EU-US Trade and Technology Council (TTC) meetings. The same trading partners are also negotiating a Global Arrangement on Sustainable Steel and Aluminium (GASSA) to facilitate trade in low-carbon steel and aluminium, and address global overcapacity in the sector. The Arrangement, which is open to like-minded countries, has a mandate to conclude the negotiations in October this year.

Similarly, talks at the plurilateral level have received new impetus through the Trade and Environmental Sustainability Structured Discussions (TESSD) and the Coalition of Trade Ministers on Climate. And some countries are even seeking to negotiate a world-first trade pact that would explicitly be aimed at climate action, the Agreement on Climate Change, Trade, and Sustainability.

These developments are encouraging. After all, trade policy and climate action are closely intertwined. Around a quarter of global climate-warming emissions arise from the production of goods that cross national borders, creating a loophole in emissions accounting and making it harder to tackle these emissions. At the same time, trade policy can contribute to achieving the Paris Agreement’s objectives, for example by facilitating the diffusion of low-carbon goods and services. It therefore makes sense for countries to discuss how they can leverage trade policies to stimulate stronger climate action and help achieve wider development goals.

However, while rhetoric on climate-compatible trade policy may be on the rise, the actions by major trading nations show a different pattern, namely one of growing protectionism. This can be observed not only in the escalating “subsidies race” between the United States and the EU, with both blocs taking action to support their domestic industries in the transition towards net zero emissions, but also in measures to protect their industries against the potentially negative effects of stronger climate action.

Just a few weeks ago, the EU cast its new Carbon Border Adjustment Mechanism (CBAM) in stone, meaning that from October onwards importers of certain energy-intensive, trade-exposed products into the EU will need to start tracking information about the carbon content of those traded goods. From 2026 onwards, these goods can only enter the EU if their importers pay a price for the emissions embedded in those imports, provided these emissions have not been similarly priced in the exporting countries. The EU is unlikely to be the only jurisdiction adopting such a border measure: Canada and the United Kingdom have held consultations to determine whether they should follow suit, and Republican Senator Bill Cassidy is preparing a bipartisan bill that would introduce a “foreign pollution fee” on goods entering the U.S.

Although the environmental goal of these measures – preventing the shift of carbon-intensive production to third countries with fewer carbon constraints – is laudable, they remain highly controversial, especially among less developed countries wary of “green protectionism”. India is reportedly planning to challenge the EU’s CBAM legislation, and China has also expressed scepticism. They also raise difficult normative questions about their social and economic impacts on developing countries, including those countries least responsible for the climate crisis.

Moreover, with multiple countries potentially introducing their own border carbon adjustments, there is a growing risk of divergent approaches. This is already becoming apparent with respect to the EU and the U.S. In Europe, the CBAM seeks to adjust for a domestic carbon price applied to European industry under the EU Emissions Trading System. In the U.S., by contrast, past efforts to introduce a federal carbon price have consistently failed, meaning that a border fee would not be accompanied by a carbon price. Unsurprisingly, views on the potential shape of the Global Arrangement on Sustainable Steel and Aluminium currently under negotiation have reportedly revealed widely divergent views on central design questions, casting doubt on the successful completion of these negotiations by October 2023.

As more jurisdictions contemplate the introduction of their own border carbon adjustments, an emerging patchwork of bespoke approaches could exacerbate existing trade tensions and erect new barriers to international trade, thereby raising costs for raw materials and components that are needed for decarbonization. More importantly, lack of coordination also threatens to sour diplomatic relations at a time when cooperation is as essential as ever to close the persistent climate policy ambition gap around the world.

Despite the encouraging advances on climate and trade cooperation, however, the issue of border carbon adjustments has so far eluded any efforts at coordination. In its Clean Energy Economy Action Plan, the G7 meticulously avoids any reference to border measures, despite containing detailed language on industrial competitiveness and emissions leakage. Similarly, the G7 Climate Club – originally envisioned as a forum that could also involve the use of border carbon adjustments – dropped any mention thereof in the terms of reference released late last year.

Even efforts to promote coordination around carbon pricing, seen by some as a necessary precursor to subsequent adjustment at the border, have faced crippling headwinds, as experienced by an initiative spearheaded by the WTO’s Director-General, Ngozi Okonjo-Iweala. If several countries are moving forward with border carbon adjustments, why is it apparently so difficult to cooperate? After all, given the scale of potential fallout from this controversial policy option, some form of coordination – and even if only on a set of shared understandings, such as best practices and core principles – would seem both necessary and justified.

A look at past areas of progress can shed light on this impasse in climate and trade cooperation. As in other fields of international relations, such cooperation requires buy-in from all participating countries. So far, advances have therefore focused on issues such as transparency and creating supportive conditions for innovation or investment – enabling goals that all countries can stand behind of. It is much more difficult, however, to secure buy-in for coordination on issues that are seen as sensitive or close to the sovereign affairs of countries.

Unfortunately, debates about carbon pricing, industrial competitiveness, and emissions leakage fall squarely into that category. They tend to be driven by domestic stakeholder politics, and therefore become part of delicate balancing acts between competing priorities and constituencies at the national level. Border carbon adjustments, with their domestic sensitivities amplified by their complex diplomatic, moral and legal ramifications, are similarly prone to reluctance to cede national sovereignty to a cooperative approach.

This greatly narrows the prospects for any meaningful cooperation on border carbon adjustments, and also explains why any efforts at bilateral or multilateral engagement on that topic have proven so challenging to date, as in the case of the Global Arrangement on Sustainable Steel and Aluminium, or why others have skirted it altogether, as occurred with the G7 Climate Club. While calls for international coordination on border carbon adjustments and even for the establishment of clubs centred around a common adjustment are understandable, this diagnosis may also offer important guidance on where to focus any future collaborative efforts.

If the decision to introduce a border carbon adjustment and its design are simply too sensitive to allow for international coordination for the time being, countries that are either considering this policy tool or may be affected by it are better advised to direct their attention to ancillary matters that are useful in their own right, yet can also serve as building blocks to any future coordinated approaches to border carbon adjustments. An example are methods and procedures to reliably determine the carbon intensity of goods and increase coherence among alternative approaches: these are critical to the success of any border carbon adjustment, and the fact that both the G7 and the Transatlantic Initiative on Sustainable Trade have included them on their agenda suggests that they are less sensitive in nature.

Over time, growing alignment on such ancillary matters can pave the way for more robust cooperation on border carbon adjustments. To the extent that such cooperation helps countries become adept at calculating the carbon intensity of goods, it may help break the ice and build mutual trust with a view to greater future coordination on border carbon adjustments. As countries with no or fewer carbon constraints gradually strengthen their domestic climate policies, be it due to the spillover effects of CBAM-like measures or other policy imperatives, they themselves may face domestic calls for a border carbon adjustment of their own. That, in turn, may set in motion a virtuous cycle that fosters greater cooperation, which is precisely what we need more of to tackle the climate crisis.



Michael Mehling is Deputy Director of the Center for Energy and Environmental Policy Research at the Massachusetts Institute of Technology, Cambridge, Massachusetts, and a Professor at the University of Strathclyde School of Law, Glasgow, United Kingdom.

Harro van Asselt is Professor of Climate Law and Policy with the Centre for Climate Change, Energy and Environmental Law at the University of Eastern Finland Law School, Joensuu, Finland, and the incoming Hatton Professor of Climate Law at the University of Cambridge, Cambridge, United Kingdom.

Kasturi Das is Professor of Economics at the Institute of Management Technology, Ghaziabad, Delhi-NCR, India.

Susanne Dröge is Head of Department for Climate Protection and Energy at the German Environment Agency (Umweltbundesamt), Berlin, Germany.

Photo by Tom Fisk

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