Negotiations at COP30 showed that the CBAM start in 2026 is also causing a stir internationally. Carbon instruments that green supply chains have an impact on global trade flows. Carbon border adjustments as well as carbon tariffs and carbon standards disadvantage countries that have more emission-intense industries.
CBAM at COP30
Many were disappointed by the outcomes of the international climate discussions. A roadmap to transition away from fossil fuels did not get into the final decisions. National climate pledges leave a big gap for a 2C target and efforts to secure climate finance struggle.
It was clear that the 30th Conference of the Parties (COP30) to the United Nations Framework Convention on Climate Change (UNFCCC) would be a difficult one – in the absence of the US in climate negotiations and with growing trade tensions.
Against this backdrop, the EU Carbon Border Adjustment Mechanism (CBAM) is becoming an increasing discussion topic. It was not included in the COP30 agenda despite several countries demanding it. And hence, many discussions were charged with CBAM.
Developing and emerging countries see the carbon price on imports and other reporting requirements, such as through the EU Deforestation Regulation (EUDR), as a pretext for the EU to seal off its market from overseas products. Countries with high EU export and emissions intensity are particularly exposed to CBAM.
Reportedly, China requested a dismantling of CBAM in exchange for more ambitious language in the final texts. But the EU stood strong. EU climate commissioner Wopke Hoekstra defended CBAM as a global game changer to accelerate the global uptake of industrial carbon pricing (see Financial Times).
With CBAM, the EU is aiming for equal treatment in the carbon costs of imported goods with those of goods produced in the EU. In the EU, the price of emissions is rising due to the phase-out of free emission allowances in the EU Emissions Trading System (ETS) and thus the risk of carbon leakage.
CBAM is already a hot topic in trade discussions. For example, the EU-US trade deal included language on CBAM. And it is also very present in EU-India discussions to seal a new deal (see Financial Times). At the same time, the EU is preparing new safeguards measures to protect the EU steel industry against unfair competition.
Carbon-based trade instruments
Different instruments for climate protection are under discussion that have an impact on trade flows. Carbon border adjustments, carbon tariffs and carbon standards differ in their design. They all put pressure on companies to decarbonize not to loose access to foreign markets.
Carbon prices and border adjustments
There are a variety of instruments for carbon pricing. Explicit prices are levied via carbon taxes or emission allowances. Implicit pricing can take the form of consumption and value-added taxes or subsidies (as a negative carbon price) for fuels and electricity.
The World Bank’s Carbon Pricing Dashboard counts 80 direct pricing instruments covering 28% of global emissions. In many countries, a variety of instruments are used to cover different emissions.
The growing number of different carbon pricing instruments threatens to fragment carbon markets. Emissions are not only measured differently in different countries and sectors, but also priced differently. This complicates international trades.
The emergence of carbon border mechanisms exacerbates this situation. Adding to the EU’s mechanism, Norway, UK and Taiwan are getting ready CBAM in 2027. Australia and Canada have been exploring such tools too and similar discussions are picking-up in Asian countries.
A joint task force with experts from the WTO, IMF, OECD, UNCTAD and World Bank recently explored ways of improving the coordination of carbon pricing. Among other things, they highlighted the harmonization of emissions calculations, standard values and benchmarks.
Also the International Chamber of Commerce (ICC) proposed global principles for designing border adjustments. These include the use of international emission accounting approaches. These are intended to minimize negative effects on companies and international trade.
Carbon tariffs on emissions-intensive goods
Many observers argue that CBAM represents a tariff. Strictly speaking, there are differences. Border adjustments ensure that carbon costs are equalized. A tariff on emission-intensive goods, on the other hand, would impose a uniform tax without taking carbon cost differences into account.
Carbon tariffs do not require an own carbon price. Such instruments are not yet used, as these tariffs would hardly be WTO-compliant.
However, there is a Republican proposal in the US for a Foreign Pollution Fee Act (FPFA). As the American industry benefits from lower emissions intensity for many goods, tis could be a pretext for a new tariff instrument. Earlier US-EU talks on a Global Arrangement on Sustainable Steel and Aluminum (GSA) have stalled.
Carbon standards for low-emission goods
Alternatively, standards can also be set for the emissions intensity of goods. This could be used to limit the import of goods that exceed certain emission benchmarks. However, there are hardly any uniform standards to date.
The Climate Club with 46 countries is now working on harmonizing carbon standards as a governmental forum for the decarbonization of industry. At COP30, its members pledged to grow near-zero and low-emissions steel and cement markets. Together with OECD the Climate Club also published a report on carbon metrics.
Technical and financial support for developing and emerging countries is to be coordinated via a Global Matchmaking Platform (GMP). The Climate Club was originally initiated by the G7, also to promote carbon pricing in these countries.
CBAM in the climate and trade policy discourse
The COP30 negotiations demonstrated that climate and trade policy measures are becoming increasingly interwoven. To facilitate dialogue on such issues an International Forum for Climate Change and Trade was launched – related but independent from the UNFCC and WTO mechanisms.
In the final COP30 decision, countries also reaffirmed that “measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade.” CBAM is likely to resurface in future negotiation.
Especially, the use of CBAM revenues for international climate finance could become a point of contention. Through the carbon-based levy, CBAM generates revenue that is going into the EU budget. These revenues could be used to finance decarbonization measures in countries affected by CBAM.
In a document published in May 2024, the EU made clear that CBAM revenues would not be earmarked for this purpose. However, stakeholders in developing countries are to receive technical support.
It is questionable if this satisfies developing and emerging countries. As CBAM impacts kick in next year – including through EU accredited verifiers examining non-EU manufacturers – critical voices could become louder. CBAM is therefore likely to continue to cause a stir in global trade discussions.
Sources and further information:
- ICC: Global Principles for Effective Border Adjustments
- World Bank: CBAM Exposure Index
- WTO, IMF, OECD, UNCTAD und World Bank: Carbon Pricing and Global Climate Goals
Photo by Michael Wave on Unsplash
