Although the EU’s carbon border adjustment was not on the COP29 agenda, it overshadowed the negotiations. Carbon border adjustments as well as carbon tariffs and carbon standards disadvantage countries that have more emission-intense industries. Climate and trade policy measures become increasingly interlinked.
CBAM not on COP29 Agenda
Negotiations at the international climate conference in Baku proved difficult. A global financing target was the focus of the 29th Conference of the Parties (COP29) to the United Nations Framework Convention on Climate Change (UNFCCC).
Not only the final agreement on this was criticized by many as insufficient. According to the agreement, developed countries are to raise USD 300 billion annually by 2035 for climate protection and adaptation in developing countries.
The EU Carbon Border Adjustment Mechanism (CBAM) also caused a stir. Before the start, China, Brazil, India and South Africa had pushed for climate-related trade restrictions to be included on the COP29 agenda. The G77 supported this move.
The EU’s CBAM was at the forefront of these concerns. Developing and emerging countries see the carbon-based import levy as a pretext for the EU to seal off its own industry from products from the global South. Countries with high EU export and emissions intensity are particularly exposed to CBAM.
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.
EU negotiators had referred to the World Trade Organization (WTO) as a forum for trade issues. As a result, CBAM was ultimately not on the final COP29 agenda.
Nevertheless, CBAM was present in the negotiations. With CBAM the pressure for decarbonization in developing and emerging countries is rising. Otherwise, they may lose access to EU markets. The required decarbonization investments were touched upon in discussions on the global financing target.
Carbon-based trade restrictions
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, but disadvantage countries that have more emission-intense industries.
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.
A recent OECD report counted 79 countries that apply explicit or implicit carbon pricing, covering 42% 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. In October, the UK followed the EU in confirming the introduction of its CBAM for 2027 with initial implementation details.
Consultations have also concluded in Canada. And Australia presented the results of a carbon leakage review at the beginning of November. These are to be incorporated into concrete recommendations for a border adjustment by the end of the year.
A joint task force with experts from the WTO, IMF, OECD, UNCTAD and World Bank recently explored ways of improving the coordination on carbon pricing. Among other things, they highlighted the harmonization of emissions calculations, standard values and benchmarks.
Shortly before COP 29, 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 levy 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 speculation that a second Trump term could bring about such a tariff. In a global comparison, American industry benefits from lower emissions intensity for many goods. This could therefore be a pretext for a new tariff instrument.
There are supporters of such instruments among both Republicans and Democrats – albeit for different motives. There are already various proposals in Congress, such as the Foreign Pollution Fee Act and the Clean Competition Act.
The USA had already considered a joint tariff system with the EU in the Global Arrangement on Sustainable Steel and Aluminum (GSA). Tariffs were to be tiered based on emission benchmarks. However, the negotiations stalled. There was disagreement about the interplay with CBAM.
Carbon standards for low-emission goods
Alternatively, standards can also be set for the emissions intensity of goods. Markets could then favor goods with carbon footprints below certain emission benchmarks. However, there are hardly any uniform standards to date.
The Climate Club with 44 countries is now working on harmonizing carbon standards as a governmental forum for the decarbonization of industry. At COP29, its members confirmed the IEA principles for low-emission steel and cement as the basis for this.
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 COP29 negotiations demonstrated that climate and trade policy measures are becoming increasingly interwoven in global discussions. Consideration is now being given to addressing such issues within the framework of a UN Committee and also at the next COP30 in Belem.
The use of CBAM revenues for the USD 300 billion target could become a point of contention. Through the carbon-based levy, CBAM generates revenue that is going into the EU budget.
These revenues could also be used to finance decarbonization measures in countries affected by CBAM, as argued in a report by the ERCST, among others. This was also recently advocated in an open letter by leading experts from European institutions.
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. An assessment of the impact of CBAM on these countries is to be presented by the end of 2025.
It is questionable if this satisfies developing and emerging countries. As CBAM levies come closer, critical voices – including at the WTO – could become louder too. CBAM is therefore likely to continue to cause a stir, and not just in the EU.
Sources and further information:
- ICC: Global Principles for Effective Border Adjustments
- ERCST: The Use of CBAM Revenues
- OECD: Pricing GHG Emissions 2024
- World Bank: CBAM Exposure Index
- WTO, IMF, OECD, UNCTAD und World Bank: Carbon Pricing and Global Climate Goals
Photo from Matthew TenBruggencate on Unsplash
