As global attention turns to climate change and the COP26 summit, the EU’s proposal for a Carbon Border Adjustment Mechanism is to be welcomed for advancing the debate on how concretely trade policy can help the fight against climate change from theory to action.
Global leaders gather in Glasgow for the COP26 summit with hopes of renewed impetus in the global fight against climate change fading. While China and the EU are among those who have increased emissions reduction commitments this year, it seems that there is no sign of a new global consensus.
Given the difficulties of achieving any sort of meaningful multilateral agreement on trade and climate change at the World Trade Organization, it is unlikely that it can be a substitute. A number of members have held discussions in the format of Trade and Environmental Sustainability Structured Discussions, but these are at an early stage.
A recent paper published by the UK Trade Policy Observatory was a useful reminder though that there is much that trade policy can offer to the fight against climate change. There are 27 items listed for possible action, which range from relaunching the Environmental Goods Agreement to tackling environmentally harmful subsidies.
Too often the missing element preventing green trade initiatives seems to have been political will.
There is at least one promising green trade initiative on offer: the Agreement on Climate Change Trade and Sustainability involving Iceland, Switzerland, Norway, New Zealand, Fiji and Costa Rica. That is reportedly close to agreement, liberalising trade in environmental goods and services, eliminating fossil fuel subsidies, and setting guidelines for eco-labelling, all of which seem welcome.
Practical measure based on detail
But overall, lack of consensus is one of the reasons why EU proposals for a Carbon Border Adjustment Mechanism are so welcome, for they force us to think about a practical measure based on detail.
Thus far, much of the debate has focused on whether CBAM is compatible with WTO rules. This seems the wrong starting point though. We should rather be asking whether this is the best thing to do in terms of climate change.
The principle behind CBAM seems reasonable enough, that if tough EU regulations on carbon emissions mean importing goods produced with more emissions at lower cost, such carbon leakage must be problematic both in terms of trade and climate change. Levying an equal carbon charge on domestic production and imports seems fair.
Actual implementation is however likely to be more difficult. Initially the proposal only covers a limited number of goods, namely cement, aluminium, electricity, fertilisers, iron and steel. This should be manageable, but charging accurately to build on the EU’s Emissions Trading Scheme will be a challenge.
There are other issues to be tested. We don’t yet know if carbon leakage really such a problem, or whether CBAM will be an obstacle to new innovation. Now we have a proposal, its measures need to be considered.
There are risks. One such risk is replacing one potential market distortion with others, encouraged by special interests seeking to game any system. If for example iron and steel costs become noticeably higher in the EU than outside, there may be demands for extension or protection of the car industry to name but one. Already the cement industry has called for particular protection.
It is widely assumed that a Carbon Border Adjustment Mechanism will not be compliant with WTO rules. Former Chair of the Appellate Body James Bacchus has written of a number of ways in which this may be the case, including inconsistency with both MFN and national treatment. Even using the exception of conservation of exhaustible natural resources would be problematic on his account.
Not all WTO legal scholars agree with this interpretation, others believing there is a direction of thinking moving towards justified regulatory measures being legitimate. Nonetheless it seems almost inevitable that a country will take a case against the EU.
There is a view entirely different that if WTO rules are seen to be an obstacle to taking action against climate change, then this would bring the rules into (further) disrepute. Again, perhaps the better question is how any issue of carbon leakage can best be considered by single governments as well as the possibility of a multi-country approach, rather than automatically thinking any resolution must be problematic.
Multilateral if possible, unilateral if necessary
Ideally, there would be a broader international agreement on carbon pricing.
The OECD has suggested following up its success on minimum corporate tax by seeking to broker such an agreement. WTO director-general Ngozi Okonjo-Iweala used a Financial Times article to suggest that wouldn’t be entirely appropriate, and it had to be involved.
It is useful to recall that agreement on corporate taxation at the OECD came after a number of countries had started to implement a digital sales tax unilaterally, offering a precedent perhaps. Though there were threats of US retaliation, these have largely been dropped in an interim arrangement pending the full arrangements coming into force. It seems the threat of unilateral action may have helped.
There are still worries however that the tax deal could unravel and individual digital sales taxes lead to more trade conflict.
The same risk, at an earlier stage, applies to CBAM. There is a chance that implementation leads to retaliation, not least as it comes as part of a suite of initiatives under the ‘open strategic autonomy’ banner which often emphasises EU protection for its industry.
Yet the severity of the climate challenge is such that risks need to be taken and different approaches tried. It is good that some countries are pursuing one kind of agreement, while the EU is progressing another tool. It is likely that both will have a part to play, particularly if they are subject to serious discussion.
We know that multilateral agreements, whether at COP or WTO, are the best approaches.
But right now with those looking unlikely countries should propose alternatives, as long as they are also prepared to be flexible in implementation.
David Henig runs the column ‘Perspectives’ on the politics of global trade for Borderlex. He is also a UK director at the think tank ECIPE.