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Trade policies and emissions reduction: establishing and assessing options (UK Trade Policy Observatory)

1. Outline

The CCC commissioned the UK Trade Policy Observatory at the University of Sussex to review trade policy options, with a particular focus on CBAMs and mandatory minimum product standards. The project set out a taxonomy of trade policy options, the current landscape, an assessment of the key design decisions for CBAMs and product standards and practical steps required for implementing these policies.

In its assessment of design options, the project highlighted that it is difficult to design measures that are simultaneously environmentally ambitious, technically feasible to implement and address concerns about fairness and equity, both domestically and for UK trade partners. Some trade-offs between these objectives are likely to be necessary.

2. Key messages

The assessments highlighted several key messages:

  • Product or sector scope: The more limited the scope of sectoral coverage, the more feasible to implement. However, restricting CBAMs to direct emissions for a few trade-exposed primary commodities risks failing to address carbon leakage. Phased introduction can allow for a learning process through which firms adjust.
  • Developing countries: Providing support for developing countries is in keeping with the spirit of the Paris Agreement’s principle of Common but Differentiated Responsibilities and Respective Capacities. Such support can take place through administering regulation differently, for example forgiving Least Developed Countries (LDCs) CBAM fees and/or phasing in requirements more slowly. It can also take place through directing CBAM revenues or other climate finance to LDCs and providing training in the implementation of requirements.
  • Climate clubs: Participation in nascent climate clubs can prevent new trade barriers with climate allies. But climate clubs that impose tariffs on non-participating countries risk World Trade Organisation (WTO) non-compliance. A key challenge is establishing equivalence between implicit (regulatory) and explicit carbon pricing. Participating countries can reduce the risk of non-compliance by basing membership on the requirement that participants have equivalent policy, and ensuring that membership criteria are clear, transparent, and open to all countries.
  • Applicability to exports: UK export competitiveness is a critical challenge for introducing CBAMs. If exporters receive rebates, this can undermine the perception that CBAMs support climate objectives. A phased approach to export rebates based on emissions-intensity can satisfy environment, WTO non-discrimination and industry objectives, but will increase technical complexity.
  • Free allowances: The UK currently provides trade-exposed industries with free allowances to prevent carbon leakage. Phasing out free allowances upon introduction of a CBAM will contribute greatly to WTO-compliance.

In setting out steps required to implement CBAMs or product standards, it highlighted:

  • Domestic steps: Coordination across a wide range of Departments is required, as well as industry consultation to inform the timing/structure of CBAMs or product standards.
  • International steps: The UK should actively participate in discussions about developing methodologies for assessing embodied emissions. The UK must also inform trade partners, in particular the EU and developing country partners, of plans to introduce CBAM or product standards in advance of their introduction.

Finally, it noted that CBAMs or standards are only one part of supporting global decarbonisation. A comprehensive approach includes actively supporting low-carbon innovation and supply chains, including through green investment and climate finance, cooperation on the development of standards, and technology transfer.