3 December 2021

At yesterday’s event “Carbon Pricing, the WTO and CBAM after COP 26: Can we connect the dots?” hosted by TCB partner IISD, speakers discussed trade-related measures linked to carbon pricing – namely border carbon adjustments (BCAs) – and how such instruments fit within the greater frameworks of the United Nations Framework Convention on Climate Change (UNFCCC) and the World Trade Organization (WTO). The event formed part of the organization’s three-day Trade & Sustainability Hub.

IISD’s Alice Tipping moderated the event, which brought together the following experts: Natalie Jones, IISD; Nathalie Bernasconi, IISD; Aaron Cosbey, IISD; Hannes Schloemann, WTI Advisors and Climate Capital SARL; Douglas Prentice, Climate Capital; Michael Napper, Climate Capital; Xiankun Lu, Friends of Multilateralism Group (FMG) Geneva; and Aarti Krishnan, University of Manchester.

The discussion made it clear that the global increase in climate ambition, especially when achieved through carbon pricing, will result in more and more countries looking to prevent carbon leakage (a concept whereby emissions move abroad in response to strong domestic climate policies). Not only does carbon leakage hinder global efforts to reduce greenhouse gas emissions, but it also harms the economies of those jurisdictions with ambitious climate policy in place, whose businesses migrate to countries with laxer climate protections. BCAs, experts agreed, will be a popular tool to prevent leakage.

Should more and more countries implement BCAs, questions arise over how these instruments will affect international trade and whether they should fall under the purview of the UNFCCC or the WTO. Speakers concluded that, while a binding BCA agreement regulated by the WTO would certainly ease international trading, such a measure is unrealistic and would not allow BCAs to be tailored to the different carbon pricing and climate policy landscapes in each country.

BCA expert Aaron Cosbey instead argued for an agreement on BCA best practices and principles. “We’re talking about principles that can be adapted to different national circumstances.” Critical for transatlantic climate policy, such an agreement would guide how BCAs could work in the EU, Canada and the US, which all have immensely different climate policy packages but all have either proposed or are considering BCAs. Such an agreement could help to partially harmonize some parts of each country’s adjustment mechanism, which could help facilitate transatlantic trade in BCA-covered goods and avert trade tensions.