Reconciling climate and trade for industrial decarbonisation

Mobilising trade to create markets for low-carbon basic materials and products, while protecting against carbon leakage risks

  • Project Duration: 06/2021 - 12/2022

The industrial transformation towards climate neutrality has important implications for global trade. Particularly CO2-intensive industrial products such as steel, aluminium, basic chemicals and cement are traded extensively on international markets. As nations introduce more meaningful carbon pricing policies as well as regulations of environmental performance of these carbon-intensive and heavily traded products, policy makers must grapple with the spillover effects of these policies on international trade.

Historically, regions of the globe with more advanced climate policies, such as the EU, have adopted a cautious attitude towards the trade-climate nexus: The prevailing approach was to avoid any risk of “carbon leakage”, id est the risk that domestic production and jobs might move offshore due to higher domestic carbon regulation costs faced by companies. While protection against carbon leakage is important, policy makers need to ensure that incentives for reducing industrial emissions to meet carbon reduction targets are not blunted. Looking forward, climate policy needs to create incentives to produce and markets to buy low-carbon products. At the same time, trading partners will need to bridge differences in national climate policy and ambition while harmonizing trade conditions for green markets.

The purpose of this project is to try to facilitate a more informed international dialogue on the trade and climate agenda for energy-intensive industries. This will include more controversial issues such as the EU’s proposed Carbon Border Adjustment Mechanism, as well as forward-looking work on the idea of climate alliances between major trading partners, including the EU, US and China. A key goal is to support the elaboration of national and international agreements and policy frameworks in a fair and non-discriminatory way, to effectively accelerate the creation of international markets for low-carbon basic materials and products.

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