Catapulted to the front row in the urge to heighten climate action ambition, the otherwise obscure and academic notion of border carbon adjustment (BCA) came of age in 2021.[1] After months of careful study and much anticipation among the policy literati, the European Commission (EC) unveiled by mid-year a proposal to establish a first iteration of what it has called a Carbon Border Adjustment Mechanism (CBAM). For many reasons — not least given the strict observance of competences in Brussels — the innovative and controversial scheme is crafted as a climate policy, carefully woven into trade regulatory frameworks and institutions. Ensuring compliance with the WTO’s principles and norms would be a critical feature. In a daunting act of policy craft, its design also intentionally aligns with the Paris Agreement’s principle of Common but Differentiated Responsibility and Respective Capabilities (CBDR-RC). At its core is the EU’s self-imposed challenge to cut carbon emissions by 50% on 1990 levels by 2030.

“The devil is in the detail”, says the adage, and this is undoubtedly the case with any border carbon adjustment, as the WTO Director-General has vigorously pointed out. A BCA scheme aims at ensuring that countries and regions that adopt carbon-pricing policies and abatement measures to effectively reduce global greenhouse gas emissions do not fall into situations wherein the burden imposed on domestic polluters leads to the migration of industry and emissions to jurisdictions with less strict mitigation efforts. This risk, also known as carbon leakage, was officially acknowledged by the G7 in June. The EC’s proposed CBAM seems designed to keep that as its primary purpose: to ensure the integrity of the carbon abatement efforts within the EU and to do so in full awareness of the current times.

Currently, only 65 national and subnational jurisdictions worldwide have established an explicit carbon price mechanism: carbon taxes, markets, or a combination of both. In 2021, these initiatives would cover
11.65 GtCO₂e, accounting for 21.5% of global GHG emissions[2]. Some jurisdictions are experimenting with carbon pricing, whilst other are rather mature, and all schemes differ from each other. Yet, there is an emerging consensus that expanding carbon pricing efforts is essential to break current trajectories and keep the planet on a stable pathway. Moreover, as demonstrated by IMF research, a well-calibrated internalization of carbon costs that results in dramatic reductions by the six largest emitters — namely the US, China, the EU, India, the UK, and Canada — may do the trick, with consequences on a global scale.

The CBAM is set to be gradually implemented between 2026 and 2035. During this interim, the EU’s complex policy-making process should allow for tinkering and readjustment of the 2021 design, as well as trigger opportunities for cooperation. The climate crisis is a problem of a global commons, requiring collective action. This, as the Covid-19 crisis continues to prove, is better and more effectively deployed through cooperative approaches.

So far, the EC’s CBAM announcement has drawn different reactions, including antagonism enrobed in suspicion of intended coercion for equivalent climate action by trading partners and of protectionism. A great deal of pushback comes from a narrative that assumes the CBAM will lead to increased costs and loss of competitiveness in international markets. However, adjustments at the border are not trade barriers and differentiated carbon pricing, if well-governed, should “vacate carbon space” for developing economies and underpin — rather than undermine — competitiveness.

Given the long-term puzzle with a shared objective, the EC’s proposal can be seen as open to further development, inviting other jurisdictions to build on it, complement it, and even participate in it. Trading partners to be excluded are yet to be defined (e.g., least developed countries, states as they become carbon neutral), new sectors are yet to be added (e.g., ceramics, glass, and construction), and different carbon pricing approaches still ought to be articulated (e.g., a bill in the US Congress proposes a BCA to ensure the integrity of mitigation efforts in a system of implicit pricing resulting from standards and regulations that determine energy use). In the future, equivalence between divergent systems will require more cooperative definition.

After COP26, the many possibilities arising for global cooperation must be explored, including the IMF’s proposal for a global system of differentiated carbon prices and a common price floor among large emitters. The G7 commits to cooperate “to drive innovation and enable the transformation to net zero, though the optimal use of a range of policy levers to price carbon.” In the run-up to, and at, COP26 in Glasgow, many are asking to bring the OECD and other institutions together to work on a standard methodology for carbon pricing. The recent success in reaching an agreement to rein in competition through corporate taxes has also led to proposals at the G20 for countries to seek an agreement over shared principles and rules for the use of border measures to address carbon leakage. The WTO and the OECD have been mentioned as natural diplomatic arenas for such a job.

At the G20 Summit at the end of October, the EU and the US announced a “carbon-based” agreement on steel and aluminium that aims, inter alia, to reduce carbon intensity across modes of production in these industries. In spite of the controversial managed-trade approach, such a proposition highlights the possibilities of intersectoral and product-based approaches and the case of preferential market access for climate-preferable goods.

Finally, constructive cooperation to generate a race to the top — rather than tensions through the unilateral imposition of measures — requires a conducive architecture. Carbon pricing is climate policy, not trade policy. We have a lousy record of assigning non-trade agendas to trade policy fora like the WTO. Ideally, both the intergovernmental machinery and the institutions working in problem-solving should not do so separately. For instance, nations under the UNFCCC should convene their ministers responsible for climate, together with those of finance and trade, in regular sessions to jointly address these matters of policy intersection.  

The climate crisis is exceptional. Any approach that eschews cooperation amounts to shooting from the hip. The narrow window of opportunity before us requires all hands on deck for ideation of solutions.  As I see it, based on three decades of policy observations, the EC’s CBAM is a call for the EU and all nations and stakeholders to act decisively on carbon pricing.

[1] This piece adopts the use of the term “border carbon adjustment” (BCA) when referring to the generic policy tool and “carbon border carbon adjustment” (CBAM) when alluding to the scheme proposed by the European Commission in 2021.

[2] World Bank’s Carbon Pricing Dashboard (accessed 26 Oct 2021).