The two-week-long 64th meeting of the subsidiary bodies of the UN Framework Convention on Climate Change (UNFCCC) ended on 18 June in Bonn, Germany. Among its outcomes was the first dialogue on the trade-climate Interface, one of three dialogues to be held over the 2026-2028 period under a mandate adopted at the Conference of the Parties (COP30) in Belém last November.
The dialogue primarily covered three questions: how trade can support climate action; how climate action can avoid adverse impacts on sustainable development; and how international cooperation can address the “trade-climate interface”. The World Trade Organization (WTO), the International Trade Centre, and the UN Centre on Trade and Development made presentations during the event.
The crucial question was the first one, about whether trade measures could promote mitigation action. Article 3.5 of the United Nations Framework Convention on Climate Change encourages parties to promote the liberal market system and sustainable development upon which the climate regime is founded. The provision mentions, “Measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade.” This provision is often referred to by developing countries to oppose unilateral trade measures imposed on global trade.
In this regard, the European Union (EU) introduced a regular agenda in climate negotiations on the trade-climate interface, and for the mitigation strategy to work, its implementation has to be universal. Otherwise, it might contribute to two crucial issues: one is carbon leakage, which offsets the reduction in one region and the other is competitiveness in external trade. For example, if one region, such as the EU, imposes stringent mitigation regulations, then its industrial producers can move their production units to areas with lax climate regulations. Second, mitigation action, such as the internalisation of emission externality costs money, so the non-internalising countries and producers have a cost advantage over the complying countries.
The EU has introduced the Carbon Border Adjustment Mechanism (CBAM) among its member countries, under which EU importers have to adjust the price of imported goods to match that of those produced domestically. The purpose of CBAM is to make sure there is a level playing field in external trade and also to ensure protection of domestic industries against cheaper imported goods produced without emissions reduction rules in countries with a weaker climate regime.
Within the EU, this mechanism is applied to imports of cement, steel, and certain other carbon-intensive industrial goods. No other country has yet introduced this mechanism, but governments like the UK, USA, Australia, and Canada are mulling it over in their own ways. However, the state of California introduced a border adjustment tax on a limited scale, specifically targeting electricity imported from other states.
In the Bonn dialogue, major emitters from developing countries argued against the introduction of a CBAM-like mechanism as it could restrict their exports to EU countries, as EU companies would reduce their imports. Countries with weak regulations may also face border taxes when exporting goods, which the countries argued would increase their compliance costs, restrict market access, and would not align with the principles of equity. The countries further mentioned that such a measure would be against the provision under the convention cited above. However, the first part of that provision relates to the promotion by all parties of sustainable development, and unrestricted emissions cannot ensure that.
Another option was a carbon tax, which is vehemently resisted by both the developed and developing countries. However, such a tax often does not deliver the intended results because of carbon leakage.
A proposal by the International Monetary Fund (IMF) proposed another way: a differential carbon tax on groups of countries across the world, depending on their level of income or development. The IMF proposed a tax of $25/tonne of carbon dioxide for low-income countries, $50 for middle-income countries, and $75 for developed countries. Acceptance of this option could circumvent the application of the complex border tax adjustment.
Given the global community's witness to a trend of runaway climate change, shoring up mitigation ambition is inescapable if we want to survive in this increasingly warming world. Here, all emitters, big and small, have to agree to a fair and justly differentiated response, and the sooner the global community agrees to a practicable solution, the better it is for us and our planet.
Mizan R Khan is technical lead of the LDC Universities Consortium on Climate Change (LUCCC).
Views expressed in this article are the author's own.
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