A Trade-Based Climate Policy Can Cut Emissions Globally
By Paul Bledsoe and Ed Gresser
The recent reopening of diplomatic dialogue by Secretary of State Antony Blinken and Chinese leaders highlighted the enormous importance of climate change action by the world’s two largest greenhouse gas emitters. But it did not yield immediate progress on China’s huge annual carbon emissions.
In contrast, the U.S., European Union and their G7 allies are taking historic actions to reduce greenhouse emissions. America’s effort includes hundreds of billions of dollars in subsidies for domestic private-sector investments in clean energy, intended to reduce emissions by 50% or more by 2030 and reach “net-zero” emissions before mid-century.
Action by the G7, however, isn’t nearly enough. Total global emissions continue to grow, setting another record last year. The reason is emissions growth from large middle-income countries. China produces nearly one-third of the world’s 36 billion tons of annual carbon dioxide emissions, more than all developed countries combined, while Russia, India, Brazil and Indonesia add 5.6 billion tons. Emissions from all these countries are still rising.
As emissions and global temperatures increase, hugely expensive and deadly climate impacts are multiplying, from last year’s floods in Pakistan to this year’s Canadian wildfires and many others in every region of the world. These are clear warnings of a future of far more devastating climate disasters unless global emissions begin falling very soon.
Recognizing this challenge, the G7 nations in June 2022 agreed to create a trade-based mechanism to provide economic incentives for all nations to cut emissions to retain full, low-cost access to lucrative G-7 markets. Unfortunately, since then the policies of the EU and the U.S. have diverged, creating tension over trans-Atlantic policy rather than cooperating toward the larger goal of lower worldwide emissions and therefore climate protection.
Last fall, the EU adopted the world’s first Carbon Border Adjustment Mechanism (CBAM). Set to become operational in 2026, it requires importers of six carbon-intensive products — steel, aluminum, cement, hydrogen, fertilizer and electricity — to pay roughly $90 per ton of carbon emitted during production, mirroring the carbon price required for EU firms. The idea is to equalize the costs of domestic producers and importers and “encourage cleaner industrial production in non-EU countries.” The U.S., meanwhile, adopted its program of large subsidies and domestic-content manufacturing rules.
This divergence has left many in the EU angry about America’s domestic clean-energy subsidies, even as many in the U.S. complain about facing EU carbon taxes over the next few years. These developments increase the urgency for G-7 nations to adopt a coordinated policy approach that resolves U.S.-European tensions, as well as creates incentives for large middle-income economies to limit emissions.
The Biden administration has suggested a sectoral approach beginning with steel and aluminum: envisioning an agreement with the EU and G7 to promote trade among nations producing these metals with lower carbon emissions while imposing fees on higher-emitting imports from other countries. Negotiations with the EU on this proposal continue. However, this policy seems far less likely than the EU’s CBAM to comply with World Trade Organization (WTO) rules, as it imposes new discriminatory tariffs rather than regulatory fees applied both to domestic producers and imports.
Even so, the Biden administration’s idea is a useful point of departure for a more coordinated policy, in which G7 nations join in a proposal we call an Alliance for Clean Trade (ACT). Under this framework, emissions intensity per sector would be the metric for harmonizing disparate climate policies within the U.S. and EU. ACT nations would charge fees for imported industrial materials with emissions above the agreed intensity level. The deal would also involve the EU giving up using its ETS carbon price to determine fees for imports, while in exchange the U.S. would provide EU and G7 nations access to many of its domestic clean-technology subsidies.
This policy would create strong incentives for China and other nations to reduce their emissions intensity to limit fees for their exports. Developed nations would also soon be eligible for the alliance, so it could include about half of the world’s GDP quite quickly. Over time, the hope is that all economies, including China, will cut industrial CO2 emissions deeply enough to join, and global emissions would accordingly fall.
The advantages of this proposal over carbon border adjustments proposed in the U.S. Congress include reducing policy conflict between G7 countries and compliance with WTO rules. This would help bypass America’s domestic controversy over carbon taxes, and unnecessary trade conflicts among countries committed to emissions reduction.
Trade measures are obviously not full solutions to global emissions growth. Many other efforts, including diplomacy with China and other major emitters and new financing efforts for developing countries, will be needed to bring emissions to net zero before mid-century.
But trade policy is a key piece of the puzzle, using global commerce as an incentive to reduce emissions and preserve access to the most valuable markets. Properly designed, trade policy can help protect our shared global home. It’s time for America and our allies to act and make an Alliance for Clean Trade a reality.
Paul Bledsoe is strategic adviser at the Progressive Policy Institute (PPI). He served on the White House Climate Change Task Force under President Clinton.
Ed Gresser is vice president and director for Trade and Global Markets at PPI. He served from 2015 to 2021 as assistant U.S. trade representative.
This story originally ran in The Messenger on July 3, 2023.
