The CCC has commissioned the UK Trade Policy Observatory at the University of Sussex to review trade policy options, with a particular focus on CBAMs and mandatory minimum product standards. The project defined a taxonomy of trade policy options, the current landscape, an assessment of key design decisions for CBAMs and product standards and the practical steps needed to implement these policies.
In its assessment of design options, the project pointed out that it is difficult to design measures that are both environmentally ambitious, technically feasible to implement and that address concerns about justice and equity. , both domestically and for UK trading partners. Some compromise between these objectives will probably be necessary.
2. Key messages
The evaluations highlighted several key messages:
- Product or sector scope: The more limited the scope of sector coverage, the more feasible the implementation. However, restricting CBAMs to direct emissions for a few trade-exposed commodities may not solve carbon leakage. Gradual introduction can allow a learning process through which companies adapt.
- Developing countries: Providing support to developing countries is in line with the spirit of the Paris Agreement principle of common but differentiated responsibilities and respective capabilities. Such support can take place by administering the regulations differently, for example by forgiving CBAM fees to least developed countries (LDCs) and/or phasing in the requirements more slowly. This can also be done by directing CBAM revenues or other climate finance to LDCs and providing training on how to implement the requirements.
- Climate clubs: Participation in nascent climate clubs can prevent further trade barriers with climate allies. But climate clubs that impose tariffs on non-participating countries risk failing to comply with the World Trade Organization (WTO). A major challenge is to establish an equivalence between implicit (regulatory) and explicit carbon pricing. Participating countries can reduce the risk of non-compliance by basing membership on the requirement that participants have an equivalent policy and by ensuring that membership criteria are clear, transparent and open to all countries.
- Export Applicability: The competitiveness of UK exports is a crucial challenge for the introduction of CBAMs. If exporters receive rebates, this can undermine the perception that CBAMs support climate goals. A tiered approach to export rebates based on emissions intensity can satisfy environmental, non-discrimination WTO and industry objectives, but will increase technical complexity.
- Free allowances: The UK is currently providing trade-exposed industries with free allowances to prevent carbon leakage. The phasing out of free allowances when introducing a CBAM will greatly contribute to compliance with WTO rules.
In defining the steps needed to implement CBAMs or product standards, he highlighted:
- Domestic steps: Coordination across a wide range of departments is required, as well as industry consultation to inform the timing/structure of CBAMs or product standards.
- International stages: The UK should actively participate in discussions on the development of methodologies for the assessment of embodied emissions. The UK should also inform its trading partners, in particular the EU and developing country partners, of plans to introduce CBAM or product standards before they are introduced.
Finally, he noted that CBAMs or standards are only part of supporting global decarbonization. A comprehensive approach includes active support for innovation and low-carbon supply chains, including through green investments and climate finance, cooperation on standards development and technology transfer.