WTO constraints of carbon-related border adjustments

The climate commitments resulting from the Copenhagen Conference of the Parties fell short, according to many analyses, of what is required to avert dangerous increases in global temperatures. Whether the trade regime can play a constructive role in efforts to mitigate greenhouse gas (GHG) emissions remains an open question but, judging by some recent debates, the answer for one particular trade measure is ‘No’: The threat of border carbon adjustments (BCAs) has been particularly divisive.

At the root of this issue is a deceptively simple policy dilemma: From an economic perspective, GHG targets, associated with explicit carbon costs, require a levelling of the carbon-cost playing field for energy-intensive, trade exposed industries. An important question is whether these costs be levelled upwards, through the application of BCAs in those regions that have carbon caps and carbon pricing, or levelled downwards, through the free allocation of emission allowances (or tax exemptions and exceptions) within those regions? This dilemma has, however, complex ethical, political, environmental and economic dynamics, along with uncertainties over compliance with international trade rules (e.g. within the WTO) and the difficulties of carbon accounting.