Why India and China have pushed against climate change-related trade measures at COP29

A formal submission by China, India and some other countries to discuss climate change-related trade measures such as those introduced in the European Union (EU) delayed the opening plenary of the climate conference in Baku, Azerbaijan, on Monday (November 11) by several hours. The request was eventually put aside for the time being but the issue is unlikely to wither away.

Trade restrictions on grounds of promoting climate objectives are expected to trigger many more battles, and result in greater protectionism and disruptions in global supply chains. It could also lead to some positives such as greater innovation in green technologies, and the adoption of higher environmental standards. At least that is the hope. However, as it happens in most cases, countries with limited capabilities and resources might find themselves at great disadvantage.

Climate-related trade restrictions

Last year, the EU rolled out its Carbon Border Adjustment Mechanism (CBAM), which taxes certain products coming in from other countries on the basis of their emissions footprint in their production process. For instance, if the imported steel was produced through a process that entailed higher emissions than the emissions standards for that product in Europe, it would be taxed.

CBAM allows industries in Europe to remain competitive while continuing to maintain high environmental standards. It prevents these industries from relocating their production to countries where the production might be cheap owing to less strict emission norms, a situation described as carbon leakage. In the process, it hopes to contribute to reducing global emissions.

However, it hurts the export competitiveness of developing countries such as China and India. These nations complain that the move is an unfair barrier to trade and violative of provisions of several international agreements. For example, the Paris Agreement has provisions that seek to protect developing countries from the social and economic impacts of “response measures” taken to fight climate change. Last year, the final outcome of the Dubai climate meeting acknowledged that “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”.

The developing countries also point out that CBAM overlooks the “differentiation” embedded in the global climate architecture that allows them to be treated differently than the developed nations.

Industries in developed economies, with emissions standards comparable to the EU, stand to benefit from a CBAM-like measure, since their products would not be taxed and, hence, become more competitive in the European market. CBAM, thus, can have the net effect of helping industries in the developed world while putting those in developing countries at a disadvantage.

On behalf of the BASIC group of countries that also includes India, Brazil and South Africa, China made a request to discuss these issues at the climate meetings. It met with strong opposition from the EU and some other countries, and the proposal has been put on the backburner for now.

CBAM is not the first-of-its-kind trade measure linked to climate change but likely to be the most impactful till now. The EU is a large market, accounting for about 15% of global imports. CBAM currently applies to only a handful of goods — emission-intensive products such as steel, aluminium or cement — but is set to be expanded on a large number of other items in coming years. Other countries might also be tempted to bring in similar regulations. The United Kingdom and Canada are already reported to be considering their own versions.

There are also other non-tariff trade measures linked to climate change. Several regions, including the EU, for example, ban the import of products made from illegally harvested forests. Even the incentives offered in the Inflation Reduction Act (IRA) to clean energy technology or electric vehicle industries in the United States are examples of climate-related non-tariff measures that can impact and reshape global trade.