Carbon border taxes raise international dispute risks

Significance

Increasingly demanding climate mitigation targets in some economies have raised concerns over industry competitiveness and possible relocations of carbon-intensive industries. The EU plans a ‘carbon border adjustment mechanism’ (CBAM), effectively a tax, by 2023, to penalise imports from economies without comparable climate policies. These types of measures strengthen industry support for such policies, but risk triggering trade disputes.

Impacts

• Efforts to link different emission trading schemes will grow.
• Decarbonisation policies will change demand patterns for manufacturing inputs.
• Developing countries’ climate diplomacy will need to be coordinated with their trade ministries.