The trend of linking climate action and trade is gaining traction, as more and more countries explore policies that reduce carbon emissions in traded goods while addressing competitiveness concerns at home.
Climate-ambitious countries and industries reasonably fear that foreign competitors skirting environmental standards may gain a cost advantage, undermining the capital investments needed to decarbonize industrial production. To ease these concerns, tariffs based on the carbon intensity of imports are now in vogue. The European Union legislated its Carbon Border Adjustment Mechanism, CBAM, on energy-intensive imports last year, and preparations are now being made for its tariff to take effect in 2026. The U.K. is expected to follow suit in 2027, and other countries—including Canada, Australia, South Korea and, importantly, the U.S.—are also considering similar policy measures.
These unilateral policies aim to level the playing field for carbon-efficient manufacturers. However, if more countries follow the trend of developing climate and trade policies in isolation and without regard to international partnerships, it could result in significant collateral damage. Markets could fragment, creating a disincentive for climate cooperation and slowing emissions reductions. The EU’s CBAM already set a precedent for proceeding without international engagement and has resulted in heightened trade tensions with the Global South.