The intersection of climate and trade policy represents a complex challenge and opportunity for the achievement of a thriving, resilient, and just net-zero economy. As climate change and policies designed to combat it increasingly influence international trade, the interlinkages between these policy areas become clear. At C2ES, we analyze how climate and trade interact and provide solutions that not only protect the climate but also ensure economic prosperity.
Climate change impacts trade by disrupting supply chains and raising costs for businesses. Moreover, a country’s climate change policies, for example, carbon pricing or clean energy subsidies, can also affect how trade is conducted by shifting the demand for traded goods towards products and producers that contain or produce fewer emissions. As more climate policies come into effect around the globe, they have the potential to redraw international supply chains.
International trade is essential for the smooth function of the global economy, impacting products ranging from the food we eat to the cars we drive. The expansion of trade can provide new economic opportunities for countries, businesses, and individuals. But it comes at the cost of greenhouse gas emissions, not only from the transport of goods across oceans and borders, but also embodied in the goods we consume.
Growing awareness of trade’s consequences has led to a proliferation of trade policies designed to account for and mitigate the climate impacts of international trade, including through border carbon adjustments like the European Union’s Carbon Border Adjustment Mechanism (EU CBAM). Trade policies not only facilitate the implementation of climate change mitigation practices but are also increasingly in their own right becoming tools to combat climate change by ensuring access to the resources needed for a resilient net-zero economy.
Climate-aligned trade policies are proliferating around the world. Most notably, several countries are following the example of the EU CBAM and are implementing or considering the implementation of their own border carbon adjustments. Presently, the United Kingdom and Norway have announced they will implement similar border carbon adjustments, while Canada and Australia have held consultations to inform their decisions on whether to follow suit. In the United States, both Republicans and Democrats have introduced legislation that would establish a U.S. border carbon adjustment.
Beyond border carbon adjustments, there are numerous trade policies countries can implement, both individually and cooperatively, to align trade with climate goals. The United States-Mexico-Canada Agreement integrated an environmental chapter, requiring the parties to uphold environmental standards. Internationally, Costa Rica, Iceland, New Zealand, and Switzerland concluded the landmark Agreement on Climate Change, Trade, and Sustainability (ACCTS), the first trade agreement to include binding provisions on fossil subsidies. Trade agreements like ACCTS and even actions taken by individual countries, for example, tariff reductions on clean energy technologies or environmental goods, can accelerate the transition to net-zero.
C2ES conducts research and analysis on the spectrum of U.S. trade policy proposals related to climate, such as border carbon adjustments, industrial policy, and subsidies, and export promotion for clean energy technologies. Well-designed climate-aligned trade policies offer a unique opportunity for the United States to reduce emissions domestically and internationally, enhance the competitiveness of U.S. industries, expand access to markets for U.S.-produced, low-carbon goods, and align U.S. policy with key partners and allies.
Beyond U.S. climate-aligned trade policy, C2ES engages with international partners to support cooperation that advances interoperable border carbon adjustments, as well as trade policies that facilitate the goals of the United Nations’ Framework Convention on Climate Change’s Global Stocktake, principally tripling renewable energy capacity and doubling energy efficiency.
Linking climate and trade policies has emerged as a promising opportunity to lower emissions in the United States while encouraging trading partners to strengthen their climate policies. There is growing interest on both sides of the political aisle to address competitiveness concerns by pairing domestic emissions reduction with trade measures such as border carbon adjustments. C2ES convenes its Climate-aligned Trade Working Group to inform policy approaches that optimize the design of a U.S. border carbon adjustment, with input from businesses and other stakeholders.