Addressing UK greenhouse gas emissions through trade policy

UK consumption leads to greenhouse gas emissions in other countries. The Committee on Climate Change (CCC) estimates that 46% of the UK’s consumption emissions took place outside the UK.1 But, the UK’s net-zero emissions target for 2050 focuses largely on domestic emissions.2

Of course, if the UK just outsources its emissions, it will not address its global contribution to climate change. As a services-based economy, there is some concern this is happening. In 2019, the UK Office for National Statistics concluded that UK citizens have very high per-capita net imports of carbon dioxide – higher than either the US or Japan. Another concern is that UK climate policies are actually increasing its carbon footprint. As a country with high carbon pricing and regulatory costs, the UK risks carbon leakage: activities that are emissions-intensive moving to less regulated countries.

The Committee on Climate Change3 commissioned us (the UK Trade Policy Observatory and the Centre for Inclusive Trade Policy, with help from Vital Economics) to write a report on Trade policies and emissions reduction: establishing and assessing options. The report will help the CCC develop its guidance to the UK Government on how to address the trade elements of its climate policy. It focuses on whether the UK should introduce border carbon adjustments (BCA) - which price the emissions embodied in imported products - and product standards - which require that imported products fall below specific embodied emissions thresholds. Both aim to extend domestic climate regulatory requirements to imported products. The UK currently applies neither but is considering the introduction of both, while the EU has recently decided to do so, in the form of a Carbon Border Adjustment Mechanism.

Our main findings:

There’s no perfect way to address UK consumption emissions through trade policy. In introducing Border Carbon Adjustments or product standards, it’s likely that there will be some trade-offs between the technical feasibility of very complex new regulatory requirements, the ambition of these requirements in achieving climate objectives, and their success in treating all countries fairly. (We develop and apply a ‘The Carbon Border Adjustment trilemma’ concept from a previous briefing paper in this report).

Coordinate policies with trade partners:

This doesn’t mean we shouldn’t act – indeed, given that other countries are considering such policies, most immediately the EU’s Carbon Border Adjustment Mechanism (CBAM), not doing anything also entails significant costs for UK business and consumers. Primarily, the EU’s planned introduction of CBAM could result in new administrative requirements for UK exporters, trade diversion to the UK, and disagreement about whether and how CBAM should be applied in Northern Ireland. To address these issues, the UK must coordinate its policies with the EU.

Develop assessment methodologies:

The UK should also actively participate in discussions about developing methodologies for assessing embodied emissions which will aid in the implementation of any domestic policy actions, such as in the Organisation for Economic Co-operation and Development (OECD) and through the Industrial Deep Decarbonisation Initiative. Clear and transparent methods for assessing embodied emissions are crucial for ensuring that trade policies are inclusive. A public- and private-sector learning process over the next few years can reduce the technical challenges to understanding how emissions are embodied in particular products.

Build alliances:

Participation in climate clubs and alliances, through which countries waive regulatory requirements or fees and cooperate toward building low-carbon supply chains, can prevent new trade barriers with climate allies. This is quite a new area of trade policy, but participating in ongoing discussions, such as through the G7, will help to ensure that the UK can implement new trade measures while minimising damage to its supply chains.  Participating countries can reduce the risk of WTO non-compliance in such climate clubs by basing membership on the requirement that participants have equivalent regulations, and ensuring that membership criteria are clear, transparent and open to all countries.

Support developing countries:

Providing additional support for developing countries is also in keeping with the spirit of the Paris Agreement’s principle of Common but Differentiated Responsibilities and Respective Capacities (CBDR-RC).

Take WTO compliance seriously:

The current weakness of the WTO dispute settlement system increases volatility, and designing regulation in a manner that takes seriously conformity with WTO requirements is an essential element of trade diplomacy.

Phase-in export rebates:

As recent debate in the EU Parliament has shown, export competitiveness is a critical challenge for introducing BCA. If exporters receive rebates, this can undermine the perception that BCAs support climate objectives. A phased approach to export rebates based on emissions intensity can satisfy environment, WTO non-discrimination and industry objectives, but will increase technical complexity.

Beyond border measures: Finally, border measures such as BCAs and product standards are only one element of trade and climate policy. A more comprehensive approach to supporting global decarbonisation includes actively supporting low carbon innovation and supply chains, including through green investment and climate finance, cooperation on the development of international standards, and technology transfer (among other tools and approaches).

These are just some of the key findings from our report: Trade policies and emissions reduction: establishing and assessing options.

Some of the key findings are also included in the CCC’s 2022 Progress Report to Parliament