COP29 notes: Climate and Trade side event, 20/11/24

While attending #COP29 I am posting notes of the side events I attend. In this case, I was also on the panel - it's a mark of my enthusiasm for the topic that I could note take and participate at the same time! This one is about the policy tools that are opening up at the intersection of trade and climate, including border adjustment. Held at the Australian Pavilion.

Howard Bamsey, Moderator

Kushla Munro, DCCEEW

Frank Jotzo, ANU & Carbon Leakage Review

Michael Mehling, MIT

Tennant Reed, Ai Group

HB: appropriate to recall that Australia has been in the care of its first peoples for countless generations

Most of us think we’re not going fast enough

What are the options to extend and expand the tools for going faster? There are policies at home, but maybe there’s room for more.

IGCC suggested executive remind station be dependent on climate outcomes - sending shivers up a few spines

Taxonomy suggested it’s not about compliance but opportunity.

As we expand the repertoire, what are we using as new instruments?

Carrots? Sticks? Tools that are both at once?

For Australia as a middle sized open economy highly dependent on trade, different to larger more autarkic economies, we need to think about trade and its impacts on us and others especially developing economies

Opening points

KM: I’m responsible for both domestic and international climate programs. Climate and trade come together here.

Objectives:

• we have to foster international approaches that meet climate and trade objectives
• In Australia we think of ourselves as an important trading partner
• Renewable energy superpower: what does that mean? Shifting from traditional traded products to new ones
• We’ve championed global markets and free trade. We value multilateral cooperation and think about bilateral and regional collaboration too
• The financing taxonomy is relevant to goods trade too.

Policies:

• Guarantee Of Origin - legislation before Parliament to measure, track and verify emissions intensity of products
• Started with H2 - chemical identity means detailed tracking needed to establish confidence.
• We extended it to intensities of green metals and low carbon liquid fuels
• Fundamental approach to verification of emissions intensity
• KM was at bilateral with China in recent months - they also were looking at products and emissions accounting. There’s a lot of politics, but the fundamentals of tracing embedded emissions are essential to all approaches

FJ: second paper of Carbon Leakage Review is out for fonsultation til 3 Dec, recommendations by end of the year, input welcome.

Aus has a baseline and credit scheme and as they deepen there are concerns of leakage. We define that strictly as industry or investment leaving because of differences in policy stringency

We’ve found (preliminary) there are emerging leakage risks for a small set of commodities - high emissions intensity commodities that are strongly trade exposed.

Safeguard settings are adequate for now but risks may emerge materially over time for some commodities.

We looked at:

• emissions product standards - very little support found for this
• Public investment. Has a role but hard to be comprehensive and sustainable fiscally for ever
• Border adjustment - could be suitable for some selected commodities where Australia is an importer as well as a producer.

Cement and lime are early candidates, plus maybe ammonia, steel, glass, some others down the line (including to be considered in 2026-27 Review)

An export adjustment is not suitable for Australia because it would run against the decarbonisation objective and trade obligations

Trade obligation respect is central to our principles, especially open trade with our region. No protectionism.

Other principles include encouraging green production through preconditions for investment in low emissions

Terms of reference made us look at multilateral and plurilateral approaches. In long term this would be excellent - perhaps a global carbon prices - but far off. Harmonization in long term doesn’t obviate the medium term measures

MM: in EU the leakage safeguard has to be wound back in line with CBAM

Once companies bear full brunt of carbon price leakage issues need to be addressed.

A staged process was also part of the EU approach. Took a long time to get links out of EUETS and EC took similar stages to CBAM, moving step by step down stream. Early observations suggest this was important as compliance rate was abysmal in the first year.

Producers need time to get up to speed

With cement it may be easier to start due to less international supply chain

Issues: exports - same issue in EU, similar motivation to avoid trade disruption, the EU has held back. But this is a crunch issue for industry. Need some solution.

Maybe investment in innovation and decarbonisation? But not a subsidy. Big paper out from EC yesterday.

Indirect emissions - EU assessing scope 2 emissions rather gradually, with cement and fertiliser

Value chain - how far down do you go? Do you just shift the competitiveness frontier?

International dimensions- US discussions involve different scope and context. We will see heterogeneity based on suitability to domestic circumstances.

Australia said it wouldn’t want to double burden producers from aboard. Giving credit for policy overseas is important. EUCBAM credit has given spur to carbon pricing to middle income economies around the world. They’ve been talking for years. But now rapidly moving to implement in CBAM sectors. Domestic politics has been changed by it - environmental ministries have got economic ministries on side to move forward with carbon pricing.

If Australia’s neighbours have a carbon price, that shifts the context for its own actions and trade.

TR:

Border adjustment is very controversial here at COP and a sore point in the negotiations

This is partly because of widespread misunderstanding, including the misinterpretation of problematic analysis

Border adjustment is relevant to two forms of carbon trade problem

• how will production in strong policy jurisdictions be viable alongside light policy jurisdictions?
• How will clean production be a viable investment anywhere?

Border adjustment is also relevant to two key elements of the Climate Finance agenda here

• Climate justice - can deliver financial flows from developed to developing countries through export revenue and home carbon pricing on those exports
• Access to capital - underlines the need for developing access to take up the clean production opportunity created by rich economy border adjustment

Recommendations: in these negotiations, developed economies should give some ground and agree to a multi year discussion of border adjustment. This will very likely produce greater calm and a productive focus on capital access and transaction cost management.

Q&A

• is EU and UK action enough to cause a carbon pricing domino effect, or do you need the USA etc?
• MM: decades ago we were after top down carbon pricing and it didn’t happen. Then EU thought bottom up via linking. Didn’t happen! Because carbon pricing systems follow very idiosyncratic pathways to reflect local circumstances and politics. If there is something driving convergence it is the stick of CBAM. Türkiye said they must show their ETS is compatible with CBAM. China similarly thinking about CBAM in expanding its ETS.
• Milan, Resources For the Future - some question whether EU economy had enough clout to move other markets - but we’ve seen a lot of engagement with EU. Some companies affected will have a huge part of their business covered. US looking at this could be a further catalyst.

Q: is a BOCA more a carrot than a stick?

• FJ is a chance to establish a green premium on the marketplace, so more carrot than stick. As a share of the price of final goods the premium is tiny, but for commodities it may give a significant advantage to clean production wherever it is located.

Q: what about product expansion?

• TR: only do it where it matters based on a competitiveness impact assessment - higher value added and complex input goods will likely not pass that test.

Q: European chemical industry experience - work backwards from “what is the market for low carbon products” “what tools do you need” then assess CBAM. We’re missing the industrial component - need to ensure that competitiveness doesn’t move down from ammonia to fertilizers - farmers will pursue cheapest inputs

Q: is there a b refit to looking at BOCA through “easiest lowest cost abatement” point of view? Maybe focus on electricity intensive goods?

• KM: GO is relevant to contribute to a patchwork approach, and that’s ok to spark and create demand.
• FJ: any adjustment flows from the domestic approach - while Australia doesn’t cover electricity we can’t adjust for it

Q: Lisa De Marco - how will this be implemented by a protectionist country?

• MM: There’s huge change coming at us on trade. “Might is right” may prevail unfortunately. EU has tried very hard to adhere to trade structures. There are three proposals in the USA - most likely to move forward imposes nothing on local industry and adjusts based on intention to reduce imports from certain countries. Many in DC see this as the only way to discuss climate with the new administration. Is that a pact with the devil?
• TR: the Invasion Of The Body Snatchers fear of secretly protectionist measures disguised as other things is understandable, but we're seeing open protectionism arise from the ocean like Godzilla and stomp towards the mainland - if people want to do protectionism they are now being quite undisguised about it. CBAM might be the calmest, most WTO-respecting corner of the trade discussion over the next few years!

Q: cement has been mentioned - there are multiple types - CBAM needs to be watertight to be effective?

• FJ: want a reliable method of determining intensity of imported product. That’s a common point in everyone’s mind.
• Audience: but what about false declarations?

Q: on leakage - if US reduces consumption of high emissions goods that may shift somewhere else - isn’t that also leakage?