Peterson Institute for International Economics
Divergent climate change policies among countries could spark a trade war. The WTO should step in
Gary Clyde Hufbauer

Potential implications of the different climate change policies among countries

Gary Clyde Hufbauer, researcher at the Peterson Institute for International Economics, exposes in this article the need for an agreement between the three major economies (the United States, China and Europe) on how to reduce carbon emissions, bearing in mind that so far all of them have adopted different commitments and measures to that end. These divergencies could lead to an increase in protectionist policies, trade wars, and competitive disadvantages that obstruct cooperative action needed to reduce global emissions.

According to the article, the United States, Europe and China "are at loggerheads over how to reduce reliance on fossil fuels without excessively disadvantaging their own economies" and this divergence is leading them to make different proposals and commitments to reduce carbon emissions and could eventually translate into political and economic conflicts between them:

  • The European Union and the United States have released border tax proposals to imported products that do not comply with the new environmental standards, not only because they go against efforts to reduce global emissions, but also because they could potentially harm their domestic industry. However, both proposals differ in the calculation of the amount to be applied -based on the price of carbon emissions- and on the date to be implemented.
  • For its part, China, in addition to opposing the new taxes proposed by the EU and the United States, has launched a carbon trading market last July, whose initial phase covers 2,225 power plants, but leaves out other sectors intensive in emissions (chemical, aluminum...) that would be incorporated later. It has also announced plans to launch mandatory climate-related disclosure requirements both for banks and other listed companies.
  • The new border tax proposals to reduce carbon emissions have received numerous critics: they are considered protectionist measures against free trade and might trigger unilateral measures in the rest of the countries, causing international trade friction and, ultimately, preventing the necessary cooperation in the fight against climate change.
  • To avoid this situation, the author proposes that the World Trade Organization should create an expert body to calculate (and periodically update) the amount of these new taxes on imports based on the environmental standards of each country, and a two-year moratorium to reach an international political agreement.

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