Emission impossible and the trade conundrum of calculating carbon

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I’ll resist the temptation to write more about the Red Sea today since not much has happened except more exchange of ordnance between the Houthis and the US. One thing: upward pressure on freight rates on the China-US west coast routes may be easing. But since this is quite likely to be to do with the demand side because of Chinese economic weakness rather than supply constraints lifting, it’s not something we should welcome. Today’s main pieces are on carbon border taxes and how to calculate them, and Charted waters is on China’s surging exports to Mexico.

A wop-bop-a-loo-bop, a-wop-CBAM-boom

(Sincere apologies to fans of Little Richard.) If you missed it, there was a terrific piece by my FT colleagues on the EU’s carbon border adjustment mechanism (CBAM) a couple of weeks ago, which in particular touched on the tricky technical question of measuring emissions. If you’re now thinking “oh God, Alan’s about to disappear down a pointy-headed/bureaucratic rabbit hole, I’m outta here”, please stay a while to consider the following.

There is basically no chance — none — that the world will multilaterally negotiate its way to an international carbon price in the foreseeable. Governments can’t even agree on what institution in which to have talks (the World Trade Organization’s too sclerotic, the OECD’s a rich-country club, the UN is, well, the UN). People at the Villars Framework initiative are working hard to create serious official conversations over climate and trade, but it’s a long-term project. 

Into this vacuum marches CBAM. Companies importing the six products it covers into the EU had to start reporting carbon footprint and emissions pricing from October 1 last year, with actual taxes being levied from January 2026. (In reality I suspect that date will get pushed back while countries come to grips with compliance.)

One of the most basic questions remains unresolved: how you actually calculate emissions to plug into the tax-generating machine. All sorts of variations are possible: they can be measured at product, plant, company or national level, using direct or indirect emissions and so on.

The snappily abbreviated Comet (Columbia University Coalition on Materials Emissions Transparency), which does impressively detailed work on this, notes that even within a single industry (steel) there are big variations. This excellent paper from 2022 runs through an example of three methods of calculating carbon emissions — the guidelines from the Intergovernmental Panel on Climate Change, which is targeted at governments, the GHG Gas Corporate Protocol, which was created for companies, and the one used by the EU for its Emissions Trading Scheme, and by extension CBAM.

And guess what? They give different answers. As the paper sternly concludes: “Relying on the various permutations of carbon accounting systems as a basis for preventing carbon leakage will also lead to extreme difficulties in making apple-to-apples comparisons, potentially giving cover to protectionist motives and planting the seeds for trade disputes.”

CBAM is very likely to be challenged at the WTO. Even if the EU’s smart lawyers have effectively litigation-proofed the principle, it can still be ruled unlawful if its implementation is unfair in practice.

And that’s before we’ve got to gaming the system or straight-up cheating. Remember Dieselgate? Now imagine emissions-intensive businesses across the world trying to fiddle the measurements, and think of the Carbongate scandal that would ensue.

Les absents ont toujours tort, or you don’t play the game, you don’t make the rules

Measuring emissions drops squarely into the category of “stuff that we really should have harmonised by now, sorry about that”. Lots of different organisations are doing work on this (the OECD is one of the most sophisticated), but no international norm is emerging.

Anyone wanting to sell carbon-intensive goods into the EU will have to calculate emissions using the bloc’s methodology, whether or not they use it for their domestic purposes. Currently, the EU allows companies to report using three different methodologies: by the end of 2024, only its own one will be allowed. To some extent that will de facto become an international standard, and governments wanting their companies to avoid the tax (the UK and Turkey being obvious examples) are planning to introduce their own border measures and have a strong incentive to align with the EU carbon price.

Longtime Trade Secrets readers will recognise exactly where we’ve arrived: back in the familiar territory of the Brussels Effect, where EU standards are disseminated abroad by the need to access Europe’s market. The EU carbon measure may not be the best system — the Comet paper argues that it has some gaps — but, as with the General Data Protection Regulation, it’s the only one where there’s a strong incentive for international adoption.

The US’s Environmental Protection Agency, for example, has its own way of measuring greenhouse gases, but since the US has no national carbon price, it’s got no real mechanism for exporting it. You don’t play the game, you don’t make the rules, as they say in Washington. Les absents ont toujours tort (those absent are always in the wrong) would be its rough Brussels equivalent.

Charted waters

It’s been noted by a few people (including economists at the Bank for International Settlements) that the US trying to decouple from China is likely to mean other countries interposing themselves to create the illusion of severing supply chains, rather than the reality. One such is Mexico. Soaring Chinese exports of cars and car components to Mexico have been concerning US lawmakers, and looking at the numbers you can see why.

Trade links

Peter Harrell, a former senior Biden White House official on international economics, writes in Foreign Affairs on “China-proofing” the global economy.

Relatedly, some nice charts from academic Richard Baldwin on how China is the world’s only manufacturing superpower.

With the WTO ministerial meeting a month away, the news service Borderlex lays out the issues on the fishing subsidies agreement that was a supposed success at the last ministerial meeting.

My FT colleague Stephen Bush on why the UK should learn to love the services industries it’s actually good at, such as video gaming.

Politico reports that late changes to the EU’s artificial intelligence regulation (which I wrote about here) will allow law enforcement to use facial recognition on video footage without a judge’s approval, to the dismay of some members of the European parliament.

My FT colleague Martin Sandbu optimistically argues that China might play a positive role in pushing decarbonisation internationally.

Trade Secrets is edited by Jonathan Moules