Trade and climate change: managing policies on the road to net zero

Contributor(s): Professor Luis Garicano, Professor Maisa Rojas Corradi, Professor Catherine Wolfram | Trade and climate change policies have become increasingly interwoven. Subsidies for green industries often provoke tariffs, such as US actions over Chinese solar panels and electric vehicles. The European Union’s Emission Trading System (ETS) has set an increasingly high price on carbon emissions. But if high emission industries like steel, simply relocate and European consumers then buy the imported steel, this “carbon leakage” undermines the original policy. To tackle this problem, the European Union has introduced the Carbon Border Adjustment Mechanism (CBAM) which seeks to tax such imports to prevent carbon leakage – and to encourage other countries to also introduce carbon taxes. The UK is planning the same. But many countries are unhappy, claiming this is simply disguised protectionism.