WTO chief calls for global carbon pricing structure to prevent trade disputes over environmental policies

The director general of the World Trade Organization (WTO), Ngozi Okonjo-Iweala, has called for the implementation of global carbon pricing to prevent trade disputes.

Speaking to the FT, Okonjo-Iweala said the WTO is working alongside the IMF, Organisation for Economic Co-operation and Development (OECD) and UN to develop a carbon pricing system for trade following the EU’s introduction of a Carbon Border Adjustment Mechanism (CBAM).

CBAM is intended to level the costs for EU manufacturers and those outside the bloc who are not subject to its policies on carbon pricing.

The first phase began in 2023, with full implementation expected in 2026, and other nations are considering bringing in their own version.

A ’protectionist mechanism’?

Okonjo-Iweala suggested that the EU measure could trigger disputes at the WTO, noting that “developing countries see it, rightly or wrongly, as a protectionist mechanism. They have contributed very little to emissions. Africa is 3% of [current] global emissions.”

“We see [litigation] coming. We think it will be quite difficult and problematic. So we’re trying to avoid that by saying why don’t we develop a global framework that is interoperable? So that we can limit the trade litigation frictions that would come here.”

Developing nations have raised questions about environmental rules, such as the EU’s Deforestation Regulation, complaining about discrimination and market access.

‘Potential for trade to do more’

The WTO has established a working group to develop an international system for carbon pricing. Okonjo-Iweala said that there were 78 different carbon pricing mechanisms already implemented around the world.

She suggested that the system would need to be designed to prevent heavy emitters of CO2 from simply moving to other markets with more relaxed carbon pricing regimes.

“I’m really personally so excited about it because I think there’s really potential for trade to do more, for trade to be part of the answer.”

The Chartered Institute perspective

Sandra Cooper, trade and customs specialist at the Chartered Institute of Export & International Trade, said that it's “important to acknowledge the crucial role that trade plays in achieving the net zero targets outlined in the 2016 Paris Agreement on climate change”.

“The introduction of a global carbon pricing system has the potential to ease political tensions among trading nations, but its effectiveness hinges on its structure, execution, and international adoption.

“For the global carbon pricing framework to succeed, it must be meticulously planned to standardise carbon regulations, create fair competition and promote collaboration on climate objectives.

“Nonetheless, if it overlooks the economic and political realities of different nations, it could trigger additional conflicts. To mitigate this, the system should feature support mechanisms for developing countries, address fairness issues and allow for adaptable implementation based on individual national circumstances.”