COP29: Row over EU's CBAM stalls day-one progress in Baku

Countries clashed over the inclusion of carbon taxes such as the EU's Carbon Border Adjustment Mechanism and other climate and trade policy measures on the agenda of the 2024 UN Climate Change Conference.

The opening plenary session of COP29 was cut short as the BASIC bloc, which represents four newly industrialized countries -- Brazil, South Africa, India, and China -- asked for "climate change-related, trade-restrictive unilateral measures" like CBAM to be discussed at this year's climate summit in Baku.

CBAM refers to a carbon tariff introduced by the EU to penalize countries that export emission-intensive commodities to the region but do not have rigorous policies on carbon pricing. The CBAM-liable commodities include aluminum, cement, electricity, fertilizers, hydrogen, iron and steel. The UK will implement its own CBAM from 2027, while Australia is also keen to have its own carbon border tax.

Making CBAM an official COP agenda is an important step that indicates the UN Framework Convention on Climate Change is viewing and evaluating the intersection of trade policies and climate policies in a more serious manner, according to some delegates.

But by 2100 local time (1700 GMT) in Baku, it was decided by the COP29 Presidency that "climate change-related, trade-restrictive unilateral measures" will not be part of the official agenda, but this topic will be discussed informally at the global climate summit, which will take place from Nov. 11-22.

Many developing countries heavily impacted by CBAM raised their concerns and criticisms on the sidelines of previous COPs. However, the UN has not previously included this part of an official COP agenda. The EU also insisted that this is an issue about trade and should be discussed at the World Trade Organization instead of COP.

The main purpose of the tax is to reduce the risk of carbon leakage -- EU industries relocating abroad -- and encourage importer nations to introduce their own carbon markets, limiting CBAM's impacts on their traded goods.

Trade and climate

In July, the BASIC bloc said the moves by rich nations to adopt carbon border taxes and trade-distorting subsidies were "discriminatory."

The intersection of climate policies and trade policies has inevitably become more influential globally, pushing the UNFCCC to provide a formal and proper stage for discussions, according to some analysts and delegates.

Kevin Conrad, the founder of the Coalition for Rainforest Nations and former special climate envoy for Papua New Guinea, disclosed that the delegations were currently fighting on this particular agenda item after the BASIC bloc requested to include this topic only a few days ago.

He said that even if this agenda item is not included in COP29, Brazil, which is the host of COP30, a part of the BASIC bloc will push for it at next year's climate summit in Belem.

A Beijing-based policy analyst said that China not only wanted to discuss CBAM at COP but also all climate-related policies that have significant impacts on global trades, such as the EU's rules on batteries and the US' Inflation Reduction Act that subsidizes domestic manufacturers in clean energy sectors.

The analyst also said that China could have greater bargaining power at COPs in the coming years due to the probable absence of the US, creating a favorable opportunity for China and similar-minded developing countries to advance their prioritized agendas.

"A US withdrawal from international climate diplomacy could create a leadership vacuum, enabling China to enhance its geopolitical influence," analysts at S&P Global Commodity Insights recently said in a report.

Impact from CBAM

CBAM essentially levies a tax on imports of selected carbon-intensive materials and products -- including aluminum, cement, electricity, fertilizers, hydrogen, iron and steel -- into the EU, removing the gap between the EU Emissions Trading System carbon price and the export country of origin's carbon price.

Many developing nations, especially BASIC countries, have been critical of CBAM because many of their exports go to the EU, leaving their economies exposed.

An analysis by Commodity Insights found that Brazil, Canada, South Africa and Turkey will be most exposed to the mechanism, with iron and steel being the biggest sectors targeted.

The EU's CBAM is in a transitional phase, with the carbon levy set to formally start from 2026.

Carbon prices vary significantly on a country-to-country basis due to the differing sectoral scope of many emissions trading systems globally.

Carbon permits under the EU Emissions Trading System are currently around five times more expensive than compliance prices in China, the world's industrial powerhouse.

Platts, part of Commodity Insights, assessed EU Allowances for December 2024 at Eur67.82/mtCO2e ($72.18/mtCO2e) on Nov. 8.

This compares with China's compliance emission allowance, or CEA, which was valued at Yuan 105.03/mtCO2e ($14.70/mtCO2e) on Nov. 8, according to the Shanghai Environment and Energy Exchange.

South Africa has repeatedly called CBAM discriminatory, while India has been considering retaliatory measures and China has raised concerns within the WTO.