Global carbon pricing needed to avert trade friction, says WTO chief

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Global carbon pricing is needed to prevent “difficult and problematic” disputes over environmental measures from disrupting trade, the head of the World Trade Organization has said.

Ngozi Okonjo-Iweala told the Financial Times in an interview that the WTO was taking the lead in working for an international carbon pricing system with the IMF, OECD and UN. 

That effort comes in response to the EU’s carbon border adjustment mechanism, which came into force this year and requires exporters to the trade bloc to pay a levy linked to the EU carbon price for the emissions of certain carbon-intensive products including steel, cement and fertiliser.

The measure, which comes into force in 2026, is meant to level the playing field between EU manufacturers, who have to pay for emissions under the bloc’s cap-and-trade system, and exporters in countries with lower or no carbon prices.

It is expected to trigger a slew of complaints at the WTO from trading partners.

India has already hinted it could bring a WTO case, while other developing countries have said the measure would price their goods out of EU markets.

“Developing countries see it, rightly or wrongly, as a protectionist mechanism,” the WTO director-general said. “They have contributed very little to emissions. Africa is 3 per cent of [current] global emissions.” 

The EU has defended the measure and emphasised that it has sent officials around the world to help countries including China to develop their own carbon markets.

In a document outlining political priorities for the next five-year mandate of the European Commission, its president Ursula von der Leyen said the bloc must “step up our green diplomacy and engage more with non-EU countries on external aspects of our policies”.

Okonjo-Iweala said the EU was right to try to tackle climate change but its approach could fragment efficient trade routes at the cost of economic growth.

“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.”

The Nigerian said there were 78 different carbon pricing and taxation mechanisms in the world.

The intention of the working group was to find a way to set different carbon prices in different regions. The EU might pay $80 a tonne, and Africa $20. 

This would require a change to CBAM, which levies the difference between the EU carbon price and that paid by the source of the imports to the bloc.

The proposed global system would also need safeguards against carbon arbitrage, where heavy emitters simply move to areas with lower prices, Okonjo-Iweala said.

Okonjo-Iweala, who has been nominated for a second term at the WTO by African countries, said she wanted trade to help reduce carbon emissions.  

“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. ”

When she started in 2021 “trade was seen as part of the problem” because of transport emissions and commodities exported from deforested land. “I really wanted to turn that around.”

She said she had encouraged countries signed up to an international procurement agreement to prioritise green purchasing. There are also WTO talks over a global environmental goods agreement that would drop tariffs on many items such as solar panels. However, the US especially has been raising tariffs to foster a domestic industry to compete with China.

Okonjo-Iweala said countries should reroute environmentally damaging subsidies towards sustainable industry. There are $1.2tn of annual fossil fuel subsidies, $600bn of trade-distorting agricultural subsidies, $300bn of water subsidies and $22bn of harmful fisheries subsidies, she said.

Her term expires next year, but she is expected to make an announcement on Monday about whether she will run for a second term.

Okonjo-Iweala could be confirmed after a month if no rival emerges, which would prevent a re-elected Donald Trump from blocking her, as he did in 2020. He left office in January 2021, allowing her to take the job.

Additional reporting by Alice Hancock in Brussels