COP29 opens with divisions over Europe’s carbon border tax and climate financing

The UN Conference of Parties (COP29) Summit began in Baku, Azerbaijan on Monday, the second year in a row that an oil-producing nation has held the presidency.

The negotiations were marred by delays, usually witnessed on the summit’s last day, as the agenda’s plenary and adoption were pushed by over nine hours.

The end of the first day did see the adoption of Article 6.4 of the Paris Agreement which sets new UN standards for international carbon markets in a key step toward allowing countries to trade credits to meet their climate targets.
While experts weigh in on the merits of this rushed approval, the focus of this year’s talks will be on finalising a new financial goal. And to that effect, diversions have already emerged between major economies.
One such debate is over the European Union’s Carbon Border Adjustment Mechanism (CBAM).
In December 2022, the EU agreed on a preliminary deal for the CBAM, which would essentially mean a tax on imported goods calculated on the basis of the greenhouse gases emitted during the production of the goods.
It was introduced as part of the EU’s ‘Fit for 55’ package, which aims to reduce GHG emissions of the bloc by at least 55 per cent by 2030.
Initially, CBAM would apply to six heavy industries — iron and steel, cement, aluminium, fertilisers, electricity, and hydrogen – and would come into effect from October 1, 2023, the EU said at the time of the agreement.
From the EU’s perspective, the mechanism was aimed at “levelling the playing field” for its firms that operate under the EU’s Emissions Trading System (ETS) and pay a domestic carbon price to cushion them from competitors who can manufacture at cheaper prices in countries where environmental laws are lax. It also hoped to incentivise its trading partners to decarbonise their manufacturing industry.
The EU said the CBAM would act as a countermeasure to the issue of carbon leakage, which UNCTAD (UN Trade and Development) defines as “a shift of polluting industries to jurisdictions with less stringent emission regulations that might occur with an increase in domestic carbon prices”.
This, the EU said, is the core purpose of CBAM which was implemented in its transitional phase from October 2023, with full implementation beginning in 2026.
Governments in the EU fear that the bloc’s ambitious climate policies may result in carbon leakage, hence undermining global climate efforts while harming EU businesses.
Under the mechanism, importers must purchase CBAM certificates priced according to the carbon emissions during the production of the goods. The price of these certificates mirrors the EU’s internal carbon price under its Emissions Trading System (ETS), ensuring consistent carbon pricing for both domestic and imported products.
During the transitional period (2023-2025), importers only need to report emissions embedded in their imports without making financial payments. This phase allows businesses to adapt to the new system and establish proper emissions monitoring procedures. From 2026, importers must begin purchasing CBAM certificates.
The system accounts for carbon pricing mechanisms in the exporting countries. If a producer has already paid a carbon price in their home country, that amount can be deducted from the CBAM fee, preventing double taxation.
CBAM represents a significant shift in global climate policy for several reasons:
1. It’s the world’s first carbon border tax
2. It sets a precedent for linking trade policy with climate action
3. It incentivises global trading partners to strengthen their own carbon pricing mechanisms
The mechanism, however, has sparked international debate, with some countries viewing it as potentially protectionist.
From the perspective of equity and common but differentiated responsibilities (CBDR), a CBAM is perceived to place the burden of decarbonisation on the developing world, disregarding the prior failure of wealthy countries to make good on their promises to ensure that green technologies are more accessible to developing countries, whether through extending knowledge or providing financing, the Centre for Science and Environment said in a report on CBAM.
According to UNCTAD, “it imposes on developing countries the environmental standards that developed countries are choosing”, and is also seen as a unilateral trade measure.
Such concerns were raised during negotiations at COP28 in Dubai last year when developing countries and blocs such as the African Group, Iran, Brazil, Egypt, and Brazil, China, India and South Africa (BASIC group) raised concerns about such unilateral trade measures negatively impacting their economies and hindering their ability to eradicate poverty and fulfil their commitments to the Paris Agreement.
“This implies a gradual convergence of the trade and climate agenda, as climate-related policy tools start showing the potential to impact global trade balances and competitiveness, and the subsequent financial health of countries with export-driven economies,” the CSE report said.
For its part, China on behalf of the BASIC group requested a separate agenda for discussion on unilateral restrictive trade measures.
“BASIC is of the view that UNFCCC Parties are obligated to send a clear and strong signal of commitment to multilateralism and global cooperation as the most effective and just manner to respond to climate change and consider concerns with unilateral trade-restrictive measures based on climate objectives while calling on all partners to strive for cooperative solutions and partnerships for stimulating the production and trade access for sustainable goods and services in line with existing legal provisions,” the BASIC submitted on November 5, a day before Donald Trump’s re-election as he US President, who is likely to introduce even stricter trade tariffs.
“As more large economies and climate change contributors put in place carbon prices for mitigation, measures such as CBAM are becoming political and economic necessities. To avoid worsening global trade fragmentation, however, the spillover effects on trading partners and the level of compliance costs will depend on coordination. National trade policies can be harnessed to align with climate goals, but without multilateral cooperation, progress on climate finance and equity will be hindered,” Chantal Line Carpentier, head, Trade, Environment, and Climate Change branch at UNCTAD said.
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