 RESTRICTED  
  
JOB/TE/81  
 
12 June 2023  
(23-3999) Page: 1/7 
Committee on Trade and Environment  Original: English  
 
FURTHER ELABORATION  ON DEDICATED MULTILATERAL DISCUSSIONS ON THE TRADE  
ASPECTS AND IMPLICATIONS OF CERTAIN ENVIRONMENTAL MEASURES  
COMMUNICATION FROM CHINA  
The following communication, dated 9 June, is being circulated by China to the Committee on Trade 
and Environment regular meeting date d 12 June.  
 
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1. Trade policies are increasingly being used as policy tools to achieve environmental objectives. 
The hybrid nature of such measures increases policy complexity and cause s further complications 
by way of spillover effects . In addition, if implemented in a unilateral or exclusive manner, they 
could  have significant implications for  developing countries  and the multilateral trading system.  
2. Pursuant to the MC12 mandate1, China submitted a proposal for dedicated multilateral 
discussion s on certain environmental measures that have a significant impact on trade  in 
March  2023.2 By way of multilateral exchanges of information and views, the dedicated discussions 
are intended to enhance the understanding of the policy objectives, means of implementation and 
potential impacts of the relevant measures, with a view to clarifying unde rstandings, identifying 
controversies,  and diffusing trade tensions by way of enhanc ing the inclusiveness of such measures 
and improving their conformity with WTO rules and basic principles of international law.  
3. On the basis of China's proposal in March, this communication  further elaborates on some of 
China's specific ideas for implementing the outcome of the MC12 and for dedicated multilateral 
discussions , taking the recently enacted EU Carbon Border Adjustment Mechanism (CBAM)  as an 
example.  
1  IDEAS  FOR DEDICATED MULTILATERAL DISCUSSIONS ON BORDER CARBON 
ADJUSTMENT.  
4. Border carbon adjustment (BCA)  is a type of measure that extends emission reduction 
measures within one’s jurisdiction to the border, thereby creating a link betw een such domestic 
measures and international trade. The EU CBAM, for example, is the first border carbon adjustment 
measure with global impact introduced by a major WTO member. In brief, it extends the EU 
Emissions Trading System (EU -ETS) to imported goods , by way of imposing a surcharge on imports 
based on their associated carbon emissions at a price determined by the EU -ETS. The CBAM 
Regulation came into force on 17 May, 2023.  
5. Besides the EU, a number of other WTO members are also considering border ca rbon 
adjustment measures. This represents the emerging trend that climate measures are crossing over 
to trade regime. The relevant measures will have significant impacts on international trade and merit 
 
1 Paragraph 14 of the Outcome Document of the 12th WTO Ministerial Conference (WT/MIN(22)/24): 
"...... note the role of the Committee on Trade and Environment as a standing forum dedicated to dialogue 
among Members on the relationship between trade measures  and environmental measures."  
2 WT/CTE/W/251  - A Proposal For Dedicated Multilateral Discussions On The Trade Aspects And 
Implications Of Certain Environmental Measures, Communication from China . JOB/TE/81  
 
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  dedicated discussions under the Committee on Trade an d Environment (CTE) pursuant to the MC12 
mandate.  
6. For further elaboration, it is proposed that the dedicated multilateral discussions should be 
informative, evidence -based, well -structure d, with the view of enhancing understanding  and 
promoting coopera tion, along the following perspectives : 
1) The basic operating mechanism, focusing on the underlying methodologies.  
For example, the CBAM is an extension of the EU -ETS to imports . Whereas the EU -ETS covers 
greenhouse gases (GHG) emissions  from installations,  the CBAM covers emissions associated with 
imported goods. It is methodologically challenging to attribute carbon emissions by facilities to 
different types of products in a fair and reasonable way . The complexity of the EU -ETS further 
exacerbates the chal lenge of this mirroring exercise. In this regard, several high -level issues have 
been identified, including the delimitation of system boundaries of the production processes, the 
criterion to include precursors, and the methodology for calculating free emi ssion allowance for CBAM 
products (for illustration, see A nnex 1). Recalling the GATT discussions on the border adjustability 
of direct taxes3, the methodology of transposing  installation  emissions (analogous to direct taxes) 
to products emissions (analogous to indirect taxes) requires further multilateral discussions. Another 
fundamental issue relates to the so -call “carbon leakage”. How to objectively quantify such risks and 
properly dis tinguish their effects from that resulted from economic development, energy transition 
and other structural or cyclical elements?  
2) The policy design, focusing on elements of implementation.  
Taking the CBAM f or example, the implementation  of the CBAM involv es authorization of CBAM 
declarants  and accreditation of verifiers, the calculation, declaration, verification  and review of 
emission data, the pricing of CBAM certificates, the administration of the CBAM registry , as well as 
the sale, surrender , repurchas e and cancellation of CBAM certificates. In -depth and interactive 
information -sharing could be useful to learn more about the policy design and operation. In addition 
to the multiple elements and steps, the complexity of the policy design also lies in the need to bridge 
different regimes, including the coordination of the CBAM with the EU -ETS, and the interface between 
the EU regime and other members’ emission control regime in the process of its extra -territorial 
application. In interfacing different measu res in different jurisdictions, issues that remain to be 
discussed multilaterally include: how to reflect principles such as transparency, cooperation, 
proportionality and trade facilitation in the CBAM regulation and its implementing acts . 
3) Environmental e ffects, focusing on the contribution of the measure to the intended  
environmental objectives.  
For example, information could be shared on CBAM’s contribution to the EU ’s obligation under 
the Paris Agreement in general and, more specifically, to its nationally  determined  contributions  
(NDCs). The Paris Agreement provides this Agreement will be implemented to reflect equity and the 
principle of common but differentiated responsibilities and respective capabilities, in the light of 
different national circumstances . 4 Being  part of  EU’s climate change package, there are some 
common concerns on h ow principles of "common but differentiated responsibilities and respective 
capabilities" and "equitable transition" could  be reflected in the CBAM Regulation and the 
implementing acts ? A discussion on these issues could help to clarify understandings and in crease 
cooperation.  
4) Trade impacts, focusing on the overall impact on international trade and potential impact on 
developing countries.  
Taking the CBAM as an example, there are some exploratory researches on channels of its trade 
impact.5 Preliminary find ings indicate two channels of trade impact : first, the level of carbon price, 
that is, members that have lower domestic carbon prices will likely face higher carbon tariff; and 
second, the export structure, that is, members that export a greater share of c arbon -intensive 
products will likely face stronger shocks. The trade impact of the CBAM can be measured in two 
steps. The first step is the micro -economic and sectoral impact, an analysis based on the policy 
 
3 Border Tax Adjustments Report of the Working Party adopted  on 2 December 1970 (L/3464).  
4 Paris Agreement, Art.2.2 . 
5 See for example: Jing Cao, Mun Ho and Xian Hu, Carbon Markets and Carbon Tariffs: Effect on World 
Trade and Emissions , May 25, 2023; Hong Ma and Ruobing Qin, Carbon Tariffs, International Trade an d Global 
Inequality, June 6, 2023 For abstracts, see Annex 2 and 3.  These working papers could be accessed at 
http://www.igd.tsinghua.edu.cn/zkcg/xsfb.htm# .  JOB/TE/81  
 
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  design of the measure6.The second step is the m acro-economic and global impacts, an analysis 
based on modelling. In addition to increasing costs to EU downstream sectors, preliminary studies 
suggest that the extra -territorial economic costs of the CBAM are mainly borne by developing 
countries for  the following two reasons: first,  developing countries tend to be more carbon intensive 
per unit output due to their status of development, stages in  energy transition and limited access to  
financial  support and technology . Second , their economy is more sensiti ve and vulnerable to higher 
carbon prices . Furthermore,  should an exclusive carbon club be formed along with the  CBAM,  the 
output and welfare of developing countries could incur greater losses  and the global trade  could 
experience a notable decline, leadin g to greater  trade distortions and global inequality.  These major 
policy issues need to be further discussed at the WTO . 
5) Inclusiveness, focusing on how the measures could be implemented in a more open, non -
discriminatory and non -arbitrary manner.   
The UNFCCC explicitly states that " measures taken to combat climate change, including 
unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a 
disguised restriction on international trade ."7 In the case of the CBAM, for example, questions remain 
to be discussed include:  (1) how to ensure that members will not be unduly discriminated because 
of their different stages of development,  different NDCs , and different pathway s of emissions 
reduction ; (2) how to take into account different  types of carbon pricing, such as implicit carbon 
price generated by other climate , energy and environment  related mitigation policy instruments ; (3) 
how to make it more open and inclusive in terms of determining emis sion factors, accreditation and 
verification, reduction, etc;  (4) whether  capacity building and technical assistance could  be provided 
to developing countries in need; and (5) how could members at different stages of development 
effectively participate in the subsequent legislative process on an equal footing?  
 
7. To facilitate such discussions, China would like to  encourage members to raise questions, to 
seek information and to identify major policy issues, along the above dimensions in an objective and 
evidence -based manner. We note that the EU intends to launch a global information campaign.8 
China is looking forward to i n-depth  multilateral exchanges with the EU in the subsequent EU law -
making process.  
2  SUGGESTIONS FOR STEPS OF DEDICATED MULTILATERAL DIS CUSSIONS . 
8. This communication puts forward specific ideas for dedicated multilateral discussions on BCA, 
taking the CBAM  as an example. More broadly, as trade and environment measures become 
increasingly intertwined, more environmental measures like the CBAM could arise. These 
environmental measures may have a significant impact on international trade, supply chains, 
develo pment and climate change, and should be the subject of dedicated multilateral discussions. 
In light of this, it is suggested that:  
• First,  dedicated multilateral discussions be held with respect to specific environmental 
measures that could significantly i mpact trade,  
 
• Second,  discussions should be carried out in a structured manner, covering 5 parts at 
the initial stage, i.e., the basic operating mechanism, various elements of policy design, 
environmental contribution, trade impact and the inclusiveness of  the measures.  
 
• Third,  when topics have been identified, members implementing the measures are 
encouraged to submit written reports that include information related to the 5 parts 
above; and members affected  are encouraged to submit pertinent questions or  studies 
along similar dimensions. A working program could be set up to facilitate such dedicated 
multilateral discussions.  
 
9. As such, informative multilateral discussions could contribute to the capacity building of WTO 
members on coping with cross -cutting issues of trade and environment, promote coherence of policy 
objectives in different areas, and strengthen the functioning of the CTE. They could also enable the 
 
6 The main variables associated with the micro and sectoral impacts of  the CBAM are: sectors covered, 
emissions covered, inclusion of indirect emissions, carbon price determination and reduction  mechanisms, f ree 
allowance benchmarks, etc.  
7 UNFCCC, Art. 3.5 . 
8 WT/CTE/GEN/29, Carbon Border Adjustment Mechanism, Communication from the European Union.  JOB/TE/81  
 
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  WTO to play a better  role, in promoting the UN 2030 Agenda and Sustainable Development Go als in 
economic, social, and environmental dimensions, in so far as those issues relate to WTO mandates 
and in a manner consistent with the respective needs and concerns of members at different levels 
of economic development,  as mandated by MC12 . 
 
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Annex I  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Annex 2  
 
 
CARBON MARKETS AND CARBON TARIFFS: EFFECT ON WORLD TRADE AND EMISSIONS  
 
Jing Cao  
Tsinghua University  
Mun Ho  
Harvard University and RFF  
Xian Hu  
Tsinghua University and Harvard University  
 
 
 
ABSTRACT  
The EU has proposed a carbon border adjustment mechanism (CBAM) to accompany their carbon 
emission trading system (EU ETS) to protect domestic producers from imports that are  not subject 
to similar carbon prices and to reduce leakage. To address how CBAM rules impact trade and growth 
in different regions of the world, we construct a dynamic CGE model with 10 world regions and 29 
sectors using the GTAP Data Base. We find first that EU carbon pricing policies have significant 
carbon leakage due to higher fuel use and energy -intensive manufacturing in the rest of the world. 
Second, the reduction in leakage due to the CBAM will be modest, from 70% without the tariffs to 
68% with. T hird, when carbon tariffs are added to the ETS, the GDP of China and India fall a little 
due to a large fall in their exports of CBAM -covered sectors to the EU. The GDP of EU itself sees a 
further reduction due to the CBAM, in addition to the fall due to t he ETS. The carbon tariffs protect 
the sectors subject to the carbon price but hurts many of the other sectors in the EU.  
 
JEL codes: C68, F18, Q48, Q56, Q58  
Keywords: EU ETS, Border Carbon Adjustments, Carbon Leakage, Dynamic Global ，CGE model  
 
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Annex 3  
  
 
CARBON TARIFFS, INTERNATIONAL TRADE AND GLOBAL INEQUALITY  
 
By 
Hong Ma  
Tsinghua University  
and     
Ruobing Qin  
University of International Business and Economics  
 
 
 
ABSTRACT  
This paper quantitatively estimates how would different schemes of carbon border adjustment 
mechanisms (CBAM) reshape the patterns of global trade and affect countries' welfare. We develop 
a structural model incorporating input -output linkages, input substitutability , and environmental 
regulations both within and across borders. We find that imposing CBAM can reduce carbon leakage, 
however, it also increases the input costs of the downstream manufacturers, making them more 
vulnerable to import competition and less com petitive in the export market. Furthermore, emerging 
countries that are targeted by the CBAM may respond by diverting their exports to other unregulated 
markets. Due to a general equilibrium effect, their exports in cleaner downstream sectors may 
increase due to lower energy prices and nominal wages. Compared with the unilateral CBAM 
proposed by the European Union, a pragmatically designed agreement with differentiated minimal 
carbon prices among a few key emitters is shown to be more effective in curbing g lobal CO 2 
emissions with lower economic costs. Finally, we show that the CBAM increases global inequality, 
with larger reduction in real income in representative developing countries.  
 
 
 
 
JEL Classification: F13, F14  
Keywords: carbon tariffs, export compet itiveness, global inequality, global value chains  
 
 
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