View this post on the web at [link removed]

As more countries focus on combating climate change, green policies and international trade are increasingly coming into conflict with each other. Depending on how different countries approach this tension, these policy areas could be on a collision course.
Some countries are trying to make strides toward reducing carbon emissions, but political and economic challenges are complicating the implementation of these green policies, particularly when they intersect with international trade. Governments are responding to these challenges in a variety of ways, from creating market incentives to directly intervening via taxes and subsidies. In a new policy brief [ [link removed] ], Atlantic Council senior fellow Barbara Matthews and I argue that market-driven policies are more likely than government subsidies to lead to low-cost renewable energy and, at the same time, avoid costly trade conflicts. Government-mandated solutions with restrictive trade policies often lack the incentives needed for long-term sustainability. Government subsidies may be popular, but they are more costly than market-driven solutions and unlikely to succeed in the long term.
The Climate Policy Toolkit and Its Trade Frictions
Absent an innovation for cheap, renewable energy, governments use several tools to set climate policy: green subsidies, government-defined carbon taxes and tariffs, market-based carbon pricing and renewable energy trade agreements.
Green Subsidies
Green subsidies are government payments that incentivize renewable energy production and emissions reduction. By design, subsidies increase production, usually beyond market demand. Subsidies thus distort prices and cross-border competition, leading to conflict with trade partners.
Green subsidies—particularly in China, which produces (for example) the lion’s share [ [link removed] ] of the world’s electric vehicles—illustrate how tricky this problem can be. On one hand, governments want to get gas guzzlers off the road, so it seems like these affordable Chinese electric vehicles should be welcome. But auto manufacturers in the United States and around the world see them as unfair competition. Recently the United States [ [link removed] ], the European Union [ [link removed] ] and Canada [ [link removed] ] have all imposed relatively high tariffs on Chinese EVs. China is taking steps [ [link removed] ] to retaliate, first against Canada by imposing its own tariffs.
The U.S. Inflation Reduction Act is another case in point. It provides substantial subsidies for clean energy technologies, including electric vehicles, and includes domestic content requirements that favor production within North America. These green subsidies, coupled with costly “Buy American” provisions, are misaligned with consumer demand and business interests, and they do not incentivize businesses to choose the most cost-effective ways to reduce emissions. Further, the “Buy American” provisions have sparked objections from the EU, which argues [ [link removed] ] that these provisions violate existing trade agreements. While the U.S. has extended some tax credits to EU-produced vehicles, bilateral talks have stalled, and trade tensions continue.
Taxes and Tariffs
Governments can also choose to limit emissions directly via taxes. A carbon tax is a government-defined carbon price and is usually measured per ton of carbon dioxide emitted. These taxes can be levied on domestic producers of any good or imposed on imports through carbon border tariffs, which aim to prevent companies from moving production to other countries for the lower environmental standards (a process often called “carbon leakage”).
The EU is a notable example of a region implementing carbon border tariffs through its Carbon Border Adjustment Mechanism [ [link removed] ], set to fully come into effect by 2026. Under this system, EU importers will be required to declare the emissions created in the course of producing all their imported goods and surrender the corresponding number of government-provided permits (or purchase them if needed) to cover those emissions. The absence of a similar policy in the United States, where carbon taxes are not yet part of federal policy, could lead to a costly transatlantic trade conflict.
The challenge of accurately measuring the carbon content of imported goods further complicates the implementation of carbon tariffs. For instance, if an importing country estimates emissions with data based on the type of activity used to produce the goods, but an exporting country uses a different approach such as atmospheric monitoring [ [link removed] ], the two countries will likely come up with different emission measures. Other countries may choose the average-data method [ [link removed] ], taking the relevant industry average emission factor and multiplying it by the mass of relevant goods and services purchased. In other words, the area is ripe for disputes over the fairness and accuracy of emission measures. 
Market-Based Carbon Pricing
Carbon pricing is one of the most prominent tools in climate policy, as it establishes a cost for emissions produced by economic activity. This cost is then reflected in the price of goods and services related to those activities. For instance, if the going price of carbon is $30 per ton, and each year my factory emits 2,000 tons of carbon dioxide, then I need to add $60,000 to the annual cost of running my factory. And if I want to avoid those costs, then I’ll try to find a cleaner way to make my widgets.
Market-based carbon pricing, which occurs via a cap-and-trade system, allows for emissions trading, in which companies with lower emissions can sell credits to those with higher emissions. The government sets a limit (cap) on the total amount of pollution allowed, then issues permits (allowances) to companies that represent a certain amount of emissions. Companies can buy and sell those permits in the market, allowing them to optimize their level of permissible emissions while keeping the overall pollution level under the cap. A market-based carbon price creates incentives for companies to allocate investment capital to energy efficiency. It also incentivizes companies that can reduce emissions more easily to sell their excess permits to companies that struggle to do so.
Renewable Energy Trade Agreements
While green subsidies and carbon taxes and border adjustments can create trade tensions, renewable energy trade partnerships offer a more collaborative approach. Allowing countries to partner with each other and commit to more open trade and investment in renewable energy increases the scope for larger markets and lower costs.
Trade liberalization in renewable energy is not a panacea, but it can stimulate investment and competition, which in turn leads to cheaper renewable energy and higher utilization rates. Green trade deals and international partnerships can complement market-driven carbon pricing and facilitate technology transfer in renewable energy.
These partnerships can also help secure supply chains for critical minerals, hydrogen and other renewable energy resources without the formality of trade treaties. For example, the EU is investing in hydrogen infrastructure, and the U.S. has initiated a “Critical Minerals Dialogue [ [link removed] ]” with Central Asian countries to strengthen supply chains for these key materials.
Toward More Sustainable Solutions
Government-mandated solutions with restrictive trade policies often lack the incentives needed for long-term sustainability. Only solutions that align with consumer demand and business interests and that encourage voluntary adoption will be sustainable over time. Green subsidies and top-down, government-set carbon taxes may be more popular, but they are more costly and unlikely to succeed. Market-based carbon pricing and renewable energy trade partnerships are more likely to offer a sustainable path to reduce emissions while avoiding costly trade conflicts.

Unsubscribe [link removed]?