This article is part of a Synergies series on climate and trade curated by TESS titled Addressing the Climate Crisis and Supporting Climate-Resilient Development: Where Can the Trading System Contribute? Any views and opinions expressed are those of the author(s) and do not necessarily reflect those of TESS or any of its partner organizations or funders.

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In recent years, government policies linked to decarbonization goals and development of clean energy supply chains have become flashpoints in the global trade system. To take what is perhaps the most prominent example, the EU’s Carbon Border Adjustment Mechanism (CBAM) has been met with accusations of “green protectionism” and “coercion” across the Global South. On the other side of the Atlantic, the US Inflation Reduction Act’s (IRA) clean energy subsidy scheme sparked outrage in Europe and Asia, and eventually a WTO challenge.

It is not just advanced economies that are feeling the heat. Indonesia has encountered sharp pushback (and an adverse World Trade Organization (WTO) ruling) for attempting to move up the lithium battery value chain by imposing an export ban on raw nickel ore. And China, the world’s manufacturing behemoth, now faces a raft of countervailing duties and protective tariffs on its electric vehicle, solar, wind, and battery exports over concerns that these sectors have benefitted from anticompetitive subsidies and other unfair trade practices.

Taken individually, these controversies may seem unremarkable. Squabbles over trade are hardly new—over 600 disputes have been brought at the WTO since its establishment. But at a moment when the international community is falling short of its climate goals, the tendency of climate policies to generate trade tensions is a worrying trend.

A stable global trade environment aligned with national climate action is essential to the green transition. The breadth of economic transformation required for deep decarbonization means that even countries with large industrial bases and abundant natural resources will depend on cross-border supply chains and the comparative advantage of foreign producers to achieve substantial emissions reductions. In addition, the thin profit margins associated with renewable power generation leaves the sector particularly exposed to supply chain disruption and unforeseen price fluctuations.

Why is the climate-trade nexus so contentious? Partly because trade relations in general have grown more fractious. Were a trade practitioner to time travel from 2015 to the present she or he would likely be dumbfounded at the erosion of some of the global trade system’s foundation norms and the mainstreaming of trade protectionism among some of the world’s leading economies, including the United States. Viewed from this perspective, fragmentation and market barriers in clean energy supply chains are a reflection of a broader loss of confidence in an open economic order.

But there is another, arguably more important reason that climate-related trade measures have so many governments at loggerheads: the modern trade system was not designed to mitigate and solve the economic and security challenges associated with the shift to low-carbon economic growth and more sustainable modes of production and consumption.

Had the 20th century architects of the trade system treated climate change with the same urgency that much of the world does today, they might have provided governments with a clear and workable framework for addressing the negative externalities of carbon-intensive economic activities. Or they might have developed principles for weighing a policy’s trade-distorting effects against its climate benefits that are consistent across WTO agreements and accommodating of diverse approaches to environmental regulation; or created incentives for climate-centered trade cooperation, for example by making an exception to the prohibition on bilateral or plurilateral sectoral agreements for clean energy goods and services.

The trade system contains none of these features, however, or any others that could guide national policymakers seeking to strike a fair and effective balance between decarbonization goals and the interests of trade partners. As a result, governments wishing to advance transformative climate regulations or encourage low-carbon alternatives to incumbent industries must navigate a set of rules and disciplines that could plausibly be interpreted to conflict with such policies. Some countries, specifically large economies with the heft to withstand or discourage trade retaliation, have been willing to embrace contestable interpretations of those rules or outright ignore them; but smaller and weaker economies will likely tread more cautiously.

The formidable obstacles to WTO reform mean that even modest revisions to the multilateral trade system are likely out of reach for the foreseeable future. But there is still room for like-minded, high-ambition countries to work cooperatively to reduce tensions around climate-related trade measures and broaden the economic opportunities associated with decarbonization.

In pursuing this project, political leaders should consider that the ideal outcome may not in all cases be a traditional free trade agreement, which would likely reproduce the same rules and disciplines that are contributing to current frictions. Instead, they would be well-served to structure negotiations around three goals, all of which could be advanced through arrangements that are more tailored and informal than a standard free trade agreement: (1) expansion of national policy space to pursue ambitious decarbonization strategies; (2) deepening of “soft” cooperation around areas such as standards and scientific measurement frameworks; and (3) proactive mitigation of common drivers of conflict around trade and climate.

The recently concluded Agreement on Climate Change, Trade and Sustainability (ACCTS) between New Zealand, Costa Rica, Iceland, and Switzerland provides one example of what such arrangements could look like. The agreement commits parties to zero-tariff treatment of a broad range of environmental goods and services and a gradual phase-out of fossil fuel subsidies. It also provides voluntary eco-labeling guidelines and a mechanism for measuring changes in carbon dioxide emissions stemming from shifts in subsidy policy. ACCTS is an open plurilateral agreement, meaning any country may join.

ACCTS is notable in advancing decarbonization goals while sidestepping the trip wires that have triggered controversies around climate-aligned trade in the past. By acting as first movers in linking market access to the phase out of environmentally harmful subsidies, ACCTS establishes a norm that other governments can reference should they seek to include similar provisions in their own trade arrangements. The agreement’s enumeration of environmental goods and services, its eco-labeling guidelines, and its emissions measurement mechanism likewise provide points of reference for regulators around the world.

Beyond these positive incentives, the designers of ACCTS also thought creatively about minimizing tensions that a sectoral agreement focused on climate might be expected to produce. To avoid running afoul of the WTO requirement that preferential arrangements between a subset of WTO members must be comprehensive—that is covering substantially all trade between parties—the parties agreed that the tariff reductions under the agreement would apply to all their trading partners, not just each other.

ACCTS is a compelling example of the kind of innovative policymaking that is needed to square climate action with open and fair trade. But we should also be frank about its limitations. All four parties to the agreement are upper or upper-middle income countries with small or non-existent fossil fuel resources, high environmental standards, and (Costa Rica aside) comparatively robust renewable and electric vehicle infrastructure. They collectively account for a tiny share of global production of the environmental goods and services covered in the agreement and have little to lose by enhancing access to foreign sources of those products. Countries with sizeable manufacturing bases or major fossil fuel industries will almost certainly find the terms of the agreement unappealing.

To foster broader consensus around climate-related trade measures, other approaches will be needed. One potential way forward is to prioritize the third goal identified above—i.e. managing sources of conflict preemptively, rather than letting them play out ex-post in dispute settlement or in vitriolic diplomatic spats of the kind seen around the IRA or CBAM. The theory behind such an approach is to identify situations where the underlying drivers of tensions are not technical arguments over the finer points of trade law but more foundational questions over who benefits from the economic opportunities presented by the green transition. By addressing these drivers head on, countries may be able to achieve a “live and let live” attitude towards divergent interpretations of WTO rules as they apply to climate policies.

To take a concrete example, much of the criticism levied by developing countries against the CBAM has centred on its purported incompatibility with the Paris Agreement, with the most common complaints being that the measure forces the EU’s trading partners to decarbonize on terms set by Brussels and places a disproportionate burden on developing countries that have contributed the least to climate change and lack the resources and capacity to invest in industrial decarbonization. This Paris-centered critique has driven much of the global CBAM conversation—an irony given that European leaders have made WTO compatibility the north star of their diplomacy around the mechanism.

Even were it possible to revise WTO rules to explicitly allow carbon tariffs, frictions over the CBAM would likely endure. A more durable solution requires thinking outside the traditional trade toolbox. Should more countries follow in Brussels’ footsteps, it may be necessary for the Global North to proactively respond to the capacity limitations of many developing countries. This could entail mobilizing capital to fund industrial decarbonization projects in covered sectors, expanding technical and financial assistance for development of carbon pricing systems, and loosening intellectual property rights for relevant technologies. Such assistance could be bundled into “partnerships” available to countries below a certain income threshold and presented as an alternative to tariff exemptions.

Another major driver of trade frictions that would benefit from fresh thinking is concentration in clean energy supply chains. In less than a decade, China has achieved extraordinary dominance in manufacturing of solar products, lithium batteries, and electric vehicles, and is now threatening incumbents in the wind turbine sector. China’s clean energy supremacy has made clean energy goods more abundant and affordable. But that benefit must be weighed against the tendency of unbalanced trade relationships to fuel geopolitical rivalry and instability.

That one country should account for upwards of 80% of production in a strategically important sector is unprecedented in the history of the modern trade system. It is unsurprising, therefore, that our existing trade rules offer little guidance on how to manage concentration in global market share. As a result, efforts to address China’s clean energy dominance have centered on whether Beijing has engaged in unfair trade practices, raising thorny questions about where subsidies and other non-market practices end and legitimate competitive advantage begins.

Rather than focus on how we arrived at a concentrated clean energy sector, which is likely to aggravate rather than reduce tensions, it would be more productive to ask how countries can work collaboratively to deconcentrate supply chains on the logic that excessive dependence on any one country to supply the material needs of the green transition presents unacceptable risks. Such a frame would move us away from questions of who is to blame and towards pragmatic solutions.

One such solution would be an ad hoc agreement to treat tariffs, subsidies, and sectoral arrangements aimed at diversifying clean energy supply chains as non-actionable for a defined period, giving countries breathing room to build economic resilience without permanently entrenching trade barriers. Such an agreement might raise the cost of clean energy goods in some markets, at least initially. But the countries most likely to opt in to the agreement are those that have already imposed or are considering substantial barriers on Chinese exports. Furthermore, some under-served markets may actually see increased availability and affordability of clean energy goods as Chinese firms seek new export destinations. In addition, the agreement would strengthen demand for non-Chinese supply, which in turn could encourage investment in clean energy manufacturing in other emerging economies.

The coming decade is likely to see rapid growth in clean energy industries. From the perspective of averting the existential crisis of climate change, this is unquestionably a good thing. But for the global trade system it presents a challenge. As the clean energy sector grows in importance, trade disputes relating to the sector are likely to become more frequent and higher-stakes, which in turn will bring into sharper relief the misalignment between trade rules and some countries’ preferred pathways to net-zero. The cumulative effect of these frictions will be to undermine confidence that an open economic order is compatible with nationally determined decarbonization.

Avoiding this outcome will require creative thinking and unconventional problem solving. Such a non-traditional approach may sit uncomfortably with veteran trade practitioners. But business as usual will hasten the arrival of a global trade system defined less by cooperation around shared principles and more by zero-sum competition and power projection.

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Trevor Sutton is Director, Program on Trade and the Clean Energy Transition, Center on Global Energy Policy, Columbia School of International and Public Affairs. He was formerly Research Director of the Remaking Trade for a Sustainable Future Project and co-author of the Villars Framework for a Sustainable Global Trade System.

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Synergies by TESS is a blog dedicated to promoting inclusive policy dialogue at the intersection of trade, environment, and sustainable development, drawing on perspectives from a range of experts from around the globe. The editor is Fabrice Lehmann.

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