This article is part of a Synergies series on Next generation trade arrangements for environment and sustainable development. 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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We need to drastically and rapidly reduce greenhouse gas emissions to curb the devastation caused by rapid climate change. To do this, governments around the world need to introduce climate policy and regulation. These policies need to impact traded products. With around a quarter of global emissions embedded in traded products, we cannot achieve the necessary emissions reductions without addressing trade. 

Trade-related climate measures (TrCMs) are government measures that have a climate mitigation or adaptation objective, but also have a direct impact on trade policy, or substantive indirect impact on trade flows.* TrCMs with direct trade policy impacts famously include carbon border adjustments. TrCMs with indirect trade impacts include green industrial policy support and product standards. These measures can all bring global welfare benefits by addressing the climate externality. But they also have costs that can reduce these global benefits. 

The most concerning efficiency cost of TrCMs is regulatory burden for supply chain participants—from primary producers to importers. While regulatory burden also affects domestic suppliers, it can have a disproportionate impact on foreign supply chain participants. When regulatory burden falls more heavily on foreign suppliers, it becomes a non-tariff barrier to trade.

Although TrCMs are necessary to address negative climate impacts of trade, it is imperative that they do not compromise the climate benefits of trade. Trade benefits climate action through its role as a key enabler of the technology transfer for emerging low-emissions technologies, as well as through lowering the cost of accessing established low-emissions technologies like solar panels. Crucially, access to global markets can help provide the economies of scale that new, clean products need in order to compete with traditional, high-emitting ones.

Fragmentation is the opposite of harmonization. Fragmentation occurs when the rules, structures, principles, and objectives of TRCMs differ across jurisdictions, or within jurisdictions across policy domains. Fragmentation causes a range of costs, including inconsistent signals and incentives for decarbonization. On the other hand, harmonization also has costs in terms of the ability of governments to design their TrCMs optimally to meet their own needs.

Regardless of where states stand on the optimal degree of harmonization, all agree that the biggest trade cost of fragmentation is that it multiplies regulatory burden. This multiplication of burden is particularly harmful for exporters with smaller domestic markets. Multiplying burden also falls most heavily on smaller producers—disadvantaging small and medium-sized enterprises. 

So why has “interoperability” emerged as the catchphrase in conversations about the costs of TrCMs? In essence, the regulatory burden from TrCMs arises principally from the costs of generating, verifying, and reporting information required to comply with these measures. A key example of the required information is product “embedded emissions.” These are the emissions that are associated with a product’s production and upstream supply chain—typically referred to as a “cradle-to-gate” emissions accounting boundary. Product embedded emissions are the basis on which carbon border adjustments are levied. They also determine whether a product meets criteria for “clean,” “green,” or “low emissions” according to standards, certification schemes, and clean procurement mechanisms. 

Interoperability is, therefore, key to reducing negative trade impacts of TrCMs. “Interoperability” means the ability to pass useful information from one system to another. Collecting, calculating, verifying, and reporting information such as that on embedded emissions is costly; but doing all those steps repeatedly according to different requirements for different policies and regulations can be prohibitive. Interoperability allows supply chain participants to generate, verify, and report information once; and use that information to access multiple markets.

It is important to note that while related, interoperability is not the same as harmonization. Harmonization of raw data definitions, measurement methods, validation, and data transfer protocols are necessary for interoperability. However, interoperability does not require harmonization of a whole range of other elements of TrCMs; in particular it does not require harmonization of emissions threshold values for “clean” goods. Hence, a focus on interoperability rather than harmonization more broadly can help to reduce trade distortions while preserving policy space.

System design determines exactly what needs to be harmonized in order to achieve interoperability. A bottom-up approach to interoperability, for instance, could be based on systems that allow raw activity data for unit operations to be transferred. An example of a “unit operation” is a diesel electricity generator, and the “raw activity data” needed to calculate the emissions from that unit operation would be the diesel consumption. Interoperability of this type of data requires only harmonization of basics, such as raw data definitions, measurement methods, validation, and data transfer protocols. 

However, if systems are designed to allow transfer of higher-order data—e.g. product embedded emissions information—then a higher degree of harmonization is required for interoperability. Interoperability requires comparability because otherwise the information transferred is not useful. In addition to raw activity data, product embedded emissions calculations depend on things such as:

• Emissions factors – i.e. what the raw activity data is multiplied by in order to determine the emissions resulting from that activity.
• Greenhouse gases included – i.e. which gases other than carbon dioxide are considered relevant for the calculation of the total CO2-equivalent (CO2e) emissions.
• Global warming factors – i.e. what emissions of greenhouse gases other than carbon dioxide are multiplied by in order to determine their CO2e.
• Emissions accounting boundaries – i.e. what parts of the supply chains and which emitting processes are considered relevant and included in the accounting.
• Default values – i.e. what emissions are assumed for processes for which data is unavailable or too expensive to collect.
• Allocation method – i.e. how emissions from processes are allocated among products, co-products, residues, and wastes, as well as the definitions of what is considered a co-product versus a residue or waste.
•  Chain-of-custody model – i.e. how information is passed along the supply chain to determine the overall embedded emissions for the product. Although highly technical, chain-of custody models can have a huge impact on the reported embedded emissions for a given unit of product.

There are a variety of ways in which states can work to reduce fragmentation and foster interoperability. The first step, however, is preventing further fragmentation.

Preventing Further Fragmentation Through Alignment With International Standards and Guidelines

Despite numerous efforts directed at improving coordination of TrCMs, fragmentation continues to be a growing issue as the number of TrCMs continues to rise. A priority, therefore, is minimizing increases in fragmentation arising from new TRCMs. A crucial measure in this regard is alignment with existing, widely accepted international standards. A range of such standards are relevant to TrCMs, we discuss two of them below for illustrative purposes.

A key international standard in relation to product embedded emissions accounting is ISO 14067 – Product Carbon Footprint Standard. Importantly, this standard is being revised in collaboration with the Greenhouse Gas (GHG) Protocol. The aim is a common agreed standard between these two leading organizations. This standard needs to be sufficiently flexible that it is relevant to all possible products. As such, it does not prescribe the specific data, methods, or accounting boundaries for specific products or unit processes. This flexibility and lack of specificity means that states’ alignment with this standard is not sufficient to achieve interoperability. Nonetheless, commitments by states to ensure their TrCMs align with this combined standard would help establish guardrails around fragmentation of the structure of approaches to product embedded emissions accounting. For example, the standard is likely to require the use of the latest IPCC-agreed global warming factors, and to limit the range of acceptable chain-of-custody models. The ISO and GHG Protocol standard is being developed through a transnational (multistakeholder) process. Therefore, before states commit to alignment with this standard, it will be important to ensure that the combined standard meets the needs of governments—including supporting a sufficient level of integrity. 

Another key international benchmark in relation to emissions accounting is the IPCC Emissions Accounting Guidelines. These guidelines provide standardized methods that can be used for granular emissions accounting down to the unit process level. For example, they specify the relevant data and equations to be used to calculate the emissions associated with a steam methane reformer, diesel generator, etc. They have been developed through international expert collaboration to help improve the integrity of states’ National Greenhouse Gas Emissions Inventories. Commitments by states to ensure accounting rules in their TrCMs align with the IPCC guidelines would help establish guardrails around fragmentation of the methods used for product embedded emissions accounting.

Fostering Interoperability

While alignment with these broad international standards can help prevent further fragmentation, it is not sufficient to support the interoperability required to avoid non-tariff barriers arising from TRCMs. So how do we go further?

1. Flexible Information Systems

The flexibility of an information system refers to its ability to support a variety of different purposes. For example, a flexible embedded emissions accounting system may be capable of taking raw activity data from the participants in a given product supply chain as an input, and use it to output product embedded emissions according to a variety of different accounting rules. The more flexible the information system, the less need there is for different jurisdictions to agree on accounting rules.

An idealized, perfectly flexible information system would be able to accept raw activity information from any supply chain and convert it to useful information for any TrCM. This could be achieved if the raw data was interoperable and the system had the relevant algorithms and equations embedded in it that were required to calculate the product emissions according to different accounting rules. However, even the negotiation of such a system for all products would require agreement on a huge amount of basic activity measures, data protocols, verification mechanisms, and unit processes. Furthermore, such an idealized system is a long way from the reality of the systems underpinning TrCMs today. Regulatory information systems in existence are far more rigid and would require agreement on a multitude of other parameters and design features. 

2. Sectoral and Product-Level Approaches

One way of avoiding the “curse of dimensionality” in harmonization is to focus efforts on a few key products. The obvious candidates for this focus are products with dual materiality; that is, significance for both climate and trade. These products tend to be upstream in supply chains, which has the further advantage of lower complexity of cradle-to-gate emissions accounting. These products also tend to be manufactured using a relatively small and well-established set of unit processes. Overall, these products have the lowest cost of harmonization, and highest benefit.

It is no coincidence that exactly these upstream, dual materiality products have been the focus of most sectoral alignment efforts to date. Steel, aluminium, and concrete have been the focus of both intergovernmental and private sector alignment efforts. Key initiatives include the Industrial Deep Decarbonization Initiative (IDDI), Climate Cub, First Movers Coalition, and Responsible Steel’s collaboration with the European Low Emissions Steel Standard (LESS) and the Chinese C2F standard.

3. Clear and Consistent Language

Confusing, inconsistent, and highly technical jargon is a major barrier to harmonization efforts: one which particularly limits the participation of less-well-resourced states. The problem of language is particularly prevalent because the design details for many TrCMs—especially those related to emissions accounting—are highly technical.

A case in point is product “embedded emissions,” which, as noted, refers to the emissions associated with a product’s upstream supply chain, from “cradle” to “gate.”  Embedded emissions are sometimes referred to as “embodied emissions,” “embodied carbon,” “emissions intensity,” or “partial carbon footprint” of a product. They are also sometimes (incorrectly) even referred to as product “life cycle” emissions. Meanwhile, “embedded carbon” is sometimes used to refer to carbon molecules that are physically embedded in the product. The number of synonyms for such a central term is emblematic of the need for greater harmonization of language as a starting point for improving interoperability of TrCMs.

4. A Structured Approach to Collaboration

The harmonization required to support interoperability can be achieved in two main ways. One way is for a small set of people to decide the rules that will apply to everyone. This set of people may be government officials from certain jurisdictions, or employees of private entities. While this approach may be an efficient and effective way of reducing fragmentation, it is less likely to be fair or perceived as legitimate. The other way to achieve interoperability is through collaboration between more diverse entities. This approach is well-established best-practice to achieve fair and legitimate outcomes, but it can be inefficient and ineffective. 

Use a structured approach can make collaboration more efficient and effective. I have previously recommended a “top-down" approach which distinguishes six levels of harmonization for TRCMs. As illustrated in Figure 1, these levels are: General Regulatory Objectives; Overarching Principles; Supporting Principles; Framework Structure; Framework Rules; and Product-Specific Rules. This sort of framework can help negotiators be clear about what it is they are trying to agree on. A top-down approach can also support ongoing efforts towards greater interoperability whereby initial agreement on objectives can lead to agreement on principles, which inform choice of structure, and so on.

Figure 1: Top-Down Approach to Alignment of Embedded Emissions Accounting Frameworks for Trade-Related Climate Measures

My work has illustrated the use of this top-down approach to develop recommendations for design and identify priorities for alignment between embedded emissions accounting frameworks. As a researcher, I chose to focus on the General Regulatory Objectives (level 1 of the pyramid) of effectiveness and efficiency; specifically, effectiveness and efficiency of the international landscape of embedded emissions accounting frameworks at providing information needed by actors (i.e. governments, investors, customers, producers) to make decarbonization decisions based on product embedded emissions information.

Moving down the pyramid, I built on the work of White et al (2024) to identify potential Overarching Principles relevant to these objectives (relevance, least restrictive means, non-discrimination), as well as Supporting Principles (accuracy, conservativeness, monotonicity, transparency, subsidiarity, comparability, interoperability, and flexibility). In turn, I used these principles to identify best-practice Framework Structure (e.g. modular accounting boundaries as recommended by White et al., 2021) as priority elements of Framework Structure (e.g. modular boundaries, temporal precision, time-scale for global warming impact) and Framework Rules (e.g. emissions allocation rules, chain-of-custody model, global warming potential factors) for harmonization between frameworks.

As TrCMs become an increasingly important part of the global climate response, fostering interoperability offers a pathway to align global decarbonization with trade benefits. Noting the importance of existing international standards for reducing further fragmentation, possible collaborative approaches to advancing interoperability include developing common language, sectoral approaches, bottom-up data alignment, and top-down alignment based on agreed objectives and principles. By prioritizing interoperability, governments can help to reduce trade distortions while preserving policy space, creating a more coherent, effective, and equitable international framework for climate action.

* TrCMs are closely related to climate-related trade measures (CrTMs). CrTMs are government actions with a trade policy objective that also have climate impacts. TrCMs and CrTMs are often impossible to distinguish because governments may have both as explicit or implicit objectives. However, they can sometimes be distinguished. For example, tariffs on solar panels or electric vehicles are unambiguously CrTMs and not TrCMs.

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Emma Aisbett is Associate Professor, ANU College of Law, Governance and Policy; and Research Lead for Program 3 (Facilitating Transformation) in the Heavy Industry Low-Carbon Transition Cooperative Research Centre (HILT CRC).

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Synergies is an online platform featuring expert commentary and opinions curated by TESS. We foster dialogue and incubate ideas on how to shape a global trading system that effectively addresses global environmental crises and advances sustainable development. Synergies draws on perspectives from leading experts and practitioners across policy communities from around the world.

The Executive Editor is Fabrice Lehmann.

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