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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Emissions embedded in international trade account for 20–30% of global greenhouse gas emissions, underscoring the pivotal intersection between trade policy and climate action. Integrating trade into nationally determined contributions (NDCs) can accelerate climate ambition. However, most developing economies—characterized by a high share of MSMEs, cooperatives, and smallholders— remain underrepresented in national climate plans. Advancing the issue of trade-climate policy alignment in discussions under the United Nations Framework Convention on Climate Change (UNFCCC) will require clear definitions, transparency, differentiation, and international cooperation.

As countries are encouraged to identify climate-strategic trade sectors and governments consider and develop a range of trade-related climate measures—including policy tools such as green value chain development, tariff reductions for low-carbon imports, public procurement incentives, and market-based mechanisms like international carbon markets that can help improve climate action’s cost-effectiveness, stimulate private investment, and contribute to financing developing countries’ efforts—equity and development concerns must be addressed.

UNFCCC discussions propose frameworks such as notification-and-consultation mechanisms, a “traffic-light” system to assess the fairness of response measures, and impact assessments to ensure developing economies are not disproportionately affected.

Ultimately, international trade must be leveraged not only as a driver of low-carbon transformation but also as an instrument for inclusive and just transitions, integrating MSMEs, smallholders, and vulnerable economies into sustainable global value chains.

A Joint WTO–UNFCCC Dialogue

The 2023 UN Climate Change Conference (COP28) marked a turning point in integrating trade into climate discussions, including through providing platforms such as the Trade House Pavilion and with initiatives like the World Trade Organization’s (WTO) Trade Policy Tools for Climate Action, joint WTO–IRENA report on trade’s role in green hydrogen market development, and global alliances for decarbonizing trade. Additionally, a shared set of Steel Standards Principles was introduced to standardize the measurement of greenhouse gas emissions in green steel production. The Climate Club was launched, and the Net-Zero Export Credit Agencies Alliance was established to foster the decarbonization of global trade through public and private funding.

However, tensions have arisen over unilateral trade measures such as the European Union’s Carbon Border Adjustment Mechanism (CBAM), which developing countries, particularly the BASIC group (Brazil, South Africa, India, China), have criticized for undermining equity and multilateralism.

If designed well, trade-climate measures can support supply chain diversification, tariff reductions for mitigation technologies, and new investments linked to carbon markets. However, mechanisms like CBAM raise concerns about unilateralism, traceability, and fairness. Trade-related climate action must embed equity, flexibility, and development priorities at its core.

Debate exists on whether the UNFCCC, with its equity-focused principle of common but differentiated responsibilities (CBDR), is better suited than the WTO for addressing unilateral measures such as CBAM. While the WTO has technical expertise, its governance and rules may inadequately account for climate goals and developing country needs. To bridge differing principles of the UNFCCC (CBDR) and the WTO (special and differential treatment), a joint WTO-UNFCCC dialogue could address unilateral measures and establish a cooperative framework balancing climate ambition, trade, and fairness.

Common Technical Backbone for Measuring Embedded Emissions

Accurate and consistent measurement of carbon content in traded goods is essential to avoid fragmented standards and excessive compliance costs. This involves both the emissions embodied in the goods and services that countries trade and the policy choices countries consider in response, including consumption-based accounting, border carbon adjustments (BCAs), and trade agreements with environmental provisions or mutual recognition of carbon pricing.

The OECD’s Inclusive Forum on Carbon Mitigation Approaches and the IPCC’s guidance on consumption-based inventories—a ready-made starting point that could endorse multilateral dialogues around trade and can provide a good basis for agreeing and debating greenhouse gas mitigation approaches from a technical and policy perspective—offer a foundation for building harmonized technical standards and shared data systems. This can support international coordination, mutual learning, and evidence-based policymaking across diverse carbon mitigation approaches.

Embedding Equity in Border Carbon Adjustments

The proliferation of unilateral BCAs risks creating conflicting rules and high transaction costs, disproportionately affecting exporters, especially MSMEs and small producers in developing countries. Small players in the Global South with limited technical and financial resources could be the worst affected. Such a scenario could further aggravate trade frictions and geopolitical tensions as evinced by the reactions to the EU's CBAM.

To mitigate inequities and trade frictions, countries imposing BCAs could consider the following options. First, recycling the proceeds from the border tax to affected developing and least developed countries can allay equity and distributional concerns. Second, a BCA-imposing country could provide technical and capacity building support, particularly for MSMEs in the exporting countries from the Global South, to aid them, for example, in their decarbonization efforts and in measuring carbon content. Third, an open and transparent discussion with the exporting countries at the planning stage of a BCA rather than unilateral imposition may help improve its legitimacy and minimize any potential political backlash against it.

Collectively, these steps can advance a fairer, more integrated global trade–climate architecture anchored in multilateral cooperation, common standards, and shared responsibility.

To move constructively in this emerging area, it is crucial to establish clear definitions, ensure transparency, and foster international cooperation. This becomes especially important as BCAs grow more relevant, raising concerns around traceability, data classification, and the risk of trade disputes.

Measurement and verification of carbon content in goods is inherently complex. For exporters of complex manufactured products in countries like India where carbon accounting infrastructure is still developing, complying with CBAM requirements, for example, presents significant challenges. 

The regulation requires detailed reporting on emissions embedded in goods, including emissions from upstream inputs. For multitiered, global supply chains, this means exporters must gather emissions data from across jurisdictions, often involving numerous intermediate producers. Such data gaps and information access issues are not only practical hurdles but also potential trade barriers.

Experts have pointed out that this level of traceability could pressure exporters to shift from low-cost suppliers to those with more transparent carbon accounting practices, thereby affecting their global competitiveness. Furthermore, CBAM’s detailed data disclosure requirements raise security and privacy concerns. Given CBAM’s far-reaching implications for climate ambition, trade flows, and geopolitical relations, there is a strong case for diplomatic engagement and cooperation.

Amidst the growing bilateral and plurilateral trade relationships worldwide, it is suggested that climate cooperation is poised to redefine economic ties between nations. With countries increasingly focusing on domestic policies to support clean energy transitions and supply chain resilience, green trade encompassing renewable energy, low-carbon manufacturing, and critical minerals is identified as a key area of shared opportunity. It emphasizes the need for aligning carbon accounting standards, harmonizing trade rules for green goods and services, and collectively shaping the emerging global governance of sustainable trade.

By promoting a common framework for green subsidies, carbon measurement, and transparent supply chain practices, partnerships can serve as a model for reconciling trade competitiveness with climate ambition. Without such cooperation, fragmented standards and unilateral border measures could intensify trade frictions and marginalize developing country interests. Conversely, a coordinated approach could help build inclusive, science-based systems that strengthen both climate goals and economic growth, signalling how trade can evolve from a source of contention into a driver of shared low-carbon prosperity.

As global trade intersects more deeply with climate policy, the focus must shift to building inclusive, transparent, and science-based frameworks not only to protect national interests, but to forge effective and equitable climate solutions across borders.

* This article is derived from a presentation at a panel on Opportunities, challenges, and pathways for enhanced cooperation on trade, climate, and sustainable development at the TESS TCSD Conference 2025. Views are personal.

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Arunabha Ghosh is Chief Executive Officer, Council on Energy, Environment and Water (CEEW).

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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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