Putting clean production at the heart of global trade in energy-intensive goods

From carbon pricing to incentives for clean manufacturing, governments around the world have chosen very different strategies to meet climate targets in the industrial sector. This variety of approaches can put countries at odds with each other when domestic carbon-reduction measures are not recognised elsewhere, increasing the risk of trade disputes. A new policy paper by Agora Industry calls for an international framework that bridges the gap between different national strategies by establishing “carbon product requirements ” (CPRs) that set limits for the CO₂ emitted during the production of basic materials, thereby reducing the risk of carbon leakage and helping to achieve global climate goals.

The report looks specifically at the role that carbon product requirements would have on the production of energy-intensive goods such as steel, aluminium, concrete and chemicals. Their manufacture and use are responsible for the majority of all industrial emissions, which in total amount to about nine billion tonnes of CO₂ every year.

The proposed CPRs would be calculated for the primary production stage of the value chain. Importantly, the requirements would need to be enforced at the point of sale, to ensure that they apply equally to domestically produced and imported goods, and comply with international trade rules.

To minimise carbon leakage – which refers to the shift of energy-intensive production process to jurisdictions with less stringent emissions requirements – CPRs would need to be adopted as widely as possible. A coordinated, multilateral approach is therefore essential. The task of developing a unified framework could fall to forums such as the G7, G20, the Climate Club or the International Deep Decarbonisation Initiative, which are already advancing efforts to establish international emissions measurement standards and labels. Incorporating the development of CPRs into their work programmes would be a natural next step.

To underscore the importance of international coordination, the report is being released as leaders from some of the world’s biggest economies gather in Brazil for the 2024 Clean Energy Ministerial, where industrial decarbonisation is one of the main topics. Carbon product requirements, along with other measures such as the creation of lead markets to stoke demand for green products, can provide a guardrail for industrial investment decisions such as the necessary replacement of ageing blast furnaces over the coming years.

The authors note that carbon product requirements can coexist with national CO₂ pricing mechanisms, tax breaks and other financial instruments designed to encourage a shift to low-emissions manufacturing. Carbon product requirements would allow for gradual increases in stringency to phase out emissions-intensive production pathways while enabling emerging economies to pursue industrial development without the long-term economic and environmental costs of carbon lock-in. A global CPR system needs to be accompanied by mechanisms to finance and facilitate the transition of the basic material sectors in emerging and developing economies. The more effective such financial and capacity-building support is, the more incentive there will be for participation, and the greater the effect will be for climate action and protection from carbon leakage. The New Collective Quantified Goal on Climate Finance (NCQG) being discussed in the context of the annual United Nations climate conferences could be one vehicle for such a support mechanism.

The 29-page report titled ‘A vision for international trade in CO₂-intensive materials’ was published by Agora Industry and can be downloaded below.