Countries including China and India want the climate talks to address unilateral measures such as the EU’s CBAM and the US Inflation Reduction Act

Ed Crooks, Vice-Chair, Americas, Wood Mackenzie

The COP28 climate talks in Dubai kicked off on Thursday with a symbolic success. One of the key items on the agenda for this year’s talks – formally, the Conference of the Parties to the UN Framework Convention on Climate Change – was finalising the institutional arrangements and financing for the Loss and Damage Fund agreed in principle at COP27 last year.

At the opening of this year’s meeting, Simon Stiell, the UN’s executive secretary for climate change, announced that an agreement had been reached to raise an initial US$300 million for the fund, which is intended to compensate low and middle-income countries for the damage caused by a warming world.

Given that the worldwide costs of climate change are estimated to run into the tens of billions a year, that sum might seem like a drop in the bucket. But the fact that there had been some progress on this issue, with Germany, the UK, the US, Japan and the hosts the United Arab Emirates all agreeing to contribute to the fund, got the talks off to a positive start. Delegates stood and applauded when the announcement was confirmed.

Dr Sultan Al Jaber, the president of the talks, said the agreement “sends a signal of positive momentum to the world”. The other goals set for the talks include agreeing a target for rapid growth in renewable power generation, strengthening the global pledge to curb methane emissions, and finalising a mechanism for international carbon trading. If all of those are achieved by the time the talks end on December 12, it will be reasonable to call the conference a success.

Beyond those issues, however, there are signs of new tensions emerging in the international effort on climate change. The BASIC countries – Brazil, South Africa, India and China – proposed last weekend that a new item should be added to the conference agenda, raising “concerns with unilateral trade measures related to climate change and their potential adverse impact on equitable and just transitions”.

In their explanation of the proposal, the countries said:
“BASIC is of the view the UNFCCC should consider concerns with unilateral and coercive climate change related measures that constitute a disguised restriction on international trade, while calling on all partners to strive for cooperative solutions and partnerships for stimulating the production and trade access for sustainable goods and services. Concerning trends towards unilateralism, trade protectionism and fragmentation of international cooperation jeopardizes trust and, consequently, ambitious climate action.”

The source of their concerns was obvious: the measures taken by developed countries, including the Inflation Reduction Act (IRA) in the US and the Carbon Border Adjustment Mechanism (CBAM) in the EU, that link restrictions on trade and support for domestic industries to climate action.

As explained in a Wood Mackenzie Horizons report in September, the CBAM is intended to prevent European producers, which have to pay a price for their emissions in the EU’s trading system, from being put at a competitive disadvantage relative to imports from countries where carbon is not priced. Exporters into the EU will pay a fee based on the embedded emissions of the products they are selling, with a rebate for any carbon price that has already been paid.

As those fees are ramped up over time, the impact on exporters into the EU will grow. By 2034, CBAM fees could increase the cost of delivered steel to the EU by about 56% for India and about 49% for China. India’s government has been considering counter-measures in response.

India’s commerce and industry minister Piyush Goyal recently described the CBAM as an “ill-conceived” move that would “cause the death knell of manufacturing in Europe” by raising the cost of steel for European buyers. China’s government has been more cautious in its language, but has also raised concerns, urging the EU to “avoid creating protectionist measures and green trade barriers."

The IRA does not include border fees, but does have tax incentives to incentivise manufacturing in the US. The early indications are that it has been highly effective in encouraging investment in domestic production. In the solar industry, if all of the announced plans for new module plants materialise, by 2026 the US would increase its total manufacturing capacity by an order of magnitude, from 10.6 GW a year to 108.5 GW.

US solar module production is also supported by tariffs on imports from China, which are scheduled to be widened in scope to include some modules coming from Southeast Asia, starting from June next year.

Allowing unrestricted module imports with no tariffs or local content incentives would cut the cost of solar power in the US. But the Biden administration see those measures as important in building a broad base of support for its climate policies.

President Joe Biden was in Colorado this week visiting CS Wind, which makes turbine towers, and emphasised the linkage between the IRA and job creation. “When I hear climate, I think jobs," he said. "Instead of exporting jobs, companies, both foreign and domestic are creating jobs here in America and exporting American made products."

Some politicians in the US have also been looking at the possibility of introducing a carbon border fee equivalent to the EU’s CBAM. Senator Bill Cassidy, a Republican from Louisiana, last month launched his proposal for a “foreign pollution fee”: a charge on the value of imports, based on the difference between their embedded greenhouse gas emissions and the emissions for the same goods produced in the US.

Senator Cassidy said his proposed fee “expands American production and increases domestic jobs while discouraging the import of more pollution-intensive, foreign-produced goods.” Some Democratic politicians have raised similar ideas, and it is possible that legislation for such a fee could win bipartisan support.

The challenge, and implicit threat, raised by the BASIC countries is that this kind of combined industrial and climate policy “jeopardises trust”, and so makes it harder to reach international agreement on ambitious action in other areas.

President Biden and his Chinese counterpart President Xi Jinping had reasonably amicable meetings in California last month, and their two countries agreed to make progress on a series of cooperative initiatives on energy and climate. But the BASIC countries’ attempt to put trade clearly on the COP28 agenda is a signal that fundamental tensions remain.

The Global Stocktake at COP28 is making clear that the world is not on track to meet the goals of the Paris Agreement, and more ambitious climate action is needed. But democratic governments have a tightrope to walk in building international support for those climate efforts while not losing the backing of their own electorates. Whatever the outcome of COP28, that challenge will continue to shape the energy transition in the years to come.

In brief

The OPEC+ countries held an online ministerial meeting on Thursday, after which several members announced “voluntary” production cuts totaling 2.2 million barrels per day, effective from January. Most of that reduction came from extending previously announced cuts. Saudi Arabia accounts for the largest share, extending through the first quarter of 2024 the reduction of 1m b/d that began in July. Russia is also extending its export cut of 300,000 b/d of crude and products that began in July, and adding a further 200,000 b/d reduction. The rest of the cuts come principally from Iraq, the UAE, and Kuwait.

The announcements followed a couple of months when oil prices have been on a declining trend. Brent crude was mostly range-bound in November between $80 and $83 a barrel, down from a recent peak of over $97 a barrel in September. The announced cuts did not seem to have much positive effect on the market, and Brent was trading at around $81 a barrel on Friday morning.

Brazil is joining the OPEC+ Charter of Cooperation, adding another significant oil producer to the group. However, it is not expecting to have to abide by any production limits.

Fervo Energy, the enhanced geothermal company, has started up its first power plant in Nevada: a key milestone in the development of the technology. The 3.5 megawatt plant has been developed under a partnership with Google, which takes power from the local grid for its data centers. Fervo, which uses horizontal drilling and hydraulic fracturing techniques developed in the oil and gas industry is also working on a much larger 400 MW project in Utah.

The province of Saskatchewan, Canada, has agreed to back the licensing and deployment of a Westinghouse “microreactor”, with power generation output of 5 MW. The reactor is scheduled to come into operation in 2029.

Germany’s electricity network regulator has announced rules giving local grid operators the right to restrict the flow of power to heat pumps and electric vehicle charging, if  threatened by “acute damage or overloading of the network.”

KeyFacts Energy Industry Directory: Wood Mackenzie