The OECD and Carbon Life-Cycle Assessments

Carbon border adjustments confront the trade and climate nexus with two primary policy paths: a race to the bottom or a virtuous circle. A race to the bottom scenario occurs when countries abandon their commitments and erect trade barriers, which can ultimately slow the transition to a decarbonized future. To promote a virtuous circle, whereby trade tools facilitate increased global climate commitments, countries should work in concert toward baseline methodologies for determining harmonized, product-specific carbon life-cycle assessments (LCAs). An Organization for Economic Cooperation and Development (OECD) framework would be stronger than the Paris Agreement, which is based on voluntary and nationally determined commitments. To launch this multilateral effort, OECD members should begin with a working group of trade and climate experts that will jointly develop a methodology for carbon accounting that succeeds in prioritizing the fair and accurate accounting of emission responsibility while remaining consistent with international trade rules.

QI: What methodologies currently exist for determining carbon LCAs?

A1: The Greenhouse Gas Protocol (“GHG Protocol”), the result of a 20-year partnership between the World Resources Institute and the World Business Council for Sustainable Development, is considered the preeminent standard for greenhouse gas (GHG) accounting. The GHG Protocol measures emissions by examining an organization's “emissions factors,” evaluating Scope 1 (direct), 2 (indirect), and 3 (upstream/downstream) emissions. To date, it is the most widely used international carbon accounting standard. Over 92 percent of Fortune 500 companies rely on it, including companies such as British Petroleum, General Motors, and Monsanto. A wide range of governments also accept the GHG Protocol as a preeminent standard, although none formally recognize it as equivalent to a national standard.

Another complementary carbon accounting methodology, derived partially from the GHG Protocol, is the ISO 14064, led by the International Organization for Standardization (ISO). The ISO 14064 was created as a basis for both governments and private sector actors to measure GHG emissions. It is divided into three sections. Part 1 is largely compatible with the GHG Protocol. The second part, ISO 14064-2, deals with the quantification and reporting of emissions reduction from project activities. The third part, ISO 14064-3, establishes a process for the verification of a GHG statement. Differences between the ISO and GHG methodologies vary slightly—the ISO explains what needs to be done, while the GHG Protocol explains how to achieve those climate goals. What the standards share in common is that they are privately run and voluntary.

Q2: Why does the global community need a standard methodology for LCAs?

A2: A common standard that is widely accepted and formally adopted by governments would reduce trade frictions related to carbon border adjustments by harmonizing methodologies among countries. Carbon border adjustments are premised on equalizing the price of carbon between the domestic products and imports. The calculation methodology of the carbon content of products would influence the applicable tax at the border. Having a standard methodology would prevent frictions that might arise if, for example, the United States and the European Union pursue different approaches to measuring the carbon content of goods like steel and aluminum. This is increasingly important as countries pursue decarbonization of heavy industry. A standard methodology would also provide a more comprehensive and accurate picture of the carbon intensity of goods traded, from fertilizers to bicycles, and would therefore help incentivize industries to pursue deeper decarbonization and to do so with more urgency. If countries and companies alike know that their goods will be affirmatively recognized as low-carbon-content goods, they are more likely to undertake policy changes to decarbonize production.

In an October 14 op-ed, World Trade Organization (WTO) director-general Ngozi Okonjo-Iweala underscored how important common methodologies are as climate and trade policy become increasingly intertwined. She wrote, “fragmentation risks generating trade frictions and unpredictability for businesses seeking to [decarbonize]. Worse, it could weaken the effectiveness of global efforts to mitigate climate change.” She went on to recommend that the OECD, WTO, International Monetary Fund (IMF), and World Bank work in concert to develop a common methodological approach to carbon pricing. It is important that these institutions recognize mutual standards, but it is unlikely they will find common ground. Among major international financial institutions (IFIs), the IMF has the most liberal approach to calculating climate costs, arguing in 2021 for the establishment of a carbon price floor of $75/ton. Another illustration of the wide differences among IFIs is that the IMF argues that, including social costs of carbon, fossil fuel subsidies equal $5.9 trillion per year, or $11 million per minute. The OECD, on the other hand, found that 2020 fossil fuel subsidies were closer to $345 billion. While the IMF numbers may be technically correct and more inclusive of total factors, they are so high as to polarize constituent countries and have not historically been successful at bringing major fossil fuel producing countries to the table. OECD numbers, on the other hand, are largely regarded as less extreme, accurate in a traditional sense, and overall, less polarizing.

Q3: Why is the OECD the best forum for convening global leaders to set a standard methodology for LCAs?

A3: The OECD is the most appropriate forum for determining an international methodology for carbon accounting for numerous reasons. First, the OECD has technical capabilities as a data-cruncher and standards-setter. Second, as discussed above, the OECD is comparatively less polarizing than other international institutions. Third, as demonstrated by the recent global minimum tax agreement, for which initial discussions began in June 2016, the OECD can facilitate the conclusion of highly complex agreements more quickly than other international institutions. The carbon border adjustment mechanism (CBAM) would enter into force fully in 2026, providing the OECD with a strict but attainable deadline by which to conclude an agreement on LCAs.

OECD secretary general Mathias Cormann recently outlined why the OECD is the appropriate forum for convening leaders to establish a global carbon price. There is no reason it could not also help establish a methodology for LCAs. While critics may point to the fact that the OECD members are largely rich developed countries, the global minimum tax agreement, which has 136 signatories, proves that the OECD can serve as a standard-setter beyond its own members and that it can achieve buy-in from developing countries, including least-developed countries (LDCs), which is vital to combating climate change.

Q4: Why not another forum, such as the United Nations Framework Convention on Climate Change (UNFCCC), the G20, or the WTO?

A4: The UNFCCC and G20 are organizations focused on setting goals and making commitments, rather than technical issues like measurement, and neither has an excellent record when it comes to climate change. The UNFCCC is far too slow and based on voluntary commitments. Its major success was the Paris Agreement, but countries have not met their Paris Agreement targets, both in terms of financial contributions and decarbonization. The Green Climate Fund’s Initial Resource Mobilization period (2014–2020) received just $8.3 billion in donations, and its first replenishment period (2020–2023) has confirmed $9.52 billion. While the UNFCCC does work closely on climate science with the Intergovernmental Panel on Climate Change (IPCC), it is primarily a political organization focused on convening parties, and its nationally determined contributions (NDCs) are nonbinding.

Similarly, the G20 is not the right forum because, as the June 2021 G20 summit demonstrated, even modest, rhetorical commitments are difficult to achieve and have seen relatively little follow-through. In June, G20 energy and environment ministers failed to agree on two key commitments—the phasing out of coal and the goal of stopping warming at 1.5°C. Opposition to these changes came from China, India, and Russia. While China proceeded to make commitments to halt financing of foreign coal plants at the United Nations General Assembly meeting in September, its decision to withhold that announcement signals China’s relatively low prioritization of the G20 as a forum of consequence. Furthermore, despite the G20’s commitment to contributing $100 billion to climate programs in developing countries, progress has not advanced. The G20 forum in October also lacked significant developments.

While standardizing carbon content methodologies will help reduce trade frictions, the WTO is not the appropriate forum to develop such a standard. Because it is consensus based, achieving substantial policy change on climate is highly unlikely, as demonstrated by the proliferation of modest plurilateral efforts, such as the Trade and Environmental Sustainability Structured Discussions (TESSD) or the Agreement on Climate Change, Trade and Sustainability (ACCTS,) which China and the United States have not joined.

What the UNFCCC, G20, and WTO share in common is their focus on establishing commitments rather than establishing scientific methodologies or standards. The OECD, on the other hand, is well positioned to establish a working group that convenes scientists and the trade community that could work to establish a standard LCA methodology that is science based and that would encourage countries to pursue a virtuous circle of climate-driven trade policy.

Q5: What steps should the Biden administration take?

A5: The Biden administration should engage with international partners at the OECD to begin developing a standard methodology for assessing LCAs. First, the administration should launch a working group, consisting of both trade and climate experts, to determine a standard methodology for LCAs. At the OECD, working groups must be created by mutual agreement of the standing committee, which includes the Executive, Budget, and External Relations Committees. The United States should work through these committees to establish a working group on LCAs. Second, while OECD Working Group recommendations are not binding, once drafted as a formal “decision,” they become binding on OECD members. Formal OECD decisions require consensus, but if a member abstains from voting on a decision or recommendation, it will continue to apply to the other members. This structure helps the OECD avoid veto scenarios. For example, if the United States does not support a measure at the OECD, it can simply abstain from voting, which allows the rule to go into effect for other countries, reducing the overall propensity for nonaction.

Emily Benson is an associate fellow with the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2021 by the Center for Strategic and International Studies. All rights reserved.

Emily Benson
Director, Project on Trade and Technology and Senior Fellow, Scholl Chair in International Business