The Geopolitics of Carbon Border Adjustment Mechanisms:

INTRODUCTION

Throughout modern history, energy and geopolitics have formed an enduring nexus, shaping empires and the balance of global power. Soon, our energy systems will undergo a major transition. The repercussions of the transition will not be confined to the energy industry. Policymakers should take heed of this dynamic, and consider which path to net-zero will deliver the most desirable geopolitical landscape.

A nascent trade policy with significant political momentum resides at the intersection of climate and geopolitics. Carbon Border Adjustment Mechanisms (CBAMs) require importers to pay a fee based on the amount of carbon emitted overseas to produce the imported good. Across the globe, different electricity sources and manufacturing methods lead to wide variances in carbon emissions per unit of production. In short, the lifecycle emissions of a commodity vary greatly depending on where it was made (Rorke, 2020).

CBAMs will reward cleaner producers while disadvantaging dirtier ones. For nations in the West who adopt this policy and their trade partners around the world, CBAMs will organize a new trade regime that guides industry to decarbonize at scale.

Many regions will be affected by the rise of CBAMs, but this paper will focus on the implications for energy producers in the Gulf. Since the 1970s, the Middle East has been a key energy supplier, and the region’s role in global markets has fueled major geopolitical conflicts. The adoption and development of CBAMs in the West will influence the future geopolitical posture of the Gulf states. Specifically, the Kingdom of Saudi Arabia (KSA) and United Arab Emirates (UAE) may strengthen their alliances with the West if CBAM regimes recognize and reward their low-carbon oil and gas value chain and their recent investments in the hydrogen economy.

While the West favors CBAMs to enhance the competitiveness of domestic industries and to reward investments in green infrastructure, developing nations like India and China contend these measures are unfair. CBAMs, they argue, discriminate against the very economies whose industrialization was stunted by the powerful nations that now impose CBAMs. Ultimately, the climate crisis will force tough choices between speed and fairness. The world after the energy transition will reflect how policymakers reconcile this difficult tension.