Climate-linked non-tariff measures are intensifying trade frictions and regulatory divergence, raising costs for developing economies and making WTO reform essential to manage the net-zero transition
At the World Economic Forum (WEF) Annual Meeting this year, there was consensus that the world is far from free and fair in global trade. Governments around the world are using trade measures to advance domestic goals, a phenomenon described as ‘intelligent frictions’ in Davos this year. It refers to the policy choice governments make through standards and regulations to balance free trade with legitimate goals while protecting market access.
Climate-linked non-tariff measures (NTMs) have been an important driver of these intelligent frictions. Governments are embedding climate objectives into trade policy. Most notably, the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM), which entered into force this year, places demanding compliance requirements on exporters through declarations and certificates related to a shipment’s carbon footprint. Similar policies are proliferating among advanced economies, with significant consequences for global trade.
Climate-linked non-tariff measures (NTMs) have been an important driver of these intelligent frictions.
While these frictions provide governments with policy space, they increase costs for smaller economies and intensify existing tensions. They also risk creating rival regulatory blocs that force smaller economies to choose sides as major powers begin to promote their own standards abroad. To manage this risk, the WTO needs to deliver a credible package of reforms at its next Ministerial Conference (MC).
The standout issue for the global economy in 2025 was the introduction of a wide range of tariffs. Even as many countries attempt to enter into favourable bilateral agreements, the use of trade policy to advance domestic goals is not going away. There has been an increase in NTMs, with 18,000 new discriminatory measures introduced since 2020 (Figure 1).
Figure 1: Number of Trade-Related Policy Measures
Source: UNCTAD based on Global Trade Alert
While tariffs are straightforward and can be negotiated, NTMs are complex and embedded in technical standards and regulations. In the energy sector, these obligations often take the form of reporting requirements tied to carbon emissions and supply chain transparency. For developing countries like India, these measures effectively squeeze them out of developed markets. NTMs discourage entry and increase exit for firms unable to meet compliance costs, leading to market concentration. Such requirements implicitly favour firms operating within advanced regulatory systems. These measures can also unintentionally penalise high-emission developing countries by deepening existing technological disparities, as many developing economies have limited access to green technologies. Moreover, the concentration of clean technology patents and supply chains in developed countries makes technology transfer expensive and politically sensitive.
For developing countries like India, these measures effectively squeeze them out of developed markets.
Another challenge posed by climate-driven NTMs is the lack of regulatory convergence. While the EU enforces CBAM, an extension of its internal carbon pricing, different models are emerging with varying reliance on carbon emissions. In the United States (US), the Inflation Reduction Act imposes local-content requirements and performance-based clean-energy tax credits tied to emission rates. China’s emissions trading system covers the power sector without a CBAM equivalent, while the United Kingdom (UK)’s CBAM proposal differs from the EU’s in sector coverage and timelines, making it operationally more complex. This challenge is further compounded by the variety of carbon accounting methods and tools that are not interoperable and increase costs. The result of this patchwork of standards is that it can compel developing economies to align with the standards of a dominant trading partner. It may also result in a North–North consolidation of trade, with advanced economies gravitating towards high-standard trade among themselves.
The future of the WTO will depend on its ability to respond to tensions in the global trading system. As the next MC approaches, the WTO would benefit from organising its agenda around a clear set of priorities.
First, it must continue to act as a source of stability and as a guardrail against global economic fragmentation. Regulatory fragmentation has high economic costs, especially for developing countries that lack the capacity to comply with multiple standards and policies. According to WEF estimates, this could lead to a loss of up to five percent of global GDP. The WTO needs to provide a space where major trading powers have the incentives to cooperate on commonly agreed-upon rules, and for that, greater transparency and accountability are essential. Stronger notification systems, through special and differential treatment for smaller economies, simplified procedures, and technical assistance, are essential.
The result of this patchwork of standards is that it can compel developing economies to align with the standards of a dominant trading partner.
Second, as the world transitions to net zero, state interventions such as carbon pricing, subsidies, or industrial policy will play a crucial role. The WTO must ensure that these interventions are governed in a manner consistent with the multilateral system and do not compete with it. In the absence of modernised subsidy rules, there is a risk of an uncontrolled subsidy race and an increase in trade defence instruments. Subsidy rules must also be modernised to distinguish between distortive policies and measures with a sustainability purpose. One approach could be to give ‘green subsidies’ greater room to operate through flexibility for developing countries and time-bound allowances. While reforms in this area will be difficult, the partial success of the fisheries subsidies negotiations demonstrates that progress is possible when negotiations are framed as contributing to sustainability.
Finally, the proliferation of NTMs has intensified tensions. While the current WTO framework allows governments to address domestic concerns, there is a pressing need to restore dialogue and cooperation within a multilateral forum. The Committee on Trade and Environment (CTE) can be used to hold structured discussions on reducing inconsistencies between carbon accounting standards and simplifying compliance requirements.
The upcoming Ministerial Conference in March is an opportunity to place the reform agenda back on track and adapt the multilateral trading system to better respond to NTMs and regulatory fragmentation.
Anika Chhillar is a Research Assistant at the Centre for Economy and Growth at the Observer Research Foundation.
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Anika Chhillar is a Research Assistant at the Centre for Economy and Growth, ORF New Delhi. Her work focuses on international trade and industrial policy ...
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