# **1. Introduction**

**<mark>Different approaches to climate mitigation policy are emerging among three major players in the global economy, collectively responsible for nearly half of GHG emissions.</mark>**<sup>2</sup> <mark>The EU led with a policy mix centered around emissions pricing, with the EU Emissions Trading System (ETS) and its complementary Carbon Border Adjustment Mechanism (CBAM) as its cornerstone for reducing net GHG emissions. By contrast, the US Inflation Reduction Act (IRA) seeks to achieve ambitious greenhouse gas (GHG) reductions by subsidizing clean production and technology adoption with a secondary goal of diversifying the critical minerals supply chains away from China.</mark><sup>3</sup> <mark>Meanwhile, China has launched an ETS based on intensity benchmarks that aims to incentivize efficiency improvements.</mark>

**These different policy approaches are anticipated to have varying consequences on trade affecting producers and consumers in developing countries, a topic not yet covered by the literature.** Existing literature focuses on how climate mitigation policies from the EU, US, and China affect their own economies. For example, Bistline (2023) estimates macroeconomic impacts of the US IRA on the US economy, Woollacott (2023) assesses its domestic environmental impacts, and Bown (2023) outlines the impacts for domestic EV manufacturers and their supply chains; Weitzel (2023) quantifies the macroeconomic impacts of the EU climate policy on the EU economy; EU (2021) assesses socioeconomic implications of EU CO2 emission standards for passenger cars; and Yan (2023) assesses the impacts of China’s climate policies on its economy. The literature also covers the impacts that climate regulations could have on selected advanced economies and globally. For instance, Kleimann et al. (2023), Attinassi et al. (2023), and Bernoth (2023) analyze the impacts of the US IRA on Europe, while Gründler (2023) discusses global effects. However, the potential effects of these policies on developing countries have been largely overlooked.

**This paper examines key mitigation policies implemented by the EU, US, and China, seeking to address following questions:**

- What are the differences in the policy approaches of the EU, US, and China?

- What are the economic channels through which the selected EU, US, and China policies impact developing countries?<sup>4</sup>

- Which sectors and countries are most exposed to these impacts?

- How should developing countries respond?

- What measures can advanced economies take to reduce negative spillovers for developing countries?

**The paper focuses on three main channels through which these climate policies can affect developing countries:** shifts in supply and demand in trade sectors, price changes, and access to technology. Using descriptive statistics and existing research, the paper identifies the sectors and countries most exposed to the policies. The paper does not cover adaptation policies or the impact of developing countries' own policies to meet their Nationally Determined Contributions (NDCs), which are discussed in Brenton et al. (forthcoming).

> 2 World Bank’s World Development Indicators.

> 3 Under the broad ‘subsidy’ category, we include tax credits for companies and consumers, grants to support programs, and the provision of technical assistance.

> 4 In this paper, the term "developing countries" will specifically refer to non-China developing nations.

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