As an integral part of the European Green Deal, the EU’s Carbon Border Adjustment Mechanism, or CBAM, is in its essence a carbon tax on imported products coming into the EU. The policy aims to prevent so-called ‘carbon leakage’: a circumstance wherein strict climate policies in one economy (like the EU’s) incentivises polluting businesses to relocate to other countries with less ambitious environmental regulations. By imposing a carbon tax on foreign businesses whose goods are sold in the European market, CBAM intends to encourage cleaner industrial practices in non-EU countries. In doing so, CBAM also sets a level playing field for European businesses by preventing competing foreign firms from circumventing the EU’s domestic equivalent carbon tax, the Emissions Trading System (ETS).
Yet, CBAM has not been spared from its share of criticism. Observers have levied worries on its economic impacts, particularly on less economically developed countries whose states, without external support, are not adequately prepared to adapt to CBAM’s impositions. Such countries generally suffer from monocultural economics, have weak statistical capacities to track the level of carbon emissions, and are more prone to ‘carbon lock-in’, features which particularly hamper an adequate adherence to CBAM’s regime. With some of such countries having high EU-trade dependence, particularly with regard to states around the Mediterranean and other parts of Africa, being partially locked away from accessing the European single market because of non-compliance with CBAM is a prospect with severe economic consequences.
Much criticism has also been levied on CBAM’s prospects of violating international trade law, specifically the World Trade Organisation’s (WTO) General Agreement on Tariffs and Trade (GATT). Ironically, some of these concerns are in part to do with the EU’s international legal obligations to prevent discrimination in their trade policies, which would in principle impede the EU from placing more lenient CBAM rules on developing countries than rich states.
Introduction
Fortunately, compliance with the EU’s commitments as a full member of the WTO with respect to CBAM is in principle feasible if implemented appropriately, without taking away from the policy’s principle objectives. To do so will ultimately mean ensuring CBAM is implemented and framed:
- as to prevent unfavourable treatment of imported products compared to domestic counterparts by ensuring a financial equivalency between CBAM and the EU’s equivalent internal regime, the ETS; and
- as fundamentally having the objective of reducing the EU’s own carbon emissions, and hence not as incentivising global de-carbonisation .
Doing so will provide the EU with a double safeguard against WTO litigations by ensuring that if (a) is shown to be violated through discriminatory measures, (b) will nonetheless override certain WTO commitments by justifying CBAM as seeking to achieve a ‘legitimate objective’, namely that of environmental protection. Moreover, implementing these two recommendations does not preclude implementing certain measures to remedy CBAM’s negative economic impact on LDCs, provided certain conditions are met.
a) Preventing unfavourable treatment of imported products
CBAM must demonstrate that it does not afford more favourable treatment to EU products as opposed to similar or competing imported goods. Importantly, this cannot be validated simply by pointing to CBAM’s original intent or legislative wording, but must be proven through its concrete application. This predominantly regards adherence to the WTO’s General Agreement on Tariffs and Trade (GATT) Article III obligations on member states, like the EU.
Therefore, CBAM must be implemented as an equivalent external counterpart to the internal ETS carbon tax, particularly with regard to an equal pecuniary charge per ton of carbon emissions. Different mechanisms at levying such carbon taxes — as is the case with CBAM certificates vs the ETS’ ‘cap-and-trade’ system — may be justifiable for practicality reasons since differential treatment does not per se prove unfavourable treatment (as proven in case EC v. Asbestos). However, any higher burden placed on importers to settle their charge must not translate in ‘a detrimental impact on the competitive opportunities’ of imported products (EC—Seal Products; and US—Clove Cigarettes).
Moreover, CBAM should be framed as an ‘internal charge enforced at the border’. That is, CBAM should be thought of and implemented as an internal measure primarily meant to reduce the EU’s own consumption of carbon and achieve its own carbon targets (ie., showing that the EU’s prime concern is that EU consumers buying imported products equates to EU consumers effectively increasing their carbon footprint) rather than a measure aimed at or perceived as indirectly imposing EU green policies overseas. For it is the reason for the charge that ultimately matters for WTO dispute settlement courts when deciding what GATT provisions apply (eg., China—Auto Parts). In this case, it is in the EU’s interest to make CBAM fall into the scope of the more lenient GATT Article III, which corresponds to internal measures applied at the border. If proven otherwise, CBAM may be considered an illegal duty/charge of importation, as per GATT Article II, likely leading CBAM only to be justifiable under the second safeguard (considered next).
b) Frame the objective as reducing the EU’s carbon emissions
Because possibility exists that CBAM may be construed by a complainant before WTO courts as a measure which favours domestic products, it is advised that the EU takes the following precautionary step.
WTO law allows for derogation from regular trade obligations if a measure which would otherwise violate the GATT is shown to seek one or more of the ‘legitimate objectives’ listed under the paragraphs of GATT Article XX. Relevant for CBAM are the paragraphs (g) and (b). The easiest to prove is paragraph (g), where a trade-restrictive measure (like CBAM) can be permitted if it seeks the ‘conservation of exhaustible natural resources’. By using consensual scientific evidence, the EU may effectively claim that the Earth’s climate is an exhaustible natural resource worth conserving through measures like CBAM. Paragraph (b) corresponds with measures seeking to protect ‘human, animal or plant life or health’ which requires the corresponding policy to be ‘necessary’ — a higher burden of proof as compared to paragraph (g) which merely requires the measure to be ‘relating to’ the resource’s conservation. The key here is to prove that CBAM constitutes the least trade restrictive measure to achieve the same level of health protection. Fortunately, WTO case-law allows defendants to prove the measure’s compatibility with paragraph (b) by including it as part of a ‘comprehensive regulatory scheme’ to achieve this protection of health (Brazil— Retreaded Tyres). With CBAM a clear part of the comprehensive European Green Deal — a policy programme which at least in part aims to protect human, animal, and plant health in the long-run —, such argumentation is realistic.
Nevertheless, in order to prevent WTO members from exploiting Article XX’s derogative abilities, such ‘legitimate objectives’ must nonetheless be proven to be genuine, as per WTO case-law. Doing so requires CBAM not to apply ‘arbitrary or unjustifiable discrimination between countries where the same conditions prevail’ and not be a ‘disguised restriction on trade’ (GATT Article XX ‘chapeau’). In addition to the above argumentations, pointing to the EU’s historic and comprehensive commitment to curbing carbon emissions domestically may relieve some doubts of CBAM’s genuineness.
It is also urged that the EU therefore make more explicit the parallel between CBAM’s objective and the two above-mentioned paragraphs of GATT Article XX, particularly paragraph (b) which has been less pronounced within the initiative’s drafting history.
Supporting Least Developed Countries (LDCs) and still complying with WTO law
As alluded, great emphasis is placed within the GATT on preventing discrimination between WTO members within states’ trade regimes for arbitrary or unjustifiable reasons. Importantly, moreover, justifiable discrimination can only be explained through the objective that was used to justify the original trade-restriction (ie., reducing carbon emissions to achieve the objectives of GATT Article XX paragraph (b) and (g)). Discrimination between non-EFTA and EFTA countries (like Switzerland and Norway), for example, is justifiable by the fact that the EU has signed agreements which extends the ETS system to non-EU EFTA members, thus not requiring CBAM’s implementation within them — an argument with a direct link to the goal of carbon emission reduction. Justifying discrimination between Least Developed Countries (LDCs) and non-LDCs by applying more lenient CBAM rules to the former or offering logistics and finance support to help them comply with CBAM is hence an argument harder to effectuate under WTO rules.
Fortunately, the GATT preamble alludes to and argues for the respect of the international environmental law principle “Common but Differentiated Responsibilities” (CBDR) which contends that states are equally concerned with environmental protection but some have more responsibilities than others in accordance with their level of development. Moreover, WTO courts have maintained that the GATT preamble must ‘add colour, texture and shading to [the] interpretation’ of rights and obligations (US—Shrimp). And ‘unjustifiable discrimination’ is between states under the ‘same conditions prevail’, as per GATT Article XX. It is recommended, therefore, that the EU proves and manifests the following:
LDCs are indeed under different conditions as compared to developed countries, particularly in regard to their technical capabilities of carbon emission tracking, and any discrimination between LDCs and non-LDCs is done in light of that.
Such argumentation would theoretically prove a correlated — albeit weak — link between the objectives sought to justify the CBAM through GATT Article XX paragraphs (b) and (g) as discussed and the reason for LDC discrimination, which is nonetheless sufficiently strengthened by reference to the CBDR principle in the GATT preamble and relevant aforementioned WTO case-law.
Conclusion:
Ensuring CBAM’s efficacy is imperative for various reasons. CBAM’s success carries much weight as it is an integral part of the politically contentious ‘Fit for 55’ package, itself a part of the European Green Deal. Furthermore, LDCs have become wary of CBAM’s potential economic impact, with EU global rivals, such as the BASIC countries (Brazil, South Africa, India, and China), taking advantage of said wariness by condemning the EU’s initiative.
Were CBAM to generate the feared economic impacts on LDCs, blow back from the international community will surely follow, with the relevant consequences on the EU’s global standing flowing from it. Moreover, worries have also arisen on the fact that CBAM’s indirect goal of incentivising decarbonisation may backfire with LDCs, where rather than investing in decarbonisation, they will attempt to shift trade flows as necessary, partly due to carbon lock-in.
It is for these reasons that the EU must ensure that LDCs are fit at adapting to CBAM’s additional demands through targeted support and capacity-building initiatives. Crucially, the EU must ensure that capacity for monitoring, tracking, and verifying carbon content in production are established within relevant LDCs. The EU must also be wary of extending the sectors incorporated within CBAM’s regime as many LDCs specialise in agricultural and textile exports, for instance, not yet included in CBAM’s scope. Initiating such supporting initiatives may be done so through a North-West African pilot programme as this is one of the higher risk regions from CBAM.
As for compliance with international trade law, it is essential that CBAM be implemented as to not treat imported products more unfavourably as domestic ones and framed as having the objective of reducing the EU’s own carbon emissions. CBAM must therefore have a highly equivalent nature with the ETS, particularly in the level of pecuniary charge per carbon ton and framed as both being internal measures, different only in their mechanism and place of tax settlement. Moreover, CBAM must be framed as seeking to conserve the Earth’s climate, arguably an exhaustible natural resource, and protecting human, animal, or plant health; where doing so will allow the EU to derogate from other WTO requirements.
Were the EU to take on the recommendation of supporting LDCs, mindful of CBAM’s economic impact, it must do so in light of the fact that LDCs are under different conditions as compared to developed countries, particularly in their technical capacities. Such will allow for WTO law compliance while at the same time addressing CBAM’s economic impacts.
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Acknowledgment:
The overall insights provided in this article and the research done to complete it is largely based off of the following academic article:
Venzke, I., Vidigal, G. (2022). Are Unilateral Trade Measures in the Climate Crisis the End of Differentiated Responsibilities? The Case of the EU Carbon Border Adjustment Mechanism (CBAM). In: den Heijer, M., van der Wilt, H. (eds) Netherlands Yearbook of International Law 2020. Netherlands Yearbook of International Law, vol 51. T.M.C. Asser Press, The Hague. https://doi.org/10.1007/978-94-6265-527-0_7