The European Union, through its recent Carbon Border Adjustment Mechanism (CBAM) legislation, claims to address global climate concerns by imposing a carbon tax on imports.
It intends to create a “level playing field” for domestic products that are subjected to carbon pricing under the EU Energy Trading System (ETS). But does it address the challenges facing the Global South and promote climate justice? Does it create a comparative market advantage for domestic goods?
CBAM fails to comply with WTO laws and regulations: Article III of the GATT of 1994 deals with the issue of National Treatment, which prohibits discrimination between imported goods and domestically produced goods. CBAM would amount to “arbitrary or unjustifiable discrimination” under Article III:4 of GATT 1994.
As discussed in the EC-Banana III case, since CBAM affects the internal sale of domestic products by providing a comparative market advantage, it would be struck down by Article III:4. The EU claims that CBAM for imported goods mirrors the scheme of ETS for domestic goods. However, it has been unsuccessful in creating an equivalent scheme under Article II:2(a).
The administrative burden on producers is greater in the case of CBAM. Further, it cannot be traded and can be carried forward for only one year. As held by the WTO Appellate Body in Korea (Various Measures on Beef), CBAM alters the “conditions of competition in the relevant market to the detriment of imported products.”
Another justification for the proposal is sought under General Exceptions (Article XX) of the GATT. Article XX(g) pertains to the conservation of exhaustible natural resources. In the US-Shrimp case, it was observed that there needs to be a close relationship between the end and the means of the object.
This necessitates a genuine effort towards the conservation of exhaustible natural resources under the mechanism. However, providing free allowances to domestic producers under ETS levels lowers the cost of production for the domestic producers, and secondly, carbon pricing is not applicable for exports from the EU.
Thus, the common global commitment to reduce carbon emissions is undermined. The EU adopts an inward-looking climate policy, which goes against the principles of the Paris Agreement of 2015. The Paris Agreement underlines global cooperation as the key to addressing the issue of climate change. Even the German G7 meeting of 2022 identified the creation of a climate alliance as one of its agenda items.
A measure like CBAM needs to be operated with the concerted effort and collaboration of all the stakeholders. This would also ensure the incorporation of the special needs of developing and least-developed countries. The Paris Agreement lays down the principle of common but differentiated responsibilities: the countries whose contribution to global pollution is less should not be subject to the same obligation as those who have contributed more, like the developed West.
Even under the present legislation of the EU, the least developed countries should be exempt. Also, instead of having a single measuring rod for all, the carbon pricing should be reflective of the economic capabilities, market size, and level of GDP of the countries. The EU can invest in decarbonisation and capacity building in lower-income economies. Additionally, it can further reinvest revenue from CBAM to augment climate causes abroad.
According to Penny Goldberg, a professor at Yale University, CBAM, in its current form, has the potential to kill trade in India and other low-income countries. It will lead to a huge tax burden on products like aluminium, iron, and steel. Through CBAM, the EU is exploring alternate sources of revenue to make up for the economic ramifications of the pandemic.
The socio-economic impact on countries that export to the EU cannot be ignored. Countries having the highest dependency on the export of CBAM goods are mostly developing and least-developing countries like Mozambique, Bosnia, and Herzegovina. For Mozambique, it covers 20 per cent of their total exports. Clara Brandi from the German Development Institute argues that for some countries, even though their share of exports to the EU may be low, it can have adverse consequences for employment in those countries.
Thus, the rationality of any measure to impose carbon pricing lies in recognising the need for global cooperation and collaboration in accordance with the principle of common but differentiated responsibilities and respective capabilities.