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T
he European Commission has proposed a issues about its consistency with the rules of world trade.
carbon border adjustment mechanism (CBAM) The immediate questions are: How will other members of
as part of its European Green Deal. The CBAM the World Trade Organization (WTO) react? Will this
would require importers to purchase carbon proposed action by the European Union set off a chain
emissions certificates for imports that the European Union reaction of similar climate-related trade restrictions else-
(EU) determines are not produced under emissions stan- where? Or will it provoke a wide outcry of global criticism of
dards similar to those of the EU. The aim is to apply a carbon green protectionism, leading to a legal showdown in the
price to imported products that is equivalent to the carbon WTO? The question over the longer term is: How will these
price applied to products manufactured in the EU. Although proposed restrictions shape the future of both trade and
the CBAM may not be implemented for several years, merely climate policies and governance globally? Without revision
proposing it has opened an entirely new front for trade and careful application, the EU’s proposed CBAM may be
confrontations. The prospect of the CBAM raises numerous inconsistent with fundamental WTO rules.
JAMES BACCHUS is an adjunct scholar at the Cato Institute, a professor of global affairs at the University of Central Florida, and author of
The Willing World: Shaping and Sharing a Sustainable Global Prosperity and the forthcoming Trade Links: New Rules for a New World. He also
was a founding judge and twice the chairman of the World Trade Organization’s Appellate Body.
B AC KG R O U N D has already adopted a resolution in support of the CBAM—
Since 2005, many EU industries have been covered by the provided it is consistent with WTO rules.6
EU’s Emissions Trading System (ETS), which charges pol- Accompanying the commission’s CBAM proposal is a
luters for the carbon they emit. The ETS is a cap-and-trade proposal to expand the ETS to include more sectors of the
system that puts a cap on overall carbon emissions, lowers European economy.7 The EU would establish a new author-
that cap over time, and sells the right to emit carbon at an ity to implement and operate the CBAM in concert with the
increasing price. Companies in carbon-intensive sectors ETS by applying a carbon price to imported products that
covered by the system must purchase emissions allow- is equivalent to the carbon price applied to products manu-
ances from the EU and then surrender them for every ton of factured in the EU. Under the CBAM, the EU would require
carbon they emit. If a company reduces its emissions, it can importers to purchase emissions certificates to account
keep its spare allowances for its future needs or sell them to for the emissions embedded in certain carbon-intensive
other companies. The ETS reduces the number of emissions imported products. At the outset, the imported products
allowances over time, which in turn drives up the price of requiring these emissions certificates would be those of the
the allowances and provides an incentive to adopt cleaner heavy-emitting electricity, iron, steel, aluminum, cement,
production techniques. The intention of the ETS is to send a and fertilizer industries. Although climate activists had
price signal that will encourage European producers to shift hoped that indirect emissions would be included, the emis-
away from carbon-based production. sions counted would be only those that result directly from
The EU’s Green Deal builds upon the ETS by seeking owned or controlled sources of production.
1
carbon neutrality by 2050. Toward this end, the EU’s aim is The prices of the certificates would be linked to the prices of
to reduce its carbon emissions 55 percent from 1990 levels the emissions allowances under the ETS. Only “authorized”
2
by 2030. Anticipating that higher carbon prices will result, importers would be permitted to import the products falling
prices for emissions permits for industries that are now within the scope of the CBAM. To be authorized, importers
part of the EU’s Emissions Trading System have rocketed to would need to report on the embedded emissions in their
3
record highs, exceeding 50 euros per ton. imported products on an annual basis and would need to sur-
European businesses are worried that a higher carbon render a corresponding amount of CBAM certificates that they
price in the EU will put them at a competitive disadvantage would have purchased in advance. Importers who do not have
relative to firms in countries without carbon pricing. This a carbon-audited supply chain after the transition period ends
could spark a further shift to more offshore production that would be required to buy CBAM certificates priced at default
would shrink economic activity in the EU. Climate activists values of carbon content equal to the average emissions of like
everywhere are concerned that these proposed restrictions products in the EU during the transition period.
will result in shoving emissions to countries with lower The EU crafted these climate-related trade restrictions
carbon emissions standards, resulting in no net reduction in with the professed goal of ensuring that they are consis-
overall global emissions. tent with the EU’s WTO obligations.8 Nevertheless, Brazil,
The European Commission released the details of its China, India, and South Africa have already expressed “grave
carbon border adjustment mechanism (CBAM) on July 14 concern,” and have declared that the CBAM is protectionism
4
as part of the European Green Deal. If the legislation is disguised as climate action that will impose unfair discrimi-
enacted, there would be a transition period of three years nation on European imports of their traded products.9 These
beginning on January 1, 2023, with the CBAM entering concerns are widely shared. One recent European study con-
fully into force on January 1, 2026. The proposal requires cluded that the most-affected products would be Colombia’s
the approval of the European Parliament and the European cement, China’s plastics, North Africa’s fertilizers, and South
Council before taking effect. There is still much debate America’s pulp exports.10 Products from Russia, South Korea,
about the shape of the CBAM in the EU, where some of the Ukraine, and other countries are also likely to be affected.11
affected industries remain resistant.5 Negotiations await U.S. climate envoy John Kerry warned that CBAM should
among the EU’s 27 member states. The European Parliament be a last resort, as it could detract from efforts to get more
2
countries to elevate their climate ambitions before the other charges connected with importation that have been
upcoming UN climate summit in Glasgow in November agreed by the EU in its WTO schedule of commitments, the
12
2021. But, on the same day the EU announced the CBAM, CBAM could also be inconsistent with another basic WTO
congressional Democrats announced that they will propose a rule.17 This inconsistency seems likely because the price of the
similar restriction as part of their pending $3.5 trillion spend- new emissions certificates would start off fairly high and then
13
ing plan. In contrast to the detailed EU proposal, Democrats climb higher as the EU implements and expands the CBAM
made their announcement of “polluter import fees” before and takes other climate actions over time.
14
deciding precisely what their proposal will be. Elsewhere, The EU will likely contend that this rule does not apply
Canada has announced that it, too, is considering its own here because the CBAM would not be a border measure. The
15
CBAM. Meanwhile, many countries are lining up to express EU will likely maintain that the CBAM is a requirement of an
their belief that the CBAM proposal by the Europeans is internal regulation. On this reasoning, it would fall instead
inconsistent with the EU’s WTO treaty obligations. under another WTO rule, which imposes no quantitative
limits on the impact of such requirements. As a result, there
would be no legal violation if the prices for emissions certifi-
DOES THE EU’S CARBON BORDER cates rose over time and exceeded the agreed ceilings of the
ADJUSTMENT MECHANISM PROPOSAL EU’s commitments on customs duties.18 However, the fact
C O M P LY W I T H W T O R U L E S ? that the CBAM mandate to purchase an emissions certifi-
The CBAM is a long way from being applied; it may be cate would be triggered by the act of importing that product
modified along the way, and precisely how it would be and would not accrue due to an internal event—such as the
applied to individual traded products in particular factual distribution, sale, use, or transportation of the imported
circumstances cannot be foreseen. Nor can we foresee which product—argues against an EU contention that the CBAM
of those products and circumstances would give rise to would be an internal regulation. The WTO Appellate Body
claims against the EU in WTO dispute settlement. Thus, any has ruled that the question of whether there is an import
legal analysis is necessarily preliminary and provisional. measure or an internal regulation turns on what triggers
Nevertheless, the legal issues raised by the CBAM about the obligation to pay. If the obligation to pay accrues at
its compliance with the EU’s WTO obligations are likely to the moment of and “by virtue of the event of importation,”
include at least three concerns. then it is an import measure.19 As it has been proposed, this
First, the CBAM could be inconsistent with the most- would seem to be the case with the CBAM.
favored-nation treatment rule that requires that any advan- Third, even if the CBAM were deemed a requirement of
tage granted to the imported products of one WTO member an internal regulation, it could be inconsistent with the
must be accorded immediately and unconditionally to the national treatment rule that requires that imported products
16
like products originating from all other WTO members. be given no less favorable treatment than that given to like
The CBAM would violate the most favored-nation treatment domestic products.20 One reason would be, in recent years,
rule if it discriminated between and among like imported 43 percent of the available ETS emissions allowances have
products originating in different WTO member countries been allocated for free to European firms.21 Under the CBAM
based on their carbon content. In self-judging other WTO as proposed, the number of free emissions allowances for all
members on the extent and quality of their climate actions, sectors would decline over time and eventually be phased
and thus picking and choosing which imported products out, but they would continue for some years after the CBAM
members will have to buy emissions certificates for, and entered into effect.22
how many they will have to buy, the European Union would Some of the affected European industries are protesting
be discriminating between and among other WTO members that the CBAM, as proposed, would not provide them suf-
in trade in like products. ficient protection from the “carbon leakage” of EU jobs and
Second, because the CBAM could apply a charge on import- production offshore that they fear. So, they are fighting hard
ed products in excess of the ceilings on customs duties and to keep the free emissions allowances as part of the expanded
3
ETS. Keeping free emissions allowances for European prod- settlement of a trade dispute, what would the design, archi-
ucts, while also requiring the purchase of CBAM certificates tecture, and revealing structure of the measure say about
for like imported products, would unquestionably be a viola- whether it is truly a climate measure?
tion of the national treatment rule. In effect, it would provide Exceptions are available under the rules for measures neces-
double protection for the European products. sary to protect human, animal, or plant life or health,26 and for
This is because domestic products will have lower costs measures relating to the conservation of exhaustible natural
than will like imported products, so long as European pro- resources if such measures are made effective in conjunction
ducers continue to receive free emissions allowances, thus with restrictions on domestic production or consumption.27
placing the imported products at a competitive disadvan- The EU is unlikely to be able to prove that the CBAM is neces-
tage. For this reason, the EU would be acting inconsistently sary, in part because there is at least one reasonably available
with the national treatment rule if it continued to provide alternative that would be consistent with WTO obligations,
free allowances because imported products would be denied less restrictive of trade, and achieve the EU’s desired level of
an equality of competitive opportunities with like domestic protection from climate change: a carbon tax.28
products in the European market.23 However, the EU may well be able to demonstrate that
The free emissions allowances currently granted to the CBAM is a measure relating to the conservation of
domestic producers by the EU through the ETS are argu- exhaustible natural resources—in this case, air at a livable
ably already illegal under WTO rules that limit the grant of temperature in a climate fit for human habitation. The EU
24
governmental subsidies where they distort global trade. can do so if it can prove that there is a “close and genuine
To date, no other WTO member has challenged this vulner- relationship” between the means used in the CBAM and the
able aspect of the ETS in WTO dispute settlement. With the end it seeks, and also prove that the restrictions on imported
CBAM, though, the potential legal inconsistency with the products are evenhanded in how the design of the measure
national treatment rule could be meliorated—although not imposes them.29 Toward this end, importantly, the CBAM
necessarily eliminated—if the EU offsets the full amount of will be made effective in conjunction with comparable
the free emissions allowances it currently gives to producers domestic measures.
of domestic products on the prices of the emission certifi- Must a measure of the type that is potentially entitled to a
cates required for the importation of like products. general exception be one that relates to the territorial juris-
diction of the WTO member applying that measure? Could
the EU apply a unilateral measure to remedy a perceived
Could the Carbon Border Adjustment health or environmental problem that is unrelated to the
Mechanism Be Excused by the territory of the EU? The WTO Appellate Body has not ruled
General WTO Exceptions for Health on the question of whether there is an implied jurisdictional
and Environmental Measures? limit to the application of unilateral measures affecting
Assuming the EU violates one or more of the these three trade in furtherance of the policy goals contained in the gen-
WTO rules, the legal question then becomes: Will the EU eral exceptions of what would otherwise be trade obliga-
violations be excused by one of the general exceptions tions.30 However, just as endangered sea turtles swim across
permitted under WTO rules for health and environmental national territorial borders (as noted in a previous WTO
25
measures? To be entitled to the benefit of a general excep- dispute), so too does air circulate across national borders.31
tion, the CBAM must be imposed for health or environmen- The extraterritorial application of the EU CBAM would
tal reasons. The EU has been careful in saying that the CBAM likely prove less significant in a WTO dispute than the
would be a climate measure motivated solely by climate question of how it is applied. For the EU will also have to
concerns relating to health and the environment. But these prove that CBAM has been applied in a manner justifying
EU statements, in and of themselves, have no legal signifi- its entitlement to one of the general exceptions. The CBAM
cance. What matters is the structure of the measure itself must not be “applied in a manner which would constitute a
and how it is applied. Upon scrutiny by WTO jurists in the means of arbitrary or unjustifiable discrimination between
4
countries where the same conditions prevail,” and it must suggested by the Democrats is also not law. Based on the
32
not be “a disguised restriction on international trade.” The extent of its climate actions so far, is the United States more
CBAM inspires a number of questions about whether it will deserving of an exemption by the EU than, say, China?
satisfy these additional legal requirements. And why is it not arbitrary or unjustifiable discrimina-
As to whether the CBAM will be “arbitrary or unjustifiable tion for the EU to be the sole judge of the sufficiency of the
discrimination,” a long string of WTO jurisprudence dating climate actions of other WTO members? Can the EU reach
back decades shows that a measure must be evenhanded so far under the WTO rules as to impose its standard on the
in its application to be entitled to one of the general excep- production processes of products made in other countries?
33
tions. Will the CBAM be evenhanded if the EU imposes its Certainly, multilateralism has already been tried by the EU
own climate standard on its trading partners without giving and the rest of the world on climate change, through three
them a chance to suggest changes in that standard or to long decades of tortuous global negotiations. WTO jurists
appeal the application of that standard to their products? It have also acknowledged that a WTO member can condition
will not be enough for the EU simply to explain its chosen access of the products of other WTO members to its domes-
standard to these affected countries; the EU must engage in tic market on whether those other members adopt or com-
the due process of a mutual dialogue with them before set- ply with a policy unilaterally prescribed by the importing
ting and applying the standard in a way that takes the views member. But would not WTO approval of the CBAM leave
of its trading partners into account. other WTO members free to impose their own standards,
Also, if the EU grants exceptions to the CBAM emissions and perhaps their own similar fees, on imported products
certificate requirements to some WTO members solely based from the EU based on global concerns other than carbon
on what the EU perceives as the sufficiency of their carbon emissions?
pricing and their other climate actions, will that discrimina- It must be remembered that WTO obligations are not
tion be arbitrary or unjustifiable? What is the proper mea- obligations to other countries or to individual traders; they
sure of such sufficiency? Is it whether another WTO member are obligations with respect to the treatment of individual
has enacted carbon pricing, whether it is keeping its prom- traded products. Thus, to prevent discrimination in the
ises of emissions-cutting under the Paris climate agreement, CBAM from being arbitrary or unjustifiable, it must be
whether it has pledged to increase those promised emis- founded on an assessment of the carbon emissions that
sions cuts, or something else? So far, the climate negotiators result from the production of individual products, and not
have been unable to agree on a single global standard for on a judgment about the adequacy of the overall emissions
calculating carbon and other greenhouse gas emissions. Is cuts that have been made or promised by the countries from
it arbitrary or unjustifiable discrimination if the EU imposes which those products originated. Emissions certificates
its own standard on other countries? must not be required for a product that was produced in a
The EU could grant exemptions from certificate payments climate-friendly way just because it originated in a WTO
for the least-developed countries that are WTO members. member country that has taken no meaningful action to
If enacted, this discrimination would not seem to be either reduce emissions.
arbitrary or unjustifiable. The least-developed countries are Lastly, as to any “disguised restriction on international
the poorest countries in the world. They have made the few- trade,” here, too, the legal answer will be found in the struc-
est carbon and other greenhouse gas emissions and yet are, ture and the design of the measure itself. As on the national
in many cases, suffering the most from the consequences of treatment issue, the greatest vulnerability for the EU would
the global extent of those emissions. be if it continued to grant free emissions allowances for
But what if the EU also decides to exempt products select domestic producers. To fulfill its WTO obligations, the
originating in the United States from the requirement to best course for the EU would be to resist domestic industry
purchase emissions certificates? The United States has not pressures and abolish these allowances. Keeping them as
adopted carbon pricing; President Joe Biden’s proposed they are would be a fatal legal mistake. Phasing them out
climate policies are not law yet, and the polluter import fee over time—even with the addition of purportedly equivalent
5
price offsets for certificates required of like imported prod- treaty must be asked and answered. And far better to ask
ucts—may, in the end, not be enough to survive legal scru- and answer them in negotiations between the EU and its
tiny in WTO dispute settlement. trading partners now—before the CBAM is applied—than
to wait and try to answer them amidst a global flurry of
similar actions and counteractions that will have severe
CONCLUSION trade consequences. Without revision and without careful
The EU’s CBAM would be the first climate-related trade application, the EU’s proposed CBAM may turn out to be
restriction. This proposed new European restriction will, inconsistent with fundamental WTO rules, and it may not
however, not be the last. Thus, these and other questions qualify for one of the general health or environmental excep-
about the lawfulness of such measures under the WTO tions permitted under the WTO treaty.
NOTES
1. “European Commission Launches Green Deal to Reset European Roundtable on Climate Change and Sustain-
Economic Growth for Carbon Neutrality,” International In- able Transition (2021), March 31, 2017, https://ercst.org/
stitute for Sustainable Development, December 19, 2019. wp-content/uploads/2021/03/20210317-CBAM-II_Report-I-
Sectors.pdf.
2. “2030 Climate Target Plan,” European Commission,
https://ec.europa.eu/clima/policies/eu-climate-action/2030_ 11. Nastassia Astrasheuskaya and Mehreen Khan, “Russian
ctp_en. Businesses Start Counting Cost of EU Border Carbon Tax,”
Financial Times, May 17, 2021; “EU to Take Special Approach
3. Nora Buli, Kate Abnett, and Susanna Twidale, “EU Carbon in Applying CBAM to Ukraine – Trade Representative,”
Price Hits Record 50 Euros per Tonne on Route to Climate Interfax-Ukraine, June 8, 2021; and Jung Suk-yee, “EU and
Target,” Reuters, May 4, 2021. South Korea Discussing Carbon Border Adjustment Mecha-
nism,” Business Korea, July 6, 2021.
4. Alex Clark, “The Fit for 55 Package: A Diplomatic Tight-
rope,” European Council on Foreign Relations, July 19, 2021; 12. Leslie Hook, “John Kerry Warns EU against Carbon Bor-
and “Carbon Border Adjustment Mechanism as Part of the der Tax,” Financial Times, March 12, 2021.
European Green Deal Before 2021-7,” European Parliament,
June 24, 2021. 13. James Bacchus, “Striking a Balance on Climate Change
and Global Trade,” The Hill, July 19, 2021.
5. Christiaan Hetzner and David Meyer, “Europe’s Manu-
facturers Fear Landmark Carbon Import Tax May Do More 14. Bacchus, “Striking a Balance on Climate Change and
Harm than Good,” Fortune, July 13, 2021. Global Trade.”
6. “Resolution of 10 March 2021 Towards a WTO- 15. “Canada Eyes CBAM Consultation as Budget Sets Out
Compatible EU Carbon Border Adjustment Mechanism,” More Stringent Climate Target,” Carbon Pulse, April 19, 2021.
2020/2043(INI), European Parliament, March 10, 2021.
16. General Agreement on Tariffs and Trade, Article I.
7. “EU Emissions Trading System (EU ETS),” European Com-
mission. 17. General Agreement on Tariffs and Trade, Article II.
8. “Resolution of 10 March 2021.” 18. General Agreement on Tariffs and Trade, Article III:4.
9. Joe Lo, “Emerging Economies Share ‘Grave Concern’ over 19. “China—Measures Affecting Imports of Automobile
EU Plans for a Carbon Border Tax,” Climate Home News, Parts,” Report of the Appellate Body, World Trade Organiza-
April 9, 2021. tion, WT/DS339/AB/R, WT/DS340/AB/R, WT/DS342/AB/R,
December 15, 2008, paras. 158, 161.
10. Andrei Marcu, Michael Mehling, and Aaron Cosbey,
“Border Carbon Adjustments in the EU: Sectoral Deep Dive,” 20. General Agreement on Tariffs and Trade, Article III:4.
6
21. “Emissions Trading System (EU ETS): Free Allocation,” Beef,” Report of the Appellate Body, World Trade Organi-
European Commission. zation, WT/DS161/AB/R, WTO/DS169/AB/R, December 11,
2000, par. 166; and “Brazil – Measures Affecting Imports
22. “Carbon Border Adjustment Mechanism: Questions and of Retreaded Tyres,” Report of the Appellate Body, World
Answers,” European Commission, July 14, 2021. Trade Organization, WTO/DS332/AB/R, December 3, 2007,
par. 170.
23. “United States—Standards for Reformulated and Con-
ventional Gasoline,” Report of the Panel, World Trade Orga- 29. “United States—Import Prohibition of Certain Shrimp
nization, WT/DS2/R, January 29, 1996, par. 6.10. and Shrimp Products,” Report of the Appellate Body, World
Trade Organization, WT/DS58/AB/R, October 12, 1998,
24. “Agreement on Subsidies and Countervailing Measures par. 136; and “United States—Standards for Reformulated
(‘SCM Agreement’),” World Trade Organization, LT/UR/A- and Conventional Gasoline,” par. 20.
1A/9.
30. “United States—Import Prohibition of Certain Shrimp
25. General Agreement on Tariffs and Trade, Article XX. and Shrimp Products,” par. 133.
26. General Agreement on Tariffs and Trade, Article XX(b). 31. “United States—Import Prohibition of Certain Shrimp
and Shrimp Products,” par. 133.
27. General Agreement on Tariffs and Trade, Article XX(g).
32. General Agreement on Tariffs and Trade, Article XX,
28. “European Communities—Measures Affecting Asbes- chapeau.
tos and Asbestos-Containing Products,” Report of the Ap-
pellate Body, World Trade Organization, WT/DS135/AB/R, 33. See especially “United States—Import Prohibition of
March 12, 2001, par. 168; “Korea—Various Measures on Certain Shrimp and Shrimp Products.”
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