The past few weeks have witnessed three important developments related to trade and climate change – the Intergovernmental Panel on Climate Change (IPCC) has once again underscored the dire reality the world can no longer wait to tackle the climate crisis.
The European Union (EU) has unveiled details of a Carbon Border Adjustment Mechanism (CBAM) to replace its current Emissions Trading System (ETS). In a recent report on CBAM, UNCTAD warned that India’s trade with the EU would be significantly affected by CBAM. Therefore, the EU CBAM deserves an analysis.
In order to level the playing field for its producers who must comply with strict national regulations in terms of reducing carbon emissions, the EU has been implementing its emissions trading system since 2005. ETS operates under a ‘cap and trade’ system, where a total limit (cap) is set for carbon emissions from industrial facilities in identified sectors. There is a fixed number of emission allowances within this cap, for which installations are not billed. A part of these allowances is free, that is to say that up to the free level, the installations are not invoiced for their emissions. Beyond the free tier, and up to the cap, facilities must pay for additional emissions. The ETS aims to gradually reduce the free allowances below the ceilings, in order to make EU production and manufacturing more carbon neutral.
Under the ETS, the responsibility for reducing carbon emissions lies with the EU domestic industry. However, the CBAM seeks to shift this burden to foreign entities that export to the EU. The implementation of the CBAM is proposed in two phases: the transition phase between 2023-2025 and the full implementation from 2026.
What is CBAM?
CBAM is supposed to be a tax on imports of certain predetermined carbon-intensive goods into the EU. Currently, it is proposed that this measure apply to the following products: cement, iron and steel, aluminum, fertilizer and electric power. The amount of the CBAM tax will be based on the integrated carbon emissions reported voluntarily by third country producers / exporters, which enter into a central EU database. The voluntary declaration would have to go through a complex verification process, before importation into the EU is authorized when the corresponding CBAM tax is imposed.
If a third country producer / exporter does not register with the CBAM system or is unable to provide data to verify the actual integrated emissions, then applying the default emissions calculation, the EU is likely to impose a high punitive carbon tax on imports from these countries. foreign producers. Indian producers / exporters could also be exposed to this high tax.
Many concerns arise from the design and proposed implementation of CBAM. First, compliance with this complex system will require considerable adjustment on the part of foreign producers / exporters. Registration with the EU central system will also increase compliance costs for them.
Second, the EU would unilaterally judge the national climate responses of each exporting country. As the EU considers its own system to adequately respond to the emissions crisis, this unilateral judgment of each exporting country’s national response to climate change may lead the EU to conclude that foreign products require taxation for them. emissions, while EU domestic producers do not.
Third, CBAM’s design suggests that with the exception of countries that participate in the ETS – Iceland, Lichtenstein, Norway and Switzerland – the EU is unlikely to recognize other countries’ carbon reduction rules. as equivalent to its own measurements. Therefore, the EU appears to be attempting to impose its climate-related measures in an extraterritorial and discriminatory manner.
Fourth, the EU claims that this measure complies with WTO rules. However, the requirements for registration with the CBAM system and the carbon pricing methodology appear to raise troubling concerns about the consistency of CBAM with WTO rules. To illustrate, as the CBAM is based on the carbon emissions embedded in imported products, potential discrimination may exist between products imported from different countries and between imported products and locally produced products. Such actions could violate WTO non-discrimination mandates.
In addition, the EU may find it difficult to justify CBAM by invoking exceptions to WTO rules aimed at conserving exhaustible natural resources or protecting human life and health. However, it is doubtful whether the CBAM meets the requirements that the measure must not be arbitrary or a disguised restriction on trade. If it does not meet these conditions, it will violate WTO rules.
Fifth, against the EU’s stated goal of encouraging international cooperation on emissions reduction, CBAM appears to be an attempt by the EU to impose extraterritorial application of its own emission reduction rules and standards. It would also go against the principle of common but differentiated responsibilities (CBDR) recognized by the UNFCCC.
CBDR is a principle of the UNFCCC that recognizes that while all states have a shared obligation to address climate change, different countries have different capacities and responsibilities to address these issues. As the CBAM tries to impose the European standard of emission reduction, it is likely that it violates the spirit of the CBDR.
Therefore, the fight against climate change requires constructive collaboration from the international community. The EU’s CBAM proposal in its current form raises important concerns from a WTO and environmental law perspective.
In addition, the UNCTAD report indicates that the impact of the CBAM on climate change would be limited – a drop of only 0.1% in global CO2 emissions. On the other hand, it will increase trade costs for developing countries including India. The EU must address these concerns, if CBAM is to be an effective response to climate change, which is also acceptable to other nations.
Das is Associate Lecturer, Jindal Global Law School; Nasution is Assistant Professor of Legal Practice at Jindal Global Law School. Opinions expressed are personal