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Implications of the EU’s “Carbon Border Tax” for the WTO and developing countries

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Several nations have implemented measures to reduce emissions, including carbon pricing, to reach their commitments under the Paris Agreement. Carbon pricing usually takes place in one of two ways. The first is Emission Trading Schemes (ETS), which set a limit on the amount of greenhouse gas emissions allowed in specific industries. The second is government-imposed carbon taxes, which are established by the government rather than by market forces.

Scope of Carbon Border Adjustment Mechanism 

CBAM will impose a “carbon price” on commodities imported from nations that do not have as strict carbon pricing policies as the EU. Only authorized declarants would be able to import such goods under the proposal, and they would be required to file CBAM statements annually representing the Greenhouse Gas Emissions embedded in the imported goods. These certificates would be priced in line with EU ETS allowances. Nations that can establish an equivalent carbon pricing mechanism can engage in agreements with the EU for exclusions from the CBAM.

CBAM and WTO

Members are prohibited from discriminating amongst their trading partners under Article I:1 of the General Agreement on Tariffs and Trade, 1994 (GATT). Goods having a lesser carbon impact are still “like items” and must be treated similarly.

If a country has made steps to cut carbon emissions but not in the way the EU prefers, they may be treated less favourably under CBAM. From the standpoint of WTO norms, this could raise more questions.

CBAM proposes that the number of CBAM certificates issued for imported items be reduced to the degree that free allowances are still supplied to EU domestic industry. A substantial number of industries previously covered by the EU’s ETS are being given free carbon emission allowances. Both of these issues violate the World Trade Organization’s (WTO) standards of fair and non-discriminatory trade.

Possible Justifications

Article XX may provide some rationale for CBAM’s proposal to treat items originating in various nations differently based on their carbon footprint. CBAM could be justified by the fact that it exempts actions from being considered violations if they are based on domestic policy purposes such as the protection of human, animal, and plant life.

According to Article XX of the CBAM, it should not be used as “a means of arbitrary or unjustified discrimination between countries where the same conditions prevail.”

The implications

A carbon border adjustment mechanism could exacerbate protectionism because border carbon adjustments are so new, there is no evidence to evaluate their performance, and no other country currently has a national equivalent. As manufacturers aim to pass on the “cost of compliance,” a CBAM mechanism affects the entire value chain, from logistics to sourcing quality control to raw material procurement, and eventually downstream and consumer industries.

There is a substantial concern that developing countries with low carbon emissions or pledges under the Paris Agreement, but weaker emission caps and tariffs, will be at a disadvantage in comparison to highly industrialized and developed countries. To avoid unilateralism, international cooperation will be critical. The Paris Agreement, which was based on voluntary commitments, could be undone if developed countries, such as the EU, can coerce other countries into taking similar steps.

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