Comment: The EU’s carbon border tax is a blow to climate justice. Here’s how to fix it

By Joel Trachtman and Dr Jan Yves Remy

November 15, 20237:24 AM ESTUpdated 15 days ago

Industry Insight from Ethical Corporation Magazine, a part of Thomson Reuters.

November 14 – On October 1, the European Union’s carbon border adjustment mechanism (CBAM) took effect in a transitional phase. Importers will be required to report relevant data to the EU but will not be required to pay the charge until January 1, 2026.

The CBAM is intended to apply to certain imports a carbon price equivalent to the internal EU regulatory price charged for carbon, through a border adjustment tax. The CBAM will initially apply to imports of carbon-intensive goods – such as cement, iron and steel, aluminium, fertilisers, electricity and hydrogen – production of which raises a perceived risk of shifting production (“leakage”) to other countries that do not impose a carbon price. The goal is to reduce carbon emissions while preserving EU competitiveness and in the longer term incentivising other countries to charge a carbon cost to their own producers.

The EU might well be commended for leading in regulation to reduce carbon emissions. Indeed, many in the EU would argue that it has acted unilaterally in response to the inability to negotiate multilaterally agreed carbon prices, or other measures to reduce emissions sufficiently to avoid catastrophic global warming.

However, CBAM has not garnered widespread support. In adopting a unilateral approach to regulating the problem, and failing to account for the differing circumstances of other countries, the CBAM has been criticised as an unfair, and worse, protectionist measure that offends core rules and principles of the multilateral trade system and has a disproportionately harmful effect on developing countries.

European Commission President Ursula von der Leyen presents a “communication” detailing the EU’s “Green Deal Industrial Plan”. The carbon border adjustment mechanism (CBAM) is part of the Green Deal.

While most of the CBAM will apply to more industrialised countries, such as Russia, China, the UK, and Norway, the countries expected to be most affected in relative terms are Mozambique, Bosnia and Herzegovina, Ukraine, Serbia, North Macedonia, Montenegro, Zimbabwe, Moldova and Albania. None of these other countries had significant input into the structure of the CBAM, yet they will be significantly affected. Indeed, when CBAM was under consideration, an exemption for least-developed countries and vulnerable economies was considered, but ultimately rejected.

Compliance with the CBAM regime will be costly: foreign producers will need to keep track of the emissions in their products by virtue of use of fossil fuels, and provide this information in verifiable form for the EU authorities. There are different ways of measuring embedded carbon, and no general agreement on a measurement protocol. Smaller countries may lack economies of scale, or regulatory capacities, necessary to satisfy compliance and certification requirements. Indeed, many in the EU would argue that it has acted unilaterally in response to the inability to negotiate multilaterally agreed carbon prices, or other measures to reduce emissions sufficiently to avoid catastrophic global warming.

Furthermore, the CBAM does not give credit to non-price methods of reducing emissions, such as the subsidies of the U.S. Inflation Reduction Act. An internationally agreed system of equivalence is needed to ensure appropriate respect for non-price means of reducing emissions.

States that export to the EU will have strong incentives to impose their own price-based measures in order to avoid transferring money to the EU: the CBAM is reduced by carbon costs charged in the exporting state. This structure might be viewed as coercive. By virtue of the size and importance of the EU market, unilateral EU regulation in this area, as in deforestation and other areas, sets the agenda for the world, and gives the EU a first-mover advantage. Firms that must comply with the EU rules lobby their governments to impose similar rules so that they do not have to contend with varying overlapping regulatory requirements. Indeed, Turkey has recently announced a move to impose carbon prices, in a kind of turbocharged “Brussels effect”.

Under CBAM, foreign producers will need to keep track of the fossil fuel emissions in their products and provide this information in verifiable form for the EU authorities.

Inclusive negotiations with other countries might have resulted in a better-tailored mechanism. The law of the World Trade Organization is uncertain in its application to this type of measure, but the most likely understanding would require that the CBAM not constitute “arbitrary or unjustifiable discrimination between countries where the same conditions prevail”.

This language, designed to ensure that the exercise of the right to regulate is not abused for protectionist purposes, has been interpreted to mean that states imposing these types of measures should consult with other affected WTO members, and that qualifying measures should not be used to coerce other states to change their policies.

The impact of CBAM will be felt most by developing countries, and in particular, the least developed and vulnerable ones. In May 2022 the European Parliament called for the EU to “provide financial support, at least equivalent in financial value to the revenues generated by the sale of CBAM certificates, to support least-developed countries’ efforts towards the decarbonisation of the manufacturing industries”, but concrete commitments have not been made to date.

Moreover, and in seeming contradiction, it appears that the EU has committed CBAM revenues to its own Innovation Fund. The transfer aspect of CBAM does not reduce leakage, nor does it help countries achieve their own emissions targets under their obligations under the Paris Agreement.

We recommend establishing a Global Sustainable Trade Fund, to be financed through carbon border adjustments, like CBAM, with the money allocated and distributed by independent organisations such as the World Bank, in cooperation with the International Trade Centre. This would help address the mitigation, adaptation and damage costs in the most affected and vulnerable countries, in line with their own development needs.

The CBAM might be considered a benevolent provocation, but the EU should not stop there. Rather, it should bring other countries to the table, in order to negotiate inclusively for a reasonable and effective means to cooperate to apply carbon prices to fight global warming, while respecting the situation of developing countries. More cooperative mechanisms are needed, and the international legal and organisational system must be adapted to respond more efficiently and effectively to these types of global problems.