In recent years, societies have become more conscious and have demanded politicians take legal and political action to slow down global warming. Various countries and regional blocks have adopted simple to complex regulations like banning plastic bags, single-use straws, and/or utensils, a Norwegian plan to prohibit sales of vehicles run by fossil fuels (established in 2021), the European Union Green Deal (established in 2019), and others.
Since the European Union signed the Green Deal, it has been at the forefront of climate change action. Its main goal is to end net greenhouse gas emissions by 2050. To reach this objective, the European Commission proposed in July 2021 a Carbon Border Adjustment Mechanism (CBAM) applied to specific sectors (cement, steel, aluminum, iron, fertilizers, and electricity) to reduce risks of carbon leakage. The proposal indicates a full implementation year of 2023.
The reason behind this is to mitigate the insufficient effort against climate change by non-EU countries to reduce their greenhouse gas emissions. It is important for the EU to level the playing field for industries that do comply with the objective to decarbonize the economy. The reality is, as quoted from the European Commission “the emissions embedded in the goods and services imported to the European Union have been rising and currently represent 20 percent of the European Union’s domestic CO2 emissions.”
The tangible efforts of the new law will be felt by way of carbon certificates purchased by importers. Just as European producers must pay a price for the CO2 generated, other countries would have to pay that same price when they export products to the EU, if they generate CO2. CBAM will offer an exception to these regulations for non-European countries already in compliance with the Emission Trading System (ETS), such as members of the European Free Trade Association (EFTA), Liechtenstein, and Switzerland.
What about the World Trade Organization (WTO) membership and Least Developed Countries (LDCs)?
As with any international organization, the WTO has rules and principles that must be followed by all members. According to some members, the CBAM does not comply with some of those principles:
– Most Favored Nation (MFN) is the first and most important article in the General Agreement on Tariffs and Trade (GATT) agreement which states, “countries cannot normally discriminate between their trading partners.” If one country grants special treatment (lower customs duty for example) to another, they must extend that treatment to all members of the WTO. An example of this item is the exemption granted to the European Free Trade Association (EFTA), Liechtenstein, and Switzerland mentioned above.
– National Treatment (GATT Art. 3) states that a country should be giving the same treatment to the goods of other nations as to one’s national goods.
– Tariff Binding means there should be no increase in tariffs that have already been agreed upon. Once contractually binding tariffs have come into effect, changes cannot be made without compensation to the affected parties.
– Quantitative Restrictions (GATT Art. 11) are “specific limits on the quantity or value of goods that can be imported (or exported) during a specific time period.”
The European Union’s response on the other hand could be holding up Art. XX (b) of the GATT agreement on health and environment. The EU could justify a violation of this magnitude by stating the proposal is a necessary measure for the protection of health as well as human, animal, or plant life.
There is a general concern coming from LDCs that this proposal can set an extra burden on trade. Many countries like India, South Africa, China, and Brazil (BASIC group) all have high numbers of exports to the EU and “have criticized the measure calling it a ‘green protectionism’ and for being inconsistent with the United Nations Framework Convention on Climate Change (UNFCCC) principle of ‘common but differentiated responsibilities and respective capabilities’” (CBDR).
CBAM implementation can have negative effects on these countries’ economies like the decline of exports and employment reduction. A United Nations Conference on Trade and Development (UNCTAD) report states, “developed countries do not suffer export declines because producers, as a whole, employ less carbon-intensive production methods in the targeted sectors than their developing country counterparts.” The same report also suggests that since CBAM will not have a great impact on CO2 reduction, the European Union should utilize some of the revenue to help modernize developing countries’ technology in sectors targeted by the proposal.
Tackling climate change involves great coordination and willpower from politicians across the globe to reverse decades of common, unethical practices in trade and industrialization. Although CBAM is a great idea to many, the proposal is still not supported by others who depend on free trade to sustain their economies. Transparency and open negotiations between the LDC Group and the European Union under the WTO framework are vital to keeping all members updated and have all interests reflected in the proposal. Although the WTO is a consensus-based organization and can make the decision process longer, it is still worth the wait in order to not have setbacks. At present, CBAM will be advancing given the support it has within the EU and it is, therefore, important that all members have a seat at the table to discuss ways its implementation or other interventions positively combat climate change.
