Exporting the European Green Deal: The WTO Compatibility of the EU’s Carbon Border Adjustment Mechanism
While environmental protectionism and trade law are often thought to be in conflict, the EU’s proposal for a climate border adjustment mechanism (CBAM) reflects a growing interest in using trade measures to combat climate change. Carbon border taxes, like CBAM, seek to address the issue of carbon leakage, which occurs when producers move to a third country with more lax
emissions standards. With a planned rollout date of October 2023, CBAM would apply only to an initial five sectors and become a component of the Emissions Trading System (ETS), EU’s domestic cap-and-trade scheme, which already sets a domestic price for carbon emissions. Producers would be able to deduct the cost of any carbon tax paid in the country of origin.
If implemented, CBAM would be the first measure of its kind, offering a novel opportunity to assess compatibility with WTO law and international environmental law. Concerns have been raised that the mechanism could violate World Trade Organization (WTO) law, specifically Articles I, III, and XX of the General Agreement on Tariffs and Trade of 1994 (GATT). In designing
a mechanism that is WTO compliant, the EU must strike a balance and ensure that it is not in violation of environmental law obligations, such as the principle of common but differentiated responsibilities (CBDR).
While the EU can make changes to the proposal to ensure better compliance, it is the WTO that has meaningful authority to better align its policies with environmental obligations. As the developments at the 2021 United Nations Climate Change Conference (COP26) have shown, there is growing consensus on the need for global carbon markets. The future of trade and climate is inherently intertwined, and the WTO objective of sustainable development cannot be achieved without evolving to meet the current threat of climate change.
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