The European Carbon Border Adjustment Mechanism and Its Compatibility with the WTO Legal Framework

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The European Carbon Border Adjustment

Mechanism and Its

Compatibility with the WTO Legal Framework

An Assessment of the Compatibility of the Proposed CBAM With the GATT 1994 and the TBT Agreement

Roberto Costanza

13319566

Master’s Thesis

LL.M. International and European Tax Law: International Trade and Investment Law

Thesis supervisor: Dr J.A.P. (Johanna) Lorenzo Word count: 12890

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2 Abstract

As part of the European Green Deal, which is aimed at supporting the EU in its ambitious climate goals, the European Commission has announced a legislative proposal for the introduction of a Carbon Border Adjustment Mechanism (CBAM). As a crucial element of the package of EU environmental policies that the EU seeks to introduce, the CBAM raises many questions in relation to the international trade obligations of the European Union.

The CBAM is primarily designed to promote an ambitious climate policy for the EU, but it is facing strong opposition from developing countries which are mass exporters of the sectoral products targeted under the measure and are likely to be the most impacted by its coverage.

The draft legislation has been a topical subject of debate and its compatibility under the WTO legal framework has been questioned by many WTO members, which claim that its objective is to improve domestic competitiveness at the expense of climate-policy effectiveness. Against this background, the present thesis will focus on the WTO provisions that are relevant in the assessment of the compatibility of the proposed CBAM with applicable WTO Agreements. It will analyse – also in light of relevant WTO case law – under which conditions the measure can be considered illegal or discriminatory under the WTO legal framework and whether the imposition of such a measure can be justified as a legitimate regulatory objective. In order to assess the WTO legality of the proposed CBAM, an analysis will be carried out in relation to the rules of conduct which can potentially be breached by the CBAM (in particular the non- discrimination standards captured in the GATT 1994). In addition, an assessment will be carried out concerning the rules and legal defences capable of providing a justification for the breach of norms related to the imposition of the CBAM (under GATT article XX) and the potential applicability of disciplines enshrined in the TBT Agreement.

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Table of Contents:

I. Introduction: ... 5

II. The European Green Deal... 7

III. EU ETS ... 9

a) Risk of Carbon Leakage? ... 10

IV. The Cross-Border Adjustment Mechanism ... 11

V. Interaction with GATT 1994 ... 14

a) Qualification Considerations under WTO Law ... 15

b) Application of the National Treatment Principle ... 17

i) Relevance of Process and Production Methods ... 19

c) Most-Favoured Nation Clause – GATT Article I ... 22

d) Possible Justifications – GATT Article XX ... 23

i) Article XX(b) ... 24

ii) Article XX(g) ... 25

iii) Chapeau Requirements ... 27

VI. CBAM under the TBT Agreement ... 28

a) Scope of Application and Potential Inclusion of the CBAM ... 30

b) Substantive Obligations and Compliance with TBT Agreement ... 32

VII. Conclusion ... 33

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LIST OF ABBREVIATIONS:

EGD: European Green Deal

CBAM: Cross Border Adjustment Mechanism

EU ETS: European Emission Trading System

WTO: World Trade Organization

GATT 1994: General Agreement on Tariffs and Trade

TBT: Technical Barriers to Trade Agreement

PPMs: Process and Production Methods

MFN: Most-Favoured Nations

TFEU: Treaty on the Functioning of the European Union

ISO: International Standardisation Organization

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5 I. Introduction:

In July 2021, the European Commission has proposed a Regulation1 for the introduction of a Carbon Border Adjustment Mechanism as part of the European Green Deal, in support of the EU’s climate targets.

European climate law is considered the centre of the European Green Deal and a foundational element of the latter Package relates to the Carbon Border Adjustment Mechanism (hereinafter

“CBAM”), a measure aimed at fostering EU’s increased ambitions in climate-related policies for the prevention of carbon leakage, which occurs through the relocation of carbon-intensive industries to jurisdictions with less stringent environmental-related regulations.

Within the various policy measures envisaged under the European Green Deal that are aimed at fostering European climate objectives, the CBAM is considered the most contentious in light of European international obligations.

The most recent details on the CBAM disclosed by the Commission reveal that the sectors in which it will be applicable are the most emission-intensive, such as the aluminium, fertilisers, cement, power, iron and steel sectors.2 In turn, the CBAM will affect the most reliant trading jurisdictions which export goods to the EU under the covered sectors.3

Against this background, since the disclosure of the details of the CBAM announced on July 14th 2021, several countries have shown their discontent with the latter. There have been many claims of WTO inconsistency and the measure will most likely be disputed before the WTO adjudication system, as many importers in the European Union heavily depend on energy- intensive industries. Several major global economies, including Russia, China, Turkey, the United Kingdom and India will be severely impacted by the CBAM and are likely to challenge the measure by claiming that it constitutes a unilateral measure that boosts protectionism and that does not effectively tackle climate change.4 Although it may take years before a WTO Panel reaches a conclusion on the matter,5 the countries affected may decide to retaliate, thus

1 Proposal for a Regulation of the European Parliament and of the Council establishing a carbon border adjustment mechanism [2021] 564. Available at: https://eur-lex.europa.eu/resource.html?uri=cellar:a95a4441-e558-11eb- a1a5-01aa75ed71a1.0001.02/DOC_1&format=PDF.

2EU Commission, ‘Carbon-Border Adjustment Mechanism: Questions and Answers (2021). Available at:

https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_366

3 See, inter alia¸ China as the one of the largest importer of aluminium within the EU and the impact that the CBAM would have on its imports charges. ‘European Steel in figures’ (EUROFER 2020) Available at:

https://www.eurofer.eu/assets/Uploads/European-Steel-in-Figures-2020.pdf Accessed 29 July 2022

4 Gary Hufbauer et al., “Can Eu Carbon Border Adjustment Measures Propel WTO Climate Talks?” (2021) Peterson Institute for International Economics 21, p.8.

5 It is important to note that the Appellate Body is currently paralysed, hence it cannot hear new appeals against panel reports

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creating a risk of penalty tariffs for EU exporters.6 Hence, its compatibility with the legal framework established under relevant WTO Agreements deserves careful scrutiny.

The present thesis will try to identify the possible WTO claims that can arise from the introduction of the CBAM , in light of the norms enshrined in both the GATT 1994 and the Technical Barriers to Trade (TBT) Agreement.

Accordingly, the present paper aims at answering the following research question:

To what extent can a carbon border adjustment mechanism (CBAM) introduced as part of the EU Green Deal be considered compatible with relevant WTO provisions?

The paper is divided into seven main sections which will eventually answer the research question. In order to pursue this goal, the paper will also consider sub questions.

Firstly, the paper will present – in section II – contextual information on the EU Green Deal as the foundational element of the carbon border adjustment mechanism proposal.

The focus of the paper will then shift – in section III – to the current mechanism in place within the EU to “impose a price” on carbon emission: the EU Emission Trading System, whose effective functioning is contingent on the avoidance of carbon leakage, which drives companies located in the EU to move carbon-intensive production in countries where there are no comparable environmental-related policies in place.

The main features of the proposed CBAM, including the legal basis for its adoption, the rationale behind its implementation, and the possible options through which it could be implemented will be discussed in section IV.

Building upon the information provided in the fourth section, the interrelationship of the proposed CBAM with the disciplines imposed under the GATT 1994 will be assessed in section V. In this context, the subsections will provide an extensive overview of the qualification of the measure under the legal framework of the GATT 1994, as well as its potential compatibility with the national treatment principle and the most-favoured nations clause. The analysis will be complemented by an evaluation of the potential applicability of relevant justification grounds under Article XX of the GATT 1994, namely the protection of human, animal or plant health and the conservation of exhaustible natural resources, as well as the requirements imposed under the chapeau of Article XX. The above analysis will demonstrate that both the

6 Gary Hufbauer et al., “Can Eu Carbon Border Adjustment Measures Propel WTO Climate Talks?” (2021) Peterson Institute for International Economics 21, p.8.

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national treatment and the most-favoured nations principle could be relevant for the CBAM, and the specific design and implementation of the measure will be decisive for its compliance with the latter principles. Furthermore, if a breach of one (or both) of the latter non- discrimination clauses is established, it will be concluded that the justifications provided in Article XX could be successfully invoked by the European Union.

The paper will then devote attention to the potential applicability of the TBT Agreement on the proposed CBAM, providing an overview on the manner in which it can be construed so as to be considered a standard or a technical regulation for the purposes of the latter Agreement. In this context, the (additional) substantive obligations in the TBT Agreement will be discussed and applied to the CBAM.

Finally, the conclusion of this paper will build upon the information postulated in the previous sections, in order to answer to the main research question, while offering a full picture on the possible WTO claims that can arise in relation to the CBAM.

The thesis will be the result of a doctrinal and evaluative exercise, which is fundamental in order to capture the mechanism of the research question.

A doctrinal methodology will be applied when assessing the proposed CBAM and the WTO legislation against which it will be weighed (i.e. GATT 1994 and TBT Agreement) and an evaluative methodology will be employed when considering the probability of the measure being considered compliant with WTO legislation (also in light of the available case-law).

Throughout the essay, attention will be devoted to the requirements of relevant provisions included in both the GATT and the TBT Agreement. Moreover, the resort to primary sources is enriched by secondary sources: recent works of experts in the field of international trade law will be considered in order to substantiate the arguments presented.

II. The European Green Deal

In December 2019, the European Commission has put forward the European Green Deal, designed as a package of measures intended to significantly change the European governance, economy and environment. The ambitious programme of work for the newly appointed Commission – although being overshadowed by the corona-crisis7 – is considered ‘this generation’s defining project for the European Union’.8 The latter initiative constitutes a

7 Ludwig Kramer, “Planning for Climate and the Environment: the EU Green Deal”, Journal for European Environmental and Planning Law, 17(3), p.268.

8 Annette Bongardt, Francisco Torres, “The European Green Deal: More than an Exit Strategy to the Pandemic Crisis, A Building Block of a Sustainable European Economic Model 60(1) Wiley Online Library, p.202.

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commitment to address the issue of climate change and envisages several environmental- related legislative measures. The Commission – in its Communication to the other bodies of the European Union – declared that the EU Green Deal intends to respond to these challenges through a growth strategy whose aim is to achieve no net emission of greenhouse gases in 2050 through the ‘EU collective ability to transform its economy and society to put it in a more sustainable path’.9 Furthermore, the measures envisaged under the EGD range across eight policy areas, comprising biodiversity, sustainable food systems, agriculture, clean energy, sustainable industry, building and renovating, sustainable mobility, the elimination of pollution and climate action.10 Building on the aim to achieve net-zero emissions by proposing specific strategies that can curb emissions across all sectors of the European economy, two other objectives are envisaged under the EGD. The first one relates to the plan to render growth independent from resource exploitation. In this context, although the territory of the European Union has witnessed a reduction in emissions in the last decades, it remains one of the major contributors of resource consumption on the globe.11 The commitments undertaken under the negotiations coincide with the need for restoring momentum in European Integration and a strong change in policy direction towards a sustainable European single market12. Through the EGD, European climate regulation turns the political ambition of reaching climate neutrality by 2050 into a legal obligation for the European Union. As a result of the adoption of legislative acts under this project, the Member States of the EU commit to decreasing gas emissions in the EU by at least 55% by 2030 (as compared to 1990 levels), which calls for a profound transformation of both the European economy and society. Given its ambitious goals, the EU Green Deal has the potential to constitute a building block to the European economic model and another qualitative change in European integration.13 By drawing on an holistic sustainability objective and carbon emission targets, the EGD can become a paradigm change

9 European Commission, Communication From the Commission to the European Parliament, the European Council, the Council. the European Economic and Social Committee and the Committee of the Regions, The European Green Deal COM(2019) 640 final, p. 2. Available at: https://ec.europa.eu/growth/single-market_it.

10 Ibid.

11 Teresa Belardo, “What You Need to Know About the European Green Deal – and What Comes Next” (2021) World Economic Forum, available at:https://www.weforum.org/agenda/2021/07/what-you-need-to-know-about- the-european-green-deal-and-what-comes

next/#:~:text=What%20you%20need%20to%20know,man%20on%20the%20moon%20moment.%E2%80%9D

&text=The%20European%20Green%20Deal%20is,no%20one%20is%20left%20behind.

12 The European Single Market provides for the “four freedoms”, i.e. the free movement of people, goods, services and capital, as enshrined in the European Union’s treaties. For more information, visit:

https://ec.europa.eu/growth/single-market_it.

13 Ibid, p.171.

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in the European economy, although some of its components, including the CBAM, are yet to be declared compatible with the Union’s international obligations.

III. EU ETS

The European Emission Trading System (“EU ETS) is considered the world’s biggest greenhouse gas trading programme. Its origin dates back to 2005 and it constitutes a cornerstone of the European legislative initiatives aimed at tackling global warming and CO2 emissions. It includes 1,500 participating installations spread across the 27 Member States of the EU and its objectives were aligned with the Kyoto targets. According to the Commission, is it estimated that the sources to which the trading scheme applies account for 30% of the total European greenhouse gas emissions.14 The EU ETS is construed as a ‘regulatory market’, as policymakers have the competence not only to establish the system, but to make decisions on how it functions and how it can be changed over time.15

The EU ET works through a ‘cap and trade’ system, whereby the total volume of greenhouse gases that can be emitted by power plants, industry factories and by the aviation sector are limited by a number of emission allowances. 16 Each cap allowance (also known as ‘pollution permit’) represents one tonne of CO2 equivalent emissions. Companies are able to obtain these permits in three ways. Firstly, they can purchase them through auctions held by the European Energy Exchange (whose profits flow directly to the EU Member States according to a predefined division key.17 Secondly, the companies operating in the industries covered by the system can receive free allowances if they satisfy certain criteria (e.g. there is a risk of shift of production abroad or for electricity production in lower-income Member States).18 Finally, emission allowances can be purchased on the open market via several trading platforms which enable ETS operators to trade permits between each other.19

14 European Commission (2005) EU Action against climate change: EU emissions trading—an open scheme

promoting global innovation. European Commission, Available at:

https://ec.europa.eu/environment/pdfs/2007/pub-2007-015-en.pdf

15 LIFE ETX (2021) EU ETS 101 – A beginner’s guide to the EU’s Emissions Trading System, p. 11. Available at: https://carbonmarketwatch.org/wp-content/uploads/2022/03/CMW_EU_ETS_101_guide.pdf

16 European Commission, ‘Emission Cap and Allowances’. Available at: https://ec.europa.eu/clima/eu-action/eu- emissions-trading-system-eu-ets/emissions-cap-and-allowances_en.

17 LIFE ETX (2021) EU ETS 101 – A beginner’s guide to the EU’s Emissions Trading System, p. 7. Available at:

https://carbonmarketwatch.org/wp-content/uploads/2022/03/CMW_EU_ETS_101_guide.pdf.

18 Ibid, p.7.

19 LIFE ETX (2021) EU ETS 101 – A beginner’s guide to the EU’s Emissions Trading System, p. 7. Available at:

https://carbonmarketwatch.org/wp-content/uploads/2022/03/CMW_EU_ETS_101_guide.pdf.

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10 a) Risk of Carbon Leakage?

In the period ranging between 1990 and 2018, the European Union has reduced its greenhouse gas emission by 23.2%, while European contribution to global carbon emissions have decreased from 15% to 8%.20 As the EU has introduced stricter emissions reduction measures on its industries (see EU ETS above), EU industries will be in competition with competitors incorporated in jurisdictions with less stringent environmental policies.21 Environmentally motivated legislations, in the form unilateral measures, significantly modify the relative competitiveness of domestic producers against competitors established in territories which do not have similar mechanisms in place.22 In this context, carbon leakage relates to the risk that companies located in the EU will move carbon-intensive production in different countries in order to reap the economic benefits of less rigorous environmental regulations.23 Under certain circumstances, carbon leakage has the potential to nullify the (environmental) contribution of unilateral measures, since losses in output, employment and welfare can occur in the region implementing the policy.24 It is important to note that the overall cap within the EU ETS is enforced by limiting the supply of total allowances over time: as the ceiling of permits is decreased, the allowances become increasingly scarce and more expensive, thereby increasing the chances of European companies competing at the international level shifting their production plants and investments to foreign jurisdictions where less demanding environmental policies apply.25 Consequently, although emissions within the EU may gradually decrease, global emission may linger or may even increase over time.26

20 European Environment Agency, ‘EU Greenhouse Gas Emissions Kept Decreasing in 2018, Largest Reductions in Energy Sector (2020) available at: https://www.eea.europa.eu/highlights/eu-greenhouse-gas- emissions-

kept#:~:text=The%20European%20Union%20(EU)%20cut,from%2015%20%25%20to%208%20%25.

21 Cameron et al. “The European Green Deal: Context, Challenges and Opportunities for South African SMEs Operating in the Green Economy. Pretoria. South Africa” (2021) Trade and Industrial Policy Strategies, p.24. , available at: https://www.green-cape.co.za/assets/The-European-Green-Deal-Context-challenges-and- opportunities-for-South-African-SMEs-operating-in-the-green-economy-October-2021.pdf

22 Helene Naegele, Aleksandar Zaklan, ‘Does the EU ETS Cause Carbon Leakage in European Manufacturing?’

(2019) Journal of Environmental Economics and Management 93(1), p. 138.

23 EU Commission, “Carbon Border Adjustment Mechanism: Questions and Answers”. Available at:

https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3661

24 Ibid.

25 LIFE ETX (2021) EU ETS 101 – “A beginner’s guide to the EU’s Emissions Trading System”, p. 24.. Available at: https://carbonmarketwatch.org/wp-content/uploads/2022/03/CMW_EU_ETS_101_guide.pdf Last Accessed May 11, 2022.

26 EU Commission, ‘Carbon Leakage’. Available at:

https://ec.europa.eu/clima/policies/ets/allowances/leakage_en#:~:text=Carbon%20leakage%20refers%20to%20t he,increase%20in%20their%20total%20emissions

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On the basis of the aforementioned, the EU identified carbon leakage risks in relation to the threat of shift of production abroad or by the replacement by more carbon-intensive imports.

Carbon leakage is currently addressed either through the free allocation of allowances within the EU ETS or with the compensation for energy intensive industries directly affected by higher electricity costs. Although recent studies have suggested that carbon leakage in the context of the EU ETS has not materialized yet27, the studies relate to a period with low carbon price and anti-leakage measures in place (such as the granting of free emission permits for certain sectors). Nevertheless, the allowances, as outlined above, will be gradually phased out and the threat of carbon leakage acknowledged by the Commission focuses on ex-ante simulations which find higher probabilities for the occurrence of the phenomenon.28 Accordingly, the Commission had decided to go a step further through the introduction of the Cross-Border Adjustment Mechanism that will require importers to be subject to similar carbon pricing mechanisms as those currently in force within the EU, so as to not undermine the effectiveness of EU’s emission mitigation policies. The foundational elements, the legal basis and the main features of the proposed CBAM will be analysed in the following section, in order to give a background understanding on the mechanism. The analysis will then focus on the interrelationship and compatibility of the measure with relevant WTO Agreements.

IV. The Cross-Border Adjustment Mechanism

A foundational element of the range of climate and environmental policies advanced under the EU Green Deal is the CBAM, designed as a policy safeguard against emissions leakage, i.e.

the relocation of emitting activities from the European Union to third countries in response to European climate policy legislative measures.29 The proposal has been mandated by the European Council in December 2020. The latter body has advocated for a carbon border adjustment mechanism that can ensure the environmental integrity of EU policies and the avoidance of carbon leakage.30 The CBAM, as proposed by the Commission, will be implemented through one of the following four measures: an extension of the EU’s ETS on

27 see, inter alia, Yamano, N. and J. Guilhoto (2020), "CO2 emissions embodied in international trade and domestic final demand: Methodology and results using the OECD Inter-Country Input-Output Database", OECD Science, Technology and Industry Working Papers, No. 2020/11, OECD Publishing, Paris.

28 Ibid.

29 Andrei Marcu, Michael Mehling and Aaron Cosbey, “CBAM for the EU: A Policy Proposal” (ERCST - Roundtable on Climate Change and Sustainable Transition 2021). p.4

30 Proposal for a Regulation of the European Parliament and of the Council establishing a Carbon Border

Adjustment Mechanism COM (2021) 564. Available at: https://eur-

lex.europa.eu/resource.html?uri=cellar:a95a4441-e558-11eb-a1a5- 01aa75ed71a1.0001.02/DOC_1&format=PDF.

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imports, an import charge imposed on carbon-intensive products, a requirement for importers to purchase EU emissions allowances or the establishment of a levy applied at the border31. The Commission has however made clear that the option that possesses the most benefits in relation to effectiveness, fair and equal treatment of import, WTO-compatibility and correlation to the EU ETS is the introduction of a CBAM on selected products in the form of certificates based on actual emission.32

The CBAM will be designed as an instrument that has the capacity to replace free allowances under the EU ETS by 2035 and is regarded as a regulatory tool to place EU companies on a level-playing field with foreign producers. Furthermore, it is aimed at leading to a full internalisation of the costs of global warming into economic decisions in the sectors concerned.33.

The legal basis of the proposed mechanism is to be found in articles 191 and 193 of the Treaty on the Functioning of the European Union (hereinafter “TFEU”). The latter article states that Union policy on the environment shall contribute to the pursuit of a number of objectives, including the preservation and protection of the quality of the environment and the promotion of measures at the international level to deal with worldwide environment problems, in particular climate change.34 On the other hand, article 191 acknowledges that any protective measure adopted through it ‘shall not prevent any Member State from maintaining or introducing more stringent protective measures’35 Furthermore, in order for measures introduced at the European level to be considered lawful, the principle of proportionality needs to be respected by European bodies, i.e. the action of the EU must be limited to what is necessary to achieve the objectives of the Treaties. Accordingly, the content and the form of the measure envisaged must be in line with the aim pursued. Against this background, the Commission has emphasized that the proposal is dictated by the need to address carbon leakage

31 Andrei Marcu, Michael Mehling and Aaron Cosbey, “CBAM for the EU: A Policy Proposal” (ERCST - Roundtable on Climate Change and Sustainable Transition 2021). p.4

32 Proposal for a Regulation of the European Parliament and of the Council establishing a Carbon Border Adjustment Mechanism COM (2021) 564, p.9. Available at: https://eur-

lex.europa.eu/resource.html?uri=cellar:a95a4441-e558-11eb-a1a5- 01aa75ed71a1.0001.02/DOC_1&format=PDF.

33 Alexandra Dumitru et al., ‘The Carbon Border Adjustment Mechanism Explained’, Rabobank Economic Research (2021). Available at: https://economics.rabobank.com/publications/2021/july/cbam-carbon-border- adjustment-mechanism-eu-explained/.

34European Union, Consolidated version of the Treaty on the Functioning of the European Union, 13 December 2007, 2008/C 115/01, Article 191.

35 European Union, Consolidated version of the Treaty on the Functioning of the European Union, 13 December 2007, 2008/C 115/01, Article 193.

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and by climate change considerations through the reduction of GHG emissions both within the Union and on a global level.36

Although the ambition of the proposal is broadly recognized, whether the risk of carbon leakage deriving from environmental policies is substantial is a hotly contested issues, as is the appropriates and legality of the EU CBAM as a whole.37 As the Commission has envisaged under the current proposals, the CBAM will function in parallel with the EU ETS, in order to complement it in relation to imported goods. The intention is to gradually replace the existing EU mechanisms to prevent the risk of carbon leakage and the free allocation of EU ETS allowances.38As environmental ambitions in other jurisdictions across the globe continue to differ, the carbon border adjustment mechanism will allegedly reduce the risk of carbon leakage and ensure that the price of selected imported products reflect their carbon content.39 Furthermore, on numerous occasions the Commission has clearly affirmed that the measure will be designed to comply with World Trade Organization disciplines and with other international obligations of the EU.40 However, as a trade measures, the EU CBAM is likely be challenged by a WTO member under its dispute settlement mechanism. Although it is considered simpler to ensure similar treatment between European and foreign-based enterprises by basing carbon equalization measures on allowances,41 when environmental concerns are addressed through a tax on imports, the determination of the value of the tax that would result in similar treatment is more problematic.42 Many authors corroborate this finding and consider a CBAM – applied in conjunction with domestic emission trading schemes to be incompatible with WTO rules.43 Nevertheless, analyses conducted by experts in the field44, including a report

36 Proposal for a Regulation of the European Parliament and of the Council establishing a Carbon Border Adjustment Mechanism COM (2021) 564,p.5. Available at: https://eur- lex.europa.eu/resource.html?uri=cellar:a95a4441-e558-11eb-a1a5-

01aa75ed71a1.0001.02/DOC_1&format=PDF.

37 Markkanen, S. et al. “On the Borderline: the EU CBAM and its place in the world of trade” (2021) Cambridge Institute for Sustainability Leadership, p.2.

38 European Commission, ‘Fir for 55 Package Proposal (CBAM, ETD and SCF) Progress Report 14574/21, p. 5.

Available at: https://data.consilium.europa.eu/doc/document/ST-14574-2021-INIT/en/pdf.

39 European Commission, Communication From the Commission to the European Parliament, the European Council, the Council. the European Economic and Social Committee and the Committee of the Regions, The European Green Deal COM(2019) 640 final p. 2. Available at: https://ec.europa.eu/growth/single-market_it.

40 Ibid.

41 Stéphanie Monjon & Philippe Quirion (2011) A border adjustment for the EU ETS: reconciling WTO rules and capacity to tackle carbon leakage, Climate Policy, 11(5) , p. 1215.

42 Ibid.

43 Ibid, p. 1214.

44 see, inter alia, Ismer, R., Neuhoff, K. “Border tax adjustment: a feasible way to support stringent emission trading” (2007) European Journal of Law and Economics 24.

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drafted by the WTO/UNEP45, questioned the validity of these arguments and have concluded that – under specific circumstances – the mechanism can be considered WTO-compatible. The following sections will shed light on the relationship between the proposed CBAM (in the shape envisaged under the proposed Regulation of the EU Commission46) and the relevant provisions of the WTO Agreements.

V. Interaction with GATT 1994

The proposed CBAM is considered as highly intertwined with existing international agreement.

Most notably, it will directly affect the applicability of the Agreements pertaining to the World Trade Organization (hereinafter ‘WTO’), which creates an international legal framework for the 164 Member States parties to it. These Agreements cover goods, services, intellectual property and other issues that impact the world of trade. The tentative conclusion from the legal analysis of the CBAM suggests that the proposed EU CBAM would, prima facie, be treated as a unilateral measures imposed by the European Union. Accordingly, at the level of rules of conduct, it could be regarded either as an internal tax or a regulation adjusting the effects of another regulation, as it seeks to complement the existing European Emission Trading System (outlined in section III). Under the regime of the General Agreement on Tariffs and Trade (hereinafter “GATT”) – which constitutes the most prominent legal agreement of the WTO and aims at minimizing barriers to international trade by eliminating quotas, tariffs and subsidies while preserving significant regulations – different provisions need to be taken into account.

This is due to the fact that different norms apply on the basis of the qualification of the mechanism which the Commission seeks to introduce. Firstly, for each product imported within the EU, a relevant tariff binding is applicable, imposing a maximum rate of import duties or tariffs (in accordance with GATT Article II). A border tax adjustment such as the one proposed under the CBAM could be allowed by GATT Article II:2 if the EU ETS is construed as an import ‘charge equivalent to an internal tax’ and if it is not applied ‘in excess’ of the internal

45 WTO/UNEP, Trade and Climate Change, Report by the United Nations Environment Programme and the World Trade Organization (2009) World Trade Organization Publications, Geneva.

46 Proposal for a Regulation of the European Parliament and of the Council establishing a Carbon Border Adjustment Mechanism COM (2021) 564, p.9. Available at: https://eur-

lex.europa.eu/resource.html?uri=cellar:a95a4441-e558-11eb-a1a5- 01aa75ed71a1.0001.02/DOC_1&format=PDF.

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charges imposed on the ‘like’ domestic products. Furthermore, it must not afford protection to domestic production, as discussed below (under Chapter V).

In addition, Article III provides for national treatment principle, which imposes a prohibition on discrimination (both de jure and de facto) for imported products when compared to EU products. To the extent that the CBAM is operated through the imposition of a payment on imports calculated against the EU ETS allowance payments, the EU must ensure a ‘level- playing field’ for imported products. Furthermore, irrespective of the classification of the border adjustment, the measure cannot discriminate between like products imported from different countries, i.e. each trading party within the WTO must nominally receive equal trade advantages as the ‘most favoured nation’ by the country granting such treatment, as envisaged under GATT Article I.

The potential qualification of the EU ETS, and the tentative compatibility of the EU CBAM with the abovementioned articles will be analysed in the following sections.

a) Qualification Considerations under WTO Law

The first question that arises when gauging the CBAM against the disciplines enshrined in the GATT Agreement concerns the applicability of GATT articles II and III. Accordingly, the qualification of the EU ETS, against which the adjustment measure is applied in respect of the carbon emitted during the production of a product, is of pivotal importance. Under the legal framework of the WTO, for GATT articles II and III to apply in relation to the proposed CBAM, the EU ETS must be considered as:

a) an ‘internal tax or other internal charge of any kind (…) applied, directly or indirectly to products47; or

b) a law, regulation or requirement ‘affecting the internal sale, offering for sale, purchase, transportation, distribution or use’.48

Therefore, whether an EU carbon measure can be adjusted on imports depends on whether the measure meets the criteria set out in the WTO provisions that would permit for a border adjustment.

47 GATT 1994:General Agreement on Tariffs and Trade 1994, Apr. 15, 1994, Marrakesh Agreement

Establishing the World Trade Organization, Annex 1A, 1867 U.N.T.S. 187, 33 I.L.M. 1153 (1994), article III:2.

48 Ibid, article III:4.

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Before delving into the substantive assessment of the requirements enshrined the relevant GATT articles and their relationship with the proposed CBAM, it is essential to acknowledge that the qualification of a certain measure within the European legal order is not necessarily consistent with the qualification under international norms.49 What constitutes a ‘tax’ under EU law or from an economic standpoint, does not automatically amount to a ‘tax’ under the relevant WTO Agreements. This stems from the fact that under WTO law the economic impact of a measure is of pivotal importance for qualification as an internal tax or charge. The European Court of Justice (hereinafter “ECJ”) has clarified – in the case Air Transport Association of America v. Secretary of State for Energy and Climate Change – that the EU ETS (in the context of the aviation sector) does not constitute a tax for two reasons.

Firstly, airlines do not have to purchase allowances corresponding to the full amount of emissions. Secondly, the price of allowances corresponding to fuel consumption are not explicitly known at the time of undertaking the flights.50 Furthermore, the ECJ has stressed, when assessing the legality of a Swedish levy on fuel consumption, that the latter measure were to be regarded as a tax if there is ‘direct and inseverable link’ between fuel consumption and the polluting substances covered by the tax.51

On the other hand, WTO jurisprudence has made a clear distinction between direct taxes (i.e.

taxes applied on products) and indirect taxes (i.e. taxes applied on producers). For a domestic tax or regulation is sufficiently product related, it can be adjusted on imports in order to ensure a level-playing field and equal competition between domestic and imported products. If, however, such tax or regulation is aimed at targeting producers instead of products, it cannot be adjusted on imported products.52 A 1970 Working Party Report on Border Tax Adjustment has corroborated the finding that only indirect taxes levied on products can be adjusted at the border under the WTO legal framework, while the same reasoning does not apply for direct taxes levied on producers.53

49 Anna Dias et al., ‘EU Border Carbon Adjustment and the WTO: Hand in Hand Towards Tackling Climate Change’ (2020) Global Trade and Customs Journal 15(1), p.16.

50 Case C-366/10 Air Transport Association of America and Others, [2011] ECLI:EU:C:2011:864, para. 143.

51 Ibid.

52 European Parliament, ‘Trade Related Aspects of a Carbon Border Adjustment Mechanism: A Legal Assessment’ (2020), p.8 Available at:

https://www.europarl.europa.eu/cmsdata/210514/EXPO_BRI(2020)603502_EN.pdf.

53 World Trade Organization, Working Party Report on Border Tax Adjustments (1970), 16S/97,para. 14.

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Therefore, provided that the EU ETS scheme qualifies as a charge equivalent to tax (imposed indirectly) on the product, a border carbon adjustment may – as it will be analysed below – be allowed for taxes in respect of the carbon content embedded in imported products.54

b) Application of the National Treatment Principle

Internal taxes in the GATT Agreements are covered by article II:2 and by article III:2. The former prescribes that ‘nothing (…) shall prevent any contracting party from imposing at any time on the importation of any product a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of article III in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part’.55 Article III:2, in turn, stipulates that: ‘the products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products (…) and that are not imposed on imported or domestic products in a manner that affords protection to domestic products.

On the basis of the above assessment of the relevant provisions in respect of national treatment obligations, carbon equalization measures imposed on imports at the border (such as the proposed CBAM) can be compliant with WTO non-discrimination rules if the measure does not impose a heavier burden on imported products than on ‘like’ domestic products and if does not afford protection to domestic products. Hence, once the products at issue are found to be

‘like products’, taxes on imports even slightly in excess of like domestic products are found to be in violation of GATT article III:2.56 The same finding was corroborated by a decision of the Appellate Body in India – Additional Duties on Imports, where it was established that the requirement of consistency with article III:2 is to be read in conjunction with the requirement of article II:2(a), whereby a charge on imports and an internal tax need to be equivalent.57

54 Anna Dias et al., ‘EU Border Carbon Adjustment and the WTO: Hand in Hand Towards Tackling Climate Change’ (2020) Global Trade and Customs Journal 15(1), p.16.

55 GATT 1994:General Agreement on Tariffs and Trade 1994, Apr. 15, 1994, Marrakesh Agreement

Establishing the World Trade Organization, Annex 1A, 1867 U.N.T.S. 187, 33 I.L.M. 1153 (1994), article II:2.

56 Stéphanie Monjon & Philippe Quirion (2011) A border adjustment for the EU ETS: reconciling WTO rules and capacity to tackle carbon leakage, Climate Policy, 11:5, 1214.

57WTO, India – Additional and Extra-Dimensional Duties on Imports from the United States (India – Additional Duties on Imports), Report of the Appellate Body, (30 Oct. 2008) WT/DS360/AB/R, para. 180.

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Against this background, a CBAM imposed at the European level can be considered compatible with article III:2 if it result in a charge (on imported products) that corresponds with an internal tax or charge on domestic like products.58 If, however, like goods produced within the jurisdiction of the EU are not subject to an equivalent charge, it will create a protectionist effect and will be prohibited by Article III.

Under the proposed CBAM, the Commission envisaged various options through which imports would be subject to carbon pricing. If the CBAM is implemented as a carbon tax on imports imposed at the border, the tax on imports need to be equivalent (hence, it needs to relate to the same amount) as the price imposed on domestic products under the EU ETS. This approach would guarantee that the carbon tax imposed on imported products corresponds to the carbon price imposed on domestic production. Nevertheless,, the CBAM option that is considered more likely to be in conformity with GATT articles II:2 and III:2 is a carbon equalization measure calculated on the basis of allowances59, which has been considered by the EU Commission as being in compliance with WTO rules and additional international obligations of the EU.60

On the contrary, if the EU Commission endorses the proposal of an import tax, the similar treatment between imported and ‘like’ domestic products would be more difficult to ensure, as the determination of the value of the tax imposed would be challenging to align with the charges imposed under the EU ETS for domestic products. As the border adjustment mechanism entails an estimate of the content of carbon emission of imports, imposing an obligation to calculate carbon emissions for foreign producers wishing to import their good within the European Union is considered to be problematic.61 An alternative solution lies in the extension of product-specific benchmarks within the EU ETS system, which are set for different industry products, which can prove to be a suitable solution in calculating the quantity of carbon emissions attributable to imported product.62 Nevertheless, in order to ensure equal treatment and to not discriminate against imported products, this system should be complemented by granting independent, third party verification that can assess whether imported products’

58 Rafael Leal-Arcas et al., “A Legal Exploration of the European Union’s Carbon Border Adjustment Mechanism” (2022) Indian Journal of International Economic Law 14(1), p. 17.

59See, inter alia, Matthew Genasci, “Border Tax Adjustments and Emissions Trading: The Implications of International Trade Law for Policy Design” (2008) 2008 Carbon & Climate Law Review 33.

60 EU Commission, “Carbon Border Adjustment: Questions and Answers”, 2021, available at:

https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3661

61 Stéphanie Monjon & Philippe Quirion (2011) A border adjustment for the EU ETS: Reconciling WTO Rules and Capacity to Tackle Carbon Leakage, Climate Policy, 11:5, 1214.

62 Ibid, p.1214

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emission are lower than the reference value under the EU ETS benchmarks.63. In addition, the phasing out of free allowances under the current EU ETS system will be of pivotal importance for ensuring that the CBAM complies with the national treatment principle, as free allowances preclude imported goods from being granted equality of opportunity and competition with domestic goods.64

i) Relevance of Process and Production Methods

Whether a product’s process and production methods (hereinafter “PPMs”), are relevant in the determination of ‘likeliness’ of products has been a contentious issues, especially if the PPMs do not have a tangible impact on the physical characteristics of the product in question. WTO case-law on the matter has suggested that non-product-related PPMs are relevant in determining the ‘likeliness’ between products when the PPMs in question affect consumer tastes and habits and weaken the competitive relationship between the products concerned.65 A particularly relevant decision by the WTO dispute settlement body in relation to the assessment of ‘likeness’ in respect of PPMs was delivered by the Appellate Body in Canada – Feed-In Tariff.66 In the latter case, the measure challenged concerned subsidies in respect of Canadian renewable energy generation equipment which were granted to Canadian domestic producers and were challenged by Japan. According to the Appellate Body, the inclination of a jurisdiction in the procurement of electricity may take into consideration that consumers might have a preference for electricity produced with different generation technologies, although this choice may be more costly than electricity produced from conventional generation sources.67 The Appellate Body, in this context, concluded that ‘what constitutes a competitive relationship between products may require consideration of inputs and processes of production used to produce the product’.68 This decision explicitly paved the way for taking

63 Joost Pauwelyn, “U.S. Federal Climate Policy and Competitiveness Concerns: The Limits and Options of International Trade Law” (2012). Nicholas Institute for Environmental Policy Solutions 7(2).

64 James Bacchus, “When two global agendas collide: how the EU’s climate change mechanism could fall afoul of international trade rules” (2021) Cato Institute. Available at: https://qrius.com/when-two-global-agendas- collide-how-the-eus-climate-change-mechanism-could-fall-afoul-of-international-trade-rules/

65 Peter Van Den Bossche and Marie Denise Prévost, Essentials of WTO Law (2nd edn.Cambridge University Press 2021), p. 59.

66Appellate Body Report, Canada – Certain Measures Affecting the Renewable Energy Generation Sector (Canada – Renewable Energy) and Canada – Measures Relating to the Feed-In Tariff Program (Canada – Feed- In Tariff Program) (6 May 2013)WT/DS412/AB/R, WT/DS426/AB/R.

67 WTO, Canada – Certain Measures Affecting the Renewable Energy Generation Sector (Canada – Renewable Energy) Appellate Body Report (6 May 2013)cWT/DS426/AB/R, para. 5.117.

68 Ibid, para. 5.63.

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into consideration PPMs, such as the carbon content contained in certain products, in the determination of likeliness of certain products.

Although the question of whether governments may regulate imported products based on PPM has been a topical issue of contention on the basis of the friction between international trade rules and environmental measures, but the PPM doctrine that has emerged is deemed to have restricted implications for border tax adjustments on carbon taxes.69

One of the landmark cases in relation to the imposition – and legality under the WTO legal framework – of a carbon adjustment measure based on chemicals used as inputs in the production process of certain substances is the US – Superfund case. The United States had imposed, through the 1986 US Superfund Amendments and Reauthorization Act, a program which aimed at cleaning up land contaminated with toxic substances and at addressing environmental emergencies, oil spills and natural disasters. Its goals included the protection of human health and the environment by cleaning up contaminated sites and make responsible parties pay for the clean up process.70 Within the measures envisaged under the program, the most controversial related to the imposition of a border adjustable direct tax imposed on certain chemicals used as inputs in the production process of certain substances. In an unprecedented decision, the Panel established that the importation of products incorporating the chemicals subject to the US excise tax was eligible for a border adjustment.71 Following the Panel’s reasoning, the amount of tax imposed on imported products that contained the toxic chemicals was deemed to be equivalent to the charge imposed in accordance with the Superfund Act on the chemicals used in the manufacture or production of the like domestic products, thus meeting the requirements enshrined in GATT article III:2.72

The most relevant aspect of the decision was that the Appellate Body is that it accepted that the requirement of ‘likeliness’ could apply in respect of PPMs and that it provided guidance in respect on the legality of certain methods of calculation that can be employed for determining a border tax adjustment on imports. The approach adopted by the US for the calculation of the charge imposed on imports allowed the import tax to be imposed solely to products containing an amount of chemicals that surpassed a predefined threshold. Importers, under the approach adopted in the Superfund Act, were allowed to demonstrate the actual chemical content of a

69 Matthew C. Porterfield, Border Adjustments for Carbon Taxes, PPMs, and the WTO (2019) University of Pennsylvania Journal of International Law 41(1), p. 37.

70 United States Environmental Protection Agency, Superfund. Available at:

https://www.epa.gov/superfund/what-superfund

71 WTO, United States – Taxes on Petroleum and Certain Imported Substances (US – Superfund) Report of the Panel, (17 June 1987) .L/6175, BISD 34S/136.

72 Ibid, para. 5.2.10.

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product, by providing sufficient information as to enable the tax authorities to determine the amount of tax to be imposed.73 Alternatively, in those cases where producers established outside jurisdiction of the US were not able to furnish such information, a charge equivalent to five percent of the value of the product at the time of importation would be imposed.

Nevertheless, a third option allowed importers to use a rate which would correspond to the amount that would be imposed if the substance were produced according to the ‘predominant method of production’ in the US.74

On the basis of the above consideration – in the context of CBAM imposed by the EU – it would be ideal from a WTO-compatibility perspective to allow importers to demonstrate the actual emission contents of their products, or to be subject to a charge on the basis of predefined level of emission, which can be either based on the predominant method of production in the destination country (as this approach has already been considered WTO-compatible in Superfund case) or on the best-available method of production in either the destination country or worldwide.75

Ultimately, the implementation of a CBAM compatible with the national treatment principle will depend on the particular implementation of the latter, in particular with respect to its design, architecture, form, coverage and adjustment base.76 Allowing a multi-tiered approach, mirroring the Superfund model, could solve the legal issues arising from the national treatment principle enshrined in GATT article III:2, but could ultimately weaken the ability of the proposed CBAM to deal with competitive concerns.77 If the CBAM is implemented with reference to carbon content established on default values on the basis of a worldwide best- available method approach, it would prima facie be considered more likely to satisfy the non- discrimination provision enshrined in GATT article III, as presuming that importers will manufacture their products using the lowest possible carbon emissions will ensure

73 United States Environmental Protection Agency, Superfund. Available at:

https://www.epa.gov/superfund/what-superfund

73 WTO, United States – Taxes on Petroleum and Certain Imported Substances (US – Superfund) Report of the Panel, (17 June 1987) L/6175, BISD 34S/136 para. 2.6.

74 Ibid.

75 Neuhoff &, Ismer “Border Tax Adjustments: A Feasible Way to Address Nonparticipation in Emissions Trading”. Cambridge-MIT Institute Working Paper (2004), p.15. Available at:

http://www.electricitypolicy.org.uk/ pubs/wp.html.

76 Stéphanie Monjon & Philippe Quirion (2011) A border adjustment for the EU ETS: reconciling WTO rules and capacity to tackle carbon leakage, Climate Policy, 11:5, 1213.

77Matthew Genasci, 'Border Tax Adjustments and Emissions Trading: The Implications of International Trade Law for Policy Design' (2008) 2008 Carbon & Climate L Rev 33, p.37.

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compatibility with the national treatment principle,78 but runs the risk of undermining the rationale on which it is implemented, i.e. avoiding carbon leakage.

c) Most-Favoured Nation Clause – GATT Article I

The most-favoured nations principle concerns a cornerstone of the WTO multilateral trading system. Its aim is to replace the disagreements arising from bilateral policies by guaranteeing that international norms and trading rights are not affected by contracting parties’ economic or political clout.79 It is enshrined in GATT article I:1, which stipulates that ‘with respect to custom duties and charges of any kind imposed on or in connection with importation (…) any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in the territories of all other contracting parties.80 The above principle entails that the access conditions granted to one contracting party shall be automatically extended to all other contracting parties and plays a major role in the considerations of a WTO-compatible CBAM.

Under the various options contemplated by the EU Commission in relation to the establishment of the CBAM, it would be particularly problematic from an administrative viewpoint to establish a jurisdiction’s climate policies and to translate the latter into an objective estimate of an imported product’s carbon emissions. This issue is particularly relevant when taking into account the fact that states may have a combination of different climate regulations or policies.81 As advocated by Monjon and Quirion, in light of the most-favoured nations clause, it would be challenging to subject a group of states to exemptions pursuant to their climate agreements, as in principle the same treatment should be extended to all other contracting parties.82 A potential additional argument to argue that a difference in treatment on the basis of diverging carbon policies in different jurisdiction would be incompatible with the framework established by GATT article I relates to the Belgian – Family Allowances case, which involved a levy on foreign goods originating in countries with dissimilar system of family allowances.83

78 Ibid.

79 World Trade Organization: “Basic Purpose and Concepts: Most-Favoured Nation Treatment”. Available at:

https://www.wto.org/english/tratop_e/serv_e/cbt_course_e/c1s6p1_e.htm

80GATT 1994:General Agreement on Tariffs and Trade 1994, Apr. 15, 1994, Marrakesh Agreement

Establishing the World Trade Organization, Annex 1A, 1867 U.N.T.S. 187, 33 I.L.M. 1153 (1994),Article I:1.

81 Rafael Leal-Arcas et al., ‘A Legal Exploration of the European Union’s Carbon Border Adjustment Mechanism’ (2022) Indian Journal of International Economic Law 14(1), p. 18.

82 Stéphanie Monjon & Philippe Quirion (2011) A border adjustment for the EU ETS: reconciling WTO rules and capacity to tackle carbon leakage, Climate Policy, 11:5, p. 1216.

83 WTO, Belgian Family Allowances (Allocation Familiales) Report of the Panel, (7 Nov. 1952) G/32 1S/59.

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In the latter, the Panel established that the imposition of the additional charge did not meet the requirements of article I, while stressing its incompatibility with the spirit of the GATT.84 In light of the above considerations and taking into account the fact that there are sixty-four different carbon pricing instruments in operation worldwide,85 the optimal solution for the calculation of a potential CBAM levy on imports would reside in independent, third-party verification of actual content of imported products. In the proposal for a Regulation establishing a carbon border adjustment mechanism advanced by the EU Commission,86 there is a possibility for importers to declare the embedded emissions contained in the imported products. Article 9 of the proposed Regulation contemplates the possibility to base default values for imported products’ emissions with calculations of actual emissions.87 If this course of action will be pursued in the final design of the CBAM, compliance with the MFN clause will be more likely to be secured.

d) Possible Justifications – GATT Article XX

Carbon border adjustments on imports are motivated by either competitiveness concerns (aimed at ensuring a level-playing field in the international arena) or by environmental concerns (such as curbing CO2 emissions or tackling carbon leakage). Within the framework of the WTO, competitiveness concerns are addressed by reference to GATT Articles I,II and III (as analysed in the previous sections). On the other hand, environmental concerns are referred to in GATT Article XX, which provides for certain exceptions which allow WTO members, under specific conditions, to adopt and maintain measures that conflict with substantive disciplines imposed by the GATT 1994.88 The latter article permit the

‘reconciliation’ of trade liberalisation with other societal values and interests.89 Under this framework, only when a measure is deemed to be incompatible with another GATT provision, such as the national treatment obligation or the MFN clause, it will be possible for a contracting party to resort to one of the general exceptions contained in GATT article XX. Accordingly, if the CBAM proposed by the EU is found incompatible with either of the two obligations

84 Ibid, para. 8.

85 World Bank Group, “State and Trends of carbon Pricing 2021” (2021) Open Knowledge Repository.

Available at: https://openknowledge.worldbank.org/handle/10986/35620

86 Proposal for a Regulation of the European Parliament and of the Council establishing a Carbon Border Adjustment Mechanism COM (2021) 564 European Commission.

87 Proposal for a Regulation of the European Parliament and of the Council establishing a Carbon Border Adjustment Mechanism COM (2021) 564 European Commission, article 9.

88 Peter Van Den Bossche and Marie Denise Prévost, Essentials of WTO Law (2nd edn.Cambridge University Press 2021), p.107.

89 Ibid, p.107.

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outlined in the previous sections, the potentially GATT-inconsistent measure can be justified under one the specific grounds listed under GATT article XX.

In order for a measure to benefit from the exceptions contained in GATT article XX, a two-tier test need to be fulfilled. Firstly, the BCAM must fall within one of the specific justification grounds listed in paragraphs (a) to (j) of Article XX. Secondly, the application of the measure must meet the requirements of the introductory clause (“chapeau”) of GATT article XX,90 which requires that ‘the measure is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail or a disguised restriction on international trade’.91

i) Article XX(b)

One ground of justification which can prove useful to justify a GATT-inconsistent CBAM is article XX(b). The latter prescribes that a measure can be justified if (1) it is designed to protect the life or health of humans, animals and plants and (2) if the measure is deemed necessary to fulfil the policy objective. Hence, two requirements need to be fulfilled. The CBAM aims at avoiding carbon leakage, and in turn at tackling climate and other environmental-related challenges92. Hence, it could be considered as a regulatory measure related to the protection of human, animal or health life as it is aimed the consequences of climate change disasters, such as floods or rising sea level.93 The importance of curbing carbon emission is broadly recognized as a ‘common concern as humankind’94, and threatens to not only significantly affect the planet, but to have direct repercussions on animal species (through the eradication of their habitat) and humans (through higher probabilities of contracting respiratory diseases from the increase in air pollution)95.

The Appellate Body has established in China – Publications and Audio-visual Products – that the requirement of necessity involves a process of balancing of different factors that include

90 Anna Dias et al., ‘EU Border Carbon Adjustment and the WTO: Hand in Hand Towards Tackling Climate Change’ (2020) Global Trade and Customs Journal 15(1), p.16.

91 WTO Analytical Index, Article XX General Exceptions, p. 562. Available at:

https://www.wto.org/english/res_e/booksp_e/gatt_ai_e/art20_e.pdf

92 Proposal for a Regulation of the European Parliament and of the Council establishing a Carbon Border Adjustment Mechanism COM (2021) 564 European Commission, Preamble.

93 Anna Dias et al., ‘EU Border Carbon Adjustment and the WTO: Hand in Hand Towards Tackling Climate Change’ (2020) Global Trade and Customs Journal 15(1), p.16.

94 Paris Agreement to the United Nations Framework Convention on Climate Change, Dec. 12, 2015, T.I.A.S.

No. 16-1104.Mar 18, 2020, Preamble.

95 Staphanie Osmanski, “How do Carbon Emissions Affect the Environment?”, (2020) GreenMatters, available at: https://www.greenmatters.com/p/how-do-carbon-emissions-affect-environment

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Outline : Conclusion