EU Carbon Border Adjustments for Imported Products and WTO Law

Abstract

In 2020, the European Commission announced its intention to table a legislative proposal for a Carbon Border Adjustment Mechanism (CBAM), as part of a wider package of laws aimed at implementing the EU Green Deal. It furthermore stated that it would explore various options, such as a so-called “carbon tax” on selected products, a new carbon customs duty, or the extension of the EU ETS to imports. Apart from political and technical challengens, it is generally acknowledged that the main legal hurdle that a CBAM would have to take is to ensure compatibility with the world trade law of the WTO.

Against this background, the present policy paper endeavours to explore whether, and if so how, the various CBAM design options that were under consideration could be reconciled with WTO law requirements as developed by panels and the Appellate Body. Different from other publications, we directly compare different CBAM instruments as to their WTO compatiblity, and we moreover also propose certain design modifications for individual instruments so as to strike a better balance with the objective of addressing carbon leakage. At the same time, the paper offers a comprehensive survey of scholarly writings on the topic and potentially relevant WTO jurisprudence. We have furthermore included a small section discussing international political economics. Due to its comprehensive nature, the findings of the paper are also relevant for the actual CBAM proposal of the Commission (published July 14, 2021), and for other jurisdictions contemplating similar measures.

This paper has been accepted for publication in the Environmental Law Reporter.

Keywords: CBAM, WTO, carbon tax, ETS, BTA, climate club, Green Deal

JEL Classification: F18, K33, K32, K34, Q54