Widely leaked in various versions over the last weeks, the formal Commission proposals for carbon border adjustment have today been publically released. Already on social media, a debate has been unleashed (not surprisingly) about the WTO compatability of the proposals, including a guest post on this blog. My overall thinking on carbon border adjustment & WTO rules goes back to my work on the subject with Antonia Eliason, which was already published in 2008. I refined some of this analysis in a later piece taking into account more recent WTO case law. Jennifer Hillman, a former US Appellate Body Member also has published a study that, as she says, built on the earlier work of Antonia and I. Anyone who has read these pieces will not be surprised about how the design and content of the EU Commission proposals have been devised to ensure WTO-consistency. More about that in later posts.
For now, what bears emphasizing is that (as I explain here) much of the WTO case law that concerns policy-based justification of trade measures has focused not on the basic design and structure of a regulatory scheme but specific issues about how it is applied in practice, often assessed under the chapeau (preambular paragraph) of the Article XX general exceptions provision (such assessment, as in Tuna-Dolphin II, might also occur in applying Article 2.1 of TBT, the "legitimate regulatory distinction" test). Quite a few details of the application or implementation of the EU proposals will be worked out over time as it is phased in. There is a future task, to be sure, in being mindful of how detailed calculations and reporting requirements, for instance, impact upon the EU's trading partners and achieving the evenhandness and calibration required under the relevant WTO law. As former Appellate Body Member James Bacchus emphasized in a thoughtful blog post a few days ago (based on previews of the CBAM), this is a process that should involve consultation and coordination with trading partners.
Even if some of the implementation concerns ultimately lead to WTO challenges, which however may well be avoided if there is good regulatory cooperation and dialogue with affected non-EU stakeholders, these challenges will not be successful at striking down the heart of the EU scheme. As has been seen repeatedly in cases like Shrimp-Turtle, Tuna-Dolphin II and EC-Seals, the WTO adjudicator may indicate where some fine tuning is needed in the details surrounding the implementation of the legal framework. Such fine tuning may indeed lead to more consistent achievement of the policy goals being sought, as was the case with Tuna-Dolphin II. In that case, the US reacted to the Appellate Body's concerns that US enforcement of a labelling scheme discriminated against Mexican fishers because of lax monitoring in other fishing areas compared with those used by Mexicans by improving its enforcement regime elsewhere, rather than relaxing it in the waters fished by the complainant. Ultimately, as revised, the US regime was upheld as WTO-consistent.
When assessing what will be the many claims of WTO inconsistency doubtless made by those whose economic interests are not served by the EU CBAM, it is important to remember that hypothetical scenarios of discrimination in the way the CBAM might be implemented or applied don't really tackle much less refute the (basically sound, as I will argue in subsequent posts) assertion of the Commission that the general design and structure of the CBAM are WTO-compliant. In the post mentioned above James Bacchus makes the basic point on the big picture: "the EU should be able to prove that CBAM is a measure relating to the conservation of exhaustible natural resources – in this case, the air we breathe – if it can demonstrate that there is a close and genuine relationship between the means used in the mechanism and the end it seeks." Carbon pricing is almost universally accepted as an appropriate policy instrument for climate mitigation, and many economists argue it is the best approach, with carbon border adjustment a second-best to a global carbon tax. Proceeding with dispatch to put in place carbon border adjustment is an imperative of the climate crisis; it is compatible with a process that evolves the detailed application of this ground-breaking and needed measure in a manner that respects the WTO's requirement of evenhandness in practice.