This is a guest post from Reinhard Quick, Saarland University and Isha Das, University of Passau.[1]
Summary
By not accepting differentiation and by insisting on a uniform European carbon price the CBAM-Regulation elevates the avoidance of carbon leakage to an overarching principle to which all other obligations are subordinate. This leads to a violation of the EU’s Paris Agreement obligations.
Introduction
The Paris Agreement offers parties flexibilities when adopting their national climate actions. It is a combination of legal obligations and flexible approaches to addressing climate change, respecting sovereignty, differentiation, local conditions, and developmental issues coupled with a gradual increase of ambition over time. All parties have to act and to implement climate mitigation and adaptation measures. Yet some – the developed countries – have to shoulder more ambitious measures given their historic pollution activities. The Agreement does not prescribe the measures parties have to adopt and leaves them the choice. The EU has formulated the CBAM-Regulation as a sovereign climate change measure in furtherance of their Paris Agreement commitments, pursuant to which they impose a CO2-price on domestic production and importation of carbon-intensive goods to prevent carbon leakage. It is this pricing-mechanism which raises concerns under the Paris Agreement.
Adherence to the Paris Agreement is regulated by an Oversight System through (1) a transparency mechanism to hold each party accountable for their sovereign climate actions; (2) a periodic assessment of the collective contribution of all parties to the Paris goals; and (3) a facilitative compliance with the mandates of the Agreement. The implementation and compliance proceedings under the Paris Agreement are based on the prerogative that no party can unilaterally decide on the adequacy of other parties’ climate actions, only the Oversight System enables such determination. The goal is to achieve implementation of more ambitious national commitments by each member in a facilitative, non-intrusive, non-adversarial and non-punitive way. Ironically, this bold goal is not reflected in the Oversight System’s procedures. Despite the System’s existence and clearly stated objectives, its non-binding nature precludes a party’s sovereign actions from being addressed in any way other than by peer pressure. This may not always be successful, given the difference in power dynamics between the parties to the Agreement. The non-binding nature of the System precludes legal enforceability of the Agreement’s commitments, thereby severely watering down its overall utility.
Common But Differentiated Responsibilities and Respective Capabilities (CBDRRC)
The EU’s CBAM-Regulation will become operational by the end of 2024 and the beginning of 2026 respectively. The pertinent feature of the Regulation is the purchase of certificates by importers of covered carbon-intensive products for every ton of carbon emitted during the production process. European installations are subject to a carbon price assessed on their actual emissions via EU-ETS. Whereas imported products, while being assessed on the GHG emissions during their production, would be subject to the European carbon price as per the CBAM-calculation.
The CBAM-Regulation applies to imported products independent of their origin. It is assumed that all potential exporting countries (except those mentioned in Article 2.4) do not have policies in place that “result in the same level of climate ambition as the Union” (Explanatory Memorandum CBAM Proposal). This justification is surprising and arguably Paris-inconsistent. The Paris Agreement does not require all parties to adopt the same climate policies as the EU. Its underlying objective is to achieve the temperature goals with ambitious self-determined national contributions in light of different national circumstances. Hence it accepts asymmetrical contributions by the parties. The CBAM-Regulation rejects differentiation based on the assumption that developing countries could increase their GHG emissions by exporting more ‘dirty’ products to the EU if they were exempted. This rejection of differentiation cannot be reconciled with the CBDRRC-principle. Developed countries have to take the lead and ‘peaking’ will take longer for developing countries with the inherent consequence that these countries can emit (in relative terms) more GHG emissions than developed countries. More precisely, this asymmetry allows a developing country to produce, for a limited period of time (until peaking), a specific product in a climate unfriendly way provided that, overall, the country follows its Paris obligations. The EU’s rejection of differentiation is not based on climate but on economic considerations: given the ambitious climate protection measures taken by the European Union, Europe can only protect its industry with equivalent climate requirements for imports and therefore cannot accept any form of differentiation. This position elevates the avoidance of carbon leakage to an overarching principle to which all other obligations are subordinate and renders the differentiation requirements nugatory. Yet, the avoidance of carbon leakage can, in our view, only be considered a legitimate climate measure if it is interpreted in accordance with the Paris Agreement’s obligations, in this case the asymmetrical differentiation requirement. Recitals 71 to 74 of the Regulation seem an implicit admission that the Regulation has a differentiation problem in that they discuss support for developing countries through dialogue, cooperation, negotiations, and financial support. Yet in the absence of an agreed solution with these countries the Regulation contravenes the CBDRRC-requirement.
Can Parties Impose a Carbon Price on Others?
The CBAM-Regulation imposes a European carbon price on covered imported products. It foresees that importers have to pay on the verified embedded GHG emissions of the imports a carbon price which they would have to pay had these products been produced in the EU. The focus on an EU carbon price is, again, justified with carbon-leakage reasons. The carbon-pricing mechanism of exporting countries can be credited in so far as importers can reduce the number of CBAM-certificates to be surrendered by the respective ‘carbon prices’ of those countries (Article 9). The Regulation defines carbon-prices narrowly (Article 3 (29)), only a carbon tax or an ETS can be credited, other climate policy measures of the exporting countries cannot. The Paris Agreement leaves parties the choice of adopting carbon-pricing or non-price regulatory measures. They decide which commitments contribute best to their highest possible ambition in light of different national circumstances. By not accepting adjustments of non-price regulatory measures the EU deprives other parties of their freedom of choice and imposes on them, in a punitive way, a European carbon price. Such a mechanism contravenes the Paris Agreement as it wrongly assumes that only carbon prices ensure compliance with Paris.
The economic character of the CBAM-Regulation becomes evident in case the exporting country has an emission trading system or a CO2-tax in place. If either system results in a lower CO2-price than the EU’s, the importer still has to buy CBAM certificates paying the difference. This ‘gold-plating’ of the value of carbon emissions up to the EU-price does not consider whether a third country’s national CO2-price ensures that country’s compliance with Paris and is hence a measure equivalent to what the ETS is for the EU. Rather, the CBAM-Regulation constitutes an extraterritorial imposition of Europe’s CO2-price on other countries, and so, its climate goals on these countries.
Default Values
The CBAM-Regulation also maintains that in case a country does not have any emissions’ trading system, or a CO2-pricing system, or indeed any measure which ‘sufficiently addresses climate change’, then it would impose a default value for calculating the emissions, hence allowing them to unilaterally impose a CO2-price. Furthermore, this default CO2-price is to be calculated based on the X% of the worst performing EU installations, where the value of X is to be product-specific and hence different for each good covered under the CBAM-Regulation. Further, the Regulation allows for alternative default values where it can be demonstrated based on ‘reliable data’ that the CO2-emission is lower than the EU’s calculation. The Regulation does not specify what data would be reliable in this regard. Given that the Agreement does not require parties to address climate change by imposing a CO2-price, the Regulation’s grounds for permitting the EU to impose a default value are vague and allow much room for discrimination against third countries in this regard.
Can the EU assume that other Parties are not in compliance with Paris?
During the discussions of the CBAM proposal it has been argued that a European carbon price is necessary given the EU trade partners’ lack of climate ambition. With the adoption of the Regulation the European Union now unilaterally judges the appropriateness and sufficiency of the climate measures taken by their trading partners. Such judgment contravenes the Paris Agreement’s Oversight System which aims at helping Parties to comply with their obligations in a non-intrusive and non-punitive way. In case the ambition of a Party is deemed insufficient, Articles 13 and 15 of the Agreement will elicit suggestions of more ambitious NDCs. The Oversight System promotes cooperation and facilitates compliance through a structured process yet is hostile to ‘punitive’ measures. By imposing a ‘penalty’ on the imports from alleged ‘climate laggards’, the CBAM-Regulation contravenes this aspect of the Paris Agreement. The EU cannot unilaterally decide that almost all its trading partners are not complying with the Agreement’s requirements.
Conclusion
One would assume that the EU would heed the different violations of the Paris Agreement and agree with exporting countries during the CBAM transition period on a Paris-compatible application of its regulation. But why should the EU react in this way? It can escape this defiance of the rule of law scot-free! Under the Paris Agreement dispute settlement remains wishful thinking! The Conference of the Parties has not taken any action to give effect to the arbitration mechanism provided for by Article 14 (2) (b) UNFCCC which is also applicable in the Paris context. Therefore, no authoritative body exists to give a finding of inconsistent conduct of a party. Moreover, exporting countries cannot challenge the EU’s claim that almost all its trading partners are incompliant with their Paris commitments, since the Katowice Guidelines from 2018 explicitly exclude implementation and compliance issues from the theoretically available Paris dispute settlement.
Ironically, in the absence of such a mandatory dispute settlement system, violations against foundational legal principles of the Paris Agreement would continue without any possibility of redressal. This is the price to pay for an agreement which opts for a diplomatic rather than a mandatory dispute settlement. More importantly, this situation puts the mandatory WTO dispute settlement under severe stress given the fact that the CBAM-Regulation is arguably inconsistent with the EU’s WTO obligations[2]. In a WTO case the Paris Agreement enters through the backdoor concerning the interpretation of the chapeau of GATT Article XX. If the climate-related activities of the complainant are in line with its Paris obligations the attacked and GATT-inconsistent trade measure (CBAM) could be considered as an arbitrary or unjustifiable discrimination since the EU has not taken the different conditions into account which occur in the exporting country (as per paragraphs 164-165 of the US-Shrimp Appellate Body Report).
Another consequence of the CBAM-Regulation has been an eruption of attempts by some countries to formulate their own ETS or other CO2-pricing systems. This ripple effect of unilateral actions undermines the multilateral approach of the WTO and Paris Agreement, or at least the plurilateral approach taking place at the WTO currently. Without a collaborative effort, the main goal of reducing rising temperatures and addressing climate change, seems to be getting lost in a tit-for-tat attempt to formulate unilateral CO2-pricing-related trade measures. It is high time that either the WTO or the Paris parties agree on permissible response measures to protect the climate and to avoid carbon leakage.
[1] The guest post is based on our article ‘Can Paris Strike Back? On the Paris Agreement’s Inability to Cope with Unilateral Trade-Related Carbon Measures such as the European Commission’s CBAM-Proposal, pp. 75 – 102, in: THE EU and the WTO: Ever the Twain Shall Meet, Liber Amicorum Marco Bronckers; Freya Baetens and Stefaan Van den Bogaert (eds.), 2023, Alphen an den Rijn, the Netherlands.
[2] Reinhard Quick, Carbon Border Adjustment, A dissenting view on its alleged GATT-compatibility, ZEuS 4/2020, pp. 549 – 596.
