This is a guest post from Reinhard Quick, Saarland University and Isha Das, University of Passau.
We would like to thank Aaron Cosbey for his thoughtful comments on our guest post and would like to reply by offering the following comments:
- Prevention of Carbon Leakage
The imposition of CBAMs on selected imports to prevent carbon leakage is not a climate measure if the exporting country complies with its Paris obligations; it rather is an economic measure, or, allegedly, a protectionist penalty, to protect the domestic industry.
Aaron notes that the CBAM-Regulation is aimed at preventing carbon leakage. It is exactly this goal which, in our view, causes the Paris issue. The EU considers the CBAM-Regulation to be an environmental measure supporting its Paris Agreement goals.[1] One would therefore assume that the Regulation is consistent with the EU’s Paris obligations. Yet, hélas, it is not! The EU has deliberately decided to impose a European CO2-price on selected imports in order to prevent carbon leakage (emphasis added). It does not apply the Paris Agreement’s differentiation requirements (CBDR-RC), nor does it allow the argument that exporting country’s climate measures are adequate to achieve the temperature goals. Only countries that have a system in place which leads to the same CO2-price are exempted. This position is astonishing and, in our view, goes against the entire structure of the Paris Agreement which permits countries to formulate their own measures in the form of NDCs to meet the goals of the Paris Agreement. Furthermore, Paris accepts different speeds (CBDR-RC). The CBDR-RC requirement, even if defined loosely, expressly permits non-Annex I countries to have lower commitments than Annex I countries. In practice, this means that developing countries are able, from a Paris perspective, to continue to produce climate-damaging products without being incompliant with their Paris obligations. We agree with Aaron that CBDR-RC does not imply that developed countries are obliged to import and consume climate-damaging goods from developing countries. We disagree with him however that Paris compliance is irrelevant in the context of CBAM. Paris compliance is relevant, since it establishes the legal standards for any climate change measure – including one preventing carbon leakage. Given the fact that the CBAM-Regulation elevates the prevention of carbon leakage to an overall principle not taking Paris principles into account, parties will put forward the argument, that the EU’s Regulation is an economic or protectionist measure not justifiable as a climate measure in a WTO case against CBAMs. This could be particularly true with respect to the GATT Article XX chapeau analysis, provided that the Regulation is found to be inconsistent with a GATT obligation. Aaron’s argument that the CBAM-Regulation treats imports in the same way as domestic products relates to the GATT non-discrimination principle and not to the EU’s Paris obligations. We would add that it is by no means clear whether EU-CBAM is to be considered in WTO terms as being a domestic measure applied at the border covered by GATT Article III:4 or whether it is a border measure covered by GATT Article II:1 (b).
The goal of preventing carbon leakage to us seems an economic, or worse a protectionist issue, not related to climate protection considerations. This is evidenced in the case of an exporting country having an ETS system in place which leads to a lower CO2-price than the EU’s. The CBAM-Regulation provides in this situation that the importer has to pay the difference between the EU CO2-price and that country’s CO2-price. Without an inquiry on whether the climate protection measures of that country are compliant with her Paris commitments, this ‘penalty’ is not taken for climate but for economic purposes. Recently IMF economists have suggested to introduce a different CO2-price for developing, intermediate and developed countries. If implemented, would such an agreement have an influence on the CBAM-Regulation or would the goal of preventing carbon leakage still trump an internationally agreed CO2-price?
- The EU’s Adequacy Judgment of Third Country Environmental Action and the Paris Agreement’s Oversight System
In his comments Aaron mentions that the EU-CBAM does not judge the appropriateness and sufficiency of their trading partners’ environmental actions while imposing the CBAM. We believe that it is only upon a judgment of the trading partner’s domestic environmental actions – including, but not limited to, the presence or absence of a domestic carbon pricing system – that embedded emissions are calculated. According to Article IV.4 of the EU-CBAM Regulation if “actual emissions cannot be adequately judged”, then default values are to be used. In this regard, the Regulation does not explain what standards would apply to determine the adequacy of judging actual emissions. Consequently, the EU retains the ability to judge emissions, and by extension, the domestic environmental actions of their trading partners to determine if they can impose a CBAM price using actual emissions or resort to calculate emissions based on a default value.
We argue that the wording of Annex IV of the EU-CBAM allows it much discretion to decide the appropriateness of a third country’s environmental actions, when deciding to impose a default value. According to us, it is this unilateral determination which violates the structure and approach of the Paris Agreement’s Oversight System. The Oversight System was formulated to prevent such unilateral determinations of appropriateness and sufficiency of climate action of each party and to enable a collaborative effort towards strengthening climate action by all parties to the Paris Agreement.
- WTO Dispute Settlement
In not adjudicating compliance the Paris Agreement beggars its WTO neighbor.
It is typical for many multilateral environmental agreements not to adjudicate differences but to seek for a diplomatic solution in case of an implementation or compliance issue. The Paris Agreement is not different, it stipulates that compliance and implementation must be facilitated in a non-adversarial and non-punitive way. In fact, compliance and implementation have been explicitly excluded from dispute settlement under the Katowice Guidelines of 2018. Hence the exporting party cannot obtain from Paris a certificate of compliance which it could use in a WTO dispute settlement case.
This will not stop WTO members to attack the CBAM-Regulation as being WTO incompatible. One could argue that the Regulation violates GATT Article I and GATT Article II:1 (b) – if it is considered a border measure – or GATT Article III:4 – if it is considered a domestic measure applied at the border. If a violation is found and a justification is being sought the interpretation of the language of the chapeau of GATT Article XX will be decisive. And in this situation the issue of Paris compliance will enter through the backdoor when analyzing the issue of whether EU-CBAM constitutes an unjustifiable or arbitrary discrimination because the EU has not taken into consideration different conditions which may occur in the territories of the exporting member. Further, in the words of the Appellate Body, discrimination also occurs “when the application of the measure at issue does not allow for any inquiry into the appropriateness of the regulatory program for the conditions prevailing in those exporting countries”.
We do not know how this issue would be decided by a WTO panel on the CBAM issue, but we would forward the following arguments: First, the Paris Agreement leaves parties a choice of action, notably it does not require them to introduce a carbon-price. Second, the Agreement mandates differentiation, which allows developing countries to adopt less onerous measures than developed countries and to produce the covered products in a less climate friendly way provided their regulatory programme is, overall, in compliance with the Agreement. Third, the Paris Agreement calls upon the parties to implement its provisions in a “facilitative, non-intrusive non-punitive way” and repeats this language also with respect to compliance. Furthermore, the whole concept of implementation and compliance is based on the prerogative that it is not up to individual parties to decide on the adequacy of other countries’ climate actions, but it is up to the Oversight System to help parties implement the Paris Agreement and comply with it. When relating these points to the application of the CBAM-Regulation, one could argue that the measure constitutes an arbitrary discrimination.
We recognize Aaron’s skepticism, yet we would like to recall the requirements of US-Shrimp, to account for different conditions in different countries and allowing flexibilities to all trading partners to meet the measure imposing country’s standard of protection in their own manner, continue to be applicable to the CBAM. Indeed, the settled position at the WTO is that while the measure imposing member can determine the level of protection aimed at, it must allow its trading partners the flexibility to formulate measures appropriate to their jurisdictions to meet that level of protection.[2]
[1] Preamble to the CBAM Regulation, especially paragraphs (1), (2), (3), (4) and (15); Article 1 of the CBAM Regulation
[2] See for example- WTO Appellate Body Report, EC-Asbestos (2001), paragraph 168; WTO Panel Report, Brazil-Retreaded Tyres (2007), paragraph 7.108; WTO Panel Report, US-Gasoline (1996), paragraph 6.22.