This is a guest post from Aaron Cosbey of IISD
I am an unlikely defender of the EU’s CBAM, knowing full well its weaknesses and limitations. But in my opinion those faults do not include any of the arguments mustered against it by Reinhard Quick and Isha Das in their guest post “The EU’s CBAM-Regulation stands in contrast to fundamental EU-obligations under the Paris Agreement”.
What follows is a rebuttal of four of their key arguments.
Argument 1. If a country is in compliance with its Paris Agreement pledge (i.e., its nationally determined contribution, or NDC), then the CBAM should not be applied to it; that country’s compliance should be considered “a measure equivalent to what the ETS is for the EU.”
The CBAM is a tool aimed at preventing leakage. It is slated to replace the previous tool aimed at that goal – free allocation under the EU’s emissions trading system. The fact that a country is complying with its NDC has no direct bearing on whether the producers of goods in that country would, absent a CBAM and absent free allocation, lead to leakage – that is, whether they would gain market share over carbon-priced EU competitors. Achieving a country’s NDC in accordance with its national circumstances may mean sufficient action under the Paris Agreement, but does not mean sufficient action to prevent its firms undermining climate efforts in other countries through trade. In other words, Paris Agreement compliance is irrelevant to CBAM.
Further, nothing in the Paris Agreement indicates that compliance should be relevant to the CBAM. Nowhere in that agreement do the Parties agree that NDCs in good standing constitute a free pass to other countries’ markets no matter what the carbon footprint of their goods. The authors invoke the principle of common but differentiated responsibilities and respective capabilities (CBDR-RC), arguing that it means that developing countries should be allowed to prolong GHG-intensive production. There is support for that argument in the literature on CBDR-RC. But they go further, in what I believe is a novel and dubious interpretation, to argue that importing countries may not discriminate against such GHG-intensive products – that CBDR-RC implies that developed countries are obliged to import and consume climate-damaging goods from developing countries.
That interpretation is certainly not rooted in the text of the Paris Agreement or the UNFCCC, where CBDR-RC is never defined, even operationally. In fact, the closest thing we have to a definition in those texts is in UNFCCC Article 3.1: Parties should be guided by CBDR-RC, and therefore “the developed country Parties should take the lead in combating climate change and the adverse effects thereof.” It may be a stretch, but I could argue that the EU is taking the lead by imposing a full carbon price on its producers and consumers – in an effort matched by no other country – and that CBAM is a necessary complement to make such ambition possible.
Argument 2. The CBAM “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.”
Under CBAM, credit is granted only to price-based climate policies in the country of export, and perhaps this is what the authors mean by a judgement on appropriateness of climate measures. Not allowing credit for non-price-based measures, however, is not a judgement that they are inappropriate means for addressing climate change. It is a much narrower judgement: that they are not effective means for preventing leakage in the goods covered under CBAM. (Whether that’s a valid assumption is an arguable question, but it’s a completely different question.)
The CBAM in no way judges the sufficiency of other countries’ climate measures. CBAM charges will be applied to imported goods, based mostly on firm-level production data, and will be applied equally to all, without taking into account the strength or weakness of the exporting countries’ policies.
Even if CBAM did make judgements about sufficiency it would not, as the authors claim, “contravene the Paris Agreement’s Oversight System” by unilaterally duplicating its role. I assume by “Oversight System” the authors mean the Article 15 Committee (the Paris Agreement Implementation and Compliance Committee). Contrary to what the authors suggest, nothing in that Committee’s mandate, or Articles 13 and 15, or the Paris Agreement as a whole, is aimed at determining whether a Party’s climate ambition as expressed in its NDC is sufficient, or whether its progress against its stated NDC targets is sufficient. The Article 15 Committee focuses on helping countries comply with their legally binding obligations to pledge and report.
Argument 3. Failing to give CBAM credit for the non-price-based climate measures taken by trading partners “deprives other parties of their freedom of choice and imposes on them, in a punitive way, a European carbon price.”
The EU’s trading partners are free to use whatever type of climate measures they choose within their borders. The EU’s failure to grant credit for their internal regulations does not deprive them of this sovereign right, any more than EU technical regulations such as quality standards deprive trading partners of the right to set their own internal standards.
Of course the CBAM does impose a European carbon price on foreign producers (indirectly, via importers). Does it do so punitively? Well, it does so in exactly the same measure that such prices are imposed on domestic producers. So in that sense it is not punitive.
I should ask: if the authors think that not crediting for foreign non-price-based climate measures is punitive, would they be satisfied by an amendment to the CBAM that did allow such credit, but that also imposed increased border charges to account for the cost of those same non-price-based climate measures within the EU? Because crediting foreign producers for regulatory costs but not crediting EU producers for the same costs strikes me as punitive for EU producers.
Argument 4. Such failure to recognize non-price-based efforts would cause CBAM to fail the conditions of GATT’s Article XX exceptions – it conflicts with the Shrimp-Turtle AB paragraphs 164-165 on taking into consideration the different conditions that may occur in the territories of other WTO members.
The authors may be right, and only time and a WTO dispute will settle the question. But I am skeptical.
The offending measure in Shrimp-Turtle was an outright ban on imports of products from countries that the US had not certified as using the same technologies or achieving the same results as those that were being demanded of US producers. In the case of the CBAM there is no ban; products are free to enter the EU, and in fact if they have low enough embodied carbon they will enjoy a carbon cost advantage over the EU’s domestically produced like products. And in the case of the CBAM, the EU is not certifying its trading partners’ policies as adequate as a condition of import. Again, the adequacy of national-level policies is irrelevant to the CBAM; it is predominantly focused on individual producers’ GHG intensity. It is thus fundamentally different than the disputed measure in Shrimp-Turtle.