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The world-first carbon-based tariff proposed last week snubbed
major EU trade partners and developing countries, but it could
still sail through on the winds of legal change.
On 14 July, the European Commission (EC) proposed the tariff as
part of the
"Fit for 55" package of laws meant to align with the Paris
Agreement and recently adopted Climate
Law.
The Carbon Border Adjustment Mechanism (CBAM) will impose
tariffs on certain imports under as-yet undecided calculations on
the carbon emissions the goods represent. It will target listed
products from six carbon-intensive sectors: cement, iron, steel,
aluminum, fertilizer, and electricity, but might include sectors
like chemicals and polymers following data assessments due to be
ready by 2026. If adopted, CBAM will require importers of specific
goods to register with customs authorities and surrender
certificates, with prices that are set weekly, purchased from
climate authorities in EU member states.
The CBAM's passage into law depends on European Parliament and
Council approval during a possible two-year legislative procedure
set out for the Fit for 55 proposals.
"It is really a credible effort, and it's really a historical
moment," European Roundtable on Climate Change and Sustainable
Transition (ERCST) Executive Director Andrei Marcu said during a 20
July webinar hosted by the nonprofit.
The CBAM has also received support, though with reservations,
from the EC's co-legislator, the European Parliament. After its
Environment Committee came to the conclusion that the CBAM was a
"fantastic opportunity" to
address climate change, Parliament gave approval in a non-binding
resolution. The CBAM counted on
the early support of France, having
emerged in 2007 when former President Jacques Chirac highlighted it
during a French multi-party environmental debate.
An existing rule in the US state of California taxes electricity
imports into the state, which has its own emissions trading system,
but the CBAM would be the first example of a national carbon border
tariff. "The CBAM is the first climate measure that has potential
to profoundly change the rules of world trade," Bixuan (Richard)
Wu, a Beijing-based senior partner at Hiways Law Firm, wrote in a
recent blog.
In addition to EU due process, the CBAM will face international
challenges. World Trade Organization (WTO) rules were not drafted
to accommodate climate change policies, so countries slapped with
new charges on exports may challenge the CBAM via a WTO dispute
settlement case.
Stephen Woolcock, a lecturer in international political economy
at the London School of Economics, told Net-Zero Business Daily
there are several ways of challenging the CBAM. "If the EU were to
introduce the measure, other countries would challenge this, and
you then go through a dispute settlement mechanism. The WTO
appellate body, if you like 'the international trade court,' would
then rule on whether this is complying with the WTO rules," he
said.
However, he said it seems likely countries will discuss it in
other forums since the US under the Trump administration blocked
appointees to the WTO's appellate body. "So, we don't have a
functioning appellate body in the WTO at the moment," said
Woolcock.
CBAM disputes could be solved through diplomacy, he suggested.
"In any case, pushing it to the WTO appellate body would be asking
lawyers to find a solution to something that should really be a
political debate. It has to be really discussed through the council
of the various forums in the WTO to find a solution," he said.
Trade partners pivot to carbon pricing
Under the proposal, countries with their own emissions trading
systems could gain levels of exemption from the CBAM, piquing
global interest in both carbon border tariffs and emissions
trading.
Exemptions for CBAM certificate obligations are in place for
non-EU countries in Europe that are in the EU ETS like
Liechtenstein, Norway, and Iceland, and also Switzerland because
its national emissions trading is linked to the EU ETS. The UK and
China may qualify for exemptions if they link their national ETS to
the EU ETS; China's power ETS started this week and will soon be
the world's largest market for carbon allowances.
Vincente Hurtado Roa, who has a role in CBAM legislation as head
of the EC's unit for excise duties, environmental and health taxes
and financial taxation, said the heads of wealthy countries at
July's G20 meeting were interested in EU-style border mechanisms as
more countries set out to enact national carbon pricing
mechanisms.
"So, that's why countries like Canada and Japan are already
thinking about the introduction of a CBAM. The US, for example, it
is also considering this possibility. I've been already in contact
with the Australians last week," Roa told the ERCST webinar
attendees.
In the US, Senator Chris Coons and Representative Scott Peters
introduced a CBAM-style legislative bill in
Congress on 19 July. Speaking on the US bill, Roa said that it is
based on a carbon price, and so comparing it to the EU's various
environmental directives collectively is like comparing "apples
with pears."
But government officials in both China and Russia worry about
trade barriers under the CBAM. Russia supplies the most fertilizer
of any EU importer, according to EC data. It supplies 36% of the
total EU imports of fertilizer; 14% of aluminum imports, second
behind Norway; and 13% of iron and steel imports, again second on
the table, this time behind China. Turkey supplies the most cement,
at 37% of EU imports.
Russian officials warned that the CBAM would cost the country's
industries, although key calculations were yet to be decided. "The
most dangerous thing is that the published regulation does not
provide a clear understanding of all the aspects of calculating and
verifying the carbon footprint of products. The most important
decisions are attributed to the level of by-laws," said Alexander
Shokhin, president of the Russian Union of Industrialists and
Entrepreneurs, in a 14 July Russian Ministry of Economic
Development statement on the CBAM.
While its exports are sure to be impacted, Russia may be
exaggerating hurdles when it comes to the carbon accounting for
CBAM, given that these calculations are common. "These are very
energy-intensive, carbon-intensive processes. A lot of the costs
are going to be related to the energy used to produce these
products. It is not going to be complicated for them to come up
with what the carbon intensity of steel, iron ore, or cement is,"
said Sujith Kollamthodi, director of policy, strategy, and
economics practice with consultancy Ricardo, which provided the EC
with analytical support related to the CBAM.
WTO challenge possible
Russia's disapproval of CBAM may not be a barrier to its
success. "Russia is not being particularly active in the WTO and
has tended to flout the rules, and so I think if it were only in
Russia that were holding out, I don't think that's going to block
things. I think the developing world opposition, in a sense, has
more traction in the WTO," said Woolcock.
CBAM could very well gain the support of other major economies
despite forcing them to treat products with more embodied carbon
differently, a change from WTO rules. "The US is nervous about this
because it's breaking from this established norm of treating the
products the same regardless of how polluting the production method
is," said Woolcock.
But major nations may see this type of policy as helpful for
achieving their own climate-related goals. "It depends on the
positions of the key WTO players on this issue of trade and climate
change. So, the EU is saying 'We have to adapt the rules, or the
rules have to develop, in order to meet the climate change
challenge,'" Woolcock said. "I suspect the current administration
in the US would go along with that. China is also moving towards
more positive positions on climate change, and China also wants to
at least maintain the existing multilateral system. Some of the key
players, I think, would support it."
Trade disputes on environmental protectionism go back decades,
and the US has fallen afoul of these norms. In 1991, the US was
found to be in violation of its obligations under the General
Agreement on Tariffs and Trade (GATT) after it embargoed imports of
tuna from countries, including Mexico, that used nets that were not
safe for dolphins, so the US created domestic dolphin-safe product
labels.
Prior to the WTO, debates arose when EU and other developed
economies raised standards for air and water pollution in the
1970s, said Woolcock. These were mirrored when trade barriers arose
targeting labor practices, for example, in sweatshops.
The EC is wary of a trade war with major economies that see the
CBAM as a negative. "They still see this as a trade measure, or a
barrier to trade. I think it's going to be very important, of
course, that we engage with that, some will say to avoid
retaliation, possibly. I think that as soon as they know the
details of the proposal, they will understand that there is nothing
like that. I think that what is more important is to find allies
around the world to also use the CBAM as a climate diplomacy tool,
and to ensure the rest of the world will team up with the EU to
reduce emissions," said Roa.
Markus Gehring, a director of studies at Hughes College and a
legal expert at Cambridge University's Centre for European Legal
Studies, said in a post on Twitter: "This is a very carefully
crafted proposal taking WTO obligations seriously. It will be
difficult to convince EU trading partners, but is a logical next
step towards the full transition to a zero-carbon economy."
Woolcock agreed. "The EU is being very careful. But that doesn't
mean to say that other countries are not going to have different
interpretations of the WTO provisions. So, this gets into the very
legal debate about how you interpret the WTO provisions and how
much scope there is. And then this, as I say, is the legal
discussion that's been going on for decades," he said.
Aaron Cosbey, a development economist with a think tank, the
International Institute for Sustainable Development (IISD), was
confident that WTO rules would change to accommodate the EU
measure. "The question is, is the interpretation of WTO law
changing? Law itself will not change. I think anybody familiar with
trade policy will tell you that," he told ERCST webinar
attendees.
Those deciding WTO disputes should rule in favor of the CBAM, he
said, given the urgent need to act on climate change. "The
interpretation of the law changes over time. And those that
interpret that law are sensitive to the realities of evolving
international priorities, [they] are sensitive to the fact that
climate change is probably the biggest challenge we face: an
existential challenge at the international level. So, we can
certainly see if a good effort is taken to respect WTO law, I
expect we will see strong desire on the part of those interpreting
that law to find the measure in question in accordance with that
law," said Cosbey.
Recent legal decisions in EU countries, for example, the
February
ruling of the Administrative Court of Paris in France and the
April
ruling of the Constitutional Court in Germany, reveal a trend
towards better climate change protections under law.
"Two questions are worth asking. Will the next decade be WTO's
decade? Will the next decade be carbon neutrality's decade? These
two questions shed light on […] the rules of the game of the
future," wrote Wu.
Developing states left behind, for now
An even more pressing question is how the EU CBAM will impact on
developing countries that rely on EU states as buyers of their
imports.
Developed nations would fare better than developing nations in a
world with the CBAM, as the gap in income between them widens,
leaving the richer nations with more and the poorer nations with
less, according to a United Nations Conference on Trade and
Development (UNCTAD) report.
Developing countries hit will likely include EU aluminum
importers Mozambique, Guinea, Sierra Leone, Ghana, and Cameroon;
steel importers Zimbabwe and Zambia; electricity importer Morocco;
and fertilizer importers Algeria, Egypt, and Trinidad and Tobago,
according to EU-funded
sustainability think tank Institute for European Environmental
Policy (IEEP).
These and other developing states with linked supply chains will
be negatively impacted by the CBAM, but exempting them "would
create confusion on the very nature of CBAM," said IEEP.
Because the EU uses the CBAM for compliance with the Paris
Agreement, this aspect of the measure could cause a backlash
against global climate efforts. CBAM disputes might "divert
significant political energy and attention from other aspects of
international climate policy in the leadup to and aftermath of
COP26, and—at worst—undermine the trust that is essential
to securing the strong multilateral agreements needed," according
to the IEEP.
In fact, that's the direction that Russia seems to be going,
based on a statement by Russian Minister of Economic Development
Maxim Reshetnikov, who argued that the CBAM conflicted with the
Paris Agreement. "The Paris Agreement guarantees countries the
right to independently determine the most effective methods for
combating climate change," he said in the statement.
Cosbey believes the CBAM is not a nail in the coffin of the
Paris Agreement, even if it is discussed at COP26. "On the question
of whether we see a conflict with the spirit of Paris Agreement in
this EU CBAM proposal? Personally, I don't. I think there are some
design elements here which are helpful in terms of asking for
actual data, in terms of nonpunitive default for GHG intensity," he
said.
The impacts on developing countries may be fixed, for example,
by directing a share of CBAM revenues to them, he said, adding: "I
would like to have seen revenue sharing effected to a much greater
extent, and I think it's going to be."
Part of the CBAM's purpose is addressing the EU's past role as a
major polluter, Cosbey continued. "But the ultimate question is,
does it respect the principle of 'Common but Differentiated
Responsibility,' which says that those that have been most
responsible for climate change in the past and those with the most
means for addressing it should take a leadership position, and
should be out in front," said Cosbey.
The principle from the United Nations Framework Convention on
Climate Change meant countries in the EU are obliged to create
something like a CBAM, he said.
Posted 21 July 2021 by Cristina Brooks, Senior Journalist, Climate and Sustainability