Cross Border Emissions Reduction and the Carbon Adjustment Mechanism: A New Trade War?
Understanding the inaccuracy
Net zero pledges are limited to geographical borders: the clothes, smartphones, appliances, cars, accessories - you name it - we buy that are manufactured abroad - as most of them are - may possibly not adhere to your country’s environmental standards. This is not limited to consumerist goods, the list includes essential commodities necessary for several aspects of a nation’s economy, including heavy metals, materials necessary for the construction of renewable energy infrastructure, as well as ammonia used for fertilisers used in agricultural practices.
An immediate impact of this is the inaccuracy created when measuring CO2 emissions and setting net-zero targets relative to those. The impact of trade is often unnoticed - perhaps naively so, or intentionally - resulting in the underestimation of emissions. These are emissions that rich countries are responsible for, but which rarely get accounted for, undermining the necessary transparency in measuring national carbon footprints, while assigning an illusionary and disproportionate split of responsibilities between nations.
Consumption v production based net zero targets
This boils down to the difference between consumption and production based net zero targets. Most targets currently only account for carbon emissions produced within a country’s borders, excluding the consumption patterns of their citizens, despite the fact these - predominantly western nations - depend on services and the mass imports of manufactured products for consumption. This leads to a massive carbon leakage from national net-zero pledges, as a quarter of global emissions are related to trade flows. Imported emissions add a fifth to the EU’s carbon and a tenth to America’s.
This is the inevitable result of economic and trade globalisation. However, it is also the inevitable result of a postcolonialist control and the imposition of a western belief system. One solution coined through this transition has been the increase of rich nations’ negative emissions to match their carbon consumption - a dangerous ploy that has the potential to result in the overreliance of carbon capture.
There have been attempts to address this at several levels – without a global agreement on carbon pricing - leading to mounting fears of national trade rights becoming impaired. Recently, the EU Commission proposed in the Fit for 55 Package the creation of a Carbon Border Adjustment Mechanism (CBAM). This comes with the Commission’s search for a World Trade Organisation-compatible framework and several implications and risks attached for third countries.
EU Carbon Border Adjustment policy objectives and conflicts
CBAM intends to counteract carbon leakages – acting as an equaliser between domestic products and imports, [European Commission] and restore a level-playing field[Cecilia Bellora]. The Commission has sought to make this WTO-compliant by issuing carbon certificates to EU importers to the carbon price that would have been paid if the goods were produced under the EU’s carbon pricing regulations. Nevertheless, this comes in tension with international trade laws - and specifically WTO rules relating to Non-Discrimination and Most-Favoured Nation Principles under the General Agreement on Tariffs and Trade (hereinafter, GATT) 1994 Art.XX.
Despite the argument that CBAM will encourage other nations to accelerate their climate action, this is a Eurocentric notion that does not account for nations that lack the means necessary to do so which will, inevitably, be prejudiced under the proposed framework (L. Eicke, S. Weko, M. Apergi, A. Marian). Due to this technological and regulatory gap (B. Lim, K. Hong, J. Yoon, J. Chang, I. Cheong), CBAM tariffs will be assessed differently based on each countries’ competencies leading to a pragmatic distinction (Han, J.H.) between nations and the violation of the MFN principle in relation to countries’ exports.
Articles 3.1 and 3.5 United Nations Framework Convention on Climate Change which emphasise common but differentiated responsibilities and capabilities, has been cited as a “way out” (L. Eicke et al) of potential violations. However, Matoo et al have found that developing country exports and economic welfare would be most impacted by the CBAM (A. Mattoo, A. Subramanian, D. van der Mensbrugghe, J. He). This is also seen in the statistics, as alongside the 15 most exposed nations under the CBAM are Turkey, Mozambique and Algeria – major exporters in energy-intensive industries including aluminium and fertilisers (A. Dumitru, B. Kolbl, M. Wijffelaars).
Springmann argues that the impact of CBAM can be mitigated if revenues are used to fund clean development and tech transfer (M. Springmann). Additionally, Branger et al have suggested that to reduce the vulnerability to risks, CBAM should exempt selected countries. However, this would adversely create “carbon havens” while conflicting with WTO rules (F. Branger, P. Quirion).
A. Dumitru, B. Kolbl, M. Wijffelaars “The Carbon Border Adjustment Mechanism Explained” 16 July 2021 in Rabobank
A. Mattoo, A. Subramanian, D. van der Mensbrugghe, J. He, “Trade effects of alternative carbon border-tax schemes”, Review of World Economics 149 (3) (2013) 587–609
B. Lim, K. Hong, J. Yoon, J. Chang, I. Cheong “Pitfalls of the EU’s Carbon Border Adjustment Mechanism” Energies, 2021, 14, 7303
Cecilia Bellora, Lionel Fontagne “EU in Search of a WTO-Compatible Carbon Border Adjustment Mechanism” 14 Oct 2021
European Commission, Inception Impact Assessment: carbon border adjustment mechanism (2020)
F. Branger, P. Quirion, “Climate policy and the ‘carbon haven’ effect”, Wiley Interdiscip. Rev. Clim. Change 5 (1) (2014) 53–71
Han, J.H. “Competition and Coexistence of International Trade Norms and Environmental Norms: Focusing on the EU Carbon Border Adjustment Mechanism” Rev. Int. Area Stud. 2021, 30, 156–162.
L. Eicke, S. Weko, M. Apergi, A. Marian “Pulling up the carbon ladder? Decarbonization, dependence, and third-country risks from the European carbon border adjustment mechanism” ERSS Volume 80, Oct 2021
M. Springmann, “Carbon tariffs for financing clean development”, Climate Policy 13 (1) (2013) 20–42