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Practical obstacles and structural legal constraints in the adoption of ‘defensive’ policies: comparing the EU Carbon Border Adjustment Mechanism and the US Proposal for a Border Carbon Adjustment

Published online by Cambridge University Press:  10 May 2022

Giulia Claudia Leonelli Open the ORCID record for Giulia Claudia Leonelli [Opens in a new window]
Giulia Claudia Leonelli*
Affiliation:
School of Law, Birkbeck College, London, UK
*
*Author e-mail: g.leonelli@bbk.ac.uk
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Abstract

This paper analyses the EU proposal for a carbon border adjustment mechanism (CBAM) and a recent US proposal for the establishment of a border carbon adjustment (BCA) as examples of ‘defensive’ policies, broadly informed by an economic level playing field and an environmental level playing field rationale. From an environmental law perspective, the CBAM's narrow focus on price-based policies, distortions of competition and trade intensity is unsatisfactory; however, the EU CBAM is more feasible in practical terms and overall more likely to be WTO law compatible than the US proposal for a BCA. An environmental level playing field perspective is associated with several practical problems: these relate to the determination of environmental equivalence, the identification of appropriate remedies, and the demarcation of the scope of application of the relevant regulatory arrangements. Further, measures informed by an economic level playing field rationale can be easier to justify under WTO law. Taking stock of these findings, the paper concludes that practical obstacles and structural legal constraints push towards a narrower focus on an economic level playing field, as a matter of regulatory design.

Keywords

environmental lawclimate change lawCarbon Border MeasuresGATT 1994EU Carbon Border Adjustment Mechanismlevel playing field
Type
Research Article
Information
Legal Studies , Volume 42 , Issue 4 , December 2022 , pp. 696 - 714
Copyright
Copyright © The Author(s), 2022. Published by Cambridge University Press on behalf of The Society of Legal Scholars

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References

1 Paris Agreement to the United Nations Framework Convention on Climate Change, 12 December 2015, TIAS No 16-1104, Arts 2(1)(a), 3 and 4.

2 On the de jure and de facto ‘Brussels Effect’ see A Bradford The Brussels Effect. How the European Union Rules the World (Oxford: Oxford University Press, 2020). On the extra-territorial reach of EU law see Scott, J ‘Extraterritoriality and territorial extension in EU law’ (2014) 62 American Journal of Comparative Law 87CrossRefGoogle Scholar; and M Cremona and J Scott (eds) EU Law beyond EU Borders. The Extraterritorial Reach of EU Law (Oxford: Oxford University Press, 2019).

3 On the notion of ‘trading-down’ see D Vogel Trading Up. Consumer and Environmental Protection in a Global Economy (Cambridge MA: Harvard University Press, 1997).

4 For an analysis of the TCA's Title on a Level Playing Field through the lens of the notions of an economic and environmental level playing field see Leonelli, GC ‘From extra-territorial leverage and transnational environmental protection to distortions of competition: the level playing field in the EU-UK Trade and Cooperation Agreement’ (2021) 33 Journal of Environmental Law 611CrossRefGoogle Scholar.

5 See below, section 2, for an overview of what a determination of economic equivalence may entail in practice.

6 For example, ensuring that imported carbon-intensive products ‘bear’ the same economic costs ‘borne’ by domestic carbon-intensive products will have some beneficial effects in environmental terms. Nonetheless, recourse to economic remedies testifies to a narrow focus on distortions of competition between products, as opposed to a broader focus on environmental goals. This tension between ‘direct’ (economic) and ‘indirect’ (environmental) goals has recently surfaced in the context of the EU debate on the CBAM and free ETS allowances; see below, section 4.

7 This, for example, would not occur if regulators focused on environmental conditionality and adopted measures which promote environmentally sustainable practices and grant an advantage to specific categories of products.

8 See below, section 2, for an analysis of this point. A focus on environmental equivalence, by contrast, can be more easily reconciled with the acknowledgment by developed and developing countries that they should take the lead in levelling the environmental playing field and postpone the application of punitive remedies.

9 European Commission Proposal for a Regulation of the European Parliament and of the Council Establishing a Carbon Border Adjustment Mechanism, COM(2021) 564 Final. On 15 March 2022, the Council adopted its General Approach on the CBAM Regulation; see Council of the European Union Draft Regulation of the European Parliament and of the Council establishing a Carbon Border Adjustment Mechanism – General Approach, 2021/0214(COD).

10 FAIR Transition and Competition Act, S GAI21718 59G, 117th Congress (2021).

11 European Commission, above n 9, at 1. The preconditions for carbon leakage to materialise are: (a) that national environmental commitments diverge, leading to differences in the economic costs of production; and (b) that trade flows are such that more expensive domestic products find themselves in competition with cheaper imported products. For an overview of different findings of different studies on carbon leakage see European Commission Commission Staff Working Document, Impact Assessment Report Accompanying the Document Proposal for a Regulation Establishing a Carbon Border Adjustment Mechanism, SWD(2021) 643 final, part 2/2, Annex 11. The proposals also seek to incentivise exporting countries to adopt more stringent environmental standards, encourage firms to invest in ‘greener’ technologies, and reduce transnational demand for carbon-intensive materials.

12 Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 Establishing a System for Greenhouse Gas Emission Allowance Trading within the Union and amending Council Directive 96/61/EC [2003] OJ L 275. The EU institutions have recently proposed a more stringent cap on emissions and an extension of the scope of application of the ETS: see the documents available at https://ec.europa.eu/clima/policies/eu-climate-action/delivering_en.

13 Arts 4 and 5.

14 Arts 6 and 8; see also Art 22. A transitional period will apply from 2023 to 2025.

15 Art 31. This matter is currently under discussion: see European Parliament, Committee on the Environment, Public Health and Food Safety Draft Report on the Proposal for a Regulation Establishing a Carbon Border Adjustment Mechanism, 2021/0214(COD). No agreement has been reached and no progress has been made on this highly controversial issue in the context of the Council's General Approach; see above n 9.

16 Recital (17) and Art 3(15) and 3(20). A draft version of the proposal, leaked in June 2021, included indirect emissions within the scope of application. A potential extension is currently under discussion: see European Parliament, above n 15.

17 See Art 7(3) and Annex III, points 4.2 and 5.

18 See Art 2(5); see also Art 2(7), on electricity.

19 See Art 3(23): ‘carbon price’ means the monetary amount paid in a third country in the form of a tax or emission allowances under a GHG emissions trading system.

20 In the absence of verified data on the emissions embedded in a product, as mentioned above, the average emission intensity of each exporting country may be employed as a default value. This is simply an alternative criterion for the calculation of emissions; it does not reflect an environmental level playing field rationale. In a very different vein, a measure informed by an environmental level playing field rationale would take the average sectoral GHG emissions of a country or the effectiveness of its GHG emission reduction policies into account to establish environmental equivalence and to (potentially) provide a reduction in the number of CBAM certificates.

21 By way of example, if country X implements GHG emission reduction policies as effective as the EU ones but has no carbon pricing in place, the application of the CBAM to products originating from country X will remedy distortions of competition between domestic and imported products, in so far as products originating from country X do not ‘pay’ an ‘explicit’ (and fluctuating) price for carbon. However, it will not have specific environmental effects; carbon leakage is unlikely to occur in country X.

22 References to trade intensity are ubiquitous in the EU IA: see in particular Impact Assessment Report, above n 11, part 2/2, p 75 ff. See also Recitals (34) and (35) of the proposed Regulation. The European Parliament advocates broadening the CBAM's scope of application; see above n 15.

23 Section 9902. Thirteen states in the US have adopted price-based GHG emission reduction policies; for more information see the information available at https://www.c2es.org/content/market-based-state-policy.

24 Section 9905(c).

25 For an examination of the tensions between ‘climate change unilateralism’ and the CBDR-RC principle see J Scott and L Rajamani ‘EU climate change unilateralism’ (2012) 23 European Journal of International Law 469. The European Parliament advocates redistributing part of the CBAM revenues to LDCs. No progress has been made on this issue in the context of the Council's General Approach; see above n 9.

26 Section 9901(6).

27 Section 9901(7).

28 See section 9901(15)(A)–(D).

29 Section 9901(15)(F).

30 Sections 9901(15)(E) and 9905(e).

31 Sections 9901(17) and 9904(a)(1).

32 Sections 9901(13) and 9904(a)(2).

33 Section 9904(a)(3).

34 Sections 9901(3) and 9903(b).

35 Impact Assessment Report, above n 11, part 1/2, p 26.

36 E Campbell and W Pizer Border Carbon Adjustments without Full (or Any) Carbon Pricing (Resources for the Future, 2021).

37 Ibid.

38 Impact Assessment Report, above n 11, part 2/2, p 63.

39 See Recital (32) in the proposed Regulation.

40 Impact Assessment Report, above n 11, part 1/2, p 22.

41 Ibid, part 2/2, pp 55 and 56.

42 Ibid, part 1/2, p 22; and part 2/2, pp 55 and 56.

43 Ibid, part 2/2, p 65.

44 Ibid, part 1/2, p 34; and part 2/2, p 72 ff.

45 Ibid, part 2/2, p 58 ff.

46 Ibid, p 67.

47 Ibid, part 1/2, pp 22–25.

48 Ibid, 17.

49 Ibid, p 18.

50 See inter alia J Pauwelyn US Federal Climate Policy and Competitiveness Concerns: The Limits and Options of International Trade Law, Duke University Working Paper (2007); J Pauwelyn ‘Carbon leakage measures and border tax adjustments under WTO law’ in G Van Calster and D Prévost (eds) Research Handbook on Environment, Health and the WTO (Cheltenham: Edward Elgar, 2013); J Hillman Changing Climate for Carbon Taxes: Who is Afraid of The WTO?, German Marshall Fund (2013); R Howse ‘Non-tariff barriers and climate policy’ in C Herrmann et al (eds) European Yearbook of International Economic Law (Berlin: Springer, 2015); G Marceau ‘The interface between trade rules and climate change actions’ in DY Park (ed) Legal Issues on Climate Change and International Trade Law (Berlin: Springer, 2016); JP Trachtman WTO Law Constraints on Border Tax Adjustment and Tax Credit Mechanisms to Reduce the Competitive Effects of Carbon Taxes (Resources for the Future, 2016).

51 See the text of Art II (‘Schedules of Concessions’) and Art XI (‘General Elimination of Quantitative Restrictions’).

52 The time at which the tax/charge is paid or collected is irrelevant; what matters is rather whether it accrues to an internal event, such as the distribution, sale, use or transportation of a product. See China – Auto Parts, AB Report, WT/DS339/AB/R, WT/DS340/AB/R, WT/DS342/AB/R (12 January 2009), para 162.

53 For an in-depth analysis of Art III:2 see Horn, H and Mavroidis, P ‘Still hazy after all these years: the interpretation of national treatment in the GATT/WTO case law on tax discrimination’ (2004) 15 European Journal of International Law 39CrossRefGoogle Scholar.

54 Arguing in favour of adjustability see Pauwelyn (2007), above n 50, pp 19 and 20; and Howse, above n 50, p 6. The reference in Art III:2 to internal taxes or internal charges applied directly or indirectly to imported products and ‘like’ domestic products may justify an inclusion of carbon taxes. Further, the Panel Report in US – Superfund has been relied on to advance the argument that carbon taxes may be subject to border adjustment; in this respect, some commentators have laid emphasis on the absence of any specification as to whether the chemical substances which were the object of taxation in US – Superfund still had to be physically present in the imported product, in order for a BTA to apply. For a more sceptical view see P Low et al The Interface Between the Trade and Climate Change Regimes: Scoping the Issues, WTO Staff Working Paper ERSD-2011-1 (2011) p 8; Trachtman, above n 50; Marceau, above n 50, p 7. These scholars refer to the wording of Art II:2(a) and of the note ad Art III, and the Report of the Working Party on Border Tax Adjustments, L/3464 (20 November 1970), para 14. They also emphasise that GHG emissions are an ‘output’ rather than an ‘input’ of production processes; this may justify a difference in the treatment of carbon taxes, vis-à-vis taxes on input materials (such as the Superfund Act).

55 Pauwelyn has suggested that this could provide a solution to the thorny issue of carbon calibration; carbon calibration is likely to be in breach of the National Treatment obligations of Art III:4. On this point see Pauwelyn (2013), above n 50. For greater emphasis on the problem of carbon calibration, including in the context of Art III:2 see Trachtman, above n 50.

56 Korea – Beef, AB Report, WT/DS161/AB/R, WT/DS169/AB/R (10 January 2001), para 133.

57 EC – Asbestos, Panel Report, WT/DS135/R (5 April 2001), para 8.94 ff.

58 The term ‘affecting’ has been interpreted as referring to any measures which may have an effect on the relevant imported goods, as detailed in Art III:4. See Canada – Autos, Panel Report, WT/DS139/R, WT/DS142/R (19 June 2000), para 10.80 ff. For a different view as regards the CBAM and a differentiation between ‘fiscal’ and ‘non-fiscal’ elements under this regulatory scheme see I Venzke and G Vidigal ‘Are trade measures to tackle the climate crisis the end of differentiated responsibilities? The case of the EU CBAM’ Amsterdam Law School Research Paper 2022-02.

59 EC – Asbestos, AB Report, WT/DS135/AB/R (5 April 2001), para 99. The notion of ‘like’ products is interpreted differently under Art III:2, first sentence. On the ‘accordion’ of likeness see Japan – Alcoholic Beverages II, AB Report, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R (1 November 1996) p 21.

60 EC – Asbestos, AB Report, paras 101 and 102, expressly referencing the Report of the Working Party on Border Tax Adjustment.

61 Ibid.

62 US – Clove Cigarettes, AB Report, WT/DS406/AB/R (24 April 2012) para 119 ff.

63 EC – Asbestos, AB Report, para 117 ff.

64 For detailed insights see Regan, D ‘Regulatory purpose and “like” products in Article III:4 of the GATT (with additional remarks on Article III:2)’ (2002) 36 Journal of World Trade 443CrossRefGoogle Scholar; Regan, D ‘Further thoughts on the role of regulatory purpose under Article III of the GATT’ (2003) 37 Journal of World Trade 737CrossRefGoogle Scholar; Lydgate, E ‘Consumer preferences and the national treatment principle: emerging environmental regulations prompt a new look at an old problem’ (2011) 10 World Trade Review 165CrossRefGoogle Scholar.

65 As first stated in US – Section 337, GATT Panel Report, L/6439 (7 November 1989) para 5.11.

66 For in-depth analyses see Ehring, L ‘De facto discrimination in world trade law: national and most-favoured-nation treatment – or equal treatment?’ (2002) 36 Journal of World Trade 921CrossRefGoogle Scholar; Regan (2003), above n 64; Lydgate, E ‘Sorting out mixed messages under the WTO national treatment principle: a proposed approach’ (2016) 15 World Trade Review 423CrossRefGoogle Scholar.

67 For an indirect acknowledgment see Impact Assessment Report, above n 11, part 1/2, p 20.

68 See Canada – Autos, AB Report, WT/DS139/R, WT/DS142/R (19 June 2000), para 77 ff; and EC – Seal Products, AB Report, WT/DS400/AB/R, WT/DS401/AB/R, paras 5.95–5.96.

69 US – Gasoline, AB Report, WT/DS2/AB/R (20 May 1996), p 22. See however Indonesia – Horticultural Products, Animals and Animal Products, Panel Report, WT/DS477/R and WT/DS478/R (9 November 2017), and Indonesia – Horticultural Products, Animals and Animal Products, AB Report, WT/DS477/AB/R and WT/DS478/AB/R (9 November 2017). In this dispute, the Panel first assessed whether seven measures adopted by Indonesia were provisionally justified under sub-paras (a), (b) and (d), and found that this was not the case. The Panel then assumed arguendo that the eighth measure was provisionally justified; when turning to the Chapeau requirements, however, it decided to assess whether the Indonesian import licensing regime as a whole (rather than the eighth measure under challenge) complied with the Chapeau. Having found that this was not the case, the Panel did not examine whether the remaining nine measures under challenge were provisionally justified under the sub-paras of Art XX, and simply concluded that they were in breach of the Chapeau. The AB acknowledged that ‘the objective that is found to justify provisionally the measure at issue under a paragraph of Art XX is a relevant consideration to assess whether there is “arbitrary or unjustifiable discrimination between countries where the same conditions prevail” pursuant to the Chapeau […]’ (para 5.98); further, it emphasised that ‘[…] following the normal sequence of analysis under Article XX provides Panels with the necessary tools to assess the requirements of the Chapeau’ (para 5.101). Nonetheless, it concluded that ‘[…] depending on the particular circumstances of the case, a Panel that deviates from the sequence of analysis under Article XX might not necessarily, for that reason alone, commit a reversible legal error, provided that the Panel has made findings on those elements under the applicable paragraphs that are relevant for its analysis of the requirements of the Chapeau’ (paras 5.100 and 5.101).

70 US – Gasoline, Panel Report, WT/DS2/AB/R (20 May 1996), paras 6.36–6.37; US – Shrimp, AB Report, WT/DS58/AB/R (6 November 1998), paras 128–131.

71 US – Gasoline, Panel Report, para 6.38.

72 US – Gasoline, AB Report, p 21; US – Shrimp, AB Report, paras 136 and 141.

73 US – Gasoline, AB Report, pp 20–21.

74 Any potential objections surrounding the alleged ‘implied jurisdictional limitation’ of Art XX(g) are unlikely to succeed after the AB findings in US – Tuna II (Mexico) and EC – Seal Products. For this reason, this point is not examined.

75 China – Publications and Audiovisual Products, WT/DS363/R, Panel Report (19 January 2010), para 7.759; EC – Seal Products, AB Report, para 5.199 ff.

76 Colombia – Textiles, AB Report, WT/DS461/AB/R (22 June 2016), para 5.67 ff.

77 Korea – Beef, AB Report, para 164.

78 Brazil – Retreaded Tyres, AB Report, WT/DS3327AB/R (17 December 2007), paras 156 and 182.

79 See for example Colombia – Textiles, AB Report, para 5.75 ff.

80 Brazil – Retreaded Tyres, AB Report, para 179; EC – Asbestos, AB Report, para 170 ff.

81 Brazil – Retreaded Tyres, AB Report, para 145 ff.

82 Ibid, para 151.

83 Alternative measures will be reasonably available if the responding Member is capable of taking them and if they do not impose undue economic or technical burdens. Colombia – Textiles, AB Report, para 5.71 ff.

84 US – Gasoline, AB Report, p 22; US – Shrimp, AB Report, paras 158–159.

85 US – Shrimp, AB Report, paras 158–159.

86 US – Gasoline, AB Report, p 22.

87 EC – Seal Products, AB Report, para 5.302.

88 Bartels, L ‘The Chapeau of the general exceptions in the WTO, GATT and GATS agreements: a reconstruction’ (2015) 109 American Journal of International Law 95CrossRefGoogle Scholar.

89 EC – Seal Products, AB Report, para 5.298.

90 US – Gasoline, AB Report, p 25.

91 Ibid.

92 EC – Seal Products, AB Report, para 5.299 ff.

93 US – Shrimp, AB Report, paras 180–181; see also EC – Seal Products, AB Report, para 5.327 ff.

94 By analogy see the findings in US – Shrimp, AB Report, para 165; and EC – Seal Products, AB Report, para 5.324 ff.

95 See Brazil – Retreaded Tyres, AB Report, para 231 ff; and EC – Seal Products, AB Report, para 5.316 ff. For the opposite view, that the Chapeau requirements enable or even oblige a regulating Member to take the (different socio-economic) conditions prevailing in LDCs into account, see Pauwelyn (2007), above n 50, p 38 ff. In this context, the US could also potentially invoke the CBDR-RC principle; see above section 2. For an analysis of the CBAM in the light of the CBDR-RC principle see Venzke and Vidigal, above n 58.

96 Other elements in the implementation of the US scheme may lead to a breach of the Chapeau. These include the specification that the BCA would apply to products originating from countries whose commitments are equivalent to the US ones, if these countries impose carbon border measures on US products; the unilateral determination by the US administration of the emissions embedded in specific covered goods and fuels; and recourse, where such information is insufficient, to the benchmark emissions of the worst performing US producers. A petition procedure is available; however, it is unclear whether this is sufficient to safeguard due process and fairness. Similar considerations came into play in US – Gasoline, where the AB found that the application of a statutory (rather than individual) baseline to imported products and the US failure to explore alternative verification methods amounted to arbitrary and unjustifiable discrimination. See US – Gasoline, AB Report, p 27.

97 See T Meyer and TN Tucker ‘A pragmatic approach to carbon border measures’ (2021) 20 World Trade Review 1.

98 Meyer and Tucker have developed this point from a product-based perspective, arguing that the CBAM fails to account for the ‘implicit’ carbon price ‘borne’ by products originating from countries which adopt non-price-based policies. In a different vein, from a state-based and environmental protection perspective, the CBAM may remedy distortions of competition between domestic and imported products, in so far as the products originating from these countries do not ‘pay’ an ‘explicit’ (fluctuating) price for GHG emissions; however, it will not have environmental effects, as carbon leakage is unlikely to occur in these countries. See also above n 21.

99 See eg US – Shrimp 21.5, Panel Report, WT/DS58/RW (15 June 2001), paras 5.56–5.59.

100 US – Gasoline, AB Report, p 28; US – Shrimp, Panel Report, WT/DS58/R (15 May 1998), para 7.56; US – Shrimp, AB Report, para 166; US – Shrimp 21.5, Panel Report, paras 5.46 ff and 5.63 ff; and US – Shrimp 21.5, AB Report, WT/DS58/AB/RW (15 June 2001), paras 123–124. As confirmed by the AB, there is no duty for the parties to actually conclude an agreement.

101 US – Shrimp, AB Report, para 172; US – Shrimp 21.5, AB Report, para 122.

102 US – Shrimp, AB Report, paras 164–166.

103 For a justification of this regulatory choice see Impact Assessment Report, above n 11, part 1/2, p 30. By contrast, Section 9905(d) of the Coons-Peters Bill stipulates that the Secretary of State and the US Trade Representative shall engage in negotiations at the international level. See also above n 95.

104 Paras 161 and 163.

105 Para 161.

106 Para 164. See also US – Shrimp 21.5, Panel Report, para 5.90.

107 Ie, if country X has highly effective non-price-based policies in place and an ‘implicit’ carbon price as high as the EU ‘explicit’ one, this country would benefit from employing carbon pricing mechanisms; translating its ‘implicit’ carbon price in an ‘explicit’ one would allow the country to keep the relevant revenues and its products to get a rebate under the CBAM.

108 On this point see also European Parliament, above n 15.

109 See also European Parliament, above n 15.

110 The European Parliament is also supportive of this approach; see above n 15.

111 The US President and the President of the European Commission, for instance, have recently announced their intention to negotiate the first sectoral arrangement for the promotion of low carbon steel and aluminium: see the European Commission's website, document available at https://ec.europa.eu/commission/presscorner/detail/en/QANDA_21_5722.