The European Union (EU) is contemplating the adoption of a carbon border adjustment mechanism (CBAM), which would extend its domestic carbon price to emissions that are produced outside its borders but are embodied into its imports of carbon-intensive commodities. In doing so, the EU is testing the boundaries of permissible unilateral action at the interface of international climate and trade law. However, the question of whether the proposed CBAM is compatible with these two multilateral legal regimes is yet to be addressed in an integrated manner. This article seeks to fill this gap in the scholarship and makes two main arguments. First, the CBAM as presently designed does not respect the principle of Common but Differentiated Responsibilities and Respective Capabilities (CBDRRC) and needs to be adjusted through two forms of differential treatment: a full exemption for least-developed countries and Small Island Developing States and the use of CBAM-generated revenue to support decarbonisation efforts in other affected developing countries. Secondly, this CBDRRC-based differentiation should be permissible under WTO law on the grounds that it does not amount to discrimination between countries where the same conditions prevail.

Differential treatment in international environmental law is the broader manifestation of the principle of common but differentiated responsibilities (CBDRs). It reflects equity concerns that have underlain most environmental debates on a North-South basis for several decades. Over the past two decades, various forms of differentiation have been introduced in environmental law instruments to the point where it has become an essential element of any international environmental agreement. At the same time, differential treatment has been the object of sustained criticism, arguing that it should be temporary, that it fails to target beneficiaries appropriately, and undermines environmental outcomes. This article takes the opposite view and argues that differentiation remains crucial in a world where widespread inequalities remain. Beneficiaries need to be identified on the basis of environmental and social indicators and differentiation should constitute the basis on which environmental measures are adopted. Worsening environmental conditions and an evolving global context call for adding new elements to the existing framework for differentiation. This requires thinking beyond the current structure centred around nation states and conceptualizing differentiation around common heritage equity. It also requires expanding differentiation beyond the field of environmental law, to include all areas of sustainable development law. Further, differential treatment needs to be implemented in a way that benefits the most disadvantaged in every country. These measures are necessary to foster a vibrant international environmental law which addresses the equity needs of all states in years to come.

Many multilateral environmental agreements have adopted differentiated rules for different countries, based on the recognition of the ‘common but differentiated responsibilities’ (CBDRs) of states. By establishing two rigid groups of countries with and without emissions reduction obligations, the intergovernmental climate regime represents the most extreme case of such differentiation. The regime has struggled to overcome this rigidity and the resulting political deadlock between developing and developed countries. Transnational climate governance (TCG) initiatives have emerged as an alternative to provide mitigation, adaptation or finance outside the multilateral process. By drawing on synergies between public and private actors, it is hoped that they overcome the paralysis of the intergovernmental process. Yet, they take place in the same world of unequal peers, with different levels of capacity and responsibility for climate change. This article investigates the extent to which such TCG initiatives reflect the CBDR principle. Do different types of initiative – involving different types of actor or with different climate-related goals – address differentiation in distinct ways? Does taking account of CBDRs affect the membership of transnational initiatives? This article explores these questions empirically by analyzing a sample of TCG initiatives in terms of how they include differential treatment of states and non-state members. It concludes that TCG initiatives address differentiation in a pragmatic way. Most frequently, they either offer participants flexibility in how to implement their commitments, or provide support to members from developing countries. Such support is, so far, still insufficient to address the limited involvement of developing country actors.