India’s concerns
India fears that CBAM will cripple the export of its carbon-intensive products to the EU.
India’s exports may be limited to aluminium, iron, and steel, and affect only 1.8% of its total exports to the EU.
India has reportedly decried CBAM as being protectionist and discriminatory.
There is also talk of challenging the CBAM at the World Trade Organization (WTO)’s dispute settlement body.
CBAM and WTO
A cornerstone principle of WTO law is non-discrimination.
Thus, countries are required to accord equal treatment to ‘like’ products irrespective of their country of origin (most-favoured nation treatment) and to treat foreign-made ‘like’ products as they treat domestic ones (national treatment principle).
CBAM’s design is origin-neutral in appearance.
CBAM may, in its application, discriminate between goods from different countries on account of:
An inadequate carbon pricing policy, or
Due to onerous reporting requirements that importers would be subject to.
Traditionally in WTO jurisprudence, must processes and production methods are not relevant for comparing products.
On that account, the CBAM violates WTO law for discriminating between EU and foreign products covered by CBAM based on the embedded emissions.
However, even if the EU’s CBAM is discriminatory, there could be a claim for justifying it under the General Exceptions clause given in Article XX of the General Agreement on Tariffs and Trade (GATT).
Under Article XX, measures taken by countries that otherwise violate GATT obligations are permitted if:
They fall under one of the listed policy grounds.
They satisfy the requirements of the introductory clause of Article XX, known as the chapeau.
The introductory clause of Article XX (its chapeau) emphasizes the manner in which the measure in question is applied.
which inter alia requires that countries do not apply measures in a manner that results in arbitrary or unjustifiable discrimination between countries where the same conditions prevail.
One of the listed policy grounds in Article XX is ‘conservation of exhaustible natural resources’. CBAM would fall under this category.
Challenges
As commentators argue, the CBAM only considers ‘explicit’ carbon prices, not ‘implicit’ costs (non-price-based costs) borne by products originating in certain countries.
Accordingly, it arbitrarily or unjustifiably discriminates between countries where the same environmental conditions exist.
Whether the carbon-intensive products to which the CBAM applies are ‘like’?
While steel products may appear similar, the process by which electric arc furnaces produce steel is less carbon-intensive than the steel produced in blast furnaces, for instance.
Being products that are not ‘like’, the rules on non-discrimination would have little application in such a case.
What is Emissions Trading System (ETS) in EU?
In 2005, the EU adopted a climate change policy known as the Emissions Trading System (ETS).
ETS is a market-based mechanism that aims at reducing GHG emissions by allowing bodies emitting GHG to buy and sell these emissions amongst themselves.
It has a mechanism for its domestic industries.
Emissions embedded in products imported from other countries may not be priced in a similar way due to a lack of stringent policies or due to less stringent policies in those countries.
The impacted industries in the EU receive free allowances or permits under the ETS.
The EU apprehends the phenomenon of ‘carbon leakage’, that is, due to the application of ETS, European firms operating in carbon-intensive sectors might possibly shift to those countries that have less stringent GHG emission norms.
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