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Introduction
The EU’s initiative of carbon-border adjustment mechanism (hereinafter”CBAM”) was brought forward with one of its rationale being to stop carbon leakage, a phenomenon where a company moves from a country with stricter environmental policies to a lenient one, resulting in the indifference in carbon emissions and undermining the actions and results of the former countries. To be implemented in phases from 2023 and reaching a definitive conclusion in 2026, the CBAM envisions to counterbalance the higher production costs in the EU by making imports more expensive, and thus, incentivising the phasing out of free allocation of EU Emission Trading System (hereinafter “ETS”). However, CBAM has been challenged by many countries including India, which has cited it as a “double punishment and discriminatory trade barrier.” Another allegation with respect to its means comes in the form of its violation of the principle of Common But Differentiated Responsibilities and Respective Capacities (hereinafter “CBDR-RC”) [See Also: Corvino (2023)]. This blog will delve deeper into the aspect of how the implementation of CBAM violates CBDR-RC and will analyse arguments regarding the same, further suggesting reforms.
CBDR-RC and How its related with CBAM
The principle of CBDR-RC is based on the historic contribution to carbon emissions by other countries, and propounds that the countries have contributed more to the carbon emission due to early industrialisation and have higher economic capacity to combat climate change have more responsibility towards the same than other countries being reflected in Article 3(1) of UNFCCC and Article 2(2) of the Paris Agreement. It has been argued by academics and scholars that whether the same can be construed as a fully fledged legal principle or rule, owing to its vague definition and applicability. [See Also: Different Perspectives on Differentiated Responsibilities, Chapter 2] However, as a signatory to the Paris Convention, the EU is bound to keep this principle in its view when making domestic policies regarding climate change laws. [See Also: Gayon, 2023, pg 290.]
The EU’s CBAM applies a carbon border tax on imported goods like steel and cement to equalize carbon costs between EU producers under its Emissions Trading System (ETS) and foreign exporters. Importers must purchase CBAM certificates reflecting embedded emissions, with adjustments for any carbon pricing paid in the origin country. [REGULATION (EU) 2023/956 (Article 6, Article 9)]. Thus, it creates an economic incentive for countries to adopt stricter carbon policies, aligning with the global goals of the Paris Agreement. By putting a price on embedded emissions, CBAM encourages exporting countries to decarbonize their industries, contributing to global emission reductions.
Arguments against CBAM in light of CBDR-RC
Although introduced to keep in check the phenomenon of carbon leakage, CBAM violates the principle of CBDR-RC. The same is argued in three folds, firstly, it relies on the assumption of comparability of carbon pricing policies without considering the position of countries. Secondly, it directly affects the economic and environmental efforts of developing and underdeveloped countries and thirdly, it tries to shift the historical responsibility of the EU under CBDR-RC to above-mentioned countries.
Firstly, CBAM relies on the assumption of comparability of carbon-pricing policies. Carbon pricing systems vary significantly across countries, both in terms of the type of policy and the price per ton of carbon. For eg., the EU ETS operates in a highly developed context where robust infrastructure, technological capabilities, and financial resources support the carbon trading system. However, many developing countries and least-developed countries (“LDCs”) lack the means to implement similar systems. Some countries have robust emissions trading systems, while others rely on carbon taxes, or may have no carbon pricing at all. Even when countries do implement carbon pricing, the price set may differ substantially, as it is influenced by factors such as national economic conditions, political will, and historical emissions. If a state wishes to avoid CBAM, an equivalent carbon pricing system is to be instated. If no comparable ETS or carbon pricing mechanism exists in the exporting country, CBAM often applies default emissions values derived from the EU’s ETS. These values are typically based on the “worst-performing installations” in the EU [REGULATION (EU) 2023/956 Annexure IV, 4.1]. Applying such default values to developing nations disproportionately burdens their exporters, as their actual emissions might be lower, but the absence of ETS mechanisms or robust data systems makes it hard to prove.
Secondly, many LDCs rely on carbon-intensive industries and exports of goods like steel, cement, and aluminum and often lack access to the necessary technology, infrastructure, and financial resources to meet the EU’s carbon benchmarks. CBAM could increase the cost of these exports, making them less competitive in EU markets. Special and Differential Treatment provisions (“SDT”) could help by providing technical assistance, capacity building, and financial aid to transition to low-carbon production, which the EU isn’t offering. The only hint of support is in a statement saying the EU is willing to work with poorer countries to help them decarbonize their industries and provide technical assistance for the new rules. This means the EU isn’t planning to adjust CBAM to reduce its impact on developing nations. At best, it might use some of the money collected from CBAM to help these countries shift to cleaner production methods. While this aligns with the global goal of fighting climate change, it doesn’t fully respect the CBDR-RC principles as it shifts the burden of climate mitigation onto developing countries by forcing them to meet the same carbon standards as wealthier nations without adequate compensation or support.
Thirdly, the CBAM allows the EU to shift focus from its historical responsibilities as the EU and developed nations have been major contributors to global greenhouse gas emissions due to fossil fuel reliance. The CBDR-RC principle expects them to lead climate action and support developing countries. The EU frames ETS and in extension, CBAM as a cornerstone of its climate policy, aligning it with the Paris Agreement’s goals of limiting global warming. By doing so, it positions CBAM as a mechanism to promote global decarbonization. However, this framing effectively externalizes the costs of the EU’s climate ambition, penalizing exporters from developing countries that rely on energy-intensive industries for economic development. It imposes EU-specific carbon standards, undermining nations’ sovereign contributions and the differentiated approach of NDCs in the Paris Agreement, pressuring them to prioritize EU standards.
Suggestions for Reforms
Some reforms for CBAM could be considered to ensure it respects equity, supports developing nations, and fosters collaborative global climate action. Firstly, introduction of exemptions or reduced rates for exports from LDCs and emerging economies will allow them time to transition to cleaner production methods. Criterions such as GDP per capita, HDI, carbon intensity of production etc. can be used for the determination of countries which receive the exemptions. A de minimis threshold can be affixed for where countries exporting below specific value or volume of product can be exempted, preventing administrative burdens on smaller economies. Further, a phased approach to these exemptions could be taken, where LDCs receive full exemptions for a specific period (say 5 to 10 years) to allow transition to cleaner energy, after which tariffs could be gradually introduced.
Secondly, currently, the EU will only provide technical assistance to LDCs with no plans to finance green transition. Thus, allocating a portion of CBAM revenue to a dedicated Climate Adjustment Fund for developing countries to finance clean and renewable energy projects could facilitate transition. Fund allocation could be decided by a governance structure that will include representatives from both the EU and developing countries. The allocation framework could be structured in the same vein as Green Climate Fund’s Investment Framework, granting funds to governments and private entities based on criterions such as need, effectiveness to mitigate or adapt to green energy, impact etc, addressing LDCs financial needs.
Thirdly, CBAM should incorporate region-specific emission benchmarks, considering sectoral realities and developing nations’ NDC progress. Benchmarks could be set based on carbon intensity of production in specific sectors, local energy sources, economic development levels, and infrastructure. Countries with high renewable energy shares could have lower benchmarks. Adjusting benchmarks according to each country’s NDC progress could incentivize compliance. Bilateral agreements between the EU and developing nations on emissions reductions could also encourage cooperation. Utilising established protocols such as the Greenhouse Gas Protocol and ISO standards (e.g., ISO 14064 for GHG emissions) to create a consistent framework for emissions reporting could help maintain transparency in setting up benchmarks.
Conclusion
In conclusion, CBAM faces criticism for violating CBDR-RC principles by assuming comparability in carbon pricing across nations and imposing uniform carbon standards that disadvantage developing countries. Many LDCs lack resources to meet EU benchmarks, raising export costs and reducing competitiveness. The EU’s framing of CBAM shifts climate mitigation burdens onto developing nations without adequate support, undermining equity and historical responsibilities.
Reforms could include exemptions or reduced rates for LDCs, creating a Climate Adjustment Fund to finance low-carbon transitions. Incorporating region-specific benchmarks and transparent policies while fostering collaboration could align CBAM with CBDR-RC, balancing EU goals with equitable global climate action.
Aman Anand is a second-year student in Rajiv Gandhi National University of Law, Punjab.
Picture Credit: Adobe Firefly (modified by JFIEL)
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