European Border Carbon Adjustment Mechanism and the WTO trade rules

July 21, 2021: The European Council and Parliament adopted a regulation establishing a carbon border adjustment mechanism (CBAM) on July 14, 2021, as part of its delivery of a European Green Deal with the ambition of a 55 per cent cut in carbon emissions compared to 1990, by 2030, and zero net emissions by 2050.

The CBAM applies EU rules on carbon emissions to both local and imported goods. It aims to reduce the risk of transfer of carbon-emitting European industries to non-European countries with weaker carbon regulation, by encouraging producers in non-EU countries to green their production processes.

Australia’s trade minister, Dan Tehan, attacked the EU proposal before the details were released and again after they were, arguing it could hit jobs and be “just a new form of protectionism”.

However, the European Union argues that the CBAM is not protectionist and is designed to comply with World Trade Organization (WTO) rules. European Union importers will buy carbon certificates corresponding to the carbon price that would have been paid had the goods been produced under the EU's carbon pricing rules. Conversely, once a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer.

The European CBAM will be phased in gradually and will initially apply only to iron and steel, cement, fertiliser, aluminium and electricity generation. There is a phase-in period from 2023 to 2026 during which importers are required to only report the carbon content of the specified imported products.

From 2026, importers will have to purchase carbon certificates, but only for the portion of imports not covered by free certificates available under the current European Emissions Trading Scheme. This is meant to ensure that importers are treated equally compared to EU producers. These free certificates will be phased out by 2035.

By the end of the transition period, the Commission will evaluate how the CBAM is working and whether to extend its scope to more products and services - including down the value chain, and whether to cover so-called ‘indirect' emissions, such as carbon emissions from the electricity used to produce the good.

On May 18, 2021, US climate envoy John Kerry said that Washington is looking into the possibility of introducing a fee on imports from countries that don’t tax heavy polluters, but he cautioned that such a move could carry risks “downstream.” Kerry said President Joe Biden had instructed US officials to examine “what are the consequences, how do you do the pricing, what is the impact”.