Exempting Least Developed Countries from carbon border adjustments: A legal and economic analysis
Sasmal, S; Zhang, D; Lydgate, E and Winters, L.A (2023)Exempting Least Developed Countries from carbon border adjustments: A legal and economic analysis, CITP Briefing Paper 5
Published 6 October 2023
· The EU Carbon Border Adjustment Mechanism (CBAM) extends EU carbon (ETS) pricing to imported products in six heavily traded sectors.
· As of October 2023, the EU has commenced the first reporting phase of CBAM; the UK government is consulting on whether to introduce CBAM.
· UK CBAM could be significant for the exports to the UK of several least developed countries (LDCs) and low and lower-middle income countries (L/LMICs), especially Sierra Leone and the Central African Republic with regards to iron and steel. But as none of these countries rely heavily on the exports of these products to the UK, the UK CBAM would not pose a major threat to these economies.
· The impact of the EU CBAM will be more significant for the exports of LDCs and L/LMICs to the EU, especially for Mozambique with regards to aluminium as well as for Uzbekistan, Egypt, Ukraine, Zimbabwe and India for various products. Given the size of exports, the EU CBAM could even impact the whole economies of these countries.
· The UK and the EU do not import products regulated under CBAM intensively from LDCs. Therefore, if the UK or the EU exempted LDC and L/LMIC exports from their CBAMs it would not do material damage to the CBAM’s objective of reducing the emissions of goods consumed in their territories.
· It would, however, relieve these countries of a major reporting burden and allow them longer periods to adjust to cleaner techniques, which seems justifiable given their income levels and small contributions to current global CO2 levels.
· WTO law and jurisprudence do not render the matter free of legal challenges. The outcome of any discrimination allegation at a WTO dispute will depend on how adjudicators decide to apply the existing law and jurisprudence to the specific case.
In October 2023, the EU introduced a Carbon Border Adjustment Mechanism (CBAM) and the UK Government is considering whether to introduce one. The Centre for Inclusive Trade Policy has commented on several aspects of these policies elsewhere.1 This paper focuses on a pressing issue of equity and potentially, of diplomacy – the extent to which one might mitigate any harm that the CBAM does to the poorest countries. Part 1 provides evidence of the potential impact of CBAMs on two groups of developing countries: the Least Developed Countries (LDCs) and the Low/Lower Middle-Income Countries (L/LMICs).2 Part 2 then discusses whether and how such an exemption might be accommodated within the existing legal framework of the World Trade Organization (WTO). The brief answer is that there are good economic and political cases for exemption, especially for the LDCs, but that the legal position is nuanced and somewhat uncertain. Part 3 concludes by summarising some proposed UK policy options. Overall, we argue that, given the urgency of adopting climate measures and the economic and political case for temporarily exempting Least Developed Countries from CBAMs, the UK and by implication, the EU (which has currently decided against exemptions) should seek to develop the strongest possible legal case and the broadest multilateral support for offering an exemption.
Part 1: Exposure to the UK and EU CBAMs
The EU’s CBAM is well understood in principle: EU producers in some sectors pay for their greenhouse gas emissions and the CBAM will levy a similar charge on imports with adjustments to consider any mandatory carbon prices paid in the country of production. This levels the playing field within the EU market and is aimed at stopping carbon leakage – the migration of the production of the products regulated by EU emissions charges to locations free of such charges. It does so, however, at the expense of significant administrative effort by exporters to calculate the emissions embodied in their exports to the EU. From October 2023, exporters have to submit data and, from 2026, pay a charge to bring whatever they have paid for emissions at home up to the EU level.3 We analyse the position for a UK CBAM on the assumption that it mirrors the EU’s, although as we have noted elsewhere, the UK price of emissions has been diverging sharply from the EU’s, and is now much lower: approximately £34/tonne in the UK versus £78/tonne in the EU at the time of writing.4
The EU CBAM will initially apply to six products: Iron & Steel, Cement, Fertiliser, Aluminium, Electricity and Hydrogen, which we refer to here as regulated products.5 Table 1 displays the LDCs’ and the L/LMICs’ exports of all regulated products to the UK as a percentage of their exports to the UK and of their total exports in 2022; it also notes the most exposed products.6, 7 The impact of the UK CBAM could be very significant for the exports of several LDCs and L/LMICs to the UK.8 Among LDCs, the shares of regulated products in exports to the UK are 18.7% and 11.7% for Sierra Leone and Central African Republic respectively in 2022. For the L/LMICs, apart from Sierra Leone and Central African Republic, Ukraine, India and Tunisia had exports of regulated products accounting for 10.7%, 5.4% and 5.2% of their exports to the UK, respectively. The largest contributors to these totals were iron & steel and aluminium.
Turning to the percentage of regulated exports to the UK of affected countries’ total exports to all markets, we find figures ranging from less than 0.001% to 0.17%. Only five countries’ regulated product exports account for more than 0.1% of their total exports in 2022: Samoa (0.17%), India (0.16%), Sierra Leone (0.11%), Algeria (0.11%) and Ukraine (0.11%). Hence none of the LDCs or L/LMICs relies heavily on the exports of regulated products to the UK. In these terms, the UK CBAM is not a major threat to any of their economies. However, the UK hopes to be a leader in global climate policy and so plausibly ought to consider how the UK’s treatment of developing countries might affect other importers’ attitudes.
|L/LMICs||LDCs||Share of its exports to UK (%)||Share of its total exports (%)||Most affected product (share of its exports of regulated products, %)*|
|Sierra Leone||18.7||0.11||1 (100)|
|Cent Afr Rep||11.7||0.01||1 (100)|
|India||5.4||0.16||1 (89.8), 4 (10.2)|
|Tunisia||5.2||0.09||1 (82.9), 4 (17.1)|
|Congo (Republic)||3.7||0.02||1 (100)|
|Kyrgyz Republic||3.2||0.002||1 (100)|
|Algeria||3.0||0.11||1 (45.5), 3 (34.9), 2 (19.6)|
|Indonesia||2.3||0.02||1 (52.7), 4 (47.3)|
|Egypt||2.2||0.09||1 (83.4), 4 (16.6)|
The data of total exports from WTO are recorded in the US dollar. We use the average of the US Dollar to British Pound exchange rate in 2022 - 0.8115 - to compute the total exports in British Pound and the shares.
*The numbers in this column indicate the different regulated products: 1-Iron & Steel, 2-Cement, 3-Fertilisers, 4-Aluminium, 5-Electricity, 6-Hydrogen.
We also collected similar evidence on the exports from LDCs/ and L/LMICs to the EU. Table 2 is similar to Table 1 except for showing exports to the EU. The impact of the EU CBAM could be quite significant for the exports of LDCs and L/LMICs to the EU.9 Among LDCs, regulated-product exports to the EU accounted for 62.2% of Mozambique’s exports to the EU for in 2022 and a huge 22.86% of that country’s total exports. They are comprised entirely of aluminium.
For the L/LMICs, apart from Mozambique, Uzbekistan, Egypt, Ukraine, Zimbabwe and India exported regulated products accounting for 27.0%, 19.5%, 12.3%, 12.1% and 11.7% of their total exports to the EU, respectively, in 2022. Given the size of the EU, it is not surprising that the exports of regulated products to the EU account for significant percentages of the total exports of Ukraine (7.83%), Egypt (6.83%), Algeria (4.5%), Tunisia (2.9%) and Morocco (2.33%).
We further examine the regulated exports of the hardest-hit countries relative to their GDP in 2022: Mozambique (10.67%), Ukraine (2.24%), Egypt (0.71%), Algeria (1.43%), Tunisia (1.15%) and Morocco (0.71%). This suggests that the EU CBAM could impact the exports and even the whole economies of these countries. Most of these countries’ exports of regulated products to the EU are of iron & steel and aluminium but fertilisers also figure for some L/LMICs.
|L/LMICs||LDCs||Share of its exports to EU (%)||Share of its total exports (%)||Most affected product (share of its exports of regulated products, %)*|
|Egypt||19.5||6.83||3 (61.0), 1 (24.5), 4 (13.7)|
|Ukraine||12.3||7.83||1 (79.2), 5 (10.1)|
|India||11.7||1.86||1 (78.4), 4 (21.5)|
|Iran||6.4||0.10||1 (78.9), 3 (11.8)|
|Algeria||6.2||4.50||3 (79.4), 1 (16.1)|
|Morocco||4.2||2.33||3 (73.3), 1 (10.3)|
|Tunisia||4.1||2.90||1 (62.5), 3 (16.1), 2 (11.0), 4 (10.3)|
|Lebanon||2.2||0.32||1 (51.0), 4 (48.8)|
The WTO data of total exports are recorded in the US dollar. We use the average of the US Dollar to Euro exchange rate in 2022 - 0.9449, to compute the total exports in Euro and the shares.
The data comes from Eurostat, EU trade data and World Trade Organization (WTO), WTO trade data.
* The numbers in this column indicate different regulated products: 1-Iron & Steel, 2-Cement, 3-Fertilisers, 4-Aluminium, 5-Electricity, 6-Hydrogen.
Finally, we explore the import shares of LDCs and L/LMICs in total UK and EU imports of regulated products. Table 3 displays these shares along with their total values for 2022. The UK and the EU do not import regulated products intensively from LDCs. In total, imports from LDCs take up 0.03% (for the UK) and 0.38% (for the EU) of the total regulated-product imports. However, imports from the L/LMICs as a group account for 4.59% (for the UK) and 5.38% (for the EU) of the total imports and these shares surge to 13.9% (for the UK) and 10.7% (for the EU) in the cement industry and 18.45% of the EU’s imports of fertilisers.
These results suggest that if the UK or the EU exempted LDC and L/LMIC exports from their CBAMs they would leave only about 5% of their imports of regulated products untreated, and thus not do material damage to the CBAM’s objective of reducing the emissions of goods consumed in their territories. It would, however, relieve these countries of a major reporting burden as well as from potentially paying significantly for their exports to Europe, depending upon the kind of preferential treatment selected.
Clearly, long-run climate objectives would leave no supplier outside the emissions-reduction apparatus, so ultimately, exemptions would need to expire, but allowing poor countries longer periods to adjust to cleaner techniques would seem justifiable given their income levels and small contributions to current global CO2 levels. We now move on to the legal feasibility of exemption.
|Country groups||Regulated product||Import value to the UK (million £)||Share of UK’s regulated-product imports (%)||Import value to the EU (million €)||Share of EU’s regulated-product imports (%)|
|LDCs||Iron & Steel||5||0.04||38||0.01|
|L/LMICs||Iron & Steel||899||6.83||15,100||5.49|
Part 2: Legal analysis of a CBAM phase-in for developing countries
Part 1 suggests that a limited exemption from a CBAM for some subset of developing countries would have relatively little effect on the CBAM’s climate objectives. It would also save firms in the exempted countries a good deal of administrative effort and offer them a longer period than other countries receive to adjust to a world in which emissions have to be lower. But whether such an exemption is legally permissible under the law of the World Trade Organization (WTO) and how it ties in with international climate agreements are important considerations to see how best to achieve it. This part shows that the relevant WTO law is nuanced and somewhat uncertain, but not so hostile to the idea that the UK lacks any options for proceeding.
WTO law differentiates between groups of developing countries using different terminology: “developed countries”, “less-developed countries”, “developing countries”, and “least-developed countries”. For the purposes of this note, the discussion is expressed only in reference to “developing countries” as a group, which broadly encompasses non-developed countries in WTO parlance. However, in practice, definitions of the set of developing countries differ and plenty of international trade policies distinguish between subsets of developing countries – for example, the UK’s Developing Countries Trading Scheme, uses an income per head distinction rather than adopting the WTO’s definition based on self-identification. A fundamental problem is that discriminatory preferential treatment (whether between developing countries or between developing countries and LDCs) could be challenged as violating the WTO’s Most Favoured Nation (MFN) obligation by those receiving lower levels of preferential treatment. Thus, our analysis is oriented around explaining the various legal defences that may be invoked by the UK in the case of such allegations.
Two fundamental principles of WTO law are a) non-discrimination (through MFN and national treatment (NT) provisions) and b) special and differential treatment (SDT), which allows for non-reciprocal, discriminatory and preferential treatment towards developing countries (DCs) across various provisions and disciplines. In recognition of the different levels of economic development in different countries, the underlying objective of SDT is to ensure that recipients are allowed to develop their respective trading capacities and integrate in the trading system in order to be able to benefit from the full commitments carefully crafted under the WTO. Accordingly, different WTO agreements allow developed countries to derogate from their non-discrimination obligation and crystallize SDT in different ways including exemptions from standard obligations, longer transition periods and technical assistance programs. For instance, developing countries, and particularly LDCs have longer time periods to comply with the obligations relating to ‘Illegal, Unreported and Unregulated’ (IUU) fishing under the WTO Agreement on Fisheries Subsidies, than developed countries who must comply immediately after the Agreement goes into effect.10 Similarly, several Economic Partnership Agreements with developing country partners entered into by the UK when a member of the European Union provide for longer time periods for these countries to phase out tariffs.11
It is in the same spirit that a CBAM, a unilateral measure, may consider exemptions for developing countries. Though desirable policy-wise, a limited exemption for developing countries has to confront the nuances in WTO law, notably in the Enabling Clause and the provisions in Part IV of the General Agreement on Tariffs and Trade (GATT) which aim to apply SDT, and in Article XX (General Exceptions) of the GATT. We find that although an exemption for developing countries is not completely free of legal challenges, there is no overwhelming argument against it and potential outcomes will depend on how adjudicators decide to apply the existing law and jurisprudence to the specific case. We explore these nuances and then conclude with a discussion of the policy options available to the UK, such as designing the CBAM as an import tariff; introducing longer phasing-in periods to comply with CBAM or different aspects thereof; introducing a non-discriminatory export volumes-based exemption; and using environmental criteria to differentiate treatment to trading partners. These options are set out in Table 4 below. In summary, there is little certainty about whether exemptions (full or limited) for developing countries from the CBAM will run afoul of WTO law.
The “Enabling Clause” (or the 1979 Decision on Differential and More Favourable Treatment Reciprocity and Fuller Participation of Developing Countries) is one possible route to justify an exemption from a CBAM for developing countries, but the law and jurisprudence suggest some legal complications.
Paragraphs 2(a) and 2(b) of the Enabling Clause are the most relevant. Paragraph 2(a) allows preferential treatment with respect to agreed global (MFN) tariff rates when trading with developing countries, administered through a Generalized System of Preferences (for example, a country can provide tariff-free access to its own market for developing countries while allowing the developing country to maintain its own domestic tariffs). Second, countries can offer differential and more favourable treatment with respect to the provisions of the General Agreement concerning non-tariff measures governed by the provisions of instruments multilaterally negotiated under the auspices of the GATT. The interpretation of this provision is complex, and discussed below. In sum, it seems likely that paragraph 2(a) could justify an exemption for developing countries were the CBAM to be considered a tariff, perhaps integrated into existing GSP arrangements and properly notified. However, given that the CBAM is administratively likelier to be considered an internal tax and not an import tariff,12 paragraph 2(a) is unlikely to provide the necessary justification. Therefore, paragraph 2(b) is the natural next resort.
The only occasion where the WTO Appellate Body was asked to rule upon paragraph 2(b) concerned Brazil’s exemption of internal taxes for Mexican imports, in Brazil – Taxation. 13 Brazil argued that the Enabling Clause could justify derogation from its MFN obligation to apply the same internal taxes to imported products from all of its trade partners. Despite Brazil’s argument that both Article III.2 of the GATT (which applies to internal taxes) and the Enabling Clause were negotiated under the auspices of the General Agreement (and thus, that differential taxation could be justified), the Appellate Body held that “paragraph 2(b) does not concern non-tariff measures governed by the provisions of the GATT 1994. Instead, paragraph 2(b) speaks to non-tariff measures taken pursuant to SDT provisions of "instruments multilaterally negotiated under the auspices of the [WTO].”
There are two implications of this reasoning: a) since there is no specific agreement and therefore no specific SDT provisions relating to internal taxes, one cannot use the Enabling Clause to justify exemptions for internal taxes; b) the Appellate Body’s reading that paragraph 2(b) covers only instruments multilaterally negotiated under the auspices of the WTO appears restrictive,14 and strictly read, would cover only the Trade Facilitation Agreement and the Agreement on Fisheries Subsidies. This very narrow interpretation would render the coverage of the provision uncertain, and certainly inapplicable as a justification for exempting developing countries from CBAM. Nonetheless, considering that there has been only one dispute on this issue and that the WTO does not follow a system of judicial precedents, the UK may invoke paragraph 2(b) of the Enabling Clause as a justification of derogation from non-discrimination obligations with respect to internal taxes. It is just that the approach bears some legal risk.
The same provisions may also be invoked to justify exemptions from the regulatory aspects of the CBAM, for example, the certification requirements or carbon emissions measurements.15 Arguably, these aspects could be covered under the Agreement on Technical Barriers to Trade (TBT) as technical regulations or standards or conformity assessment procedures. If any exemption is borne out of SDT provisions in the TBT, such treatment would arguably be covered by paragraph 2(b) of the Enabling Clause—provided “instruments multilaterally negotiated under the auspices of the [WTO]” per the AB’s interpretation extended to the TBT, considering its status as a Uruguay Round Agreement negotiated under the auspices of the then existing GATT. For example, if a potential UK CBAM were to consider providing an exemption from the declaration and verification requirements for x years to developing countries according to the SDT provision (Article 12) of the TBT, it would likely be permissible under paragraph 2(b) of the Enabling Clause. However, it is worth noting that a substantive challenge under the non-discrimination obligations of the TBT cannot be ruled out.
One further feature to note about the Enabling Clause is that, in Article 2(d), it envisages “Special treatment on the least developed among the developing countries in the context of any general or specific measures in favour of developing countries.” Thus, it permits distinctions between LDCs and other developing countries.
Finally, the footnote to paragraph 2 of the Enabling Clause authorises (but does not require) “CONTRACTING PARTIES to consider on an ad hoc basis under the GATT provisions for joint action any proposals for differential and more favourable treatment not falling within the scope of this paragraph.” The relevant GATT provisions on Joint Action are Article XXXVIII and Article XXV,16 which envisage multilateral action and closer cooperation with other international organizations. It is therefore possible to extend the coverage of the Enabling Clause to internal taxes, but pursuant to multilateral approaches.
In any event, an exemption must be carefully crafted and accompanied by strict rules of origin provisions in order to reduce the scope of circumvention. Rerouting third-country exports through developing countries will subvert the purpose of the exemption and adversely impact climate objectives.17 One might also wish to introduce something akin to the ‘competitiveness clause’ found in tariff preference schemes, such that if a beneficiary’s exports of a product grew excessively, the exemption was phased out.
Part IV of the GATT titled “Trade and Development” provides another set of relevant provisions. It contains mandatory obligations to reduce barriers on a high priority basis to products of particular export interest to “less-developed countries” and to refrain from imposing new barriers, or increasing existing ones, on such products. Developed countries are also to “give active consideration to the adoption of other measures designed to provide greater scope for the development of imports from less-developed contracting parties and collaborate in appropriate international action to this end”. Ad Article XXXVII provides a non-exhaustive list of such other measures, such as steps to promote domestic structural changes, to encourage the consumption of particular products, or to introduce measures of trade promotion. They shall also “have special regard to the trade interests of less-developed contracting parties when considering the application of other measures permitted under this Agreement to meet particular problems and explore all possibilities of constructive remedies before applying such measures where they would affect essential interests of those contracting parties”. Individually and collectively, these provisions mandate developed countries to eliminate trade barriers and refrain from imposing fiscal measures such as the CBAM in relation to imports from less-developed country members of the WTO. Failure to consider the trade interests of affected developing countries and explore all possibilities of constructive remedies could thus be a violation of Article XXXVII commitments.
Like the Enabling Clause, there is little WTO case law clarifying the applicability of these obligations but one pre-WTO GATT Panel in EEC - Restrictions on Imports of Dessert Apples - Complaint by Chile, a dispute regarding EU agricultural quotas, found that commitments in Part IV of the GATT are effective only if the challenged measure were permitted under Parts I – III, which include the main non-discrimination obligations of the GATT.18 Therefore, there is legal uncertainty about whether Article XXXVII of the GATT would protect the UK from a potential discrimination allegation. Two types of disputes could foreseeably arise: given any kind of preferential treatment to developing countries, non-DC countries could allege a MFN violation, and developing countries not in receipt of exemptions or dissatisfied with the level of exemptions, could allege that the kind of preferential treatment does not meet the requirements of Part IV of the GATT. In our view, Article XXXVII could be used by the UK to defend a challenge by a DC regarding non-consideration of SDT or adequacy thereof, but the provision is not designed to justify an exemption, if the challenge were brought by non-DCs. In any event, whether such discrimination complies with the Parts I – III of the GATT must first be analysed under Parts I – III of the GATT, including Article XX of the GATT (see analysis below). One could imagine that if the measure passed this test, Article XXXVII could then be invoked if the concerned DC disagrees with the level of SDT given.
Regardless, Article XXXVII specifically and Part IV of the GATT generally provide strong normative credence to the need to provide preferential treatment to developing countries to support their economic development, including by mitigating or reducing the trade-restrictiveness of measures imposed by developed countries
Any violations of the non-discrimination obligation under the GATT may still be justified by the UK, under the “General Exceptions” provision in Article XX of the GATT that allows for measures based on public policy objectives. The two-pronged test requires the CBAM to first attain provisional justification under the environment-related exceptions in Article XX (b) and (g); and second, to meet the conditions of the chapeau. Assuming that the measure is found to be “necessary to protect human, animal or plant life or health” under Article XX(b) and “relates to the conservation of exhaustible natural resources” under Article XX(g), the measure must pass muster under the chapeau of Article XX.
The chapeau requires that the CBAM does not result in discrimination; that the discrimination should not be arbitrary or unjustifiable in character; and that there should be no such discrimination between countries where the same conditions prevail.19 There should also be no disguised restriction on international trade.
To consider that the CBAM creates arbitrary or unjustifiable discrimination, it must be shown that the cause of discrimination bears no rational connection to the objective of reducing emissions.20 In other words, for the UK’s measure to be justified, the discriminatory aspects of the CBAM must be rationally related to its policy objective.21 The UK needs to prove that the time-bound preferential treatment towards developing countries is related to its climate policy objectives and the need to level the playing field for domestic producers, but with normative regard to developmental status of partner countries. While the UK cannot deny the discriminatory application of the measure, it can stress the economics of the relaxation, whereby even a full exemption to imports from developing countries does not materially impact the emissions reduction objectives of the CBAM.
Further, the AB has held that “discrimination exists…when the application of the measure does not allow for any inquiry into the appropriateness of the regulatory programme for the conditions prevailing in those exporting countries.”22 Accordingly, a CBAM must provide the flexibility to check the appropriateness of the CBAM under different national conditions, especially in low-income and least developed countries affected most by the measure.23 Thus, the UK could potentially justify less stringent regulatory requirements on imports from developing countries on this basis. In recognition of the fact that measuring embedded emissions is a cumbersome task, the use of default emissions to assess the payments necessary under a CBAM could be argued to simplify such barriers in meeting the CBAM requirements. However, the use of default emissions in and of itself is not without legal challenge. The UK must take care to not resort to adverse inferences. An approach more favourable to developing countries would be to imply that best available technology (BAT) was used when calculating default emissions levels. If this favourable BAT benchmark is not available to all countries, however, it could be challenged as arbitrary or unjustifiable discrimination under the chapeau of Article XX.24
Next, the UK must stress that the chapeau prohibits any discrimination between countries where the same conditions prevail. Since any relaxation afforded by the CBAM would be limited to developing countries, the UK may be able to argue that the CBAM can legally discriminate between countries where different conditions prevail.25 As per existing jurisprudence, the conditions that the chapeau refers to must be understood in the context of the sub-paragraph under which the measure was provisionally justified, as well as the substantive obligations under the GATT 1994 with which a violation was found. If a respondent considers that the conditions prevailing in different countries are not ‘the same’ in relevant respects, it bears the burden of proving that claim.26 Presumably, since the substantive violation of the MFN obligation would be found owing to preferential treatment towards developing countries, their economic and developmental status is useful to understanding the meaning of relevant “conditions”.
The UK will have to bear the burden to prove that the levels of development in developing countries are different from those of more developed countries such that they need time-bound preferential treatment to prepare to comply with the CBAM.
Several scholars have argued for the harmonized reading of the Common but Differentiated Responsibility and Respective Capacities (CBDR-RC) principle of international environmental law with WTO law, relying upon Article 31(3)(c) of the Vienna Convention on the Law of Treaties.27 CBDR-RC is also a foundational principle of the Paris Agreement, which sets out that developing countries have less individual responsibility to contribute to emissions reduction,28 lending support to a differentiated approach to bearing the CBAM burden. While CBDR-RC can ideally help in the interpretation of WTO law, how it would manifest in the adjudicator’s decision-making is unclear. The UK could argue that CBDR-RC helps to characterize the terms “discrimination” and “where the same conditions prevail” present in the chapeau. However, preferential treatment for only a subset of developing countries may be harder to justify since CBDR-RC extends to all developing countries.
There are complex legal challenges concerning the design of a WTO-compatible CBAM. One cannot rule out an allegation of discrimination obligations by WTO members that are not covered under the stated category and consider themselves at a level of development that warrants preferential treatment. Therefore, blanket exemptions to a strictly defined list of countries may confront various legal challenges. Table 4 below provides an overview of the policy options available to the UK, along with their potential legal challenges.
If the CBAM were to take the form of an internal tax, the Enabling Clause has not been interpreted to allow preferential treatment by developed countries. Another option is for the UK to approach the Ministerial Conference to request the grant of waiver from its non-discrimination obligations. Article IX of the Marrakesh Agreement lays down the procedure for attaining such a waiver, but the decision to grant the waiver must be by consensus of the WTO membership, failing which, a 3/4th majority vote will decide.29 However, if the CBAM were designed as an import tariff, preferential treatment under the GSP could be leveraged to comply with the Enabling Clause.
Instead, as has been stressed in WTO jurisprudence, the use of objective standards (rather than, for example, country-based distinctions) for any form of differentiation insures against risks of violation, although an allegation of de facto MFN violation could be made. In terms of development, criteria such as GDP or GDP per capita could be used to differentiate between levels of development, but their appropriateness and accuracy have been controversial. A blanket exemption to imports based on de minimis quantitative thresholds is another option, where thresholds could exist in the form of maximum shipment weights or average quantities imported from a country. But the actual value of such thresholds must also be determined and set through objective standards, with well-reasoned explanations regarding the choice of such thresholds. Countries could also circumvent the maximum shipment weight threshold by exporting greater numbers of smaller weights at a time.30 One way to get around the latter problem would be to institute an aggregation rule, such that preferential treatment would be suspended for the remainder of a year when the value or quantity threshold was exceeded or lost permanently if exports exceeded the threshold for x consecutive years. However, the potential for a de facto discrimination violation would still remain whereby the UK may be required to justify the measure based on its policy objectives.
The UK could also consider introducing phase-in periods for the CBAM based on a variety of objective criteria, such that countries at different levels of development are granted different transition periods. Such an approach should be easier to defend than permanent exemption under the GATT since there is no exemption involved, but it would still deliver temporary discrimination commensurate with their economic differentiation.
It may also be possible to invoke paragraph 2(d) of the Enabling Clause which allows LDCs to be treated separately from other developing countries, provided the UK extends the relaxation in the form of phase-in to all developing countries and then allows LDCs a longer phase-in period.
Another option could be to exempt from the CBAM, imports based on objective environmental criteria regarding total or per-capita emissions levels defined in the United Nations Framework Convention on Climate Change (UNFCCC) or the Paris Agreement. If the UK were to devise a method to rely upon information submitted to and analysed by the UNFCCC, regarding emissions and performance in pursuance of nationally determined contributions (NDCs), such an approach might be: a) based on objective criteria b) aimed at achieving climate goals, and c) therefore, not an arbitrary or unjustifiable form of discrimination. Differentiated CBAM rates could also be considered, based on Annex I and non-Annex I countries of the UNFCCC, reserving the most preferential treatment for LDCs. To further differentiate amongst non-Annex I countries, there will need to be consideration of other objective criteria. Globally recognised indices recording and rating different countries’ climate action responses could be used for this exercise too.31 The challenge is to ensure that there is global acceptance of such indices. The World Bank, International Monetary Fund, UNFCCC, United Nations Conference on Trade and Development, and Intergovernmental Panel on Climate Change in particular can play a crucial role.
|CORRESPONDING AND POTENTIAL LEGAL JUSTIFICATIONS|
|POLICY OPTION||Enabling Clause||Part IV of the GATT||Article XX of the GATT||WTO Agreement Article IX Waiver|
|Blanket exemption based on country||Likely possible if CBAM is classified as a tariff (but this may cause other complications with CBAM administration)||Only supportive if measure is in conformity with Parts I – III of the GATT (incl. Article XX where applicable)||Uncertain; may be difficult to justify.||Would require consensus or support from ¾ WTO members.|
|Export volumes based thresholds||Not necessary due to MFN nature of requirement||Not necessary due to MFN nature of requirement||Could face de facto MFN violation challenge; burden would be on the UK to justify under Article XX chapeau.||Not necessary due to MFN nature of requirement|
|Phase-in periods||Paragraph 2(d) of the Enabling Clause could be relevant if there were phase-in periods being accorded to all developing countries.||Could be relevant if measure is justified under Part IV of the GATT.||Uncertain; but may be possible under current jurisprudence.||Could consider a waiver for a limited period of time.|
This box provides a snapshot of the policy options available to the UK to provide preferential treatment to certain developing country trading partners. The box also provides against each policy option the corresponding legal provisions that may bear relevance in legally defending the same before the WTO.
Ultimately, each of the preferential treatment policies should be accompanied by technical assistance and capacity building for developing countries, not only for generic, normative considerations but also to expedite the process of decarbonization globally and reduce the scope of carbon leakage. Redirecting CBAM revenues to developing countries through climate finance, responsibly and with accountability, will increase the legitimacy of the CBAM and help defend it under the chapeau of Article XX of the GATT. Other kinds of assistance, such as through technology transfers, should also be considered in relation to climate-based trade measures.
In any of these scenarios, the final arbiter would be Article XX of the GATT. Jurisprudence shows that it is exceedingly difficult, almost impossible, to justify a measure under the chapeau of the provision. Thus, the optimum outcome would be achieved by way of multilateral negotiations. The direct application of CBDR-RC from international environmental law in WTO law may also be best clarified by a decision of the WTO membership. But for the sake of pragmatism and practicality, the above-mentioned policy suggestions provide the second-best option.
There is a very strong case, from the perspective of equity, for establishing objective criteria that enable the UK and EU to provide preferential treatment to LDCs with respect to the application of CBAMs. There could also be a case for extending this to L/LMICs, but this is more complex within the rules of the WTO and is arguably less pressing in terms of equity. Exempting LDCs (and L/LMICs) would help the UK to reconcile a CBAM with its support for development objectives, at little climate cost. The relevant provisions integrating development concerns into WTO obligations have been interpreted very narrowly in past disputes. But these equity concerns suggest the desirability of finding the narrow path that preserves the letter of the law as fully as possible while avoiding undermining its spirit.
- See several blogs and working papers:/publications?_sf_s=CBAM and a fuller analysis here, which discusses exemption in principle on pages 67-70.
- LDCs include 46 countries classified as such by the United Nations – see List of LDCs – United Nations; Lower Income Countries include 28 countries and Lower Middle-Income Countries include 54 countries classified by the World Bank in 2022 – see List of Lower-/Lower Middle-Income countries - World Bank 2022. The group of L/LMICs covers 82 countries in total, including the LDCs.
- The EU’s introduction to its CBAM is at https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en
- See Ember Carbon Price Tracker: https://ember-climate.org/data/data-tools/carbon-price-viewer/
- See the precise definitions of regulated products in EUR-Lex - Ares(2023)4079551 - EN - EUR-Lex (europa.eu).
- We caution that there are significant discrepancies between the UK import numbers from different sources, e.g. between HMRC, HMRC trade data table and the International Trade Centre’s, Trade maps. We use the HMRC data for UK imports in this paper.
- Previous studies of the impact of the EU CBAM on LMICs/LDCs include: the African Climate Foundation and the Firoz Lalji Institute for Africa at LSE focus on CBAM’s implications on Africa (The impact of EU CBAM on Africa), and Carnegie Europe’s report that the most affected countries are either low-income countries or LDCs or developing countries in the EU’s neighbourhood (A political economy perspective on the EU's carbon border tax)
- 18 out of 46 LDCs and 44 out of 82 LMICs exported to the UK in 2022. Only countries with a share of regulated exports to the UK higher than 1% are listed in Table 1.
- 26 out of 46 LDCs and 76 out of 82 LMICs exported to the EU in 2022. Only countries with a share of regulated exports to the UK higher than 1% were listed in Table 2.
- Article 3.8, Agreement on Fisheries Subsidies, WT/MIN(22)/33, 2022.
- For example, the EU’s Economic Partnership Agreement with the East African Community proposes for certain goods a tariff liberalization period commencing 12 years after the Agreement comes into force and ending 25 years after.
- Whether CBAM is a tariff or internal tax has been debated in various analyses; we briefly examine the issue here: Emily Lydgate, L. Alan Winters, Peter Dodd, Camilla Jensen, Guillermo Larbalestier, Chloe Anthony and Camille Vallier, Trade policies and emissions reduction: establishing and assessing options, Committee on Climate Change, June 2021, pp. 81-82. For internal political/procedural reasons, the EU had to deem the CBAM an administrative matter, but the UK is probably not similarly constrained. It would still, however, have to renegotiate its tariff bindings if the CBAM-enhanced tariff would exceed the existing bound rates; this is highly likely and is a major diplomatic challenge.
- Appellate Body Report, Brazil – Taxation, Para. 5.414.
- Appellate Body Report, Brazil – Taxation, Para. 5.432: “Paragraph 2(b) of the Enabling Clause, following the entry into force of the WTO Agreement, thus provides for the adoption of a limited category of differential and more favorable treatment, namely treatment that concerns non-tariff measures governed by provisions of instruments multilaterally negotiated under the auspices of the WTO.”
- Ingo Venzke and Geraldo Vidigal, ‘Are Trade Measures to Tackle the Climate Crisis the End of Differentiated Responsibilities? The Case of the EU Carbon Border Adjustment Mechanism (CBAM)’ (Amsterdam Law School 2022) 22.
- Article XXV.1 of the GATT states that “Wherever reference is made in this Agreement to the contracting parties acting jointly they are designated as the CONTRACTING PARTIES.”
- Tim Gore, Eline Blot, Tancrede Voituriez, Laura Kelly, Aaron Cosbey, Jodie Keane, What Can Least Developed Countries and Other Climate Vulnerable Countries Expect from The EU Carbon Border Adjustment Mechanism (CBAM)?, Institute for European Environmental Policy, 2021.
- See also, Panel Report, European Economic Community - Restrictions on Imports of Dessert Apples - Complaint by Chile, L/6491, adopted on 22 June 1989, 36S/93, 134, para. 12.32.
- Appellate Body Report, US – Shrimp, para. 150.
- Appellate Body Report, Brazil – Retreaded Tyres, paras. 226-228.
- Appellate Body Report, US – Tuna II (Mexico) (Article 21.5 – Mexico), para. 7.316.
- Id. at para. 164-165.
- Brandi, C. (2013). Trade and Climate Change: Environmental, Economic and Ethical Perspectives on Border Carbon Adjustments. Ethics, Policy & Environment, 16(1), p. 79-93. https://doi.org/10.1080/21550085.2013.768395.
- Hillman, J. (2013). Changing Climate for Carbon Taxes: Who’s Afraid of the WTO? Climate Advisers, 8; Howse also writes that determining baselines on the basis of assumptions about domestic production processes may also violate Article III.2. Howse, R. (2015). Non-tariff Barriers and Climate Policy: Border-Adjusted Taxes and Regulatory Measures as WTO-Compliant Climate Mitigation Strategies. European Yearbook of International Economic L., p. 10.
- Joost Pauwelyn, David Kleimann, Trade Related Aspects of a Carbon Border Adjustment Mechanism. A Legal Assessment, Briefing, European Parliament Directorate-General for External Policies, 2020, p. 11, https://www.europarl.europa.eu/cmsdata/210514/EXPO_BRI(2020)603502_EN.pdf.
- Appellate Body Reports, EC – Seal Products, paras. 5.299-5.301.
- Gracia Marín Durán, Securing Compatibility of Carbon Border Adjustments With The Multilateral Climate And Trade Regimes, 72 International & Comparative Law Quarterly 73–103 (2023); Joel P. Trachtman, The Domain of WTO Dispute Resolution, Harv. Int'l L.J., 40: 333 1999; Gabrielle Marceau, Conflicts of Norms and Conflicts of Jurisdictions, The Relationship between the WTO Agreement and MEAs and other Treaties, 35 J.W.T. 6: 1081-1131, 2001; Gabrielle Marceau, WTO Dispute Settlement and Human Rights, 13 E.J.I.L. 4: 753, 2002; Joost Pauwelyn, The Role of Public International Law in the WTO: How Far Can We Go?, A.J.I.L.95: 535-578, 2001; Joost Pauwelyn, Conflict of Norms in Public International Law, How WTO Law Relates to Other Rules of International Law, Cambridge University Press, Cambridge, UK, 2003; Isabelle Van Damme, Treaty Interpretation by the WTO Appellate Body, Oxford University Press, Oxford, UK, 2009; David Palmeter and Petros C. Mavroidis, The WTO Legal System: Sources of Law, A.J.I.L. 92: 398-413, 1998.
- Article 2(2) ; https://unfccc.int/sites/default/files/english_paris_agreement.pdf.
- In the WTO system, waivers have been overwhelmingly granted by way of consensus. James Bacchus, The Case for a WTO Climate Waiver, CIGI, 2017, https://www.cigionline.org/sites/default/files/documents/NEWEST%20Climate%20Waiver%20-%20Bacchus.pdf.
- Elisabetta Cornago , Sam Lowe, Avoiding The Pitfalls of an EU Carbon Border Adjustment Mechanism, Centre for European Reform, 5 July 2021, https://www.cer.eu/insights/avoiding-pitfalls-eu-carbon-border-adjustment-mechanism.
- For example, Climate Change Performance Index, https://ccpi.org/countries/.