International trade has a carbon problem

International trade has a carbon problem

Subject : International Relations

Section: International organisation

Context:

• India has opposed to the Carbon Border Adjustment Mechanism (CBAM) introduced by the European Union to restrict the trade of products from carbon-intensive industries like Iron and Steel, aluminium, cement etc.

What is the issue?

• India fears that CBAM will cripple the export of its carbon-intensive products to the EU.
• While 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. 

EU’s concern:

• The EU’s concern is that while 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.
• This would put its industries at a disadvantage.
• To tackle this, the impacted industries in the EU had so far been receiving free allowances or permits under the ETS.
• The EU also 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.

How CBAM will resolve this concern?

• CBAM is levelling the playing field for the EU industries.
• Under the CBAM, imports of certain carbon-intensive products, namely cement, iron and steel, electricity, fertilizers, aluminium, and hydrogen, will have to bear the same economic costs borne by EU producers under the ETS.
  • The price to be paid will be linked to the weekly average of the emissions priced under the ETS.
  • However, where a carbon price has been explicitly paid for the imported products in their country of origin, a reduction can be claimed.

WTO’s consistency with the CBAM:

• A cornerstone principle of WTO law is non-discrimination.
• Under this law, 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).
• Discriminatory nature of CBAM:
  • While the CBAM’s design is origin-neutral in appearance, it 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.
  • There are no clear provisions for which products are considered ‘like’.
  • The CBAM violates WTO law for discriminating between EU and foreign products covered by CBAM based on embedded emissions.

Article XX of the GATT:

• 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,
• first, they fall under one of the listed policy grounds, and
• second, if they satisfy the requirements of the introductory clause of Article XX, known as the chapeau.
• One of the listed policy grounds in Article XX is the ‘conservation of exhaustible natural resources’.
• CBAM would fall under this category.

However, it is doubtful if it would satisfy the chapeau, 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