International trade has a carbon problem

Source- The post is based on the article “International trade has a carbon problem” published in “The Hindu” on 3rd June 2023.

Syllabus: GS3- Economy. GS3- Environment

Relevance– Issue related to green economy

News- The European Union has introduced the Carbon Border Adjustment Mechanism (CBAM).

Why has the EU introduced CBAM?

In 2005, the EU adopted the Emissions Trading System (ETS). ETS is a market-based mechanism. It aims at reducing greenhouse gas emissions by allowing bodies emitting GHG to buy and sell these emissions.

The EU is concerned that emissions embedded in products imported from other countries may not be priced in a similar way 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 has issues regarding ‘carbon leakage’. Due to the application of ETS, European firms operating in carbon-intensive sectors might possibly shift to countries having less stringent GHG emission norms.

CBAM is aimed at addressing these issues, and ensuring a level playing field for the EU industries.

What is CBAM?

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

What are legal issues related to CBAM?

A cornerstone principle of WTO law is non-discrimination. Countries have to give equal treatment to products irrespective of their country of origin and to treat foreign-made products as they treat domestic ones.

CBAM’s may discriminate between goods from different countries on account of an inadequate carbon pricing policy, or due to reporting requirements for importers.

However, even if the EU’s CBAM is discriminatory, it can be justified under the General Exceptions clause given in Article XX of the GATT.

Under Article XX, measures can be taken by countries that violate GATT obligations. They Should fall under one of the listed policy grounds.

One of the listed policy grounds in Article XX is ‘conservation of exhaustible natural resources’. CBAM would fall under this category.