Shirking Liability: A mockery of the EU’s carbon tax diversity

By RV Anuradha

In all, 193 countries have informed the Nationally Determined Contributions (NDCs) under the Paris Agreement to the United Nations Framework Convention on Climate Change (UNFCCC). These include the European Union, the United Kingdom and India. The NDCs are based on the UNFCCC policy of “common but separate responsibilities and associated powers” (CBDR-RC). This stems from the UNFCCC recognition that developed countries are “responsible for the largest share of historical and current global greenhouse gas emissions,” and that “global emissions from developing countries will increase to meet their social and development needs”. Developed countries were also tasked with transferring technology and financial resources to enable developing countries to take a green path of development. However, initial experience of implementing obligations under the UNFCCC, including the CBDR-RC policy, has not been effective. The United States refused to ratify the 1997 Kyoto Protocol at the UNFCCC, Canada withdrew in 2012, and many countries refused to commit after 2012. The 2015 Paris Agreement was anchored by each country on the NDCs, an agreement that reached with greater awareness. Climate change presents that clear and current danger.

NDCs are based on economy-wide emissions reduction – a country has sovereign discretion over how to distribute reduction responsibilities across different sectors. In an ideal world, each country would play its part, live up to the NDC commitments and enable the transfer of money and technology to achieve green growth. Unfortunately, this ideal world does not exist. As widely reported, the promise of অর্থ 100 billion annually by developed countries for climate change by 2020 remains unfulfilled in developing countries. Add to that the EU’s proposed implementation of the Carbon Border Adjustment Mechanism (CBAM), a unilateral charge that countries’ climate policies differ from those of the EU. The UK is likely to follow the recent directives of the UK Parliament’s Environmental Audit Committee to implement similar measures soon. Canada and the United States are also considering such a move. At the heart of this effort is the equalization of climate policy differences through unilateral trade arrangements. Such measures are therefore a mockery of the rationale and principles of internationally agreed climate action.

The EU argues that in the absence of its international partners sharing the same level of climate ambition, there is a risk of carbon leakage due to the shift of EU industry to countries with lower emissions targets. Beginning January 1, 2023, the EU’s CBAM Order, which imports into five sectors in the EU – iron and steel, aluminum, fertilizer, cement and electricity – must comply with the requirements for detailed reporting of emissions related to their manufacturing. This “reporting only” conversion period will last until December 31, 2025. From 1 January 2026, five sectors must be accompanied by CBAM certification related to verified emissions for imports into the EU.

CBAM is a mandate that a country wishing to export to the EU must replicate its requirements for emissions reduction and carbon pricing as determined by it. The price of the CBAM certificate will reflect the average weekly auction price of the EU Exit Trading System (EU-ETS). Annual revenues from CBAM are expected to reach 2.1 billion by 2030. It will probably be set up for CBAM administrative and other related expenses. There are no plans to return the money raised as climate finance to developing countries. At the constructive stage of its CBAM proposal, a legal assessment conducted for the EU Parliament in 2020 proposed that the EU may consider a waiver for imports from the parties to the Paris Agreement. However, the EU has chosen to ignore a simple approach that measures its compliance with the principles of equity and climate justice. In addition to the immediate impact on the five target sectors, carbon boundary systems will have an impact on downstream products across the supply chain and especially on MSMEs across both developed and developing countries. Sectoral opportunities for the inclusion of paper, glass and chemicals are also expected to expand. From the lens of international trade law, a CBAM that distinguishes between similar products based on emissions in the manufacturing process is less likely to stand the test of compliance with WTO rules. Due to the lack of alignment with internationally agreed differential emissions reduction commitments under the UNFCCC, it may be difficult for the EU to justify CBAM as an environmental exception to WTO rules.

However, the WTO Dispute Settlement System with a non-effective appeals body gives little hope for any real or timely solution to the problem. The US unilateral tariffs on steel and aluminum imports in 2018 and subsequent retaliatory measures imposed by some affected countries (including India) against US imports are still awaiting a decision at the WTO. Similar results in the case of EU CBAM will only increase trade friction, and will not contribute to a green planet. The only realistic option for countries is to resolve this at the UNFCCC and agree that unilateral trade arrangements cannot weaken the NDC. The WTO Director-General warned against the risk of unilateral action and suggested that countries work towards setting the carbon price attached to the Paris Agreement. Any alignment of the Paris Agreement means that there cannot be a global common value and countries must recognize the value of the differential carbon associated with the NDC. When the clock is ticking for climate change, it is important to take timely steps to prevent it, instead of wasting time and resources on futile unilateral border measures and countermeasures.

Author Partner, Clarus Law Associates, New Delhi

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