Reconciling the Climate/Industrial Interplay of CBAMs: What Role for the WTO?

Abstract

The European Union (EU) recently proposed the introduction of a carbon border adjustment mechanism (CBAM) and suddenly transformed into reality an almost two decade-long debate over the hypothetical use of CBAMs as antidotes to uneven carbon prices. The European Commission presented the scheme as a climate measure aimed at reducing the risk of carbon leakage for energy intensive and trade-exposed industries facing the cost of increased climate ambition.1 At the same time, however, it listed the mechanism among the instruments that support a “competitive [green] transition” for EU businesses in the context of the new industrial strategy supporting the EU Green Deal.2 This ambiguity risks undermining the credibility of the scheme as a legitimate climate response unless it can be shown that the equalization of carbon costs (i.e., the fair competition/industrial component) is instrumental to achieving higher emission reduction levels than could have been achieved otherwise (i.e., the carbon leakage/climate component). While the exact balance between climate- and industrial-informed features is ultimately an issue of design, this essay argues that making the scheme (as) compatible (as possible) with the rules of the World Trade Organization (WTO) improves its environmental effectiveness and accordingly contributes to reconciling the CBAM with its stated climate purpose.