Is the EU realizing an externally just green transition? A short analysis of the Carbon Border Adjustment Mechanism from the perspective of the CBDR principle and the right to development of LDCs.

The EU is on track to adopting by the end of this year the regulation establishing the Carbon Border Adjustment Mechanism (“CBAM”) with the trialogues (informal negotiations between the European Parliament and the Council, involving the Commission, during which a common approach to a legal act is agreed, based on amendments proposed by both co-legislators) currently taking place . In brief, the CBAM will impose on certain imported products (cement, iron and steel, aluminum, fertilizers, electricity) a carbon price that will mirror the price of CO2 allowances in the EU’s Emission Trading System (EU ETS). In theory, the equalization of the carbon price should lead to the creation of a leveled playing field between manufacturers from the EU and third countries. The purpose of the instrument is to protect the EU against carbon leakage at the same time enabling the adoption of more stringent domestic climate mitigation policies, which are intended to lead to a reduction of emissions by 55% (compared to 1990 levels) till 2030.

The CBAM sparks countless controversies, especially related to its compatibility with the GATT 94 and other multilateral agreements concluded by the members of the World Trade Organization. However, in this blog post I flag possible discrepancies between the CBAM and the principle of common but differentiated responsibilities as well as the right to development, which both are of paramount importance to the least developed countries (LDCs).  

Common but differentiated responsibilities

The principle of common but differentiated responsibilities is at the heart of international climate law. According to art. 2 par. 2 of the Paris Agreement:

‘[it] will be implemented to reflect equity and the principle of common but differentiated responsibilities and respective capabilities, in the light of different national circumstances‘

Equivalent provisions can be found in the UN Framework Convention on Climate Change and the Kyoto Protocol.

The principle at hand, is commonly understood to embody equity in international climate law. On one hand, it acknowledges that the atmosphere is a global common and all states share responsibility for mitigating the effects of global warming. On the other hand, it points to the fact that not all countries are equally responsible for historic emissions of greenhouses gases and do not have the same capabilities to reduce emissions. Developed states are perceived to be bound to take the lead on climate action, leaving other countries sufficient time to enhance their capacities in this regard. This is exemplified by the practice of submitting Nationally Determined Contributions under the Paris Agreement, in which states communicate their intended mitigation goals. On average, developed states declare more ambitious emission reduction targets, especially in the short term, than other countries.

By adjusting the carbon price at the border, the CBAM results in extending stringent EU ETS rules to products imported from third countries. When the regulation enters fully into force, importers will be under an obligation to surrender CBAM certificates, priced identically as EU ETS allowances (currently at around 70 EUR per ton of CO2 equivalent), in order to cover emissions embodied in products brought to the European market. At the same time, the regulation foresees very limited exceptions. De jure from its application exempted will be only products originating in countries that have “cap-and-trade” carbon pricing systems linked with the EU ETS, which are for now only the EFTA states (please note that there is also a specific exemption mechanism for the import of electricity but it is irrelevant to this discussion). Also, de facto exempted from the financial obligations set out in the CBAM regulation will be products for which an equivalent to the EU ETS carbon price was paid in the country of origin. No exceptions are foreseen for LDCs, that bare little responsibility for climate change and have currently limited possibilities to decarbonize their industry.

It seems plausible to argue that the CBAM, in its currently envisioned shape, will undermine the principle of common but differentiated responsibilities by burdening imports from LDCs  with the same carbon price as is paid by EU manufactures. This is especially alarming due to the fact that the EU’s CBAM might become a blueprint for other border carbon adjustment mechanisms. At the same time the European Commission admits in its impact assessment (par. 5.2.1.11) accompanying the regulation that products from those states account for an extremely limited amount of imports covered by the CBAM. Hence, it should be possible to work out a solution that accommodates the rights of LDCs and is also coherent with the EU’s climate ambitions.    

It should be underlined, that a general CBAM exception for LDCs would carry substantial risks, even potentially leading to an increase of industrial emissions in those states. Alternatively, two other solutions could be proposed, with a possibility of implementing them in parallel, that would align the CBAM with the principle of common but differentiated responsibilities. Firstly, a longer transition period (e.g. till 2040) could be envisioned for products coming from LDCs during which importers would only pay a carbon price for a fraction of emissions embodied in those goods. Secondly, a maximum carbon price for products originating from LDCs could be established. In an IMF staff paper discussing the plausibility of a global minimum carbon price it was suggested that an adequate carbon price for low income countries could amount to around 25 USD per tone of CO2. This rate could constitute a maximum carbon price for products imported from LDCs.  

Right to development

It is also important to look at the effects of CBAM on the right to development of people living in LDCs. This right does not fit into traditional classifications since it is derived from both instruments that protect civil and political freedoms as well as those that embody economic, social and cultural principles and moreover, it is enjoyed by individuals, as well as it can be exercised by a collective. The right was proclaimed in the Declaration on the Right to Development, which is a soft law document but it can be argued that to a certain extent it is an expression of customary international law. Also, certain of its provisions are embodied in treaty law. It is also important to note that an explicit reference to it is made in the preamble to the Paris Agreement. Regardless of the fact that its legal status and scope are highly controversial (see more here), it can be argued, in relation to the topic at hand, that states are under an obligation not to hinder through their climate mitigation policies the capacity of other nations to economically develop and progressively eradicate poverty.  

Due to the fact that the manufacturing of CBAM products in the EU is significantly less carbon intensive than in other parts of the world, e.g. the carbon footprint of primary aluminum in the EU is 6.7 tons of CO2 per ton of aluminum while the global average is more than two times higher, the CBAM mechanism will put entities form LDCs at a competitive disadvantage, most likely resulting in lost market shares. It is also important to emphasis that revenues derived from the CBAM will be transferred to the EU budget and for the time being no binding redistribution programs for LDCs are foreseen. By this virtue the EU will be de facto extracting funds from states that already struggle to finance their decarbonization process. This should also be read in the context of the unfulfilled commitment of developed countries (however, the EU argues that it has delivered on its part) to mobilize jointly 100 billion dollars by 2020 to address the needs of developing countries related to climate mitigation.

Regardless of the fact that LDCs make up less than 0.1 % of imports of CBAM products to the EU, lost market shares might have a detrimental impact on the economies of those states. For example, aluminum exports to the EU accounted for nearly 7% of Mozambique’s GDP in 2020. A strong argument can be made that the EU by adopting the CBAM in the current form will violate the right to development of people living in LDCs by negatively impacting the economic situation in those states, leading to the increase of poverty levels.

A possible way to align the CBAM with the EU’s human rights obligations is to legally insure that at least all CBAM revenues collected in relation to products originating from LDCs will be transferred back to those states with a purpose of supporting decarbonization and climate change adaptation. A similar proposition has found its way into the amendments (art. 24a) to the CBAM proposed by the European Parliament, which are now under negotiations. Unfortunately, member states have been rather skeptical towards such mechanisms.      

Conclusions

The EU in its strategic documents as well as through the speeches of its officials strongly emphasizes the goal of realizing a just green transition that “leaves no one behind”. As I intend to argue in this blog post, in order to realize a just transition in its external dimension the EU should observe the principle of common but differentiated responsibilities as well as the right to development, which both embody substantial legal obligations. The upcoming weeks, during which the final form of the CBAM will be decided, will show to what extend the union decides to put its money where its mouth is.