Policy Brief 124, 5 February 2024
How the EU’s Carbon Border Adjustment Mechanism discriminates against foreign producers
By Peter Lunenborg and Vahini Naidu
In April 2023, the European Parliament adopted the final text of the Carbon Border Adjustment Mechanism (CBAM) and revisions to the European Union (EU) Emissions Trading System (ETS). One of the stated objectives of CBAM is to create a level playing field for selected sectors in the EU market and to protect against the risk of ‘carbon leakage’. Based on an analysis and comparison between the legal texts of CBAM and ETS, this paper finds that CBAM discriminates against foreign producers in favour of EU domestic producers in many areas including with regard to the scope and type of emissions covered, free allocation of allowances, exemptions under EU ETS not mirrored in CBAM, buying and selling of ETS allowances in comparison with CBAM certificates, verification, penalties, authorization, use of credits from the Carbon Development Mechanism (CDM) and guarantees.
The paper also provides a brief overview of how the CBAM and ETS align with WTO rules, highlighting the potential discrepancies in the implementation as they apply to foreign and EU producers respectively. The paper provides several suggestions on how to make EU’s CBAM more WTO-compatible and a recommendation for further legal research.