Accounting for Carbon Pricing in Third Countries Under the EU Carbon Border Adjustment Mechanism

Abstract To avoid penalizing exporters that already paid carbon prices, the EU Carbon Border Adjustment Mechanism credits carbon taxes and Emissions Trading Schemes in third countries. By excluding instruments of traditional regulation (e.g. emission standards) and indirect carbon prices (e.g. fuel excise taxes) from this crediting mechanism, the EU is criticized for discriminating against countries that do not follow its climate model, in breach of international trade and climate law. This article seeks to nuance this criticism by arguing that the calculation of actual emissions (instead of default values) under the EU CBAM allows exporters to reflect compliance with foreign emission standards, and thus respects states' right to pursue emission reductions through traditional regulation. However, amendments of the CBAM Regulation are necessary to recognize the positive and negative impact of indirect carbon prices on decarbonization, and the role of carbon-crediting mechanisms in equalizing carbon costs in a more flexible and equitable way.