Securing Compatibility of Carbon Border Adjustments With the Multilateral Climate and Trade Regimes

Abstract The European Union (EU) is contemplating the adoption of a carbon border adjustment mechanism (CBAM), which would extend its domestic carbon price to emissions that are produced outside its borders but are embodied into its imports of carbon-intensive commodities. In doing so, the EU is testing the boundaries of permissible unilateral action at the interface of international climate and trade law. However, the question of whether the proposed CBAM is compatible with these two multilateral legal regimes is yet to be addressed in an integrated manner. This article seeks to fill this gap in the scholarship and makes two main arguments. First, the CBAM as presently designed does not respect the principle of Common but Differentiated Responsibilities and Respective Capabilities (CBDRRC) and needs to be adjusted through two forms of differential treatment: a full exemption for least-developed countries and Small Island Developing States and the use of CBAM-generated revenue to support decarbonisation efforts in other affected developing countries. Secondly, this CBDRRC-based differentiation should be permissible under WTO law on the grounds that it does not amount to discrimination between countries where the same conditions prevail.