The journey of development that the developed world has undergone has been steeped in emissions and environmental consequences, with many industrialised nations historically thriving on carbon-intensive growth. These nations reached their current state of prosperity by following a path that, in many ways, exploited not only the planet’s resources but also the resources of what we now know as developing nations. Philosophers on justice, from Rawls to Sen, have underscored the importance of fairness and equity in any discourse.
Thus, when the European Union seeks to impose measures like the Carbon Border Adjustment Mechanism (CBAM), which, while designed to put a price on carbon and motivate cleaner production, can also be seen as an imposition on developing countries. Starting October 1, 2023, the CBAM transition phase has been initiated and will continue until December 31, 2025. Throughout this period, exporters to Europe are mandated to submit detailed production and emission data for goods shipped to the EU. The CBAM has been applied to sectors like iron, steel, cement, aluminium, fertiliser, hydrogen, and electricity production. The taxation phase commences on January 1, 2026, with an expanding list of products being subject to CBAM, and by the year 2034, the mechanism will encompass all items.
While its primary aim is to level the playing field by placing a price on carbon and promoting cleaner industrial processes, it carries undertones of neo-colonialism and imposes burdens particularly on developing nations. This raises concerns about parity and justice. Ethically, this raises concerns about equity, historical accountability, and the paternalistic stance of developed nations imposing policies on countries still in the throes of development.
As articulated by Finance Minister Nirmala Sitharaman, this trajectory feels unjust; the developed world, after centuries of pollution and exploitation, is now preaching the gospel of eco-consciousness to those still trying to rise. True climate justice would demand reparations in terms of climate finance and technology transfers, recognising the historic culpability of the developed world. Yet, the OECD countries have faltered in fulfilling these obligations.
It seems not only paradoxical but also deeply inequitable that the developing world is now being handed the bill for a feast they didn’t fully partake in. This also happens to be a contravention of Paris Agreement. The CBAM’s alignment with the Paris Agreement is questioned due to its potential deviation from the principle of Common but Differentiated Capacities and Responsibilities. Without exemptions for LDCs, it could unfairly burden those least responsible for climate issues. Furthermore, while the European Commission plans to use CBAM revenues for the EU budget, reallocating some funds to support LDCs’ energy transition might be more equitable.
For reasons beyond just fairness and ethics, the CBAM has been criticised for imposing a significant and unwarranted strain on exporters. Numerous businesses and trade associations have raised alarms about the unpredictable costs tied to the extensive paperwork and the subsequent alterations to existing contracts and operational methods. As reported by the Financial Times, some of the mandatory documentation templates are exhaustive, demanding details across ten different sections for every individual importer. The mechanism’s primary intention is to level the playing field for European manufacturers. These producers are grappling with escalating expenses tied to greenhouse gas emissions under the emissions trading scheme.
Might breach rules
Potential conflicts exist between CBAM and WTO rules, notably concerning the principle of non-discrimination. This principle obliges members to avoid discrimination between “like” products from different trading partners (under the “most favoured-nation” or MFN status) and between domestic and “like” foreign products (providing “national treatment”).
CBAM might breach the MFN rule by differentiating imports from WTO members based on carbon content, disadvantaging less developed countries with higher border carbon adjustments due to their limited resources to cut GHG emissions. Although WTO members have significant latitude to set their environmental goals, CBAM’s intersection with trade and non-discrimination raises pivotal questions about whether products will be deemed “like” and if imported goods will face less favourable treatment. Resolving these queries hinges on specific CBAM implementation rules and a nuanced, case-by-case analysis per WTO jurisprudence, considering factors like its supportive role to the EU Emissions Trading System (ETS), which already differentiates between EU industries.
Further, countries like Germany have asked for the exemptions for MSMEs. If Germany and other European nations secure exemptions for their MSMEs, the WTO’s non-discrimination principle demands equal treatment. Therefore, developing countries’ MSMEs should also benefit from similar exemptions to ensure fairness and maintain a level-playing field in global trade.
One of the reasons why CBAM was introduced was to check the carbon leakage under EU ETS. A study in the journal Fundamental Research found that the CBAM demonstrates limited efficacy in mitigating overall carbon leakage, and its capability dwindles with escalating carbon prices. Currently, at the EU ETS’s prevailing carbon price, the CBAM curtails only 10.5-29.7 Mt of emissions outside the EU, representing a mere 8.8-24.9 per cent of the leakage prompted by the EU ETS. Alarmingly, a surge in carbon prices not only further dilutes CBAM’s effectiveness in addressing EU ETS’s carbon leakage risks but also amplifies economic burdens and endangers the market reach of EU products.
Thus, CBAM, much like the Trojan horse in the classic film Troy, is presented as a solution but may harbour unintended consequences. While aimed at mitigating environmental concerns, it inadvertently erects trade barriers for developing nations without fully addressing its core objective. Such oversight underlines the inherent injustice of CBAM, suggesting a dire need for its revision or potential removal.
The writer is OSD, Research, Economic Advisory Council to the Prime Minister. Views are personal