1 Introduction
This chapter assimilates the conceptual themes of the book. However, drawing on the author’s experiences of the gradual construction of the European Union, it posits that the process by which States construct multilateral governance structures, from the bottom up, in response to the need for proper governance of common goods, is necessarily evolutionary. There would not appear to be any other method reasonably available. This evolutionary process is driven economically, politically and legally, often during or after a “crisis”. Usually, the solution, in one form or another, is “more EU”, that is, more transnational governance. So, when we consider global governance issues, the interesting questions are, where are we on the evolutionary track and what is the next logical step? The wto looks the way it does today, constitutionally, institutionally and in terms of legal policy, simply because it represents a relatively early stage in the global evolutionary process. This is inevitable and could not be otherwise. As so many diverse States attempt to reach agreement on such diverse matters, especially through the lens of trade, the early stages were always going to be marginal and replete with attenuated constructive ambiguities. This is also why each wto Member only has one vote (there is no weighting); why, even though voting is provided for, in practice no Member ever calls for a vote and all decisions are taken by consensus; and there is no independent executive. Mandatory and binding adjudication is a step down the evolutionary path but is temporarily partially obstructed by the United States. In these circumstances, and as well-illustrated by the history of the European Union, the only logical way forward, down the evolutionary path, is for larger States to leverage their markets to create regulatory incentives for others to follow. This is the best democratic proxy available for the time being.
By way of a practical example of a step towards better transnational governance of a common good, this chapter focuses on legislation recently adopted
The chapter will situate cbam, as a legitimate, if partial, response to transnational governance failure, in the context of the EU’s international obligations and rights, particularly as regards World Trade Organization (wto) law and explain why it is consistent with those obligations and rights. It will explain why the cbam is an idea, and a measure, whose time has come. In this respect, whilst it may be characterised as a “second-best” response, if one rather takes as a premise the absence of transnational constitutionalism,4 at least for the time being, measures such as cbam can also been seen as the “lesser evil”, and therefore the most rational way forward at this point.
To put the matter in context, the chapter will briefly describe certain aspects of the historical development of international trade law, which is rather similar to EU law (the law of international economic integration), albeit with some important differences. It will consider how the context has changed from one in which states and firms were primarily or even only concerned with boosting exports and keeping imports out (‘Where can I sell my stuff?’) to one in
The chapter will also explain how, in this new globalised world, states are collectively presented with new problems that demand (preferably collective) action, of which climate change is the prime example. It will identify a specific activity that, historically, the wto legal establishment has assumed is not normal regulatory activity. This is the regulation of so-called non-product-related processes and production methods (ppms) – that is, those that do not manifest themselves in the characteristics of the product – in a third country. It is because of this historical assumption that such measures, if non-discriminatory, are not obviously regulated by the General Agreement on Tariffs and Trade (gatt), which one can see as a specific example of governance failure in the principal instruments of international trade law. This has thrown up a whole series of intellectual problems that have been resolved in various ways. This is also the reason why such measures are largely excluded from the relevant subsidiary wto agreements (the tbt Agreement and the sps Agreement).5 The chapter will explain that, although relatively novel, measures such as cbam are consistent with wto law, if their design and architecture ensures that they treat imports and domestic products in an even-handed manner and that any differences flow exclusively from the pursuit of the relevant legitimate regulatory objectives (particularly, in this case, the protection of the environment). In other words, cbam is a novel but legitimate and effective response to transnational governance failures, and the only type of response realistically available at this point.6
2 Climate Change and Transnational Governance Failures
It is not the purpose of this chapter to rehearse the evidence regarding climate change and its consequences. Suffice it to say that the European Green Deal and the cbam are grounded in the propositions that climate change and its consequences are real and serious and that they must be addressed through reductions in carbon emissions. If a complainant in international trade litigation were to assert or suggest otherwise, that would surely only make the task of the defendant easier.
International negotiations with the objective of reducing carbon emissions have been continuing for some years, notably within the four corners of the Paris Agreement.8 Consensus among participating countries is required, which has proved difficult to reach, and understandably so. Least developed and developing countries take the reasonable view that developed countries should bear a greater burden in addressing climate change since they carry a greater responsibility, having already industrialised and polluted, and are
Against this background, the European Green Deal and the cbam are grounded in the proposition that, faced with such a transnational governance failure, the only way forward at this point is to adopt more of a bottom-up approach. That is not to say that the approach is simply ‘unilateral’. One may reasonably point out that when a country continues to pollute a common good, which all the citizens of the world have a right to enjoy, including EU citizens, it is in fact that country that is acting ‘unilaterally’. In any event, the EU approach is not simply unilateral, because, while taking necessary action, the EU continues to engage with other countries, and in particular with its main trading partners, in an effort to explain the reasons for the measures it has adopted and to encourage them to follow suit. Furthermore, the EU does not have the pretension to direct non-EU countries as to how they must produce for their own market, or for markets in other non-EU countries. We may hope that our measures contribute to further movement in that direction, but we do not seek direct regulation of those matters. Rather, we condition access to our market on a requirement that a carbon price has been paid for the product, either in the non-EU country where it was produced or at the EU border. At this point, there is simply no other choice. It has been said in the past that globalisation is not a policy choice but a fact; one may equally state today that taking action with respect to climate change is not a policy choice but an overwhelming governmental and moral imperative, which demands that new ways are found to overcome pressing transnational governance failures. In this sense, in adopting cbam, the European Union is, in some measure, a “regulatory exporter”, in that it is conditioning access to its market on a carbon price having been paid, and, in addition, hoping to “nudge” third countries to follow the same path. This means that, although it may be the case that Europe’s
3 A Governance Failure in wto Law: Non-product Related Production Methods, de facto Discrimination, and the Environmental Exception
At this point, it is perhaps helpful to step back and consider the law of economic integration, and particularly wto law, which is something of an analogue of EU law, albeit with more participants (164 compared with 27 states) and somewhat less complete. We are speaking of the law of economic integration between states, through treaty law. That is, the entire structure is conceptualised through the lens of states as the basic building blocks, both as the authors of the agreements and as the subjects of the law. There is nothing particularly objective about this; it is just historically the case. Thus, the very concept of trade, in terms of volume and/or value, as something that occurs between states, as a protected interest, flows from the state-centred lens on which the entire structure is based. We should constantly bear in mind that trade is just a subset of economic activity more generally (including transactions within states). It is precisely such conceptual assumptions, even as written into the relevant treaties, that come under increasing stress as the processes of integration and globalisation progress. Citizens are simply becoming progressively more central to the thinking.10
We also need to bear in mind that we are speaking of the World Trade Organization, not the World Organization for the Protection of the Environment. Trade is an interest protected by the wto by definition; the environment is not (in the absence of any specific environmental agreement to that effect). States may act for environmental reasons and their measures may be tested by the wto to ensure that they are not excessively trade restrictive. But the wto will never tell a state that it must do more to protect the environment.
Finally, we must also be aware of the concepts of absolute and comparative advantage; the latter explains why least developed and developing countries have an interest in participating in the system. A particular developed country
Against that background, the structure of the main relevant treaty, gatt 1994 (which originally dates from 1947), is conceptually straightforward. The main rule is that each member must treat goods from other members in a non-discriminatory way (that is, no discrimination between goods on grounds of origin). The rule covering non-discrimination between other members is known as the most favoured nation (mfn) rule; that covering non-discriminatory treatment of domestic and imported goods is known as the national treatment rule.11 Naturally, what happens at the border is regulated. In principle, the only tariffs that can be applied are those in the agreed schedule of concessions (unless, exceptionally, anti-dumping or countervailing duties are justified).12 Quantitative restrictions on imports are also generally prohibited (unless the conditions for a safeguard measure are present).13 Internal measures, both fiscal and regulatory, are also regulated: they must be non-discriminatory.14 Internal taxes and regulations enforced at the border are analysed under Article iii, as opposed to Article xi.15 If a subsidy is used as a policy instrument (as opposed to a fiscal measure or regulation), it is acceptable for it to be granted only to firms on the territory of the subsidising member (the member does not have to make the subsidy available globally), provided that it is not
Importantly, for indirect fiscal measures such as value added tax (vat) the law provides for the operation of the so-called destination principle. According to this principle, the rate of tax to be paid is that applicable in the country in which the product is sold. Thus, when an imported product enters a country, it is subject to the tax applicable in that country; when a domestically produced product is exported, it is not subject to that tax, or a rebate applies. Such rebates are specifically carved out of subsidies law – that is, they are deemed not to be subsidies.17 Critically, as discussed below, no such mechanism exists for regulatory measures.
The treaty states that nothing in the gatt is to be construed as preventing a member from adopting a measure necessary to protect an enumerated list of protected legitimate policy objectives, including the protection of public morals, or human, animal or plant life or health, or the conservation of exhaustible natural resources. There is also a provision covering security-related exceptions.18
Traditionally, the treaty has been interpreted and applied by taking a bifurcated approach to the obligations (such as the mfn rule) on the one hand and the rights or exceptions (such as the so-called environmental exception) on the other hand. Following this approach, one speaks of a ‘violation’ of an obligation and then considers whether that violation is ‘justified’ by one of the rights. However, this is not how the treaty is actually written. Rather, it is written in a more integrated or unitary manner, providing that nothing in the gatt is to be construed as preventing the adoption of a measure that pursues one of the enumerated legitimate policy objectives. There is a difference between a violation that is justified and a measure that, as a whole, is consistent with the balance of obligations and rights under the treaty.19 This is a point to which we shall also return.
With this summary of the design and architecture of the gatt in mind, we may see how it functions with regard to the regulation of product characteristics. Traditionally, countries may regulate the characteristics of products sold
It is important to note that, in accepting non-discriminatory but autonomous national regulation, the system accommodates limitations on the protected trade interest. That is, while it welcomes and encourages internationally agreed rules, at the same time it accepts in principle a situation in which each of the 164 wto members may have a different regulation concerning the product characteristics of a particular item (such as a plug), with respect both to domestic production and imports. Obviously, this is not ideal for achieving economies of scale or for specialisation or, thus, for exploiting comparative advantages, but it is inherent in the design and architecture of the system. It is a compromise.
Finally, we must consider the problem of the regulatory measure that is non-discriminatory on its face. Without more, this would not appear to be caught. It would not appear to violate the rules against discrimination on grounds of origin, or the rules regarding the schedule of concessions, or the rules regarding quantitative restrictions. Thus, without more, the measure would never be subject to the necessity test under Article xx of the gatt (that is, it would never be scrutinised in order to ensure that it was the least trade restrictive measure available and that there was no alternative, less trade-restrictive possibility that would make an equivalent contribution to the legitimate policy objective).
The main solution to this problem20 has been the development of the concept of so-called de facto discrimination. This concept is based on the provisions concerning internal taxation, which seem to create a second category, leaving aside measures that expressly discriminate on grounds of origin.21 This
An important part of this puzzle is the concept of ‘like product’, about which a great deal has been written and which is much misunderstood. The correct approach is actually quite simple. First, one has to consider what is the definition of the product – that is, which things can be grouped together and referred to as one product. There is no ‘right’ answer to this question, because it depends on the cross-price elasticities of demand (and to a lesser extent supply) that are deemed sufficient to establish that two things compete sufficiently closely to be grouped together as a single product. Next, in examining whether or not there is de facto discrimination, and in particular whether or not there is an asymmetrical adverse impact on imports, one must define the domestic product and the imported product, categorically, in identical terms.
In considering whether or not two things compete it is legitimate to take into account not just their physical characteristics but also other considerations relevant to the operation of the forces of supply and demand, including the manner in which they have been produced. Consider, for example, two identical items, one of which has been produced in an environmentally friendly manner and the other of which has not. It is possible to argue that, if consumers care about the environment and are informed by an appropriate label, a situation might in theory be reached in which all consumers always choose the environmentally friendly item, there being no price difference at which they would switch to the other. In that case, one might argue that the two items were in different markets – that is, that they did not compete at all. Accordingly, one could argue that a regulation banning the environmentally unfriendly item (both domestically and with respect to imports) does not give rise to de facto discrimination. One could even try to develop this argument by focusing only on those consumers who always choose the environmentally friendly product and asserting that they constitute a different market. However, such an argument is hardly realistic. In the real world, price will continue to play a role. One also needs to be wary of situations that are created by the measure under scrutiny itself. But perhaps most importantly, one has to be alert to the fact that there is no way an international trade adjudicator is going to sign off on a relatively intrusive non-product-related ppm regulation on the grounds that it is non-discriminatory. This would represent a binary analysis and outcome. Instead, the adjudicator will always seek, and find, a way to get to the calibrated necessity test under Article xx of gatt 1994, and with good reason.
Layered on top of the gatt is the tbt Agreement, the two agreements applying concurrently. The tbt Agreement, which dates from 1995, controls technical regulations and standards, which are precisely defined. Article 2.2 of the tbt Agreement contains a necessity test that is an analogue of the necessity test in Article xx of the gatt. The problem of getting to the necessity test is thus solved, since the tbt Agreement simply applies to the relevant types of
4 The European Union Emissions Trading System: Governance Failure with Respect to the Transnational Dimension
With the foregoing observations in mind, the next step is to consider the EU emissions trading system (ets),25 which is a ‘cap and trade’ system. The objective of the EU ets is environmental, and specifically to reduce carbon emissions by putting a price on them. It reflects the fact that the EU is pursuing a particular level of environmental ambition, in terms of reducing carbon emissions, higher than that of certain of its trading partners, and indeed higher than that of the Paris Agreement.
Under the ets, firms producing the designated products in the EU are required to purchase and surrender certificates entitling them to do that. Because this relates to production in the EU, it does not apply to imports, an aspect that leaves the system incomplete and that may be characterised as a
It is in the nature of economic integration from the bottom up that this type of regulatory measure entails what might be termed a ‘first-mover disadvantage’. That is, by comparison with its trading partners, the EU has increased its level of environmental ambition, specifically with respect to domestic production. This creates the regulatory problem of carbon leakage, on both the import side and the export side. In other words, all other things being equal, EU producers will have an incentive to shift offshore, to a non-EU country that is less regulated in terms of carbon price, in order to continue serving the EU market with imports. On the export side, they have an incentive to move to the less regulated non-EU country in order to produce there and serve that market. This is a particular problem when one is speaking of a common good such as the environment, which is adversely affected by carbon emissions everywhere. Thus, without more, the very purpose of the EU ets, which is to reduce carbon emissions, would be frustrated, because industry would just shift offshore and continue polluting, and there would be no impact on climate change.
The solution to this has been to provide for free allowances to those sectors covered by the ets that are most at risk of delocalisation – that is, the
The EU ets has reached the point at which it needs to be updated and complemented with the cbam. The tension inherent in the system between the relatively increased level of environmental protection and the granting of free allowances can be sustained only up to a point. It is clear that the Paris Agreement is not delivering a timely solution to the problem of climate change, which is itself a transnational governance failure. The level of environmental ambition must be raised further. This means that the free allowances must go. And this means in turn that the problem of carbon leakage, on both the import side and the export side, returns.
5 Transnational Governance of Production Processes Unrelated to Product Characteristics in International Trade Law
Before turning to the cbam itself, it is opportune to explore in more detail the issue of the regulation of production processes unrelated to product characteristics in international trade law. As explained above, traditionally, this has
It is helpful to understand the reticence with which such measures have been considered by the trade establishment in Geneva. As explained above, even in the case of the regulation of product characteristics, multiple national regulations have the effect of fragmenting markets and diminishing the benefits of trade, although this is a compromise that is accepted by the system. The regulation of non-product-related ppms exacerbates that effect. A national producer in one wto member might in theory need not just 163 different versions of their product but 163 different production lines. This does more than just hinder economies of scale and the exploitation of comparative advantage; it entirely negates them, because it makes economies of scale impossible to achieve in practice. In addition, another member might legitimately complain that such regulation was relatively intrusive on its domestic policy calculus. It might affirm, for example, that it cared just as much about the environment but had a relatively impoverished population to feed, as a priority. If all 164 wto members were to adopt non-product-related ppm regulations on all matters of concern to them, the whole international trading system would probably grind to a halt.
However, the fact remains that wto law does not per se prohibit the regulation of non-product-related ppms. It may be that, when the gatt was originally written in 1947, this was not something that the drafters were thinking about. But the notional intent of a small group of people involved in the negotiation of an agreement is an illusory basis on which to interpret and apply the law. Rather, we must look at the law itself – that is, the words that are actually in the treaty – and, by studying the design and architecture of the relevant provisions, understand their purpose. This is an objective notion of ‘intent’ or ‘object and purpose’. It is the same way that we can look at a hammer and understand that it is for nails, and look at a screwdriver and understand that it is for screws.
Thus, when we examine the gatt, we do not, in truth, find any prohibition on the regulation of non-product-related ppms. They cannot be said to somehow violate the rules against quantitative restrictions or non-discrimination per se, and to be incapable of justification. Article xx of gatt 1994 does not contain a territorial limitation.28 On the contrary, certain subparagraphs, such as subparagraph (e) (‘relating to the products of prison labour’) appear to strongly suggest that such measures are possible. The chapeau of Article xx itself refers to ‘countries where the same conditions prevail’, apparently directing the reader to consider the conditions prevailing in the third country or countries, and not just the characteristics of the regulated product.
The problem, then, is to try to understand how the system finds a reasonable balance between the acceptable regulation of non-product-related ppms and a regulation of non-product-related ppms that would be excessive. The key to this is the necessity test, particularly when applied in the context of a common good, such as the climate – that is, when it is in the nature of the problem being addressed that it necessitates the regulation of non-product-related ppms. And that brings us, finally, to the cbam and wto law.
6
Aware of the complexity of the problem, and the controversy surrounding it, the EU has for years been engaged in discussions with its trading partners and with other countries in order to address the problem of carbon emissions and climate change. There have been extensive exchanges of information and analysis directed towards that outcome, and this continues to be the case today. However, at some point it becomes clear that, in addition to continuing discussions, some further action is necessary, even if it needs to be autonomous. That point has been reached. The climate emergency is extremely serious and accelerating. Urgent action is required. European citizens demand it. They will simply not accept that being a member of the wto and participating in the international trading system has as a consequence that we must sit on our hands while the planet burns. Nor will European consumers accept that they must continue to use goods that have not paid a carbon price, effectively dumping the problem, or at least responsibility for it, on someone else’s doorstep. In effect, EU citizens demand that new ways of thinking about, interpreting and applying international trade law be found, in order to allow their legitimate concerns to be addressed. In moving forward, the EU has very carefully selected the least trade-restrictive measure reasonably available, and the only one that creates a regulatory incentive for other countries to follow suit.
6.1 The Overall Regulatory and Governance Response
The first point to make is that the matter can only reasonably be considered by looking at the ets/cbam as a whole. That is because the cbam has been designed to complete and complement the ets and is dependent upon it. No doubt, complainants may be particularly interested in the cbam, because it applies to imports, and less interested in the ets, because it does not. But it is not, or at least should not be, the subjective trade or perceived legal interests of complainants that determines what reasonably constitutes the subject of the discussion.
In wto case-law there is a certain amount of focus on what constitutes ‘the measure at issue’. Lawyers in particular tend to become very focused on this. They like to get absolutely clear from the start what ‘the measure at issue’ is and then carry that analytical clarity with them all the way through the case. So the question is, is ‘the measure at issue’ inconsistent with the obligation, is ‘the measure at issue’ justified by the exception, and so forth. There is certainly some merit in this approach. It brings some analytical clarity and order
The answer here is that, while it is reasonable to do what is necessary to comply with the procedural requirement that ‘the measure at issue’ be appropriately identified, one should not overstate the point. As observed above, for example, complainants will no doubt wish to focus on the cbam, but this should not release them from properly analysing it in the context of the ets or allow them to ignore the overall design and architecture of the ets/cbam. If complainants accept in principle that a measure of this type is possible (which they should), we should not need to read lengthy arguments directed against the regulation of non-product-related ppms per se. To the extent that this implies that there must be a specific aspect of the ets/cbam with which complainants may wish to take issue, such as product coverage, we should expect it to be reasonably identified from the outset. And so forth.
There is also a certain line in wto case-law, consistent with the above point, to the effect that it is in principle for the complainant to identify what ‘the measure at issue’ is. This is a reasonable point of departure. After all, the complainant should know what it is complaining about. It is not for the defendant or the panel to guess what that might be. That said, as always, there are certainly limits to this proposition. For example, it is probably fair to say that one of the consequences of some of the ‘over-lawyering’ that has sometimes taken place in wto litigation is that, having analysed the case, lawyers have attempted to manipulate the process by artificially circumscribing what they assert is ‘the measure at issue’. To take a somewhat simplified but obvious example, if
Linked to this discussion is the fact that the wto Dispute Settlement Understanding has been interpreted and applied in such a way that the terms of reference of a panel are defined only by the panel request. There is no statement of defence integrated into the terms of reference (even though this is something that could have been done). Such a statement of defence would give the defendant an opportunity to indicate whether or not it considers the description of ‘the measure at issue’ advanced by the complainant reasonable (as opposed to under-inclusive or indeed over-inclusive).
The answer here, again, is that one should not overstate the point. While complainants may be expected to identify ‘the measure at issue’, they should not be permitted to artificially and unfairly control the conduct of the case, including the manner in which the panel eventually frames its analysis, without regard to a more reasonable and objective view about what is or should be the subject of the discussion.
6.2 Incomplete Governance: Product Coverage
Based on experiences in similar cases, one may expect that one of the issues that may come up is product coverage and alleged de facto discrimination. The argument goes like this: here is a product that is covered by the ets/cbam; here is another product that is not and that competes in some degree; I make or would like to make the product that is covered; regulatory purpose is irrelevant; so there is a violation of the non-discrimination rules. We continue the analysis under Article xx of gatt 1994, according to which the defendant has the burden of proof.
This kind of argument is profoundly unsatisfactory in many ways, legally and intellectually, for the reasons already explained above. At its heart is a concept of de facto discrimination that has, at this point, practically become an empty shell – that is, a very low or even non-existent hurdle on the way to Article xx of gatt 1994. As explained above, one cannot meaningfully compare two different products; one must consider the entire category on both sides of the comparison. One cannot reasonably ignore the fact that the situation complained of results, at least in part, from decisions made by the industry of the complainant, or to be made (allegedly) by it in the future. And one cannot
Here is what has, in fact, occurred.
First, the product scope of the ets was chosen by focusing on sectors with relatively high carbon emissions, but also taking into account what was administratively feasible (the sps Agreement refers to what is reasonably available, taking into account technical and economic feasibility). No one could even sensibly suggest that, in fixing the product scope of the ets, the EU was engaging in de facto discrimination against imports. The ets does not even apply to imports. Exactly the reverse is true. In adopting the ets, the EU was autonomously increasing the level of its environmental ambition, placing a burden on domestic production that was not placed on imports at all. That is, by its own terms, the ets represents reverse discrimination. In other words, under the ets, imports are treated more favourably than domestic products. To characterise this as de facto discrimination would be indeed surreal.
Second, the cbam simply adopts as a starting point the same product scope as the ets, in order to complete the regulatory structure and eliminate the reverse discrimination. The regulation, therefore, specifically identifies the product scope of the cbam on the basis of objective criteria, including carbon emissions and the risk of carbon leakage, taking into account what can reasonably be achieved at this point in time, having regard to technical and economic feasibility.
Third, it is certainly the case that some wto members will produce or assert that they wish to produce a product covered by the ets/cbam that competes in some degree with a product that is not covered or not yet covered by the ets/cbam. As wto law has to date been interpreted and applied, it would be impossible to design a measure without this result.
Fourth, one cannot reasonably expect a wto member seeking to regulate from the bottom up on an issue such as climate change to regulate everything at once. wto members are permitted to approach a complex and extensive problem progressively when regulating. That is what the EU is doing, with the extension of the ets/cbam to more sectors already under discussion and consideration.
Sixth, complainants making such arguments should take great care that they do not get what they wish for. wto law does not dictate how adverse panel findings are to be implemented. A discrimination finding can be implemented by aligning either with the lower or the higher standard. Thus, if the best a complainant can do is complain that a particular product is covered while another is not, it would be a simple matter to implement such findings by extending the product scope of the ets/cbam, which would, of course, not be the result actually sought by complainants. In bringing the case, the complainant would in fact be doing the environmental lobby in the EU a big favour. Potential complainants should probably therefore think very carefully before acting as to what they are trying to achieve, and not be misled by enthusiastic lawyers, who will have their own agenda.
6.3 The Legitimacy of the Environmental Governance Objective
One of the points that will come up in the litigation is the question of what objectives the EU is pursuing in adopting the ets/cbam. The EU will explain that it is pursuing an environmental objective, seeking to address climate change by reducing carbon emissions.29 There cannot be any doubt that this comfortably meets the requirements of Article xx(g) of gatt 1994, which
Complainants are likely to assert that one of the objectives of the cbam is to raise revenues. That is not particularly the case. Like many such measures, the ets/cbam may reasonably be expected, at least in the short term, to have both a behaviour-changing and a revenue-raising outcome. Taxes often have both consequences and are rarely set so as to be entirely behaviour changing (that is, prohibitive) or entirely revenue raising (that is, with no impact on behaviour). But the fact remains that, in the ideal world that the EU would like to see evolve, all its trading partners would introduce carbon pricing, and no one would ever pay a cbam charge. In any event, raising revenue is an entirely respectable exercise for all wto members, and they all do it all of the time, so the fact that the ets/cbam may have that outcome, at least in the short term, certainly does not take it outside Article xx of gatt 1994.
Of course, the term ‘exclusively’ here is important. It means that the adjudicators will need to be satisfied that the design and architecture of the ets/cbam is ‘pure’, in the sense that it pursues legitimate policy objectives (notably, the protection of the environment and public morals), even if there is some revenue raising at least in the short term, and taking into account what is reasonably achievable from a technical and economic point of view. In other words, they will need to be satisfied that the design and architecture of the ets/cbam does not reveal that it has the objective of discriminating between countries where the same conditions prevail or of creating unnecessary obstacles to international trade (that is, that it is protectionist).
6.4
We may also anticipate that complainants will repeatedly affirm that the EU is acting to address carbon leakage on the import side only because it does not want its industry to shift offshore, for industrial policy reasons. They will argue that this is an end in itself and sufficient to establish the protectionist nature of the measures. However, the measures themselves explain at great length, and this is also very clear from the context and from the design and architecture of the measures, that they address the problem of carbon leakage on the import side not as an end in itself but only as a necessary means of achieving the overarching environmental objective. This is a subtle but important distinction.
6.5 Respect of the Environmental Governance Principle: The Measure Is Always Calibrated to Carbon Emissions
Keeping in mind the foregoing discussions regarding the concept of de facto discrimination, the important point to note is that the ets/cbam is even-handed because it is always calibrated to carbon emissions. That is, it merely sets out to ensure that all the relevant products produced or sold in the EU have paid a carbon price at least once. If a carbon price has not been paid in the non-EU country, a cbam payment will be due. If a carbon price has been paid in the non-EU country, no cbam payment will be due.
It is important in this context to think carefully about what one means by the concept of discrimination on grounds of origin. What that concept actually means is that two identical products are treated differently only because of their origin. If they are treated differently for any other reason, one is not looking at discrimination on grounds of origin at all but at discrimination on grounds of whatever that other difference may be. Here, the difference is whether or not a carbon price has been paid. In other words, once it is demonstrated that the ets/cbam is consistent with Article xx of gatt 1994, the logical conclusion is actually that it does not involve de facto discrimination at all. Hence the observation that what is really going on, or at least what should really be going on, is not a bifurcated analysis but rather an integrated or unitary analysis.
No doubt complainants will seek to scrutinise any differences between the ets and the cbam. Such differences certainly exist for a variety of very good reasons. For example, the ets is a cap and trade system. One could not have such a cap and trade system on the import side without introducing quantitative restrictions, which would be more trade restrictive. And in any event one could not reasonably, as a regulating authority, have the pretension to cap production in non-EU countries.
6.6 Nudging Trading Partners to Price Carbon as a Legitimate Governance Objective
It should now be apparent from the foregoing discussion that the key feature of the measure is the regulatory incentive for non-EU countries to introduce carbon pricing of their own, at least for exports to the EU. This is the regulatory nudge that is designed to overcome the blockage at the level of the Paris Agreement and to catalyse the necessary action by other countries. In this respect, the EU is not conditioning access to its market by using a stick. It is using instead a carrot, albeit one that has been created by designing a particular, non-discriminatory, regulatory framework. That is, it is creating a situation in which the exporting member faces a choice: either it does not introduce carbon pricing and pays cbam (to the EU), or it introduces carbon pricing, collects the relevant funds itself, redistributes them as it sees fit and pays no cbam. All other things being equal, the hope is that this relatively simply calculus will produce the desired result. And the EU hopes that the process may spill over into carbon pricing for the domestic market of the non-EU country and its other export markets, even if this is not directly the object of the measures it has adopted.
This feature confirms that the ets/cbam is not a tax but a regulatory measure. There is a certain amount of pseudo-technical analysis that has gone into the question of which substantive obligations under gatt 1994 may be employed in order to assess the ets/cbam – that is, whether it is a border or internal measure, a tax (whether direct or indirect) or a regulation. This does not need to be the centre of gravity of the debate, and one should not get lost in the detail, since it will not, or at least should not, change the outcome. The most straightforward observation one can reasonably make is that the ets/cbam is, in essence, a behaviour-changing regulatory measure that pursues exclusively legitimate objectives and, at this point, is the least trade-restrictive option available to address the urgent problem of climate change.
It should also be clear that creating an incentive for non-EU countries to adopt carbon pricing, at least for exports to the EU, is a legitimate objective, even though it is in some sense extra-territorial. That flows from the nature
A carbon price based on the destination principle would not make the same contribution to achieving the overarching legitimate policy objectives of the EU. It would not create the same regulatory nudge for non-EU countries, because no credit would be given for carbon pricing in the non-EU country. In other words, it would not create any incentive for non-EU countries to introduce carbon pricing of their own. Furthermore, on the export side, it would not make the same contribution to the legitimate objectives being pursued (because there would be a rebate). Finally, even though subsidising or supporting exports might seem to enhance trade, when trade deflection and diversion effects are taken into account such measures actually tend to introduce inefficiencies, and at least in this sense would be more trade restrictive. We will return to the question of subsidies, but at this point we may observe that the necessarily relatively intrusive nature of the ets/cbam on the import side is nicely and appropriately balanced by forbearance on the export side, given the absence of the rebates that would be associated with a tax based on the destination principle.
6.7 Transnational Governance on an Even-Handed Basis
As explained at the beginning of this chapter, an important part of the discussion in the context of the Paris Agreement relates to the balance to be struck between the environmental objective and the development objective, taking into account, in particular, the costs of past industrialisation and pollution. This is quintessentially a matter of international climate change politics, which is precisely why the discussion is stuck and is unlikely to progress further in a timely manner – an unobtainable “Utopia” for the time being.30
However, the question that we must ask ourselves as lawyers is whether or not, as a matter of law, the wto requires the EU to integrate the development objective into the ets/cbam. The answer to that question is that clearly it does not. The key provision is the chapeau of Article xx of gatt 1994, which refers to countries where the same conditions exist. The question, of course, is what are the relevant conditions – that is, what is the metric by reference to which sameness is to be determined as present or not. Clearly, it cannot be all the characteristics of a country, since no two countries are the same, and if this were the meaning the term ‘where the same conditions exist’ would be
That is not to say that the EU is not concerned about such matters. It is, and there is a host of flanking measures adopted by the EU that are designed to help other countries, including in particular least developed countries and developing countries, to adjust to the EU’s new environmental measures and to deal with the challenges posed by climate change. But the point is that, legally, the EU is not required to integrate these concerns into the ets/cbam.
6.8 Transnational Governance Issues with Respect to Exports
We turn now to briefly address the final piece of the puzzle, which relates to the problem of carbon leakage on the export side. As explained above, in the case of a fiscal measure, the wto agreements provide for the operation of the destination principle. This means that the rate of tax paid is that in the country where the product is sold. Consistently with this, rebates are granted on exports and the tax at destination imposed on imports. Such arrangements are carved out of wto subsidies law.31
However, as we have also explained above, the ets/cbam is not a tax but a regulatory measure, whose purpose is in essence behaviour changing, which is why credit is given for a carbon price paid in the non-EU country. For regulatory measures, there is no equivalent to the destination principle. The scm Agreement applies. This means that, if subsidies are given (for example, in the form of free allowances), they may not be contingent, in law or in fact, upon export. These would be prohibited subsidies that could not benefit, in law or in fact, from the exceptions in Article xx of gatt 1994.
However, what is perfectly possible is that the EU can grant subsidies that are available indistinctly as regards domestic sales and export sales, such as subsidies for green innovation. We are entitled to do this precisely in order to retain industry on our territory; we are not required to make the subsidies available to firms in all parts of the world.32 This therefore provides a legitimate policy tool for the EU to address the problem of carbon leakage on the export side. In this respect, it is important to note that the case-law makes it clear that it is not the reason for which a subsidy is granted that determines whether or not it is a subsidy contingent in law or in fact upon export, but
7 Conclusion
As indicated at the outset, this Chapter assimilates the analyses of Petersmann and Steinbach set out elsewhere in this book. However, it is grounded in the “bounded rationalism” both refer to. In the presence of constitutional pluralism, the live question is what, at this point, can realistically be done to address transnational governance failure, specifically with respect to climate change. Answering that question is not about describing a Utopia. Rather, drawing from the lessons of history, including the development of the European Union, the live question is more modest: what can be done to set matters in the right direction of travel, gradually nudging the global regulatory process towards the essential objective. In the history of economic integration large markets have always in some measure leveraged that characteristic in order to be, in effect, “regulatory exporters”. This may be an imperfect approach, but it can be effective. cbam is the main current example of this process. Critically, it has not been adopted in contravention of the European Union’s international trade law obligations and rights, something that could itself be characterised as a transnational governance failure. Rather, from its inception, as explained in this Chapter, it has been carefully designed to be consistent with the balance of those obligations and rights. As such, it represents a legitimate policy tool for responding to transnational governance failures, and probably the only effective model currently available.
Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a carbon border adjustment mechanism [2002] oj L130/52.
European Commission, Commission communication – ‘Fit for 55’: Delivering the EU’s 2030 climate target on the way to climate neutrality, com(2021) 550 final.
Essentially: iron and steel, cement, fertilisers, aluminium, electricity and hydrogen.
See: Chapter 2, Ernst-Ulrich Petersmann, ‘Constitutional Pluralism, Regulatory Competition and Transnational Governance Failures’, at page [1].
The wto Agreement on Technical Barriers to Trade, which applies to technical regulations, standards and conformity assessment procedures, and the wto Agreement on the Application of Sanitary and Phytosanitary Measures, which applies specifically to measures adopted to protect human, animal or plant life or health on the territory of the regulating member.
See: Chapter 3, Armin Steinbach, ‘Constitutional Economics and Transnational Governance Failures’, at page [26]. cbam differs from the so-called carbon club concept because it is specifically about carbon pricing, which is a market-related mechanism, and therefore has a different focus compared to other regulatory measures. cbam is: quantitative, being based on a market mechanism, as opposed to qualitative, which would demand complex, time-consuming and controversial procedures for quantification and comparison; dynamic, since the price can vary daily, as opposed to static, meaning that the re-assessment of changing qualitative measures can only be done over an extended period of time; and calibrated, meaning that a prior partial payment of the carbon price will be taken into account, as opposed to binary, meaning one is either in the club, or not.
Professor Paul Freund, Harvard University, often referenced by Ruth Bader Ginsburg, Justice of the US Supreme Court.
See, generally, United Nations Climate Change, ‘The Paris Agreement’ <
See: Chapter 2, Ernst-Ulrich Petersmann, ‘Constitutional Pluralism, Regulatory Competition and Transnational Governance Failures’, Section 2, at page [8].
See, for example, Ernst-Ulrich Petersmann, Constitutional Functions and Constitutional Problems of International Economic Law (1st edition, Routledge 2020).
gatt 1994, Articles i and iii.
gatt 1994, Articles ii and vi; Agreement on Implementation of Article vi of gatt 1994 (Anti-Dumping Agreement); Agreement on Subsidies and Countervailing Measures (scm Agreement).
gatt 1994, Articles xi and xix; Agreement on Safeguards.
gatt, Articles iii:1, iii:2 and iii:4.
Note Ad Article iii.
gatt, Article iii:8(b); scm Agreement, Articles 3.1(a) and (b) and Part iii.
Note to Article xvi of gatt 1994; scm Agreement, footnote 1 and Annex i, particularly items (e) and (h) and footnote 58.
gatt 1994, Articles xx and xxi, particularly Articles xx(g), xx(b) and xx(a).
See, for example, Joseph Weiler, ‘Law, culture and values in the wto: gazing into the crystal ball’ in Daniel Bethlehem, Donald McRae, Rodney Neufeld and Isabelle Van Damme (eds), Oxford Handbook of International Trade Law (Oxford University Press 2009).
An earlier theory posited that non-product-related ppm regulations are controlled by Article xi of gatt 1994, which prohibits quantitative restrictions on imports. See, for example, gatt Panel Report, US-Tuna (Mexico), paras. 5.11–5.14 (unadopted by the Dispute Settlement Body); gatt Panel Report, US-Tuna (eec), paras. 5.8–5.10 (unadopted by the Dispute Settlement Body). This theory has now been largely discredited.
gatt 1994, Article iii:2, first and second sentences.
Appellate Body Report, European Communities – Measures prohibiting the importation and marketing of seal products, paras. 5.101–5.530.
James Flett, ‘wto space for national regulation: requiem for a diagonal vector test’ [2013] Journal of International Economic Law, Vol. 16, No. 1, 37.
Appellate Body Report, European Communities – Measures prohibiting the importation and marketing of seal products, paras. 5.8–5.12.
See, generally, European Commission, ‘Climate action’ <
These include, notably, the US-Shrimp/Turtle, US-Tuna/Dolphin and ec-Seals cases. The EU already has measures of this type in place, for example covering genetically modified organisms, the protection of animals at the time of slaughter, the use of animal testing in the development of cosmetics, the labelling of eggs, the use of leghold traps, the sale of cat and dog fur, and the killing of seals.
Appellate Body Report, United States – Import prohibition of certain shrimp and shrimp products, paras. 127–134.
gatt Panel Report, US-Tuna (eec), paras. 5.14–5.20; Appellate Body Report, US-Shrimp, para. 133 (basing its reasoning on the observation that the relevant species of turtle migrates also in US waters, without ruling on the question of whether or not there is an implied territorial limitation in Article xx(g)).
As indicated above, other general exceptions are or may be relevant, including those under Article xx(b) (measures to protect human, animal or plant life or health), Article xx(a) (public morals) and Article xx(d) (measures necessary to secure compliance with law or regulations not inconsistent with gatt 1994).
See: Chapter 2, Ernst-Ulrich Petersmann, ‘Constitutional Pluralism, Regulatory Competition and Transnational Governance Failures’, Section 3, at page [12].
scm Agreement, footnote 1.
gatt 1994, Article iii:8(b).
Bibliography
Flett J, ‘wto space for national regulation: requiem for a diagonal vector test’ [2013] Journal of International Economic Law, Vol. 16, No. 1, 37.
Petersmann E-U, Constitutional Functions and Constitutional Problems of International Economic Law (re-print of the 1991 1st edition, Routledge 2020).
Weiler J, ‘Law, culture and values in the wto: gazing into the crystal ball’, in Daniel Bethlehem, Donald McRae, Rodney Neufeld and Isabelle Van Damme (eds), Oxford Handbook of International Trade Law (Oxford University Press 2009).