HUYNH Duc Ngoc Anh

Abstract

Climate change is a major global issue, with January 2024 being the warmest on record, and the 12-month average of 2023 over 1.5°C above preindustrial levels, according to the Copernicus Atmosphere Monitoring Service (CAMS)^[1] of the European Union (EU).^[2] In response, the European Commission has introduced the CBAM as part of its climate policy. The Carbon Border Adjustment Mechanism (CBAM) aims to address the carbon footprint of imported goods, aligning with the EU’s environmental goals. Additionally, the European Commission asserts that CBAM is crafted to align with various aspects of international law. However, the reassurance provided has not succeeded in mitigating the global dissatisfaction with the unilateral approach taken in trade policy.^[3] Businesses engaged in exporting to the EU market and the EU’s partner nations express a heightened level of concern. There is a growing focus on both the practical implications of CBAM and the potential conflicts with World Trade Organization (WTO) obligations arising from its reporting requirements. This unease stems from the perceived challenges that CBAM might pose to fair trade practices and the potential imposition of additional burdens on businesses navigating international markets.

Keywords: Carbon Border Adjustment Mechanism, WTO, CBAM, international trade law.

Résumé

Le changement climatique est un problème mondial majeur, janvier 2024 ayant été le mois le plus chaud jamais enregistré, et la moyenne des 12 mois de 2023 étant supérieure de plus de 1,5°C aux niveaux préindustriels, selon le Service de surveillance de l’atmosphère Copernicus (CAMS) de l’Union européenne (UE). En réponse, la Commission européenne a introduit le Mécanisme d’ajustement carbone aux frontières (MACF) dans le cadre de sa politique climatique. Le MACF vise à réduire l’empreinte carbone des biens importés, en s’alignant sur les objectifs environnementaux de l’UE. De plus, la Commission européenne affirme que le MACF a été conçu pour être conforme aux divers aspects du droit international. Cependant, ces assurances n’ont pas suffi à apaiser les inquiétudes mondiales face à l’approche unilatérale adoptée dans la politique commerciale. Les entreprises exportant vers le marché de l’UE ainsi que les partenaires commerciaux de l’UE expriment une inquiétude croissante. L’attention se porte de plus en plus sur les implications pratiques du MACF et sur les conflits potentiels avec les obligations de l’Organisation mondiale du commerce (OMC) en raison de ses exigences en matière de déclaration. Ces préoccupations découlent des défis perçus que le MACF pourrait poser aux pratiques commerciales équitables et des charges supplémentaires potentielles pour les entreprises évoluant sur les marchés internationaux.

Mots-clés : Mécanisme d’ajustement carbone aux frontières, OMC, MACF, droit du commerce international.

   

Climate change poses one of the greatest problems of our time, with record-breaking global temperatures and widespread environmental impacts becoming increasingly evident. With ambition to address this issue, the European Union has implemented numerous environmental initiatives, including the Carbon Border Adjustment Mechanism, a key component of the European Green Deal. The CBAM aims to reduce carbon leakage by assigning a carbon cost to imports of certain goods, ensuring that the carbon footprint of these products aligns with the EU’s stringent environmental standards. However, efforts to align the CBAM with international law have raised concerns about its impact on WTO rules, particularly on non-discrimination and Special and Differential Treatment for developing countries. The additional reporting and carbon pricing requirements on imports have made businesses and trade partners wary. This paper examines how WTO rules apply to the CBAM and explores its potential negative effects on international trade and development strategies. The objective is to assess whether the CBAM, as currently announced, can meet the dual objectives of advancing environmental sustainability while complying with global trade laws, or whether adjustments may be necessary to strike a balance between these two factors.

1. An Overview of Climate Change Mitigation and the European Union’s Carbon Border Adjustment Mechanism

1.1. The Current State of the World in Environmental Policy Implementation

Global climate change continues to be fundamental and regarded as one of the most critical challenges for the planet. By 2023, 97 Parties (an increase of twelve from 2022), representing 101 countries and accounting for 80.7% of global greenhouse gas emissions, have communicated a net‑zero target. The European Union (EU) has demonstrated ambition and commitment in facing the challenges of climate change through resolute actions such as the EU Green Deal. Climate change globally continues to be a fundamental challenge and is considered one of the most critical issues for the planet. By 2023, 97 Parties (an increase of 12 from 2022), representing 101 countries and accounting for 80.7% of global greenhouse gas emissions, have communicated a net-zero target.^[4] The EU has demonstrated ambition and commitment to address the challenges of climate change through decisive actions such as its Green Deal.^[5]

However, to achieve the objective of the Paris Agreement,^[6] the urgency of scaling up climate ambition remains paramount.^[7] Carbon pricing policies play a crucial role as an essential part of an effective emissions reduction strategy. Based on data last updated in March 2023, there are carbon pricing initiatives covering 72 regional, national, and subnational authorities. These initiatives would cover 11.66 GtCO2e, representing 23% of global GHG emissions.^[8]

1.2. CBAM Regulations in Executing Greenhouse Gas Reporting

1.2.1. General Objective and Scope of Application

A raised concern is that the climate policies of each country are becoming increasingly divergent. According to Article 4(3) of the Paris Agreement on Climate Change, countries with less stringent climate policies contribute to this divergence. Under these provisions, the climate policy is considered a “nationally determined contribution” and is implemented at the highest possible effort – a level that varies according to each country’s conditions.^[9] Faced with this reality, some countries find themselves in a dilemma, trying to balance the aspiration to strengthen environmental policies and prevent carbon leakage.

The EU has addressed this issue through the “Fit for 55”^[10] package. This proposed package not only implements the EU Emission Trading System—the main tool of the EU in addressing emission reduction issues targeting domestic goods^[11]—but also introduces the CBAM as the tool regulating imported products to prevent carbon leakage.^[12] According to the perspective of EU leaders, the CBAM, as declared by the President of the European Commission, is a central part of its European Green Deal with the mission of avoiding the risk of carbon leakage.^[13] Assigning a cost to products with increased carbon emissions will help avoid carbon leakage while fully complying with our international commitments.^[14] Additionally, Frans Timmermans,^[15] Executive Vice-President for the European Green Deal, pledges that this new mechanism is entirely WTO-compliant.^[16]

In general assessment, through the statements above, CBAM functions as a mechanism to assign a cost to the carbon emissions associated with the production of carbon-intensive goods entering the EU. Its purpose is to promote environmentally friendly industrial production in non-EU nations. By verifying the payment of a price for the embedded carbon emissions in certain imported goods, the CBAM guarantees that the carbon cost of imports aligns with that of domestic production, preventing any compromise to the EU’s climate goals. The CBAM is strategically crafted to adhere to WTO regulation.

Regarding its scope of application, the CBAM will initially apply to specific goods and key precursors with carbon-intensive production processes, posing the highest risk of carbon leakage. These include cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen. The transitional period is intended as a pilot phase to facilitate learning for all stakeholders, including importers, producers, and authorities, and to gather valuable data on embedded emissions to enhance the methodology for the definitive period. The gradual implementation of the CBAM allows for a cautious, predictable, and proportionate transition for both EU and non-EU businesses, as well as for public authorities. During this phase, importers of goods falling under the new regulations will only need to report greenhouse gas emissions (both direct and indirect) embedded in their imports, without any financial payments or adjustments required.

1.2.2. Latest Notable Developments

On April 18, 2023, the European Parliament endorsed the implementation of the CBAM with a substantial majority.^[17] The EU initiated a carbon border adjustment mechanism on May 17, 2023, following its publication in the Official Journal of the European Union.^[18] To offer clearer guidance on CBAM during the transitional period, the Commission Implementing Regulation (EU) 2023/1773 officially came into effect three months later. ^[19]

Figure 1. About the timeline for the implementation of CBAM

In accordance with Regulation (EU) 2023/956^[20] issued by the European Commission, which articulates the establishment of the CBAM in the EU, the CBAM mechanism is poised to embark on its transitional phase from October 1, 2023,^[21] with the initial reporting obligation for importers concluding on January 31, 2024.^[22] This phase serves as a transitional period for importers to familiarize themselves with the system, providing the EU with a valuable opportunity to meticulously evaluate the practical effectiveness and impact of CBAM, along with a comprehensive assessment of the associated legal risks, before its complete operationalization. The specific regulations and criteria governing the reporting of emissions under CBAM have been intricately detailed in the Implementing Regulation. They are poised to receive official endorsement from the European Commission through Commission Implementing Regulation (EU) 2023/1773.

To ensure a seamless implementation process, EU importers are granted exemption from both financial adjustments and third-party emission audits during this transitional phase.^[23]

Figure 2. Timeline of CBAM transitional phases

Initially, CBAM will concentrate on product categories posing the highest risk of carbon leakage, including cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen, which collectively contribute significantly to the EU’s industrial emissions. Furthermore, the practical impact of this transitional period will serve as a foundation for the European Commission to evaluate and potentially broaden the scope to include a wider array of products and services, encompassing value chains, and potentially incorporating “indirect emissions”, such as carbon emissions from electricity used in the production of goods.

The next phase is the operational phase. Beginning in January 2026, there will be a gradual reduction to 0% of free allowances under the EU Emissions Trading System (ETS), coupled with a gradual increase to 100% of financial obligations under CBAM.^[24] This transition will require importers to acquire CBAM certificates, with their price determined by the average weekly auction price of EU-ETS allowances. By 2034, the CBAM implementation process, along with the elimination of free EU ETS allowances, will be fully realized.^[25]

1.2.3. The Rules and Requirements for Reporting Emissions under Commission Implementing Regulation (EU) 2023/1773

Chapter 2 of Commission Implementing Regulation (CIR) EU 2023/1773 delineates the rights and obligations of reporting declarants concerning reporting. As specified in both Article 8(2) of this Regulation and Article 35(1) of Regulation (EU) 2023/956, the reporting declarant is defined as either an importer or an indirect customs representative. The entity entrusted with reporting responsibilities must comply with the CBAM report format as detailed in Table 1 of Annex I, accessible through the CBAM Transitional Registry. Furthermore, when submitting the CBAM report, they are required to include the specified information outlined in Table 2 of this Annex. Noteworthy elements subject to examination under the CBAM may encompass the number of imported goods, the aggregate embedded emissions associated with these goods, and factors related to carbon pricing or any potential rebate/compensation. It is evident that the content of the report relies heavily on the data furnished by the operator,^[26] or the declarant may solicit the operator from providing specific information following the template in Sections 1 and 2 of Annex IV.^[27] This section will focus on detailing the information that businesses are required to provide for the reporting declarant, directly impacting the carbon price the respective enterprise must pay. This constitutes the core content that the EU aims to capture through CBAM statistics.

About the entities targeted, in the course of this transitional period, the CBAM will be implemented as an initial measure targeting commodities and essential precursors distinguished by their carbon-intensive production processes. This strategic focus aims to address the heightened risk of carbon leakage within these industries, marking a critical step in the EU’s efforts to curtail emissions and ensure the effectiveness of environmental policies. To determine the obligation to provide information for CBAM reporting, it is necessary to identify goods imported into the EU within the sectors of cement, iron and steel, aluminium, and certain chemical industries (including fertilizers and hydrogen), as well as electricity. Specifically, the classification of goods will be determined by their combined nomenclature (CN) code.^[28] In Table 1 of Annex II of this Regulation, the EU has provided a CN code list to identify goods falling within the scope of CBAM reporting. Simultaneously, within this table, CBAM explicitly outlines the measurement of carbon dioxide for most products, perfluorocarbons for aluminium, and nitrous oxide for certain fertilizer products.

Regarding the calculation of total emissions, after identifying the goods subject to the greenhouse gas reporting requirements of the CBAM, the mechanism places a notable emphasis on the provision of detailed information regarding the potential emissions attributed to these goods. This is particularly crucial for actual emissions prioritized when calculating emissions for CBAM goods. As per Annex II, emissions are governed by the process outlined in point (22) of this Section, involving the incomplete oxidation of carbon in a gaseous state under standard conditions.^[29] Once identified, these gases will be converted and presented as CO2e per tone, following Sections F and G of Section III (for regularly imported goods),^[30] or expressed as tone CO2e per MWh, as detailed in Section D of Section III (for imported electricity).^[31]

The CBAM utilizes information from routes that reflect the technology employed in goods production and parameters specific to a category in Section 2 of Annex IV to ascertain embedded direct emissions. For imported electricity, essential details include the emission factor utilized for electricity (tCO2e/MWh) and the methodology employed to establish this emission factor. CBAM relies on information related to the electricity consumption per tone of goods during the production process and the corresponding emissions factor in determining embedded indirect emissions. To delineate the methodology for determining the emissions of goods, the CBAM introduces several prioritized methods. According to Article 4(1) of Regulation (EU) 2023/1773, two methods are specified: (1) the calculation-based methodology^[32] and (2) the measurement-based methodology,^[33] designed to ascertain the specific embedded emissions of the source stream^[34] and emission source of goods.^[35] These methodologies are considered new and are recognized as EU methods. Post January 1, 2025, the method outlined in Article 4(1) will be the exclusive accepted approach. The selection of the method will hinge on the nature of each source to meet the stipulated requirements in Section B.3.4 or Section B.6 of Annex III of this Regulation with precision and reliability. During the initial transitional period until December 31, 2024, if the aforementioned methods are impractical, the determination of specific embedded emissions may be achieved through three alternative approaches: (1) a site-specific carbon pricing scheme; or (2) a mandatory emissions monitoring scheme at the facility’s site; or (3) an emissions monitoring program at the site, possibly involving validation by an accredited verifier.^[36]

According to Article 4(3) of Regulation (EU) 2023/1773, when direct or indirect emissions cannot be fully determined through the aforementioned methods, default values will be employed to assess goods’ emissions. The European Commission will calculate, update, and issue default values for the average emissions performance of each exporting country for CBAM-covered goods based on the latest and most reliable information, including data provided by the exporting country or group of countries. These default values represent X% of the “world” average weighted by EU production volumes for each product category and may be adjusted by a designated ratio in subsequent CBAM-related documents to ensure environmental integrity. This provisional regulation is effective until July 31, 2024. Default values do not signify a compromise by the European Commission but function as a tool to aid exporters, providing additional time to implement the two methods for determining specific embedded emissions under Article 4(1) of this Regulation.

The use of default values is divided into two stages: for the first three quarterly reports covering Q4 of 2023 and Q1&2 of 2024, declarants can choose to disclose embedded emissions using default values with no specific quantitative limitations. For the remaining period until the end of 2025, declarants can still estimate emissions, limited to complex goods, and capped at 20% of overall embedded emissions.^[37] The estimation method is considered a less prioritized option under Article 5 of Regulation EU 2023/1773.

To minimize double counting and address data gaps, any method must identify a suitable diagram and process description of the installation.^[38] The CBAM also regulates data reporting about goods regarding inward processing, including goods released for free circulation following inward processing and goods placed under inward processing that resulted in processed products released for free circulation.^[39]

About the reduction in carbon prices, in order to ensure parity in the treatment of installations within the EU-ETS and those situated in other countries, the practice of paying a carbon price in the country or sub-national region where a CBAM-regulated good, along with its precursors, is manufactured becomes instrumental in effecting a reduction in the CBAM obligation. This adjustment is particularly applicable during the definitive period starting from 2026 onwards. It is noteworthy that the obligation to report such carbon pricing details is imperative throughout the transitional phase of CBAM, specifically extending until the culmination of the year 2025. The CBAM permits the deduction of emissions if importers can substantiate the payment of a carbon price during the production of imported goods.

About reporting period , throughout the transitional phase of the CBAM spanning from October 1, 2023, to December 31, 2025, the reporting process will occur quarterly. It will entail the assessment of greenhouse gas emissions linked to specific products imported into the EU, with reports due within 30 days following the conclusion of each quarter.^[40] The initial deadline is January 31, 2024, but it can be extended to an additional 30 days, until March 1, 2024, due to technical glitches in the CBAM registration system.^[41] Furthermore, Article 9 of this Regulation allows for an extended period for adjustments for the first two quarterly reports, until the deadline for the third-quarter report.

In conclusion, CBAM reporting responsibility lies with EU buyers or authorized authorities, technical emission-related data heavily relies on input from exporting businesses. Although Regulation (EU) 2023/1773 provides supportive provisions, businesses need to choose suitable methods in line with CBAM requirements actively. Moreover, countries aiming to export to the EU should create policies to assist businesses in swiftly adapting to emission calculations and reduction strategies, mitigating potential financial impacts from CBAM in future phases.

2. The Analysis of the European Union’s Carbon Border Adjustment Mechanism under WTO Law

The WTO stands as the sole global international organization tasked with regulating trade rules among members.^[42] The legal relationship between the European Union CBAM and the WTO involves a complex interplay between the EU’s efforts to address climate change and the rules governing international trade. Even though EU leaders have spoken about the environmental benefits of CBAM, it is still an international trade mechanism that must comply with WTO regulations. Due to its novelty, legal risks are considered significant and require careful attention and analysis. Several key aspects highlight the legal relationship between the CBAM and the WTO, including: i) technical regulations and standards; ii) non-discrimination; iii) legitimate environmental exceptions; and iv) transparency.

2.1. The Risks of Disputes Related to Provisions on Special and Differential Treatment for Developing Countries in the Trade Barrier Technical Agreement

CBAM involves a system where certain products entering the EU are taxed or adjusted based on their carbon content. If a product is produced in a country that does not have an equivalent carbon pricing mechanism, the CBAM adjusts for the difference. This adjustment mechanism can be considered a form of “technical regulation” under TBT, as it sets a requirement for importers to disclose or pay a price corresponding to the carbon emissions associated with their goods. The reporting requirements of CBAM impose the obligation on manufacturing enterprises to provide some specific technical information. This could potentially give rise to the risk of violating WTO rules, specifically concerning leading legal issues related to reporting standards under the Technical Barriers to Trade (TBT) Agreement. Concerning CBAM, the TBT Agreement is formulated to guarantee that the procedures for certifying and quantifying carbon emissions “do not create an unnecessary obstacle to international trade”.^[43]

Therefore, the obligatory administrative requirements of the CBAM, specifically the mandate for an authorized declarant to determine the total “embedded emissions” using the intricate methods specified in Annex III of the Regulation EU 2023/1773, might be construed as a technical trade barrier if they become excessively challenging to calculate.

Applying the definition of “Standards”^[44] to CBAM leads to several conclusions. Concerning the applicability of standards related to the CBAM, the TBT Agreement addresses international standards adopted by international standardization bodies without the necessity of consensus. The crucial question is whether these international standards exist and are suitable for CBAM. An international standard relevant to the implementation of CBAM could be the Paris Agreement, which may be considered as endorsed by almost all global participants. In particular, Article 6 of the Paris Agreement specifies two critical criteria^[45] for environmentally supportive measures, namely (i) the objective of reducing carbon emissions and (ii) the prevention of double counting. Thus, if CBAM is designed to decrease carbon emissions and avoid double counting, it could be deemed following the criteria outlined in Article 6 of the Paris Agreement.

Moreover, an alternative standard that holds significant relevance for calculating carbon emissions within CBAM is the ISO standard. The ISO is acknowledged as an authorized standardization organisation under the TBT Agreement. The most recent certification meeting the requirements of CBAM is ISO 14067:2018 Greenhouse Gases—Carbon Footprint of products.^[46] ISO 14067:2018^[47] aids in computing the carbon emissions of a product based on its life cycle. Therefore, if the EU can refer to these standards for calculating carbon emissions as per the reporting requirements of CBAM, it may avoid the risk of violating TBT.

2.2. The Risk of Violating the Principles of Non-Discrimination Outlined in the GATT

The principles of non-discrimination within the GATT come into play when assessing the “likeness”^[48] between domestic and imported products. If these products are deemed to be similar, their treatment must adhere to the principles of Most-Favoured Nation (MFN) and National Treatment (NT).

2.2.1. The Risk of Violating the MFN Principle under Article I of the GATT

The MFN principle is fundamental to the WTO’s multilateral trading system. Its objective is to replace disputes arising from bilateral policies by ensuring that international norms and trading rights remain unaffected by the economic or political influence of contracting parties.^[49] Particularly, it forbids either legal or practical discrimination between products considered “like” that come from different trading partners. In summary, any benefit provided by the Regulation to a product originating in the territory of any WTO member should be granted without bias to all equivalent products originating from other WTO members. Considering the design and operation of CBAM, there may be certain features that do not align with the MFN principle.

Firstly, differentiation in the treatment of products based on specific national origins

Legal discrimination will exist if the CBAM is considered to impose restrictions on like products manufactured in countries with carbon-intensive production processes compared to other countries with cleaner production technologies. This is expected to arise during the transitional phase if the selection of cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen by CBAM for its benefit purposes imposes restrictions on certain specific countries. In reality, this negative impact is currently unfolding, notably affecting countries such as China, and the USA, which are the largest overall exporters to the EU, and Russia, and Turkey, which have the largest exports to the EU in the five CBAM-applicable sectors. However, the EU justifies the inclusion of these sectors based on the greenhouse gas emissions situation within the EU, aiming to address sectors with a substantial risk of carbon leakage. Additionally, there is a potential for allegations of actual discriminatory treatment due to administrative complexities and practicalities arising from the implementation of CBAM reporting. Specifically, regarding the obligation of manufacturing enterprises to provide information for CBAM reporting, geographical disparities between developing countries and advanced economies may lead to unintended consequences for importers in calculating and verifying greenhouse gas emissions under the CBAM. Developing countries may lack the technical expertise to calculate and verify the carbon content in their exported products. Regarding the calculation method, it can be observed that currently, the CBAM does not explicitly demand the implementation of proprietary or restrictive technologies. Concerning measurement methods during the transitional phase, there are relatively open provisions, facilitating the involved parties in greenhouse gas reporting to familiarize themselves with five different measurement methods and using default values.

Secondly, the elements constituting the “carbon price” under the CBAM

The Regulation allows for a pricing adjustment for countries with a domestically designed carbon tax scheme or an emissions trading system. However, not every policy is recognized, and in reality, there are numerous different carbon pricing tools operating worldwide. Countries may have a combination of different climate policies or regulations.^[50] Therefore, it will be a challenge to impose a group of countries exempted under their climate agreements, as in principle, similar treatment would apply to all other signatories.

2.2.2. The Risk of Violating the NT Principle under Article III of the GATT

The NT principle, as outlined in Article III of the GATT, prohibits any form of discrimination, whether de jure or de facto, between domestically produced and foreign products within the domestic market of each member state of the WTO. Essentially, the NT principle in the GATT serves as a crucial legal mechanism to regulate non-tariff barriers that may intentionally or unintentionally disrupt international trade. In this context, the CBAM may be related to two specific provisions: (1) imported products shall not be subject, directly or indirectly, to any internal taxes or other internal charges above those applied to like domestic products, if considered a financial measure, and (2) imported products must receive treatment equal to that given to domestically produced like products in the territory of any contracting party if considered a non-financial regulatory measure. As the CBAM involves aspects of both fiscal and regulatory dimensions, its alleged legality is examined under GATT provisions in the subsequent sections.

To assess under Article III(2) of GATT 1994, it is necessary to determine whether the products within the scope of the CBAM are considered “like”^[51] or “directly competitive or substitutable”.^[52] Additionally, it involves examining whether the treatment given to the products leads to discrimination against imported products when compared to domestic products. The identification of whether products are similar or directly competitive and substitutable carries significant implications. If two products are not considered similar or directly competitive and substitutable as per Article III(2) of the GATT, countries are allowed to treat the imported product less favourably. However, if the two products are considered similar or directly competitive and substitutable under Article III GATT, then the country must ensure fair treatment for these products in its domestic market, and this fairness should be maintained indefinitely. The CBAM addresses specific areas within the scope, all following the CN goods code.^[53] This allows for a clearer determination of whether they are like or not. In this context, a CBAM applied at the European level can be deemed consistent with Article III(2) if it leads to a fee (on imported products) equivalent to an internal tax or fee on similar domestic products EU-ETS. Conversely, if similar goods produced within the EU do not face a corresponding charge, it would result in a protectionist impact, violating the principles outlined in Article III(2). Assessing the similarity between the carbon pricing mechanisms of CBAM and EU ETS is challenging. If the CBAM accurately reflects the costs that EU businesses incur under the EU ETS, this could help ensure the CBAM doesn’t violate Article III(2). This similarity can be considered as ensuring “equal treatment” between imported and domestic goods. The CBAM can be understood as a mechanism determining carbon prices at the product level, whereas ETS, particularly the EU-ETS, operates at the enterprise level. However, this distinction is not difficult to explain, given that the EU-ETS is designed to manage national enterprises within the EU’s authority. The EU does not have authority over enterprises in other countries; instead, it can only regulate the products imported through markets within the EU.

Regarding Article III(4) of GATT 1994, this article applies to “laws, regulations, and requirements” (non-fiscal measures) affecting the internal sale, offering for sale, purchase, transportation, distribution, or use of products. CBAM is considered a non-fiscal measure under Article III:4 because it imposes procedural requirements and conditions on imported goods related to the sale and use of products within the EU territory. After determining the “likeness” of the imported products within the scope of CBAM with domestic products, CBAM will be concluded as inconsistent with Article III:4 if the treatment accorded to imported products is “less favourable” than that accorded to like domestic products. the term “treatment no less favourable” requires effective equality of opportunities for imported products to compete with like domestic products.^[54] To avoid violating the national treatment principle under Article III(4), the EU must demonstrate that domestic products bear a similar burden to the requirements imposed on imported products to meet additional conditions, such as demonstrating carbon emissions and purchasing carbon certificates. Furthermore, even if it can be demonstrated that CBAM applies similar regulations to both imported and domestic goods, differences in costs and procedures could cause discrimination, reducing the competitiveness of imported goods, especially for countries without comparable emissions reduction systems. Therefore, the potential for CBAM to violate Article III(4) of GATT 1994 exists. However, the EU could argue that CBAM pursues a legitimate objective, such as environmental protection, under Article XX of GATT, provided the measure is necessary and does not constitute arbitrary or unjustifiable discrimination or a disguised restriction on international trade.

2.3. Assessing the Compatibility of the Reporting of Emissions under Chapter II of Commission Implementing Regulation (EU) 2023/1773 with Article XX of the GATT Provisions on General Exceptions

The CBAM on imports are driven by either competitiveness concerns, aiming to establish a level‑playing field internationally, or environmental concerns, such as reducing CO2 emissions or addressing carbon leakage. In the context of the WTO, competitiveness concerns are dealt with by invoking GATT Articles I and III, which relate to non-discrimination, as discussed in the preceding sections. If it is determined that CBAM does not align with the EU’s international trade agreements regarding non-discrimination, the measure could still be deemed justified under one or more of the general exceptions outlined in Article XX GATT. Environmental measures in the realm of trade are typically justified under paragraphs (b) and (g) of Article XX (General Exceptions).^[55]

Regarding Article XX(b), this exception stipulates that a measure may be justified if (1) it is designed to protect human, animal, or plant life or health, and (2) the measure is deemed necessary to achieve the policy objective. To demonstrate that the reporting requirements of the CBAM fall within the ambit of this exception, it must be shown that its nature aligns with Article XX(b) and that its implementation is necessary. The CBAM aims to prevent carbon leakage, thereby addressing challenges related to climate change and other environmental concerns.^[56] So, it can be considered as a regulatory measure related to the protection of human, animal, or healthy life, as it is aimed at addressing the consequences of climate change disasters. The EU is likely to meet this threshold of the CBAM by demonstrating the consequences of carbon emissions on human, animal, and plant health, referencing available scientific data. Explaining and demonstrating that the areas CBAM regulates align with the criteria of Article XX(b) is essential According to the 1990 Panel Report on “Thailand – Restrictions on Importation of and Internal Taxes on Cigarettes”,^[57] The panel’s conclusion regarding Thailand’s import restrictions was that they could only be considered “necessary” within the meaning of Article XX(b) of the General Agreement on Tariffs and Trade if no alternative measure existed that would achieve the same objective while being fully consistent with the General Agreement, or at least less inconsistent with its provisions. In other words, the restrictions were justifiable only as a last resort, if no other reasonable policy option was available that better aligned with GATT principles. The CBAM, aimed at controlling imports with high emissions levels, introduces reporting requirements for emissions data to determine carbon pricing. However, this mechanism also addresses rebates or reductions in carbon pricing for goods originating from countries or regions with existing carbon pricing mechanisms. Therefore, to ensure uniformity in CBAM data collection and prevent confusion for declarants, the implementation of CBAM reporting will be considered “necessary” if no more GATT-consistent measures achieving the same objective is identified. Crucially, the burden of proof for less trade‑restrictive alternatives rests with the complaining WTO member, who must propose specific alternative measures capable of achieving the measure’s objective to an equivalent extent. equivalent extent.^[58]

Related to Article XX(g), a measure affecting imports, such as CBAM, is deemed justified under Article XX(g) of the GATT if it proves that it must be implemented concurrently “with restrictions on domestic production or consumption”,^[59] a condition commonly referred to as the “even‑handedness”^[60] requirement. The EU would be required to demonstrate that (1) the measure is linked to the conservation of depletable natural resources and (2) that the measure is implemented concurrently with limitations on domestic production or consumption. In this context, the CBAM, as an import-impacting measure, is a response to a domestic initiative, specifically, the EU-ETS.^[61] Moreover, in US-gasoline, the Panel acknowledged that “clean air”^[62] could be considered a depletable natural resource within the context of applying Article XX(g).

2.4. Assessing the Compatibility of CBAM with WTO Regulations Related to Transparency

CBAM officially entered its transitional phase on October 1, 2023.^[63] Based on the analysis in Chapter I, the CBAM creates obligations for exporters to the EU market to provide information enabling importers to report emissions for their products, which then determines the carbon price applied to imported goods. These characteristics classify the CBAM as both a requirement on imports and an environmental charge, falling within the scope of Article X of GATT 1994. Therefore, the CBAM must adhere to the following criteria: (1) transparency in publication, (2) transparency in the implementation timeline and (3) transparency in dispute resolution.

Regarding transparency in publication, the CBAM must adhere to the Article X:1 requirement that regulations “be published promptly in such manner as to enable governments and traders to become acquainted with”.^[64] EEC—Restrictions on Imports of Dessert Apples, Complaint by Chile^[65] provides an example of compliance with Article X(1). According to the panel report, the EEC contended that the regulations establishing and modifying the Community’s import licensing system were published quickly and appropriately in the Official Journal. For instance, Regulation 346/88 introducing surveillance was published just three days after it was adopted, with the entry into force scheduled for eight days following publication.^[66] This indicates that there was no specific time limit or delay set between publication and the implementation of the regulation. Regarding the case of CBAM, this mechanism timeline has been a subject of concern, particularly regarding how promptly importers could adjust to the new rules. The definitive version of the CBAM regulation was published on July 14, 2021,^[67] but its provisional implementation started in October 2023.^[68] During this period, importers were required to start collecting data on the carbon content of goods imported into the EU. While the extended timeline between publication and data collection could allow importers to familiarize themselves with the new requirements, the critical question is whether it provides enough time for businesses and traders to “become acquainted”. Thus, although the publication period might allow some time for acquaintance, the lengthy delay in full enforcement should be carefully scrutinized from the perspective of ensuring adequate time for adaptation.

Regarding transparency in the implementation process. According to GATT Article X:2, any measures that increase duties, impose new charges, or introduce restrictions on imports must be officially published before enforcement. In the case of CBAM, while the timeline provides importers with a transitional period to adjust, the EU’s lack of guarantees regarding changes to the mechanism until 2034 raises concerns about its transparency. Potential future modifications could undermine the stability and predictability of the rules, which may cause uncertainty among affected nations and traders, further emphasizing the need for consistent transparency throughout the process. Moreover, If the CBAM regulations, including aspects like carbon data collection or adjustment costs, are not administered equitably, they could result in unfair trade practices, potentially violating the principle of administering trade measures in a uniform, impartial, and reasonable manner, as stated in Article X:3(a) of the GATT 1994.

Regarding transparency in dispute resolution, the CBAM mechanism can be examined through Article X:3(b) of the GATT 1994. This article mandates that any administrative actions related to trade should be reviewed and corrected in a timely, ensuring that disputes are addressed efficiently. According to Article X:3(b) of the GATT 1994, this provision allows the EU to prioritize internal dispute resolution; however, it also requires the EU to have an independent system in place for resolving disputes related to carbon pricing on imports. This would offer importers a fair opportunity to challenge decisions if they believe they are unfairly treated. Therefore, while CBAM aims to achieve its environmental goals, special attention must be given to its administration and dispute resolution processes. This is crucial to avoid disputes and ensure that the implementation of CBAM is seen as fair and transparent for all parties involved.

3. Some Recommendations for Vietnamese Businesses

3.1. Swiftly Update CBAM Reporting Guidelines

The Swift Update of CBAM Reporting Guidelines can help Vietnamese businesses avoid disputes with CBAM within the WTO framework. This is because it provides businesses with the opportunity to quickly adapt to the new reporting requirements of CBAM. In doing so, businesses can ensure that their reporting information complies with the CBAM requirements, reducing the risk of legal conflicts and disputes. The prompt updating of guidelines also assists Vietnamese businesses in maintaining flexibility and efficiency in the reporting process, avoiding unnecessary risks. Additionally, staying abreast of changes in guidelines demonstrates a business’s commitment to complying with both CBAM and WTO regulations. In this way, businesses can establish a robust reporting system that is adaptable and responds promptly to policy changes, helping them navigate international trade challenges and maintain positive relations with the EU market.

3.2. Refer to International Standards

Referring to international standards in reporting data plays a pivotal role in aiding Vietnamese businesses to effectively adapt to the CBAM. By aligning their reporting practices with globally recognized standards, these businesses can ensure compliance with CBAM regulations, minimizing the risk of legal complications. Moreover, the use of international standards fosters consistency in data generation, providing universal language and accepted measurement methods. This consistency not only facilitates straightforward comparisons but also reduces confusion in the reporting process. The credibility of Vietnamese businesses in the global market is significantly enhanced when they adhere to international standards. Partners and customers are more likely to trust the accuracy and reliability of reported data, establishing a positive reputation. The incorporation of international standards acts as a safeguard against potential legal issues related to CBAM. In conclusion, integrating international standards into data reporting not only ensures adaptation to the CBAM but also provides a range of general benefits, positioning Vietnamese businesses for success in a sustainable and compliant global market.

3.3. Proactively Engaging with the EU

Proactively engaging with the EU regarding the potential WTO violations that the CBAM could pose to Vietnam is essential. Trade disputes are generally undesirable and should be avoided. Additionally, the EU is currently in the process of receiving feedback from exporters about the CBAM regulations. By maintaining an open dialogue with the EU, Vietnam can address any concerns or risks associated with WTO compliance early on. This proactive approach not only helps prevent potential trade conflicts but also allows Vietnam to contribute to shaping the regulations in a manner that considers the interests of its exporters. Engaging in such discussions demonstrates Vietnam’s commitment to fair trade practices and helps protect the country’s trade interests in the long term.

3.4. Updating Responses of Foreign Importing Businesses to the EU Market with Similar Positions to Vietnam

Updating the responses of foreign importing businesses with similar positions to Vietnam in the EU market is crucial for Vietnamese businesses to comprehend potential WTO violations associated with the CBAM. Firstly, understanding how businesses from similar positions respond to CBAM regulations in the EU market provides valuable insights into the challenges and compliance issues they may face. This knowledge allows Vietnamese businesses to proactively address these challenges and implement strategies to navigate potential WTO-related concerns. Additionally, monitoring the responses of foreign counterparts helps Vietnamese businesses stay informed about the evolving landscape of the CBAM and its implications on international trade. By staying updated, these businesses can align their strategies with global market trends and anticipate potential disputes related to WTO regulations. In conclusion, updating the responses of foreign importing businesses with similar positions in the EU market is a strategic approach for Vietnamese enterprises. It equips them with the necessary information to comprehend potential WTO violations associated with the CBAM, fostering an initiative-taking and compliant approach in the global market.

Conclusion

Through this study, the examination of the greenhouse emissions report under the CBAM has raised several potential WTO legal challenges that the European Union (EU) may face. The CBAM, as a unilateral trade- based measure, aims to align with the EU’s domestic climate ambitions and ensure fair competition conditions for certain emissions-intensive products. Despite the European Commission’s claims about its compatibility with various arms of international law, concerns and debates surrounding its unilateral nature persist. The international community, including businesses exporting to the EU and EU trade partners, has expressed reservations and raised questions about the WTO compliance of the CBAM. Issues related to the WTO’s non-discrimination principle and the potential imposition of an additional technical burden on importing businesses have fuelled these concerns. Furthermore, the research has highlighted the importance of assessing the CBAM within the WTO framework, not only to identify potential legal pitfalls for the EU and importing businesses but also to provide insights for other nations considering similar mechanisms. The potential conflicts with WTO obligations necessitate a thorough understanding of the implications and the exploration of alternatives that are both effective and legally sound. As the EU navigates the complexities of implementing the CBAM, it becomes imperative for the European Commission to engage in a constructive dialogue with WTO members, addressing concerns and seeking common ground. This collaborative approach would not only contribute to the effectiveness of the CBAM but also foster international cooperation in addressing the challenges of climate change.

In conclusion, while the CBAM represents a significant step toward environmental protection, the EU must carefully navigate the legal intricacies within the WTO framework. Striking a balance between climate ambitions and international trade obligations requires thoughtful consideration and diplomatic engagement to ensure the successful implementation of the CBAM without compromising global trade norms.

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