Carbon Border Adjustment Measures: A Straightforward Multi-Purpose Climate Change Instrument?

Abstract

Carbon border adjustment measures (CBAMs) are instruments that can be used to mitigate climate change, but also have a positive impact on trade, climate leadership and even public finance. In this article, I challenge the view that they can serve as straightforward multi-purpose instruments. In a first step, I analyse each of the purposes that can be achieved through CBAMs and explain their underlying differences. In a second step, I discuss their legal design and explain how CBAMs’ design features affect the types of purposes that they can achieve. I apply this two-step analytical framework to the European Union context, where a proposal for a regulation establishing a CBAM has been published by the European Commission in July 2021. I demonstrate that the design of the EU CBAM is inconsistent with the Commission’s main objectives of promoting fair competition and climate mitigation in line with the Paris Agreement. The EU CBAM proposal is primarily an instrument of climate leadership.

Climate action in the making: business and civil society views on the world’s first carbon border levy

“…As such, the business constituency is less inclined than civil society to view CBAM as the tool for addressing carbon leakage, resulting in some businesses expressing an outright opposition to the mechanism. While it can be argued that it is not uncommon for policy instruments to pursue multiple objectives, in the case of CBAM, some objectives may be mutually exclusive to achieve (Pirlot 2022). Thus, attaching a variety of purposes to one instrument may complicate its design and undermine its implementation and effectiveness (Cullenward and Victor 2020).…”

“…CBAM has been proposed as a substitute for the free allocation of allowances (Ismer et al 2020), as free allowances need to be phased out for the EU ETS to be effective in reducing emissions. However, additional purposes have been attached to CBAM in policy circles, e.g., encouraging other countries to implement stronger climate policies, generating revenue for the EU and promoting European climate leadership (Pirlot 2022). The precise purpose of CBAM is important, because it will guide policy design choices (Pirlot 2022) and have implications for the international legitimacy of the mechanism, trade relations and alignment with the UN Framework Convention on Climate Change (UNFCCC) (Droege 2011).…”

“…However, additional purposes have been attached to CBAM in policy circles, e.g., encouraging other countries to implement stronger climate policies, generating revenue for the EU and promoting European climate leadership (Pirlot 2022). The precise purpose of CBAM is important, because it will guide policy design choices (Pirlot 2022) and have implications for the international legitimacy of the mechanism, trade relations and alignment with the UN Framework Convention on Climate Change (UNFCCC) (Droege 2011). If CBAM tries to accommodate multiple objectives, it risks becoming ineffective (Cullenward and Victor 2020).…”

Carbon Levy of the European Union:at the Intersection of Climate and Trade Policies

“…"Carbon leakage" implies a hypothetical risk of strict climate control in some jurisdictions translating into relocation of carbon-intensive production operations to countries with weaker climate policies to result in negligible overall reduction in greenhouse gas emissions at the global level. However, the reality of the risk of leakage caused precisely by environmental and climate policy remains debatable [Pirlot, 2022].…”

Allocation, allocation, allocation! The political economy of the development of the European Union Emissions Trading System

“…However, some important political and administrative constraints may limit both the effectiveness and acceptability of this solution. The fact that rebates for EU exporters would be contrary to WTO principles, or that charging CBAM on imports from least developed countries conflicts with international climate change law (Pirlot, 2021), for instance, means that there are still downsides even with a CBAM charging importers. The Commission proposal to gradually phase in a CBAM before completely phasing out free allocations may raise protectionist concerns that could trigger retaliation by the EU's trading partners (Leal‐Arcas et al, 2022).…”