CBAM and its Discontents

To meet its commitment to carbon neutrality by 2050, the EU has proposed a Carbon Border Adjustment Mechanism (CBAM). While the US is considering implementing its own CBAM following the EU, other countries have raised various degrees of opposition, especially from Brazil, China, India, and South Africa (Berahab 2022). To understand CBAM, it is a mechanism that uniquely includes externality costs of environmental harms (Barrett et al. 2021). While currently it only covers 5 sectors (i.e., iron, steel, cement, fertilizers, aluminum and electricity) and calculates emission emitted in production processes and input goods, its applied scope might expand in the future if needed. In practice, it contains a pilot program of gradual phases for adaptation and avoids double-counting if other price-adjusting mechanisms are already in place for price differences. Note that CBAM coexists with other alleged global efforts and treaties such as the Paris Agreement and doesn’t serve as a substitute for any. There are two clarifications of this essay. First, some have criticized CBAM for concerns of its design details such as the logistics of carbon emission processes (Hart and Koester 2021). However, because there is much flexibility to adjust based on feedback in the pilot program and generally, this essay assumes improvement in such logistics overtime with constant adjustment to the extent that they are generally mature, accurate, and practical for predictability and transparency. Second, for a holistic evaluation, this essay analyzes CBAM’s global influence on both developed and developing countries. Although CBAM is theoretically a justified aspirational model advancing environmentalism in a non-discriminatory manner under WTO’s guidelines, in practice it disproportionately harms developing countries which furthers global inequalities and tensions and is harmful for global cooperation on climate change. Moving forward, developed countries using CBAM with more capabilities should be more responsible in financial assistance to developing countries while holding themselves accountable for domestic changes. CBAM is legally justified and compatible with WTO’s non-discriminatory principle. Principally, CBAM is consistent with the polluters pay principle where corporations pay for environmental harms. Legally, the EU can justify its measures under the exception conditions in Article XX, as measures “necessary for the protection of human, animal or plant life or health” (b) and measures “necessary for the conservation of exhaustible nature resources” (g)1 . This is especially applicable given the necessity and urgency of environmental protection: When humankind is ever closer to the tipping point of climate change with no existing enforceable treatment, CBAM is a crucial measure to prevent the existential risk. Although some have criticized that CBAM violates WTO’s fairness principle, it is legally compatible with the rule if carbon prices are paid by all EU and non-EU products using the same calculation method (De Catelle et al. 2021). In other words, CBAM is fair as long as it applies the same standard to all domestic and imported products. When applying the same fairness principle, however, the “Buy American” preference is inconsistent with the fair environment-based standard of CBAM2: In the context of CBAM, the

1 For original texts, see “Article XX General Exceptions - World Trade Organization, ” World Trade Organization, accessed November 24, 2022, https://www.wto.org/english/res _ e/booksp_ e/gatt _ ai _ e/art20 _ e.pdf. 2 For a review of the “BuyAmerican” preference, see “BidenAdministrationAmends ‘BuyAmerican’Rules to Increase Domestic Content Requirements, ” McGuireWoods, March 10, 2022, https://www.mcguirewoods.com/client-resources/Alerts/2022/3/biden-administration-amends-buy-american-rules.

US can only promote its “Buy American” preference when US products are cleaner than all other products from all other parts of the world. When buying steel for public projects, for instance, the US can justify “Buy American” with reference to Indian steels because US steels are cleaner than Indian steels. However, it can’t justify this with reference to German steels which have lower CO2 intensity in production (Hasanbeigi 2020). Insofar as the US doesn’t have the cleanest products in the world, CBAM is incompatible with an absolute “Buy American” preference which is discriminatory and uniquely benefits US national self-interest without fairness. Environmentally, CBAM is uniquely effective by decreasing products from dirtier production. In essence, CBAM is designed to capture “carbon leakages”: First, by charging externality costs, CBAM deters EU-based companies from moving their carbon-intensive production to other regions with lower environmental standards and prevents a global race to the bottom; Second, it also increases the comparative advantage of products with cleaner production by pressuring other ‘dirtier’ products with the same environmentally aware pricing standard. In the long run, the private sector also has more of an incentive to invest more in innovative greener production, thus increasing the possibility of disruptive green technologies to transform production. On a less tangible but equally important note, CBAM can serve as a meaningful precedent for other countries to follow and signals consensus building on climate change. This is beneficial for all of humankind, especially for developing countries who are already the most vulnerable victims of climate change (Georgieva et al. 2022). Currently, they lack resources to combat dwindling water resources or to cool their homes under extreme heat. lack resources to recover from natural disasters; and lack capacities to combat desertification but are forced to further exploit the environment for unsustainable, short-run profits in a vicious cycle. They are the ones who have no alternative and will benefit much more from any decrease in carbon emission by a giant multinational corporation (MNC) who goes greener to decrease costs under CBAM. Economically, CBAM benefits developed countries with cleaner production by increasing their comparative advantage in trade. Empirically, developed countries have greener production technologies in general (Avenyo and Tregenna 2022). With more money to continuously invest in more productive and greener technologies, developed countries have cleaner products which will become comparatively cheaper under CBAM after including externality costs. Further, when MNCs no longer find it profitable to move around their bases for the next pollution haven, they might move their production base back to their mother countries for convenience, thereby increasing employment in developed countries. Theoretically, CBAM might also economically benefit developing countries for two reasons. First, under the previous global race to the bottom, developing countries have gained little economic growth in the first place while most profits flow to the companies. Under CBAM, without exploitation by profit-driven companies, they can now avoid the environmentally harmful poverty trap and instability after MNCs leave for the next pollution haven. Second, developing countries might also benefit from a potential environmental leapfrogging. With adequate investment and modern technologies, developing countries can bypass the dirty stages of economic growth and jump to more effective production with less pollution (Yayboke 2020). When CBAM increases demand for products made from greener production, the worst-off in developing countries without any infrastructure in place now have a unique advantage of no opportunity cost. This differs from the US and Russia who already have mature infrastructure in place and political lobbying tied to these industries. Contrary to the above win-win hypothesis,

developing countries have been and are still unable to achieve theoretical economic development because they lack the crucial prerequisite: money. Some advocates in developed countries might happily rush to defend that developed countries have already agreed to provide money to developing countries to compensate for their disproportionate losses from climate change and to help them gradually go green or to achieve environmental leapfrogging. Yet, this is a rather credulous caveat that rarely plays out. Like every policy, CBAM doesn’t exist in the beautiful void of environmental economic theories, but in the dynamic global context of counties each prioritizing their national self-interest. Despite the promising theoretical agreements, the reality seems to overwhelmingly suggest the opposite picture of irresponsible developed countries unable to fulfill their obligations (Sommer 2021). Developed countries have historically fallen short of their alleged commitments. For example, instead of the promised $100 billion-a-year pledge to developing countries for climate goals, developed countries only granted $83.3 billion in 2020 (Kabukuru 2022). Moreover, the US has only paid one-third of its share in the green climate fund (Green Climate Fund). But, even if developed countries eventually fulfill their commitments, although unlikely, the negotiated funds are always insufficient for actual breakthrough progress, either for damage restoration or for economic leapfrogging (Jeworrek 2021). Because of insufficient funds, developing countries are constantly running on unsustainable aid that is impractical for them to solve any structural problems and leaves them more vulnerable in the long run. Given the historical trajectory, even as COP27 has now successfully produced a climate fund breakthrough, its concrete plan and progress remains uncertain and deserves some caution. Therefore, while it is certainly easy and tempting to defend CBAM with a reassuring solution that developed countries will financially aid developing countries, waiting for it seems more like waiting for Godot. Without sufficient funding and technology support, developing countries barely have adequate capabilities to transform into greener production, but will only have less competitiveness in the international market. Based on the current trajectory, their comparative after CBAM is not an ideal green transformation of their production, but rather more economic hardship with no alternative to transition. In summary, although there’s a potential win-win situation where developing countries don’t have to face the trade-off between environmental protection and economic development with the help of developed countries, this is hardly ever the case before or now. Therefore, the realistic case for developing countries is that they still have an incentive to further economic development and, unfortunately, still face the inevitable trade-off. To shift from the ideal theoretical scenario to the realistic realm then, CBAM will be ineffective and even counterproductive regarding its socio-economic impacts on developing countries. First, CBAM might be ineffective when developing countries can designate specific corporations to meet sectoral CBAM standards. For instance, China can specify a few companies to specialize in trading with the EU using the greenest technologies available while the remaining sell their products in the domestic market. This limits CBAM’s global impact because the decrease in emission from the trading products might have relatively little impact in total. Further, since countries have incentives to compensate for the increasing costs in their EU-certified products, they might increase emission for domestic products that offsets the marginal decrease in emission. Second, when CBAM increases environmental costs without complementary policies, developing countries might cut costs in other areas such as lowering local labor standards. Although they must abide by international labor standards, countries will still have a global race to the bottom for worker rights. As these workers are likely already the worst-off in developing

countries, this is especially harmful because it only increases the most vulnerable stakeholders’ burdens. As opposed to sectoral trade diversion, another alternative may be that green economies will only trade with other similar green economies, and dirty economies will similarly only trade with other dirty economies. For instance, many developing countries such as Brazil and India might choose not to trade with the EU, but only trade with each other. Although this is highly unlikely, it is still feasible because the cost of transforming the entire energy and industrial infrastructure might be prohibitively expensive to meet the standards of CBAM in the long run. When the increased costs of trading with the EU outweighs the foregone potential benefit, developing countries might still be willing to lose the EU as their trading partner from a cost-benefit perspective. When carbon clubs are formed, CBAM still actively brings harm because when dirty economies completely break ties with green economies, they face less accountability and supervision to regulate their environmental harms. In the long run, this might also lead to a reduction in global environmental standards as a vicious cycle. In either case, people in developing countries are always the most vulnerable and suffer the most eventually. Most importantly, CBAM will garner significant backlash from developing countries that deter crucial global cooperation. Surely, it is uncertain whether the actual intent of the EU is a genuine concern for the environment or to increase its competitiveness. But regardless of intent, when the EU now links climate change with trade without providing sufficient material help, CBAM fits into and strengthens the perception held by many developing countries that climate change is a politicized excuse to maintain economic hegemony and exploitation, rather than helping the environment itself. In the current timeframe, trade is already increasingly politicized as seen in the US-China trade war. In response to CBAM, developing countries will likely interpret concerns for carbon emission as an excuse for developed countries to increase their products’ competitiveness and further discourage the economic development of developing countries. When developing countries become even more skeptical and reluctant to cooperate on climate change, the backlash from such a perception alone outweighs any potential marginal environmental improvement under CBAM. This is detrimental to efforts mitigating climate change because as a global issue, this requires global cooperation. Politically, global division might lead to further ripple effects where developing countries become more reluctant to cooperate in other important issues besides climate change, discouraging future cooperation with a general dislike and distinction of ‘the West’ or ‘western standards’ in general. Based on the existing power dynamics and sector specific CBAM logistics, developed countries are uniquely the winners of CBAM. On the other hand, the ‘losers’ are developing countries who currently have dirtier production not because they are maliciously ignorant of climate change, but because they simply lack the capabilities to go green when their citizens are struggling with survival. To put such struggles into words, we live in a world where “955 million citizens of the affluent countries own 81% of global wealth in the face of three times as many people mired in severe poverty” (Pogge 2005). Despite an overall improvement in economic growth, global inequalities have only increased over the course of development (World Bank Group 2021). When 8% of the global population in low-income countries own below 1% of global wealth, it seems extremely credulous, if not inhumane, to demand environmental actions from them at the cost of losing the little economic advantage they have through, unfortunately unsustainable,but necessary exploitation. When we are already highly alert of the harms of any regress in economic development in the US, bear in mind that such harms will be exponentially worse in developing countries with less social safety nets in place.

If we were to stay consistent with a human-oriented, Rawlsian principle instead of a utilitarian one, one’s citizenship determined by the lottery of birth behind the veil of ignorance is also a morally arbitrary factor that ought not to determine the opportunities one qualifies for (Lamont and Favor 2017). Yet in the status quo, people in developing countries disproportionately suffer more because of where they are born. It is therefore not morally justified for the global South to bear even more burden under CBAM for an issue concerning everyone when they already suffer the most. Even if we assume perfect efficiency, it is true that CBAM is necessary because, on the comparative, there would be no progress and climate change would simply stagnate as a global collective action problem. It is also true that this is necessary because climate change constitutes an existential risk with infinite magnitude. But when we consider the fact that it comes at the cost of additional burden on developing countries, it is unclear whether the environmental advancement that has a larger magnitude outweighs the severe hardship of people in developing countries. To put it bleakly, it is inequitable and impossible to weigh between people dying from climate change in the long run if CBAM is not introduced and our world pass the no return of 2°C; and people mostly only in developing countries dying from poverty for morally arbitrary reasons in the short run if CBAM is introduced in its current version. In conclusion, what are the implications? While this essay supports CBAM overall for environmental necessity, this is conditional upon more actions from developed countries. At the bottom line, developed countries must change their focus: instead of pressuring developing countries, developed countries must prioritize mitigating domestic carbon emission to show their shared efforts. If we believe that a life in a developing country is worth the same as one in a developed country, developed countries with much more capabilities should hold themselves accountable and focus on pushing for domestic structural transformations—especially when developed countries account for 6/20 countries with the highest carbon emissions per capita. Another potential way to increase financial support for developing countries might be to distribute the collected externality costs under CBAM back to developing countries for green technology investments or for climate damage funds. Either way, developed countries must show stronger commitments to equitable and sustainable efforts to mitigate climate change.

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