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1、October 2022A working paper bySupported byAddressing the Riskof Carbon Leakage:Assessing the EUs Carbon Border Adjustment MechanismContents1.Introduction12.The Problem of Carbon Leakage 23.TheCarbonBorderAdjustmentMechanism:OneSolutiontoCarbonLeakage43.1 BackgroundandRationale43.2 ElementsoftheEUsCB

2、AMandHowitWillWork64.EffectivenessandFeasibilityoftheEUsCBAM84.1 PoliticalandLegalResistancefromTradingPartners84.1.1 PoliticalResistance84.1.2 WTO-compatibilityoftheEUsCBAM104.2 FeasibilityofImplementingtheEUsCBAM134.3 InabilitytoFullyAddressAllSourcesofCarbonLeakage145.AlternativeProposalsforEncou

3、ragingSustainableTrade155.1“CarbonClub”andInternationalCarbonPriceFloor155.2 Output-basedAllocationofAllowances166.Conclusion18Annex:LiteratureReview19References 20AcknowledgementsThe authors of this Singapore Institute of International Affairs(SIIA)workingpaperareAssociateProfessorSimonTay,Chairman

4、,MeixiGan,DeputyDirector(Sustainability),Aaron Choo,Senior Assistant Director(Special Projects andSustainability),andNgSzeHian,Intern(Sustainability).ClairePan,AssistantDirector(Sustainability)alsocontributedtothispaper.Allviewsexpressedinthepaperarethoseoftheauthors,unlessotherwisecredited.TheSIIAw

5、ouldliketothanktheHinrichFoundationfortheirgeneroussupportinmakingthisstudypossible.TheauthorswouldalsoliketothankHosukLee-Makiyama,Director of European Centre for International Political Economy(ECIPE)for hiscommentsonthispaper.1.IntroductionTheinternationalcommunityhasgalvaniseditselftocombatclima

6、techangeandlimitglobalwarmingwithcommitmentsembodiedintheParisAgreement.Throughnationallydeterminedcontributions(NDCs),eachstatecommitstoreduceitsemissionsofgreenhousegases.Asdevelopedanddevelopingnationshavedifferinglevelsofclimateambitionsandcommitmentsaredecidedbyeachstate,thereisaconsiderablevar

7、iationbetweendifferentcountries.Inprinciple,thisisjustifiedundertheconceptof“commonbutdifferentiatedresponsibilities”.Asamatterofpracticality,too,thereisotherwisenoclearpathtoaglobalagreement.However,thevariationbetweendifferentcountriescreatesasignificantriskof“carbonleakage”.Thisisgiventheglobalpa

8、tternsofproductionandtrade.Situationscanthereforearisewhereeffortstoreducegreenhousegasemissionsinonecountrycaninadvertentlycauseanincreaseinhigher-carbonproductioninanothercountry,leadingtoariseinemissions.Unlessaddressed,theconcernisthatdiversestandards,limitsandpricingcancausecarbonleakageandthis

9、mayultimatelyleadtoanetincreaseinoverallglobalemissions.ResponsestosuchconcernsaretakingshapeandthefirstmoveronthisissueistheEuropeanUnion(EU).InJuly2021,theEuropeanCommissionpresentedaformallegislativeproposaltointroduceacarbonborderadjustmentmechanism(CBAM)toresolvetheproblemofcarbonleakage.Ifappr

10、ovedandenactedasanEUregulation,theCBAMwillimposeachargeoncarbon-intensiveimportsofgoodsfromoutsidetheEUfrom2026.Whiletheproposalhasitsproponents,someoftheEUstradingpartnershaveexpressedconcernsaboutitscontentandapproach,aswellastheunilateralmannerinwhichithasarisen.Inthispaper,weaimtoanalysetheEUspr

11、oposedCBAMinanumberofways.First,weoutlinetheproblemofcarbonleakageandotherdifferenttypesofleakages.Second,ourpapertriestoprovideanunderstandingoftheCBAMproposalcurrentlytheonlyformalproposalputforwardtoaddresscarbonleakageandhowitismeanttoworkinpractice.Finally,theeffectivenessandfeasibilityofthemea

12、surewillbeassessedbeforesubsequentlyexploringtwootherproposalsthatexpertshaveputforth.Thispaperwasproducedfromareviewofacademicliterature,researchstudies,andnewsreportsregardingcarbonbordermeasures.MostoftheseresourcesfocusedspecificallyontheEUsCBAMproposal.Italsobearsnotingthatacademicresearchonthe

13、topicisstillemerging,andmostofthepresentlyavailablestudieshavecomemainlyfromdevelopedcountries.Incontrast,analysisofthepotentialeffectsondevelopingcountries,andoncountriesintheAssociationofSoutheastAsianNations(ASEAN),iscurrentlylimited.Itcanandshouldbeanissueworthfurtherconsiderationfromtheperspect

14、ivesofthesecountries.Inthiscontext,ourpaperdoesnotatthisjuncturefocusonpolicyrecommendations.WehaveamorelimitedaimforthepresenttoanalysetheEUCBAMproposalanddebatessurroundingit,andtohighlightitsimplicationsfortheASEANregion.Ouroverallassessmentatpresentisthat,eveniftheoreticallysound,theCBAMproposal

15、willlikelyfacesignificantimplementationchallenges.Politicalresistancefromtradingpartnersisalreadyrising,andtherearepotentiallegalchallengesattheWorldTradeOrganisation(WTO).Thisiscoupledwithpracticalfeasibilityissuesandthemechanismsinabilitytoresolvealltypesofcarbonleakage.Assuch,itwouldbeprudentfort

16、heEUtoincreaseengagementwithitstradingpartnersasitmovesaheadwiththeCBAMsdesignduringtheapprovalwindow,aswellasduringthetransitionalwindowfollowingimplementation.Correspondingly,itisimportantforASEANandotherEUtradingpartnerstodeepentheirunderstanding of the CBAM proposal and to generate improvements

17、and possible alternatives.This isimportantbecauseclimatechangeisaglobalconcern,asaretheglobaleconomyandtradingsystems,andthemutuallysupportiveandsynergisticapproaches,ratherthanmisunderstandingandconflict,shouldbetheintendedoutcomes.12.The Problem of Carbon LeakageTheinternationalcommunityhasbeenrou

18、sedintocombatingclimatechangeandlimitingglobalwarmingasamatterofurgency.InrecentreportsbytheIntergovernmentalPanelonClimateChange(IPCC),scientistshavewarnedthatmanychangesintheoceanandsealevelsareirreversible1andthattemperaturesarelikelytoriseby1.5degreesCelsiuswithinthenexttwodecades,unlessthereare

19、immediateandrapidreductionsingreenhousegasemissions.2Toachievethisgoal,nationshaveagreed,undertheParisAgreement,toworktowardstheirNDCsandbringaboutgreenhousegasemissionsreductions.Yetascountriespursuetheirrespectiveclimateactionplansbasedon“commonbutdifferentiatedresponsibility”,i somegovernmentswit

20、hgreaterambitionswillinevitablyimposestricterclimate-relatedstandardsascomparedtotheirtradepartners.Thisresultsinariskofcarbonleakageasituationwhereeffortstoreducegreenhousegasemissionsinonecountryinadvertentlycauseanincreaseinemissionselsewhere.3Thereareseveralwaysthroughwhichcarbonleakagecantakepl

21、ace,butthetwolargestchannels,whichpolicymakersareconcernedabout,arethe“competitiveness”andthe“energymarket”channels.4i Taydefinescommonbutdifferentiatedresponsibilityastheprinciplethatallcountriesshareacommonresponsibilityfortheglobalenvironment,buttheyhavedifferentabilitiestocontributetodischarging

22、thoseresponsibilities.SeeTay,Simon(2021),“Economicintegration,climatechange,andsustainabledevelopmentinEastAsia”inF.Kimuraetal.(eds),HandbookonEastAsianeconomicintegration,Cheltenham:EdwardElgarFigure1:CarbonleakageexplainedCountry BProducersfromCountryArelocatetoCountryBwherethereisnoorlowercarbont

23、ax,resultinginincreasedoutputandemissionsinCountryBConsumersinCountryBmaytakeupthesupplythatCountryAisnolongerconsuming,sothereisnochangeinoutputand emissionsCountry AProducersinCountryAneedtopayhighercarbontax,whichmotivatesproducerstorelocateCarbon leakage can also occur whenCountryAintroducesapre

24、miumoncertainfuelsorgoodsforclimatereasons,causingdemandinCountryAto decline2ii CarbonleakagerateisdefinedbyArroyo-Currsetal.asthechangeinnon-abatingregionsemissionsoverdomesticemissionreductions;Arroyo-Currsetal.“Carbonleakageinafragmentedclimateregime:Thedynamicresponseofglobalenergymarkets”Techno

25、logicalForecastingandSocialChange,January2015.Accessed1stOctober,2021.https:/ Market*RestrictionsontheuseoffossilfuelsinCountryAandothereconomiesleadstoaglobal decrease in demand for fossil fuels andafallinfuelprices CountryBandothercountrieswithnoorfewercarbonregulationsincreasetheirconsumptionoffo

26、ssilfuels,takingadvantageoflowerpricesCompetitiveness ProducersinCountryAarerenderedlesspricecompetitiveduetostricterenvironmentalpoliciesintheirhomecountries,suchastighterregulationsorcarbon tax LossofcompetitivenessleadstounaffectedproducersinCountryBgainingmoremarket share ProducersinCountryAmayd

27、ecidetorelocatetoCountryBorelsewhere33.The Carbon Border Adjustment Mechanism:OneSolutiontoCarbonLeakage3.1BackgroundandRationaleTheEuropeanCommissionhasdescribedtheCBAMasasolutiontothethreatofcarbonleakage.Inessence,theCBAMwillexamineimportsintotheEUonthebasisoftheircarbonintensity.Wheretheexportin

28、gcountryhasnocarbonpricingoronethatisnotequivalenttotheEUs,CBAMwillallowtheimpositionofanadditionalchargeonthoseimports.CarbonadjustmentproposalshavebeenontheEUsagendaforalongtime.In2007,theEuropeanParliament observed that energy-intensive industries were under pressure from significantly highcarbon

29、pricessetbytheEUsEmissionsTradingSystem.Thislossofcompetitivenessincreasedtheriskofcarbonleakage,giventhatbusinesseswouldbeincentivisedtotransferproductionabroadinjurisdictionswithfewerregulations.Toaddresstheseconcerns,theEuropeanParliamentcalledontheEuropeanCommissiontoexaminetheoptionofbordertaxa

30、djustmentsasasolution.8Intheory,bylevyinganequivalentcarbonpriceonthecarbonemissionsofimportedgoods,aCBAMwouldcreatealevelplayingfieldforcompetition,thusensuringthatimportsanddomesticproductionaretreatedthesame.9ThiswouldpreventtheEUsclimatepolicyaimsfrombeingunderminedbyproductionrelocatingoutsideo

31、ftheEU.ThesuggestionwasultimatelynotsupportedbytheEuropeanCommission,whochosetoextendfreeallowancesofemissionsforcertainenergy-intensiveindustriesasanalternative.10OneemissionsallowancerepresentspermittingonetonneofCO2eemissions,andtheseallowancesaretradedontheEUemissionstradingsystem(ETS).Bygrantin

32、gfreeallowancestoproducersdomiciledwithintheEU,thelossofcompetitivenessduetohighercarbonpriceswouldbemitigated.However,freeallowanceshavealsomeantthatthecostpressuresoncompaniestobemoreefficientandreducecarbonwereblunted.Anotherattemptoccurredintheaviationsector.In2008,theEUsoughttoimplementadirecti

33、vethatairlineoperatorsmustdeliveremissionsallowancesforcarbonemittedfromflightsgoingthroughEuropeanairports.ThiswouldhaveaffectednotonlyEuropeanairlineswhoaresubjectedtoEUregulations,butalsoallairlinesthatarrivedinoreventransitedthroughtheEU.Theproposeddirectivewasstronglyresistedandlaterwithdrawnfo

34、llowingcomplaintsfromothercountriesthatitwasanextra-territorialimposition.Nonetheless,commitmentstopushaheadonclimatechangehavegrown,withtheEUsaimtobeclimate-neutralby2050aspartofitscommitmentsundertheParisAgreement.11InDecember2019,theEuropeanCommissionannouncedanambitiousGreenDealthatwouldhelptheE

35、Uachieveitsclimateobjectives.12Thiswasaccompaniedbyacomprehensivesetofclimatepolicies,includingloweringtheoverallemissioncapoftheETSwithintheEU.Intandemwiththeseinternal,EU-widecommitments,theEuropeanCommissionintroducedaproposaltointroduceanewCBAMpolicytoaddresslinkagesbetweentheEUandtheglobalecono

36、my.13AccordingtotheCommission,suchameasureisjustifiedbyincreasedclimate-relatedeffortsdrivenbytheEUGreenDeal.WithoutaCBAM,theconcernisthatwideningdifferencesinlevelsofambitionworldwidewillincreasetheriskofcarbonleakage.ClimatepoliciesenactedbytheEUmaybeoffsetifEuropeanproducersrelocateabroadtoavoidt

37、heregulatoryburdenimposedonthemwithinEUjurisdictions.Inthiscontext,theCBAMisseenbysomeasanecessarypieceoflegislationtoavoiddefeatingthepurposeoftheEUGreenDeal.144Internalpolicychangeswillalsoproceed.TheEuropeanCommissiontakestheviewthatthepresentsystemoffreeemissionsallowancesforEU-basedbusinessesis

38、ultimatelyanunsatisfactorypolicythatweakensthepricesignalsandincentivesforcompaniestoinvestingreentechnology.TheEUisthereforeaimingtophaseoutfreeallowancessothattheETScanhaveoptimalimpact,withimplementationinaneven-handedmanneracrosssectors.15Tocomplementthesesteps,theCBAMisthereforeseenasanecessary

39、andapreferablemechanism.The CBAM is following ordinary legislative procedure for the EU,whereby proposals from theEuropeanCommissionarealsoagreedonbytheEUCouncilofMinistersandEuropeanParliament.On15March2022,theEUCouncilagreedonacommonapproachtotheEuropeanCommissionsproposaltheCouncilspositionwasbro

40、adlysimilartotheproposal,withafewdifferences,namelycallingforgreatercentralisationofCBAMgovernanceattheEUlevel,ratherthaneachindividualEUmemberstaterunningitsownregistryofCBAMimporters.TheCouncilalsoaddedsomemeasurestohelpsmallbusinessesavoidnegativeimpacts.On22June2022,theEuropeanParliamentadopteda

41、positiononapackageofEUclimatedraftlaws,includingtheCBAM,callingforabroaderscopeofgoodstobecoveredbytheCBAMatitsinceptionthantheEuropeanCommissionsoriginalproposalandacceleratedimplementationofthemeasure.ThesemovesmeanthattheCBAMpolicyisnowveryclosetobecomingreality.Sofar,nocountriesinAsiahavepropose

42、denactingaCBAM.ChinarespondednegativelytotheEUsCBAMproposal,callingitaviolationofWTOprinciples.21OthersinAsia,too,havetheirreservations.However,Asianclimateleadershipisgrowing,withcountriessuchasChina,Japan,andSouthKoreahavingannouncednet-zerotargetstobemetwithinthenextfewdecades.Chinahasalsolaunche

43、danemissionstradingsystemwhich,duetothesheersizeoftheChineseeconomy,coverssome15percentofglobalemissions.AsChinaandotherAsianeconomiesincreasetheireffortstodecarbonise,thesamelogictoaddressthelinkagesoftradeandinvestmentandthepotentialcarbonleakageswillapply.ThusAsiancountriesmayalsoneedtoconsiderbo

44、rderadjustmentmeasurestomaintaincompetitivenesswhilemeetingnationalclimategoals.Table1:BeyondtheEUproposedcarbonborderadjustmentsindevelopedeconomiesCountryPositiononCarbonBorderMeasuresUSADemocratsintheUnitedStatesSenatehaveadvocatedfora“polluterimportfee”tocombatclimatechange,thoughtheUSdoesnothav

45、eanofficialcarbonpricefromwhichtobenchmarkaborderlevy.16JohnKerry,theUSSpecialPresidentialEnvoyforClimate,hassaidacarbonborderadjustmentshouldbealastresortduetoitsimplicationsforinternationaltrade.17CanadaPrimeMinisterJustinTrudeausgovernmentisexploringthepossibilityofacarbonborderadjustment,andisen

46、gagingwithCanadiansandinternationalpartnersto“advanceaglobaldialogueonthisimportantissue”.18UKTheConservativegovernmentintheUnitedKingdomisconsideringacarbonbordertaxadjustment,19 amidconcernsthatheavyindustrymaybedriventorelocateduetotheUKseffortstocutemissionsby78%by2035.20However,othersintheUKare

47、opposedtoaBritishcarbonbordertaxandarelobbyingagainsttheEUsCBAM.53.2ElementsoftheEUsCBAMandHowitWillWorkTheuseofborderadjustmentmeasurestodealwithcarbonleakageisbeingconsideredbymanycountries.Yetatpresent,onlytheEUhaspublishedspecificdetailsabouthowsuchasystemwouldwork.Consideringtheproposalinsomede

48、tailcanthereforebeusefulinseeinghowaCBAMpolicywould be implemented in practice.While the mechanisms design mayyet evolve over time,thefollowinganalysisisbasedontheEuropeanCommissionsJuly2021legislativeproposal22andothersecondarysourcesatthetimeofpublication.Figure3:TheEUsCarbonBorderAdjustmentMechan

49、ism(CBAM)Transition PeriodFrom1Jan2023,importersofgoodsintheEUwillneedtoreportemissionsembeddedintheirimportseachquarter.Nofinancialadjustmentswillneedtobepaidduringthisperiod,butreportingismandatoryandimporterswhofailtocomplywillfacepenalties.TheCBAMwillinitiallytargetselectedgoodsatriskofcarbonlea

50、kage:cement,ironandsteel,aluminium,fertiliser,andelectricity.TheEuropeanParliamenthascalledfororganicchemicals,plastics,hydrogen,andammoniatobeadded.Moregoodsmaybeaddedgoingforward.ThetransitionperiodisintendedforEUimportersandtheEUstradepartnerstoadapttothemeasure,andfortheEUtoengageindialogue,poss

51、iblyadjustingthemeasureifneeded.2023Full ImplementationFrom1Jan2026,CBAMcertificateswhichcorrespondtoonetonneofembedded CO2eemissionsingoodswillbeintroduced,withthepricedeterminedbytheweeklyaverageauctionpriceofEUETSallowances.Importerswillneedtodeclare:Thetotalquantityofgoodsimported(coveredbytheCB

52、AM)The total embedded emissions of the goods ThetotalnumberofCBAMcertificatestobepurchased,afteranyreductionsduetocarbonpricepaidinthecountryoforiginandanyadjustmentsduetofreeEUETSallowances20266WhentheEUsCBAMisimplemented,importersmayclaimintheirdeclarationstoEUauthoritiesthattheirgoodsrequirefewer

53、CBAMcertificatestobepurchasedandsurrendered,ifitcanbeproventhatacarbonpricehasalreadybeenpaidinthecountryoforiginfortheembeddedemissions.23PursuanttoArticle9ofthelegislativeproposal,theimportermustkeeprecordsoftherelevantdocumentation,certifiedbyanEUauthority.Theexactmethodologyforcalculatingtheredu

54、ctionisnotspecified,buttheCBAMwouldempowertheEuropeanCommissiontodeterminethis.24Likewise,toensurethatthemeasureisappliedinaneven-handedway,therequirednumberofCBAMcertificatesareassumedtobereducedtoreflectfreeETSallowancesallocatedtoproducerswithintheEU.25Thisensuresthatimporterscompetitivenesswilln

55、otbedoublyimpactedbytheCBAMandtheprovisionoffreeETSallowances.74.EffectivenessandFeasibilityoftheEUsCBAMTheEUsCBAMproposalappearstheoreticallysound,withaclearobjectiveoftacklingcarbonleakage,andtheproposaldetailshowitwillbeexecutedfrom1January2023onwards.Nevertheless,thispaperfindsthatthelegislative

56、proposalmayfacesignificantpoliticalandlegalchallengesifitisenactedasanEUregulation.Moreover,itseffectivenessandfeasibilityasalarge-scalemechanismisquestionable,giventhelackofawarenessandreadinessamongnations,especiallydevelopingones,regardingmeetingitsrequirements.Thisisaconcerngiventherelativelysho

57、rttransitionalwindowof2023to2025beforethemeasureisfullyimplemented.Moreover,itisnoteworthythataCBAMdoesnotresolvecarbonleakagethatoccursthroughtheenergymarketchannel.Itsusefulnessisthereforelimitedtomitigatingcompetitiveness-relatedcarbonleakage.Inlightofthesecritiques,theEUsCBAMproposalmaynotbethem

58、ostdesirablesolutioninitscurrentform.Thefollowingsectionwillexpandonthesechallenges.4.1PoliticalandLegalResistancefromTradingPartners4.1.1 PoliticalResistanceAccordingtotradedata,CBAM-coveredexportstotheEUareconcentratedamongafewcountries,withRussia,China,andTurkeyaccountingformorethanone-thirdofaff

59、ectedtrade.WhileRussiaandTurkeyhaveexplorednationalcarbonpricinginthepast,therearecurrentlynonationwidecap-and-tradesystemsorcarbontaxesimplemented.26WhileChinahaslaunchedanationalETS,itspricesremainsignificantlylowercomparedtotheEUETS.WithoutcomparablecarbonpricingtotheEUs,ChinawillbesubjecttotheCB

60、AMregulationandcouldbesignificantlyimpacted.Unsurprisingly,theEUsmajortradepartnershavethusexpressedconcernovertheCBAMproposal.AttheheartofthesecomplaintslietheperceptionthattheCBAMregulationisinconsistentwithWTOandUNFCCCprinciples,withsomecriticsarguingthatthepolicyisbothprotectionistandunfair.A202

61、1expertstudyconductedbyKonradAdenauerStiftungfoundthatmanyexpertstakeholdersinFigure4:CarbonpricinginChinaAttheendof2021,Chinascarbonpricewas54.22(7.50)pertonneofCO2e emissions27ThisisfarbelowtheEUETSpriceofaround80pertonneAtpresentChinasnationalETSonlycoverstheenergysectorwithentitiesreceivingallow

62、ancescalculatedbasedon70%oftheir2018output.288Asia-PacificregardtheCBAMasameasuredesignedprimarilytoprotectEUbusinesses.29Acommonrefrainisthatitsblanketapplicationdoesnotaccountforthe“commonbutdifferentiatedresponsibilitiesandrespectivecapabilities”principlewithintheUnitedNationsFrameworkConventiono

63、nClimateChange(UNFCCC)andthevoluntary,bottom-upapproachintheParisAgreement.Individualcountries,especiallydevelopingnations,aresupposedtobefreetopursuecarbonemissionsreductioninamannerthatismostsuitabletotheircircumstances,buttheCBAMeffectivelyhasapunitiveeffectonjurisdictionsthatdonotintroducecarbon

64、pricingmeasuresthatareidenticaltotheEUs.LowerandmiddleincomecountriescouldbedisproportionatelyaffectedoneexpertanalysisfoundthattheEasternEuropeanandCentralAsiantradingpartnersoftheEUwouldbemostexposedtotheCBAMbypercentageofGDP.30Table2:ConcernsfromtheEUstradepartnersabouttheEUsCBAMCountryConcernsBr

65、azil,China,India,SouthAfricaIssuedajointstatementlabellingunilateralcarbonborderadjustmentsas“discriminatoryandagainsttheprinciplesofequity”.31RussiaHascalculatedthatitcouldloseUS$7.6bnfromthemeasure,sayingtheprospectofanadditionalfinancialburdenontradeis“extremelyunpleasant”.32AustraliaCriticisedth

66、eEUsCBAMas“detrimentaltoglobalgrowthandtofreetradeglobally”,andameasurethatrisks“enhancingprotectionism”.33AnotherissueisthatundertheEuropeanCommissionsCBAMproposal,therevenuegeneratedfromtheCBAMwouldgointotheEUs“ownresourcesfeedingintotheEUsbudget”,coveringthecostsoftheEUsCOVID-19recoverypackage.34

67、Thisisunlikelytositwellwiththedevelopingcountriesandwillnotassuagefearsofdisguisedprotectionism.TheEuropeanCouncilsofficialmediareleaseaboutthebodysagreementontheCBAM,issuedon15March2022,statedthatthemainobjectiveoftheCBAMistoavoidcarbonleakageandencouragetheEUstradepartnercountriestodecarbonise.But

68、thereleasealsoframedthepolicyintermsofprotectingEuropeanbusinessesandEuropesenergysecurity.FrancesMinisterforEconomicAffairs,FinanceandRecoveryMr.BrunoLeMairesaid:“TheagreementintheCouncilontheCarbonBorderAdjustmentMechanismisavictoryforEuropeanclimatepolicy.Itwillgiveusatooltospeedupthedecarbonisat

69、ionofourindustry,whileprotectingitfromcompaniesfromcountrieswithlessambitiousclimategoals.Itwillalsoincentiviseothercountriestobecomemoresustainableandemitless.Finally,thismechanismrespondstoourEuropeanambitiousstrategythatistoaccelerateEuropesenergyindependence”.359Additionally,inprincipletheEUissu

70、pposedtophaseoutfreeallowancesinitsETSaftertheintroductionofaCBAM.However,iftheEUsCBAMpolicyisimplementedandthereisanoverlappingperiodwheretheEUcontinuestoalsoallocatefreeallowances,thenthismightconstituteanillegalsubsidyinviolationofWTOrules.ItbearsmentioningthattheCBAMproposalhasnotenjoyedunanimou

71、spoliticalsupportwithintheEUeither.Forexample,countrieswithmajorindustriesthatdependonsteeloraluminiumworryaboutthecostimplicationstotheirbusinesses.However,internalEUoppositionstotheCBAMarebeyondthescopeofthispaper.Figure5:ImpactoftheEUsCBAMonASEANeconomiesVietnamistheonlyASEANeconomyintheworldstop

72、20exportersofCBAM-coveredgoodsInpercentageofGDPthemostCBAM-exposedASEANcountriesare:36 Vietnam:0.14%Malaysia:0.05%Indonesia:0.03%Thailand:0.02%Thisisakintowipingoutthegainsachievedbyamajorfreetradeagreement(FTA)TheseestimatesarebasedontheinitialscopeoftheCBAM.ASEANsmainexportstotheEU,machinery,agric

73、ulturalproducts,andtextilesarenotcurrentlycovered,butcouldbeincludedgoingforward.SomekeyASEANexportsarealreadyfacinginternationalscrutinyforenvironmental,social,andgovernance(ESG)reasons,suchaspalmoil.4.1.2 WTO-compatibilityoftheEUsCBAMTheaforementionedpoliticalresistancewilllikelytriggerlegalchalle

74、ngesattheWTOorothertrademechanisms.iiiForitspart,theEUhasconsistentlymaintainedthattheaimoftheCBAMispurelyiii Inadditiontotheissuesdiscussedinthissection,therearealsopotentialcompatibilityissueswiththeWTOAgreementonImportLicensingProcedures(ILA).CBAMcouldbeconstruedasalicensingscheme,anditmaynottake

75、intoaccountdevelopingcountryconsiderationsasrequiredunderILA1.2.10iv EveniftheCBAMwasconsideredatax,sincetheobligationtopayaccruesatthemomentofand“byvirtueoftheeventofimportation”,itwouldstillhavetofulfillthenationaltreatmentruleunderArticleIII(2)GATT.See“ChinaMeasuresAffectingImportsofAutomobilePar

76、ts”ReportoftheAppellateBody,WorldTradeOrganisation,WT/DS339/AB/R,WT/DS340/AB/R,WT/DS432/AB/R,December15,2008,paras158,161.environmental.37Inresponsetotheconcernsoftradingpartners,theEUseconomycommissionerPaoloGentiloniinsistedthattheCBAMwas“inlinewithandcompliantwithinternationaltradingrules”.38 A p

77、ossiblejustificationforthisisperhapsdescribedinanindependentpolicybriefcommissionedbytheEuropeanParliament,39andaresolutionadoptedbytheEuropeanParliamententitledTowardsaWTO-compatibleEUcarbonborderadjustmentmechanism.40TheCBAMregulationmustmeetthecriteriaintheWTOprovisionsthatallowforborderadjustmen

78、t.GiventheargumentthattheCBAMisdesignedtoaccompanytheEUETSratherthanimposeanoutrighttaxonimportsenteringtheEU,themeasureislikelytobeconsidereda“regulation”ratherthanan“internaltax”.41Thus,CBAMmustattheveryleastliveuptoArticleIII:4oftheGeneralAgreementonTariffsandTrade(GATT),thenationaltreatmentprinc

79、iple.ivThismeansthat,undertheCBAM,importsshallbeaccordedtreatmentnolessfavourablethanthataccordedtolike-productsintheEU.Some past WTO rulings have held that products will be deemed as“like”notwithstanding theirdifferencesincarbonfootprint.Inotherwords,imported“dirtier”steelwithhigherembeddedemission

80、sand“cleaner”EU-manufacturedsteelareconsideredlike-products.Ontheotherhand,recentrulingsontechnicalbarrierstotradewithinWTOsuggestthatprocessesandproductionmethods(PPMs)canbetakenintoaccountasabasistodifferentiatebetweengoods.WithregardstotheproposedCBAM,theEUislikelytoarguethatanycarbon-intensiveim

81、portstotheEUwillstillbeaccordednationaltreatmentonthesametermsasEUproducts.This is based on two grounds:First,there is no de jure discrimination between imports and EUproducts.42CBAMcertificateswillbepricedaccordingtotheweeklyaverageauctionpriceoftheEUETSallowances,andthusimportswillbechargedwiththe

82、sameratepertonneofcarbonasgoodsfromwithintheEU.Second,asmentionedearlier,theEUisexpectedtophaseoutfreeallowancesorprovideequivalentallowancestoCBAMimportersunderitsETSafteraCBAMpolicyisimplemented.ThiswillavoiddoubleprotectionforEUproducts,whichwouldsurfaceiffreeemissionsallowancesforEU-domiciledind

83、ustrieswerepreservedwhileimporterswererequiredtosurrenderCBAMcertificates.43Notwithstanding the claims above,the EUs trading partners could assert that there is defacto discrimination.ThereportingrequirementsundertheCBAMfrom2023onwardswillputimportstotheEUonanunequalfooting,astheinformationdutyandle

84、galduediligencerequiredofforeignentitiesunderCBAMaremoreonerousthanthereportingrequirementsundertheEUsETS.ThiscouldbeconstruedasadejureviolationofWTOnationaltreatmentprinciples.CBAMwillrequirenon-EUproducerstorevealtheirproductionmethodstoestablishtheiremissions,andhavetheircalculatedemissionsverifi

85、edbyanEUcertifiedauthority.Ifnon-EUproducersrefusetosubmitthisdata,ortheEUdoesnotaccepttheiremissionsdata,thentheEUcommissionwillapplyanemissionsratebasedontheaverageoftheworst10percentofpollutersintheEU.Additionally,theCBAMpolicydoesnotprovideforexclusions,whiletheETSdoesforsmallinstallationsandwhe

86、reemissionsfallbelowacertainthreshold.SomeEUmemberstatesalsohavenationalsubsidiesforcertainindustriestooffsettheeffectsoftheETS,butforeignproducerswhoseproductsfallunderCBAMwouldnothavesimilarbenefits.NationalTreatmentRule11Beyondthisconcern,theCBAMregulationwouldalsohavetoabidebythemost-favoured-na

87、tiontreatment(MFN)ruleunderGATTArticleI.Thisrequiresthattheremustbenodiscriminationbetweenlike-productsimportedfromdifferentcountriesoforigin.AnyadvantageaffordedtotheimportedproductsofoneWTOmembermustalsobegivenimmediatelyandunconditionallytoalllike-productsoriginatingfromotherWTOmembers.Anybenefit

88、smustbemultilateralised.44Fromthisperspective,theCBAMregulationcanbedeemedasdiscriminatory.TheEUsCBAMpolicywillapplytoallnon-EUorEEAtradepartners,butasdiscussedearlier,manufacturersinsomecountrieswillbemoreabletomeetthereportinganddisclosurerequirementsmandatedundertheCBAM,whileotherswillexperiencec

89、hallengesandthereforebefacedwithahigherrate.Importedlike-productsdeemedtohavelowercarbonembeddedemissionswouldsurrenderfewercertificatesthanthosecalculatedtohavehigherembeddedemissions.Moreover,thenumberofcertificatescanalsobereducedifacarbonpricehasalreadybeenpaidinthecountryoforigin.Onceagain,theE

90、UwouldhavetorelyonGATTArticleXXtojustifythedeviationfromtheMFNrule.Most-favoured-nationRuleTheEUmayhavetoarguethattheCBAMregulationqualifyforthegeneralexceptions(onthegroundsofpreservationofexhaustiveresourcesorhumanhealth)perGATTArticleXX.TheEUhashadsomesuccessinvokinganotherWTOexception,byarguingt

91、hatsuchimportrestrictionsarenecessaryfordefending“public morals”.Alternatively,there are past WTO rulings which suggest that nationaltreatmentobligationsaremet,ifthedetrimentalimpactcanbeexplainedbyfactorsthatareunrelatedtotheforeignoriginoftheproduct.45Forinstance,iftheEUcandemonstratethatthehigher

92、carbonfootprintinforeignproductsisduetotheirproductionandprocessingmethodsratherthantheirforeignorigin,itispossiblethatnodefactodiscriminationwillbefound.Ultimately,thereisnoclearanswerastothecompatibilityoftheCBAMregulationwithArticleIII:4,whichmayinduceundesirabletradelitigation.Significantpressur

93、ethusfallsonArticleXX,andwhetheritcanbeusedtojustifytheCBAMregulation.Specifically,theEUwouldseektoprovethattheCBAMregulationisnecessarytoprotecthuman,animalorplantlifeorhealthunderArticleXX(b)orisrelatedtothe“conservationofexhaustiblenaturalresources”underArticleXX(g).ToqualifyforArticleXX(b),theEU

94、mustshowthattheCBAMistheonlyoptionthatwouldallowittoprotecthealthconcerns;theEUwouldneedtoprovethepolicyisnotarbitrary,unjustifiable,thatitistheleasttrade-restrictivemeasurereasonablyavailable.46TheEUmustalsodemonstratethattheCBAMpolicyisnecessaryforitsstatedobjectivesandnotadisguisedrestriction.Int

95、hisregard,theoft-repeatedclaimthatthepurposeofCBAMisto“leveltheplayingfield”isproblematic.CriticsofCBAMhavemaintainedthattheEUhasnotattemptedtonegotiateingoodfaithtoachieveamultilateralsolutiontocarbonleakageithasthereforenotyetexhaustedallalternatives47 andproventhatCBAMis“leasttraderestrictive”for

96、theregulatorystandarditseeks.AselaboratedinSection5ofthispaper,therearealternativeproposalstoCBAMthatcanalsopromotesustainabletrade.Asanalternative,theEUcouldthereforeseektojustifytheCBAMregulationunderArticleXX(g).Thiswouldinvolveassertingthatitisrelatedtotheconservationofexhaustiblenaturalresource

97、saslongasthemeasureisusedinconjunctionwithsimilarrestrictionsonEUproduction.However,whiletheCBAMregulationaimstocombatclimatechange,itisframedintermsofminimisingcarbonleakageratherthanconservationofresources.Also,carbonemissions(orglobalaveragetemperatures)arenotanexhaustible“resource”assuch.TheEUmu

98、stdemonstratethatthereisa“closeandgenuine”relationshipbetweentheborderadjustmentonimportsandconservationgoals.48Inthisregard,thefactthattherevenuegeneratedfromtheborderadjustmentswillgototheEUbudgetmayalsoattractscrutiny.GeneralExceptionsBasedonGATTArticleXX12AssumingtheEUpassesthe“closeandgenuine”r

99、elationshiptest,thechapeauofArticleXXalsoprovidesthatmeasuresmustnotconstitute“arbitraryorunjustifiablediscriminationbetweencountrieswherethesameconditionsprevail,oradisguisedrestrictiononinternationaltrade”.Ontheissueofarbitraryorunjustifiablediscrimination,theimportanceoffairnessandjusticeintheimp

100、lementationofameasurehasbeenemphasisedinpastWTOrulings.Inthisregard,theEUwillmostlikelyarguethatcalculatingthenumberofCBAMcertificatestobesurrenderedbasedonthecarboncontentofproductsandthecarbonpricepaidinthecountryoforiginisspecificallyonenvironmentalgrounds,andisthereforenotarbitraryinnature.Itcou

101、ldalsobesuggestedthatconditionsprevalentinothercountriesarenotthesameduetodifferencesincarbonpricingpolicies.Noneoftheseargumentsarefoolproof.Inparticular,theimpositionofaunilateralstandardonothercountrieswithoutathoroughprocessofmutualdialogueisquestionable.Indeed,whereunilateralmeasuresandlawswere

102、challengedinpastWTOcases,theneedforconsultationandmultilateralassistancetotradingpartnershasbeenemphasised.Similarly,thepowerassertedbytheEuropeanCommissiontodecideonthemethodologyforaccountingforothercountriescarbonpricingpoliciesmightnotbejustifiable.Fromthisperspective,theCBAMregulationmayhavean“

103、intendedandactualcoerciveeffectonthespecificpolicydecisionsmadebyforeigngovernments”,whichhasbeencondemnedinpastWTOrulings.Finally,ArticleXXstatesthattheCBAMregulationcannotbeadisguisedrestrictiononinternationaltrade.Assuch,theintentionsoftheEUmustbegenuinelyenvironmentalinnature.Inthiscontext,there

104、weresuggestionsthattherevenuegeneratedbyCBAMshouldbeusedtoassistdevelopingcountriespivottowardscleanerproduction.Thusfarthishasnotbeendone.Asnotedearlier,theEuropeanCommissionsCBAMproposalenvisagedthatrevenueswouldgototheEUitself,inthecontextofrepayingthedebtgeneratedbytheEUsCOVID-19recoverypackage.

105、Atthispaperstimeofwriting,theEuropeanCouncilhascalledforfurtherdiscussiononthequestionofhowCBAMrevenueswillbeutilised.ButifrevenuedoesindeedfeedintotheEUbudgetinthepolicysfinalimplementation,thiscouldbecomeaproblematicissueinsofarasitwouldinviteallegationsthattheCBAMisnotforpurelyenvironmentalgoals.

106、Conversely,iftheEUsCBAMrevenuesareusedtoprovidetechnicalassistanceformanufacturersindevelopingeconomiestomeetthecarbonaccountingstandardsmandatedbytheEU,thiswouldgoalongwaytowardsassuagingconcernsaboutthepolicy.Ifproducersareunabletododetailedcarbonaccounting,theCBAMwillapplyadefaultemissionsvalueto

107、producersbasedontheircountryoforigin,whichcouldbeunfavourabletobusinesses.ThelegalquestionsarisingoutoftheCBAMproposalarecomplexandstillevolving.TheEUfacesanuphillbattletoensurethatthevalidityofCBAMisnotchallengedbytradingpartners.Moreover,passingthelegaltestismerelyaminimumrequirement;itdoesnotguar

108、anteepoliticalacceptanceoftheCBAM.Shouldwidespreadpoliticalresistanceremain,themeasureseffectivenessinachievingitsoverarchinggoalofadvancingglobalclimateactionmaybecalledintoquestion.4.2FeasibilityofImplementingtheEUsCBAMApartfromlegalandpoliticalresistance,thefeasibilityofimplementingtheCBAMregulat

109、iononalargescaleisalsounclear.AnnexIIIoftheCBAMproposaloutlinesthemethodsthatproducerswillhavetofollowtocalculatetheembeddedemissionsintheirproducts.Mostofthefocusintheproposalappearstobeondirectemissions,butthemethodologyprovidediscomplicated.49Forinstance,calculatingthedirectembeddedemissionsfor“c

110、omplex”goodsrequirestheembeddedemissionsofinputmaterialsconsumedintheproductionprocess.v v Complexgoodsaregoodsthatrequiretheinputofothersimplegoodsinitsproductionprocess.Simplegoodsrefertogoodsthatareproducedinaproductionprocessrequiringexclusivelyinputmaterialsandfuelshavingzeroembeddedemissions.S

111、eeEuropeanCommission(n19),Art.1(a)and(b),AnnexIII.13Smallerproducersinemergingeconomies,suchasIndiaorIndonesia,maystruggletoadapttotheseadministrativerequirementsduetocostsassociatedwithEUcertification.ManycompaniesacrossthecomplexsupplychainsinIndonesiadonotrecordtheiremissionsdata,andhencearenotpr

112、eparedtocomplywiththeCBAMregulation.50Likewise,inThailand,emissionsdataismeasureddifferentlyascomparedtotheEU,andthemethodologyusedislessdetailed.ThaistakeholdershavefurtherpointedoutthattheEUsintentiontoimplementtheCBAMatthestartof2023is“tooshortofatimeline”duetointerveningpriorities,suchastheCOVID

113、-19pandemic.51Suchpracticalconcerns,coupledwiththehighcarbonpriceontheEUETS,mayhavetheunintendedconsequenceofgrowingleakagemarkets.Thiscouldpotentiallyresultintheworldsplinteringintoalow-carbonblocandahigh-carbonbloc.52ToavoidthehassleoftradingwiththeEU,producersindevelopingeconomiesmayelecttosellth

114、eirproductsinothermarketswithlessstringentregulationsortotradedomestically.Forinstance,anexpertinIndonesiainterviewedfortheKASstudycommentedthat“withouthelpfromtheEU,developingcountrieshavetobepragmaticandlookforothermarkets”.53 Inasimilarvein,inresponsetodecliningpalmoildemandfromWesternmarketsduet

115、osustainabilityconcerns,MalaysiasMinisterofPlantationIndustriesandCommoditiessaidthatMalaysiashouldlooktowardsnewMiddleEasternandCentralAsianmarketsinstead.WhiletheEUisalargeeconomyandmarketoverall,thisdoesnotapplyacrossalltradingpartnersandforallsectorsandproducts.WheretheEUmarketlackssizeandinflue

116、nce,theCBAMmayhavetheeffectofshuttingoutemerging-marketexportersfromitsmarketsandthensimplyre-directingthoseexportstoothermarkets.TheCBAMcanlimitEUimportsbutnot,insuchacase,trulyimpactactualproductionandcarbonemissions;borderandtrademeasurescontinuetobesecond-besteffortscomparedtochangesinproduction

117、itself.TherearealsoconcernsaboutthefairadministrationoftheCBAMscheme,andwhetherEUauthoritieswillbeabletohandletheadministrativeburdenofimplementingtheCBAMregulationfairlyandconsistentlyacrossalltradingpartners.54Asnoted,areductionofCBAMcertificateswouldbeappliedbasedonthecarbonpricepaidinaproductsco

118、untryoforigin.Thisisontheconditionthatthegoodsarenotsubjecttoanexportrebateoranyothercompensationonexportation.55Assuch,theEUrequiresevidenceofthecarbonpricepaid,andtheabsenceofexportrebates,tobecertifiedbyanindependentperson.Therelevantauthoritieswouldthushavetobearthetedioustaskofverifyingallrelev

119、antdocumentationprovidedbyproducersfromacrosstheworld.Giventhatcountriescarbonpricingpoliciesarepatchworksofregulationsandsubsidies,theevidencemaycomeindifferentforms.ThedifficultyofensuringthattheserecordsareauthenticandaccuratemayallowforthereductioninCBAMcertificatestobeexploited.4.3InabilitytoFu

120、llyAddressAllSourcesofCarbonLeakageAsmentionedearlier,intheenergymarketchannelofcarbonleakage,globalenergypricesfallduetodecreasedfossilfueldemandwhencertaincountriesputenvironmentalrestrictionsinplace.Thisinturnencouragesfossilenergyconsumptioninothercountrieswithfewersuchrestrictions,leadingtoanin

121、creaseinoverallemissions.SincetheCBAMregulationonlytacklestheissueofcompetitionanddoesnotaddresspriceeffects,carbonleakagethroughtheenergymarketchannelwillnotbemitigated.Suchinabilitytofullyaddressallsourcesofcarbonleakageisconcerning,sincetheexactproportionofcarbonleakagecausedbytheenergymarketchan

122、nelisdebatable.Modellingliteraturesuggestsmostcarbonleakageoccursthroughtheenergymarket.56AstudybytheLeibnizInstituteforEconomicResearchfoundthatathirdofcarbonleakagewasdrivenbytheenergymarketchannelandwouldnotbeaddressedbyborderadjustments.57145.AlternativeProposalsforEncouragingSustainableTradeAlt

123、houghmanyofthesepotentialchallengesarespeculativeatpresent,itisevidentthattheEUsCBAMregulationcouldfacesignificanthurdlesevenifsuccessfullyenacted.OppositionfrommajortradingpartnersmayleadtoprotractedlegaldisputesandtheEUstradepartnersmayalsobemoreinclinedtoretaliateratherthanlitigate,forinstancevia

124、tariffsimposedonEUsteel,ordisplacementoftheEUsagri-foodproductsandmachineryonothergrounds.58Theadministrativefeasibilityandeffectivenessofthemeasureisalsoindoubt.Giventheseconcerns,expertshaveputforthalternativeproposalsforencouragingsustainabletrade.Theseincludetheprospectoflinkingorharmonisingseve

125、ralETSschemesunderasinglemultilateralemissionstradingsystem.TheOECDhasalsoproposedtonegotiateaninclusiveframeworkoncarbonpricing,includingnon-OECDcountries,similartotheOECDsrecentglobaltaxdeal.Twoparticularsolutionswillbediscussedinthissection.Thesearehighlightedbasedontheirpotentialtocircumventdiff

126、icultiesarisingfromtheCBAMproposalwhileaddressingcarbonleakageconcerns.However,itshouldbenotedthattheyarenotdirectsubstitutesfortheCBAMandarenotmeanttobetakenaspolicyrecommendationsfortheEUorothercountriesconsideringcarbonborderadjustments.5.1“CarbonClub”andInternationalCarbonPriceFloorInprinciple,t

127、heideabehinda“carbonclub”isthatagroupofcountriesagreeamongthemselvesonaninternationaltargetcarbonprice.Notably,Germany,thelargesteconomyintheEUisinfavourofsuchasolution,andGermanChancellorOlafScholzhasproposedthattheG7nationsbefoundingmembersofacarbonclub.59TheGermangovernmenthasnotexplicitlyframedt

128、heintroductionofacarbonclubasareplacementoralternativeforaCBAMpolicy,thoughChancellorScholzhassaidthatsuchaclubcouldhelpavoidtradefrictionsarisingfromclimateprotectionmeasuresintheEU.Nonetheless,acarbonclubcouldimplicitlyimplythatanymajoreconomydecidingtostandoutsideofitwouldbesubjectedtoaborderadju

129、stmentmeasurelikeCBAM,whichwillincentiviseothermajoreconomiestoconcludeacarbonclub.Figure6:Exampleofacarbonclubaninternationalcarbonpricefloor(ICPF)International Carbon Price Floor(ICPF)InJune2021,theIMFcalledforacarbonpriceagreementamongacoregroupoflargeemittingcountries,toalignemissionswithParisAg

130、reementobjectives.60Differentiated PricingUnderanICPF,therewouldbedifferentminimumcarbonpricesfordevelopedanddevelopingeconomies.Forinstance,countriesliketheUSandEUwouldadoptaminimumpriceofUS$75pertonne,whileChinamightcommittoUS$50pertonneandIndiamightbeinathirdtierofUS$25pertonne.15Crucially,acarbo

131、nclubdeal,liketheIMFsproposedinternationalcarbonpricefloor(ICPF),couldhavefewerpoliticalobstaclesthanaCBAM.Thevoluntarynatureofsuchanagreement,asopposedtoaunilateralCBAM,isinlinewiththespiritofmultilateralismandcooperationintheParisAgreement.Assumingdevelopedeconomiesacceptthatdifferentiatedcarbonpr

132、icesarerequiredduetodifferingeconomicsituations,thereshouldbenocomplaintsofdisguisedprotectionismthathaveplaguedtheCBAMproposal.Onthelegalfront,therearenoWTO-relatedimpedimentssincethemechanismwouldnotinvolvetradepolicies,andinsteadbeimplementedthroughnationalandinternalpoliciesthatdirectlyimpactpro

133、duction,pricing,andconsumption.ItshouldbenotedthattheIMFsICPFisnottheonlypossibleapproachtoacarbonclub.Acarbonclubcouldalsotaketheformofasectoralbaseddealonemissionsreductionratherthanacommoncarbonprice,combinedwithacommonexternalcarbonadjustment.FortheEU,pursuingaplurilateralapproachthroughacarbonc

134、lubwoulddemonstratetheblocssincerityanddesiretoachieveasuitablesolutionforallparties.ShouldtheEUadvocateforaninternationalcarbonclubandthenfail,itwouldthengivetheEUgreaterjustificationandpoliticallegitimacytoenactaCBAMregulation.Inthishypotheticalsituation,theEUcouldarguethatitwouldhaveexercisedallr

135、easonableendeavoursandactedingoodfaithbeforeresortingtoborderadjustments.ThiscouldbeusefulindefendingitseffortagainstchargesofunilateralismundertheWTOrules;alternatively,theEUsforthcomingadoptionofaCBAMpolicycouldserveasanincentiveforothermajoreconomiestoparticipateinacarbonclubarrangement.5.2Output

136、-basedAllocationofAllowancesAnotheralternativeproposedisanoutput-basedallocation(OBA)offreeemissionallowances,tobecomplementedwithaconsumptionchargeoncarbon-intensiveindustrialmaterials.OBAsdistributetradableemissionsallowancestoproducersinindustriesathighriskofcarbonleakage,inproportiontotheircurre

137、ntproductionlevel.62Figure6:Exampleofacarbonclubaninternationalcarbonpricefloor(ICPF)(Contd)Advantages of the ICPFThemechanismwouldhaverelativeeaseofimplementationandwouldnotcreateanadministrativeburdenliketheEUsCBAM.61Projected ImpactTheIMFestimatesthatifthe“bigsix”emitters,China,UnitedStates,India

138、,theEU,Canada,andtheUK,allcommittoanICPF,thiswouldreduceemissionssufficientlytokeeptheglobaltemperatureincreasetounder2C.Implications for Carbon LeakageByincludinglargedevelopingeconomiesinthedeal,carbonleakagewouldbemitigated.ProducersinChinaandIndiawouldbesubjecttoaknownlevelofcarbonpricing,levell

139、ingtheplayingfieldwhilereducingoverallglobaldemandforfossil fuels.16How to benchmark the allowances remains an issue.One hypothetical benchmark could be theperformanceofthetop20percentoffirmsinagivensectorwiththelowestemissionsintensities.Asanexample,theemissions-ratebenchmarkforgreycementinCanadais

140、0.733tonnesofCO2eemittedforeverytonneofcement.67Producerswhomeetthisbenchmarkaredeemedtobecarbon-efficientandwouldreceivealltheallowancestheyrequiretocoveremissionsfromtheircurrentproductionlevels.68Asemissionsallowanceswouldbegrantedindirectproportiontoproductionlevels,theycanbeseenasasubsidytoprod

141、uction.Nonetheless,OBAscomeatacost.SinceOBAsfullycompensateproducerswhomeettheemissionsbenchmark,thetruecostofemissionsisnotpassedontoconsumers.Consumersthushaveaweakerincentivetochoose“greener”products.Thisinturnlimitstheincentiveforcompaniestoconductfurtherresearchanddevelopmentoncarbonreductionte

142、chnologies.69ProponentsforOBAsrecognisethisandsuggestthatthemeasureistobepairedwithaconsumptionchargemoredirectlyoncarbon-intensiveproductstorestoreconsumerpricesignals.70Thechargewouldbeleviedatthepointofsaleandcalculatedbasedonthecarboncontentoftheproduct.Thisincentivisesproducerstosupplylower-car

143、bongoods.TheOBAmodelsupplementedwithaconsumptionchargeispreferabletoaCBAMfortworeasons.First,theEUisalreadymovingtowardsanoutput-basedallocationoffreeemissionsallowances.InPhase3oftheEUETS(20132020),allocationsweregrantedbasedona5-yearaveragehistoricalactivitylevel.However,sincePhase4oftheEUETSbegan

144、in2021,allocationscanbeadjustedannuallytoreflectfluctuationsinactualproductionlevels.71Second,likeICPFs,OBAsinvolvelessofanadministrativeburdenthanaCBAM,astheEUwouldnotneedtofactorintheirtradingpartnersregulations.Finally,anOBAdoesnotinvolvetradepolicyandislesslikelytoinducerelatedlitigation.72These

145、 two alternatives to border measures and the EUs CBAM proposal bear evaluation.Therecanbedifferentpoliciesandprocessestoaddresscarbonandclimatechange,intandemwiththecompetitivenessofbusiness,andglobaltradeandinvestment.Figure7:Output-basedallocation(OBA)offreeemissionallowancesOutput-based Allocatio

146、nUnderanOBAmodel,freeemissionallowancesareallocatedinproportiontoproductionlevels,basedonproductorsector-specificperformanceindicatorsforemissionsintensity.63Advantages of OBAAslongasproducersmeetefficiencybenchmarks,theywillbefullycompensatedforthecostsarisingfromcarbonpricing.Producerscanproduceas

147、muchastheywishwithoutneedingtopurchaseallowances.64Implications for Carbon LeakageAnOBAmodelsignalstoproducersthatemissionsreductionshouldnotbesoughtthroughareductioninoutput;thisinturnreducescarbonleakagearisingfromthemovingofproductiontoothermarkets.65StudieshavefoundthatOBAsavoidasignificantpropo

148、rtionoftheleakagewhichwouldariseundertheauctioningofemissionsallowances.66176.ConclusionAstheworldmovestowardscarbonneutralityandnet-zerogoals,therewillinevitablybedifferencesinclimateambitions.Producersinheavilyregulatedjurisdictionsmustbesubjecttohighercarbonpricesthantheircompetitors.Withtradeani

149、ndispensablepartofamodern,interconnectedworld,thispushforclimateactionhasadirectbearingoneconomiccompetitiveness.Theissueofpotentialcarbonleakagethatunderminesclimategoalsshouldnotbeignored.Somemajorandinfluentialeconomiesmaybeinclinedtopursueunilateralactionstosolvetheproblemofcarbonleakage.Sofar,t

150、heEUistheonlydevelopedeconomytointroduceaCBAMproposaltoaddresscarbonleakage,butithasbeensubjecttointensedebateandcriticismamongtradingpartners.Theproposalisalsonotguaranteedtopassinternally,asithasyettobeapprovedbytheEuropeanParliamentandtheCouncilofMinisters.Thelegalandpoliticalobstaclesaresignific

151、ant,andthereareconcernsthattheregulationisadministrativelyunfeasibleandwouldtakeyearsforEUimportersandforeignproducerstoadaptto.ShouldtheEUultimatelychoosetomoveaheadwithitsCBAMregulation,itshoulddosowithconsiderationtotheobjectionsthathavebeenraised,andwiththebroaderaimofseekingatrulymultilateralso

152、lutiontoachievingsharedclimategoals.Othermeanstoaddresscarbonleakagecanalsobeconsidered.ForSoutheastAsia,itwouldbeunwisetoadoptanay-sayerorevenawait-and-seeapproach.Therealityisthatgiventhefast-growingASEANeconomy,theregionwillfaceincreasingpressuretopullitsweightinglobaleffortsagainstclimatechange.

153、ThisisnotonlyfromtheEUandothertradepartnersbutfromtheincreasedawarenessoftheASEANgovernmentsandpeoplesabouttheimpactsofclimatechange.ASEANcountriesshouldthereforeimplementandstrengthencarbonpricingpoliciestoshiftlocalindustriestowardslow-carboneconomicactivity.Intandemwithsuchefforts,attheleast,ASEA

154、NcountriesshouldpushforfutureCBAMrevenuefromASEANexportstobeallocatedtowardshelpingdevelopingregionsdecarbonise.Finally,ASEANregulatorscanandshouldmovetoimplementcarbonaccountingrequirementsdomestically.Thesepre-emptiveactionswouldnotonlymitigatebusinessandtradedisruptionscausedbyaneventualEUCBAMimp

155、lementation,butalsoputtheregioninapositiontothriveinthegreenerglobaleconomyofthefuture.AsASEANmovesforwardwithitsownclimateactionplansandNDCs,thereisaneednotonlyforeachofitsmemberstoactbutfortheregiontoactwithgreatercoordinationforefficiencyandscale.SeveralASEANcountriesareintheprocessofimplementing

156、orconsideringnationalETSpolicies.Ideallytheseschemesshouldbeinteroperablefromtheoutset,bothforsynergypurposesandtoavoidfuturefrictionasETSpoliciesmaynecessitateCBAM-likemeasurestoavoidcarbonleakage.Assuch,anintra-ASEANdiscussionaboutclimatepoliciesandcarbonpricingisnecessarytoaugmentnationalefforts.

157、ASEANregionalcooperationcanalsoservetoadvancefurtherdialoguewithtradepartnersliketheEU.18Annex:LiteratureReviewThispaperwasproducedfromareviewofacademicliterature,researchstudies,andnewsreportsoncarbonbordermeasures.MostoftheseresourcesfocusedspecificallyontheEUsCBAMproposal.Itbearsnotingthatacademi

158、cresearchonthetopicisstillemerging,andmostofthepresentlyavailablestudieshavecomemainlyfromdevelopedcountries.Incontrast,analysisofthepotentialeffectsondevelopingcountries,oronASEANcountries,iscurrentlylimited.Ontheprevalenceofcarbonleakage,Misch,FlorianandWingender(2021)builtonpreviousempiricalstudi

159、estodemonstratethatleakageissignificant,butthattherearedifferencesacrosscountriesbasedonopennesstotradeandcountrysize.Recentliteratureonthechannelsofcarbonleakagewasalsoreviewed.Mostpapersidentifiedthe“competitiveness”and“energymarkets”channelsasthemaincontributorstocarbonleakage(Arroyo-Currsetal.,2

160、015).Otherchannelsincludedthe“inducedinnovationchannel”,whichhasbeentheorisedalthoughitsempiricalscopeislacking(Fischer2015).Thischannelcreatesnegativeleakageinthelongterm,wheninnovationincleanertechnologieslowerstheircostsglobally,increasingtheirattractiveness.Ahandfulofpapersexploredtheeffectivene

161、ssofacarbonborderadjustmentmechanisminmitigatingtheriskofcarbonleakage.Ingeneral,therewasaconsensusthatborderadjustmentswereeffectiveinreducingcarbonleakageoccurringthroughthecompetitivenesschannel(Mrsdorf,2021).Nevertheless,therewerecriticismsregardingitspoliticalfeasibilityandlegalstatusunderWTOla

162、w.Bacchus(2021)concludedthattheWTO-compatibilityoftheEUsCBAMcouldbechallengedonmultiplefronts.ThiswassupportedbyMarcuetal.(2020).TheadministrativeburdenthattheCBAMregulationcouldpotentiallyhaveonEUMemberStateswasanotherpointcommonlymentionedintheliterature(Lamyetal.,2020).Givendifficultiesarisingwit

163、hcarbonborderadjustmentmeasures,severalpapersadvocatingforalternativesolutionswereidentified.Amongtherecommendations,output-basedallocationsoroutput-basedrebatesstoodout(Quirion,2021).Output-basedsolutionsareoftenpairedwithconsumptionchargesonindustrialmaterialstoaddressweakenedpricesignalsduetoprod

164、uctionsubsidies(Sato,2016,andAcworthetal.,2020).Theliteraturealsopositedthatoutput-basedallocationswouldnotbeaspoliticallycontentiousasaCBAMproposal,andthereforelesslikelytoinducetradelitigationattheWTO(Kaufmanetal.,2020).References1“ClimateChange2021:ThePhysicalScienceBasis”IntergovernmentalPanelon

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174、ent/EN/TXT/?uri=CELEX%3A52021PC056415 EuropeanCommission(n14).16 Dlouhy,JenniferandNatter,Ari.“DemocratsProposeTaxonCarbon-IntensiveImportsinBudget”Bloomberg,July2021.Accessed8thSeptember,2021.https:/ Hook,Leslie.“JohnKerrywarnsEUagainstcarbonbordertax”TheFinancialTimes,March2021.Accessed8thSeptembe

175、r,2021.https:/ Sparrow,Andrew.“UKmayeventuallyneedcarbonbordertax,GeorgeEusticesays”TheGuardian,Nov2021.Accessed28thMarch,2022.https:/ Morison,RachelandEdwards,Anna.“U.K.ConsidersCarbonBorderTaxtoProtectDomesticIndustries”Bloomberg,May2021.Accessed10thSeptember,2021.https:/ Gross,Matthew.“TheEuropea

176、nUnion,theCarbonBorderAdjustmentMechanism,andGlobalClimateLeadership”.HarvardInternationalReview,November 2021.Accessed 20th January,2022.https:/hir.harvard.edu/the-european-union-the-carbon-border-adjustment-mechanism-and-global-climate-leadership/22 EuropeanCommission(n14),Art.36(3)(a)23 ibid,Art.

177、924 ibid,Art.9(4)25 ibid,Art.3126 Kardish,Chrisetal.“WhichcountriesaremostexposedtotheEUsproposedcarbontariffs?”ResourceTradeEarth,August2021.Accessed14thSeptember,2021.https:/resourcetrade.earth/publications/which-countries-are-most-exposed-to-the-eus-proposed-carbon-tariffs27 Okutsu,Akaneetal.“Chi

178、nafiresupcarbontradingasAsiaturnsontogreenerpath”NikkeiAsia,July2021.Accessed14thSeptember,2021.https:/ Jia,JingweiandTan,Mervyn.“Analysis:HowChinasNationalEmissionsTradingSchemeWillWork”PaulsonInstitute,June2021.Accessed6 April,2022.https:/www.paulsoninstitute.org/green-finance/green-scene/analysis

179、-how-chinas-national-emissions-trading-scheme-will-work/29“PerceptionofthePlannedEUCarbonBorderAdjustmentMechanisminAsia-PacificAnExpertSurvey”KonradAdenauerStiftung,March2021.Accessed19thAugust,2021.https:/www.kas.de/en/web/recap/single-title/-/content/perception-of-the-planned-eu-carbon-border-adj

180、ustment-mechanism-in-asia-pacific-an-expert-survey30 Cosbey,Aaron.“Countingcarbon:Theimplicationsofbordercarbonadjustmentsondevelopingcountries”.HinrichFoundation,December2021.Accessed21stJanuary,2022.https:/ Khanna,Vikram.“AnobstaclecourseaheadforEUcarbonbordertax”TheStraitsTimes,July2021.Accessed1

181、4thSeptember,2021.https:/ Hook,Leslieetal.“EUplanforworldsfirstcarbonbordertaxprovokestradingpartners”TheFinancialTimes,July2021.Accessed14thSeptember,2021.https:/ Aarup,SarahandMoens,Barbara.“AustraliaattacksEUcarbonborderlevyplans”Politico,June2021.Accessed12thSeptember,2021.https:/www.politico.eu

182、/article/cbam-detrimental-to-growth-australian-trade-minister-says/34 EuropeanCommission(n14),p.1035“CouncilagreesontheCarbonBorderAdjustmentMechanism(CBAM)”.CounciloftheEU,March2022.Accessed22ndAugust2022.36 Cosbey,Aaron(n30)37 EuropeanParliamentresolutionof10March2021“TowardsaWTO-compatibleEUcarbo

183、nborderadjustmentmechanism”.Accessed14thSeptember,2021.https:/www.europarl.europa.eu/doceo/document/TA-9-2021-0071_EN.html38 Hook,Leslie(n32)39“TradeRelatedAspectsofaCarbonBorderAdjustmentMechanism.”EuropeanParliamentPolicyDepartmentforExternalRelations,April2020.Accessed15thSeptember,2021.https:/ww

184、w.europarl.europa.eu/thinktank/en/document.html?reference=EXPO_BRI(2020)60350240 ibid.2041 Marcu,Andreietal.“BorderCarbonAdjustmentsintheEU.”EuropeanRoundtableonClimateChangeandSustainableTransition,October2020.Accessed16thSeptember,2021.https:/ ibid,p.1943 Bacchus,James.“LegalIssueswiththeEuropeanC

185、arbonBorderAdjustmentMechanism”CATOInstitute,August2021.Accessed20thSeptember,2021.https:/www.cato.org/briefing-paper/legal-issues-european-carbon-border-adjustment-mechanism44 ibid,p.345 DominicanRepublicImportandSaleofCigarettes,ABReport,para96.46 ibid.47 Marcu,Andreietal.(n41)p.2148 UnitedStatesI

186、mportProhibitionofCertainShrimpandShrimpProducts,ReportoftheAppellateBody,WorldTradeOrganisation,WT/DS58/AB/R,October12,1998,para136.https:/docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=Q:/WT/DS/58ABR.pdf&Open=True49 Lamy,Pascal(n10),p.850 KonradAdenauerStiftung(n29)p.3551 ibidp.7452 Tsafos,N

187、ikos.“HowCanEuropeCanCarbonBorderAdjustmentRight?”CenterforStrategic&InternationalStudies,August2020.Accessed27thSeptember,2021.https:/www.csis.org/analysis/how-can-europe-get-carbon-border-adjustment-right53 KonradAdenauerStiftung(n29)p.4254“Carbonbordertariffs:Theshapeofthingstocome”NortonRoseFulb

188、right,April2021.Accessed27thSeptember,2021.https:/ EuropeanCommission(n14)56 Fischer,Carolyn(n3)57 Mrsdorf,George(n7)58 Markkanen,S.,Viuales,J.,Pollitt,H.,Lee-Makiyama,H.,Kiss-Dobronyi,B.,Vaishnav,A.etal.“OntheBorderline:theEUCBAManditsplaceintheworldoftrade”CambridgeInstituteforSustainabilityLeader

189、ship,2021.Accessed6thApril2022.https:/www.cisl.cam.ac.uk/files/cbam_report.pdf59 Kurmayer,NikolausJ.“ScholzwalksEUtightropeinpushforinternationalclimateclub”Euractiv,January2022.Accessed6thApril,2022.https:/ Parry,Ianetal.“ProposalforanInternationalCarbonPriceFloorAmongLargeEmitters”InternationalMon

190、etaryFund,June2021.Accessed28thSeptember,2021.https:/www.imf.org/en/Publications/staff-climate-notes/Issues/2021/06/15/Proposal-for-an-International-Carbon-Price-Floor-Among-Large-Emitters-46046861 Fischer,Carolyn(n4)p.300;alsoseeDervis,Kemal“Theconfusinganddifficultissueofcarbonpricing”TheBusinessT

191、imes,August2021.Accessed28thSeptember,2021.https:/.sg/opinion/the-confusing-and-difficult-issue-of-carbon-pricing62 Quirion,Philippe.“Output-BasedAllocation and Output-Based Rebates:A Survey”FrenchAssociation of Environmental and ResourceEconomists,2021.Accessed30thSeptember,2021.https:/ideas.repec.

192、org/p/fae/wpaper/2021.03.html63“Allocation”InternationalCarbonActionPartnership.Accessed30thSeptember,2021.https:/ Kaufman,Noahetal.“Output-BasedRebates:AnAlternativetoBorderCarbonAdjustmentsforPreservingUSCompetitiveness”CenteronGlobalEnergyPolicy,December2020.Accessed27thSeptember,2021.https:/www.

193、energypolicy.columbia.edu/research/commentary/output-based-rebates-alternative-border-carbon-adjustments-preserving-us-competitiveness65 Fischer,Carolyn(n3)66 Bhringeretal.“Theefficiencycostofprotectivemeasuresinclimatepolicy”UniversityofOldenburg,August2016.Accessed30thSeptember,2021.https:/www.eco

194、nstor.eu/bitstream/10419/148227/1/865264376.pdf;seealsoMonjon,StephanieandQuirion,Philippe“AddressingleakageintheEUETS:Borderadjustmentoroutput-basedallocation?”EcologicalEconomics,2011.Accessed30thSeptember,2021.https:/econpapers.repec.org/article/eeeecolec/v_3a70_3ay_3a2011_3ai_3a11_3ap_3a1957-197

195、1.htm67 Kaufman,Noahetal.(n64)68“Allocation to industrial installations”European Commission.Accessed 30th September,2021.https:/ec.europa.eu/clima/policies/ets/allowances/industrial_en69 Sato,Misato.“EUETSreform:Howtotackleclimatechangeandcarbonleakage”GranthamResearchInstituteonClimateChangeandtheE

196、nvironment,February2016.Accessed30thSeptember,2021.https:/www.lse.ac.uk/granthaminstitute/news/eu-ets-reform-how-to-tackle-climate-change-and-avoid-carbon-leakage/70 Acworth,Williametal.“CarbonLeakageandDeepDecarbonization”InternationalCarbonActionPartnership,June2020.Accessed30thSeptember,2021.http

197、s:/ Quirion,Philippe(n62)p.972 Fischer,Carolyn(n3)p.30321AbouttheSingaporeInstituteofInternationalAffairs(SIIA)Insights Networks AccessEstablishedin1962,theSingaporeInstituteofInternationalAffairs(SIIA)isanon-profitandindependentthinktankcommittedtoproducingpolicyanalysis,fosteringin-depthdialoguesa

198、ndbridginggapsbetweenpolicymakers,privatesectordecision-makersandexpertstoshapepublicpolicyandsocialresponses.CentredaroundASEANfocusedthemes,theinstituteaimstodeliverpolicyanalysisininternationalaffairsandonissuesdrivingenvironmentalsustainability.TheSIIAhasbeenconsistentlyrankedasoneoftheleadingth

199、inktanksinSoutheastAsiaandthePacific,intheGlobalGoToThinkTankIndexbytheUniversityofPennsylvania.Since2017,theSIIAwasrankedtheNo.1independentthinktankinAsia.Itwasalsorecognisedasoneofthetop50thinktanksglobally,excludingtheUnitedStatesofAmerica.Fortwoconsecutiveyearssince2019,itwasrecognisedastheNo.1t

200、hinktankinSouthAsia,SoutheastAsia,andthePacific(excludingIndia).In2020,itwasalsorecognisedasoneofthethinktankswiththebestpolicyandinstitutionalresponsetotheCOVID-19pandemic.AbouttheSIIAsSustainabilityProgrammeTheSIIAsSustainabilityProgrammewasestablishedin1997whenitorganisedSingaporesfirsthazedialog

201、uewiththeSingaporeEnvironmentCouncil.Sincethen,theSustainabilityProgrammehasevolvedtoaddressarangeofsustainabilityissuesASEANfaces.TheProgrammecontinuestofocusontheforestrysector,aswellasusinggreenfinanceandcarbonfinancingasleverstoadvancesupplychainsustainabilityanddriveSoutheastAsiasgreenrecoveryf

202、romtheCOVID-19pandemic.As part of its Sustainability Programme,the SIIA facilitates dialogues between governments,privatesector,academiaandNGOs.OneoftheSIIAskeyplatformsisitsflagshipevent,theSingaporeDialogueonSustainableWorldResources(SDSWR),launchedin2014.Theannualeventattractsabout300high-levelpa

203、rticipantstodiscussbestpractices,newcommitmentsandnoteworthycross-sectorcollaborationsinASEANsresourcesector.2022SingaporeInstituteofInternationalAffairsForfurtherinformation,contacttheSIIAat:60AOrchardRoad,#04-03Tower1TheAtriumOrchard,InternationalInvolvementHubSingapore238890t|+6567349600 f|+6567336217e|membershipsiiaonline.orgw|www.siiaonline.orgSingaporeInstituteofInternationalAffairsthink.siiasiia_tweetsiia_sgRankedNo.1IndependentThinkTankinAsiaASEAN-ISISNetworkofThinkTanksAsiaSociety(USA)StrategicPartnerUNECOSOCConsultativeStatus