Thread by @TomWlost

An important voice in the debate about #CBAM and its compliance with WTO rules. Here, major critique from a leading expert on WTO law, James Bacchus. /Thread

https://twitter.com/CatoTrade/status/1446905059812560899

First, let me just note that nothing I write below should be taken as my attempt to question Mr. Bacchus' interpretation of WTO law. He is a legend of WTO. Twice the chairman of WTO Appellate Body. An expert and authority like no other. Hats off. /1

To make a long story short, Mr. Bacchus notes four potential problems with CBAM. He sees potential violations of the following clauses of the GATT:
- art. I (Most Favored Nation);
- art. II (bound tariffs);
- art. III (national treatment); and
- art. XX (exceptions).
/2

On MFN, Mr. Bacchus simply notes that imposing #CBAM on imports may violate the WTO duty not to treat less favorably like products imported from different countries. /3

The idea would be that a coil of the same grade of hot-rolled steel from Russia and Brazil could face a different CBAM, even though it appears to be the same product. /4

However, Mr. Bacchus side-steps the key issue here: are two coils of steel, with the same grade, same physical characteristics, really "like products", if they were produced through different methods leading to completely different emissions? /5

Those with good understanding of WTO law know there is a long debate and some GATT/WTO jurisprudence on whether the so-called PPMs (Process and Production Methods) can be taken into account when analyzing if two products are really "like products". /6

I won't attempt to summarize the jurisprudence here, but I think its fair to say that in general, PPMs have been until now largely rejected when assessing "likeness". /7

For CBAM purposes this would mean that two products appearing the same should be treated the same, even if one was manufactured in a horribly polluting fashion, while another was completely "green." /8

That said, the cases leave room for arguing that PPMs could be considered. That is particularly the case, if consumer perception justifies treating the products differently. In prior cases, this was not proven. Perhaps it could be proven now. /9

In general, some experts argue the world & climate/environmental protection has moved on since old WTO cases. There's reater understanding sth must be done abt climate. Changing the interpretation of "likeness" could open the door for WTO-compliant environmental measures. /10

Mr. Bacchus knows all of this much more than I do, so I assume he omitted this discussion for a reason. Probably not to get bogged down in it (as I just have). /11

My main point here is only that the issue of art. I (and III) violation really hinges on how we define "likeness". So the jury may be out on this one. /12

Moving on: art. II & bound tariffs. In a nutshell, each WTO member has committed to a maximum customs duty on imports of each product. Bacchus notes that to the degree that CBAM charges, when added on top of customs duties, exceed that maximum, this clause would be violated. /13

He also notes that EU will defend CBAM as not really a "border measure", since it is paid after importation, so it is an internal regulation. /14

Just to recall: CBAM will be paid not by foreign exporters, but by EU importers, who will submit an annual declaration listing all of their imports in the past year & associated emissions, together with a calculation of how many CBAM certificates should be surrendered. /15

Bacchus questions this defence noting that the payment of CBAM "would be triggered by the act of importing". This is only partially true. Imports of CBAM covered goods will be subject to payment of CBAM only if other conditions are met. /16

For example, CBAM would not be due 1) for imports from countries exempted as having an ETS equivalent; 2) if emissions were zero or lower than EU benchmark, 3) if carbon has already been paid for in the country of export. /17

This may, or may not, have WTO significance. I am just pointing this out to highlight that it takes more than just importation of a CBAM-covered product to trigger the duty to actually pay. /18

To be fair, there is automaticity in applying the CBAM regulations (i.e., bureaucratic burden) to all CBAM imports. But the CBAM itself would not automatically have to be PAID for all imports. /19

It is also a good observation by Bacchus that the duty to pay CBAM "would not accrue due to an [EU] internal event - such as distribution, sale, use or transportation of the imported product." He is correct that in this sense, the act of importation triggers CBAM./20

Perhaps this is something that the EU legislator can take a look at and consider whether moving the CBAM obligation one step further down the line would make sense from a legal perspective. /21

Third, and this is where Mr. Bacchus has omitted a key element of the CBAM structure, he claims that CBAM - by continuing to envision the provision of free ETS allowances to CBAM sectors - provides "double-protection" and hence violates art. III GATT/national treatment. /22

However, the CBAM proposal makes clear that CBAM on imports would be charged only after subtraction from the CBAM bill of free allowances granted to the domestic industry. /23

Perhaps the provision above can be improved ("adjusted" does not specify how; although sec.2 talks about "reduction").

That said, EU industry will not get double-protection. For practical purposes, it will be as if foreign exporters were getting free allowances as well. /24

An EU producer and a foreign producer with identical emissions will pay for exactly the same share of emissions above the benchmark: an EU producer because of his free allowances; a foreign exporter because free allowances of EU industry will be deducted from his CBAM bill. /25

Fourth, prof. Bacchus seems to doubt whether CBAM will really fit as neatly into the art. XX exemption for "protection of human & animal life" and for "conservation of exhaustible natural resource" as the EU would like.

Here, four of Prof. Bacchus' points should be noted. /26

He recalls that for art. XX to apply, EU must prove CBAM is "necessary" to achieve the objective (protection of climate) as there is no "reasonably available alternative". /27

Prof. Bacchus suggests that there is an alternative: a carbon tax!

That is a very novel claim.

If this alternative is so readily available why hasn't the US adopted it yet? 😉 /28

Prof. Bacchus strongest point from WTO perspective is about EU refusing to accept that other countries can achieve their own climate-targets in their own way and CBAM should provide for that. /29

He asks who gave the EU the right to demand that everyone have an ETS system that is exactly like the EU system (the only one exempted from CBAM). There is no mechanism for CBAM to consider the adequacy of other (non-ETS) measures and this indeed is a fact. /30

To be fair, CBAM considers carbon pricing in other countries and this can be deducted from the CBAM bill. But Bacchus is right that with CBAM, EU assumes that ETS is the only way to achieve the climate objective. This may run into WTO problems. /31

This is where Bacchus doesnt do CBAM full justice, noting that since WTO concerns itself w/ treatment of products, not countries, EU shouldnt focus all of its attention exclusively on whether exporting countries have an ETS-like system, but should look at products themselves. /32

But this is exactly what CBAM does. First, it has an elaborate system for analyzing the emissions from the product itself. It may rely on country-specific default values, but only as a last resort; the primary focus is on the exporter. /33

It allows the importer to deduct from CBAM bill price paid for emissions from imported product in a 3rd country.

The CBAM system is actually quite good in analyzing the v specific situation of imported product. Of course how this will work in practice, we will only find out. /34

Lastly, v interesting observations on whether art. XX exemption has a jurisdictional element, i.e., whether EU can use art XX to fight climate change in 3rd countries.
Given the nature of his paper (only 7 pages), he only touches on the topic. But a fascinating topic indeed./35

That said, I strongly encourage everyone interested in #CBAM to read prof. Bacchus paper. It is excellently written, narrows in on most important/hard issues. A true joy to read. 36/36 @CatoTrade

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