Carbon tax's WTO test and opportunities

The change in political leadership in the US has signalled large-scale impairment of multilateral institutions.

- RAJEEV KHER & ANSHUMAN GUPTA

The World Trade Organization is of particular interest to Donald Trump. However, this will hit the developing world hardest at a time when these countries need it most to protect themselves from environmental regulations like the Carbon Border Adjustment Mechanism (CBAM).

The WTO does not have any specific agreement on environment. However, Article XX of the General Agreement on Tariffs and Trade (GATT) allows exceptions to free trade with adequate safeguards. The European Union (EU) claims it to be WTO-compliant. According to the EU, CBAM is non-discriminatory, as it does not violate the most-favoured nation (MFN) and national treatment (NT) clauses of the GATT. The EU has justified protecting the environment and restricting free trade under GATT articles XX(b) and XX(g). Article XX(b) is used to protect human, animal, or plant life or health, while Article XX(g) is applied for conserving exhaustible natural resources.

However, critics have opposite views stating that it violates the core provisions of the GATT, like Article I (relating to MFN treatment), Article II (tariff schedule), and Article III (NT). According to them, certain features of the CBAM—such as exempting some countries from its application, providing allowances for carbon prices paid in the country of origin, and estimating embedded emissions based on non-product-related process and production methods (NPR PPMs)—violate the MFN and NT principles.