China Calls EU’s Carbon Border Tax Proposal WTO-Inconsistent

The European Commission recently proposed a package of legislative measures to reduce the EU's carbon emissions by at least 55% by 2030, including a Carbon Border Adjustment Mechanism (CBAM). This proposal has drawn criticism from Chinese officials and experts, who argue that it violates WTO obligations, as well as principles of the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement.

On July 26, the spokesperson of China’s Ministry of Ecology and Environment, Liu Youbin, said at a press conference that the EU CBAM is a “unilateral measure” and “extends the climate issue to the trade field out of proportion”; and it violates WTO rules and is inconsistent with the principles of the UNFCCC and the Paris Agreement. Instead of new barriers, Liu argued that lowering tariffs, reducing trade barriers, and facilitating trade and investment can help push for sustainable development world-wide, and that multilateralism is the only way out of global problems such as climate change. The full text of Liu’s statement is in Annex I.

In addition to the government’s response, a number of Chinese academics and other policy experts have evaluated the European proposals. Echoing Mr. Liu, Wang Mou, an analyst at the Institute of Ecological Civilization of China Academy of Social Science, said in an interview that the EU CBAM ignored the principle of “common but differentiated responsibilities.” Even though it may have a limited impact on Chinese exports for now because of its initial narrow scope of application, it may be expanded to other areas later, which would pose a challenge to the normal economic and social development of China and other developing countries, Wang said.

Reports on the EU CBAM have pointed to countries such as China, Russia, and Turkey as those likely to be most impacted by the measure. Researchers at Tsinghua University’s Centre for Industrial Development and Environmental Governance found in May that although China is the primary target of such policies in the European Union and the United States, in the long run the impact on China will be reduced as China accelerates its energy transformation.

Chinese scholars also considered the CBAM to have other political motives that go beyond environmental protection. Zhang Xiaotong, a professor of Fudan University, stated during an interview that the CBAM was designed to prevent carbon leakage and prevent high-emission companies from relocating, on the one hand, but, on the other hand, to enhance the EU’s industrial competitiveness and weaken the technological and price advantages of overseas manufacturing companies and raw material sellers in other countries. Wang Sidan, a lecturer at the Institute of International Relations of China Foreign Affairs University, said during another interview that the proposal was targeted at enhancing the EU's global influence and was one of the key measures to materialize its global climate leadership.

The CBAM is part of a “comprehensive and interconnected set of proposals” that would help meet the EU's ambitions to reduce carbon emissions, according to the European Commission. Aiming at “ensur[ing] that European emission reductions contribute to a global emissions decline” and “align[ing] the carbon price on imports with that applicable within the EU,” the mechanism would impose levies on imports that correspond with the charges imposed within the EU. The CBAM will initially apply to selected goods with a high level of carbon leakage such as iron, steel, cement, fertilizer, aluminum and others, according to the proposal.

The Commission's CBAM proposal will now face legislative scrutiny within the EU, with the Council and the Parliament individually drafting amendments. The final version, which could be completed during the second half of 2022, has to be adopted by both the Parliament and the Council before it can enter into force in 2023, as suggested by the Commission. While the EU's trading partners have raised questions about the WTO-consistency of this proposal, the Commission insists that it is compatible with the WTO. Back in March 2021, the European Parliament adopted a Resolution supporting the adoption of a CBAM provided it is compatible with the WTO.

Annex I:

Remarks of Liu Youbin, spokesperson of China’s Ministry of Ecology and Environment:

Tariffs reduction, trade barriers reduction, trade and investment liberalization and facilitation are the key guarantors of active response to climate change, promotion of sustainable development throughout the world, and the establishment of a community with a shared future for mankind.

The CBAM is essentially a unilateral measure. It extends the climate issue to the trade field out of proportion. It violates WTO rules, conflicts with the free and open multilateral trading system, seriously sabotages the mutual trust of the international community and the prospects for economic growth. It is also inconsistent with the principles and requirements of the United Nations Framework Convention on Climate Change and the Paris Agreement, in particular the principles of common but differentiated responsibilities, and the “bottom-up” institutional arrangements of nationally determined contributions. It will foster unilateralism and protection, and will greatly crack down the enthusiasm and ability of all parties to deal with climate change.

China has always believed that multilateralism is the only way to solve global problems. All countries are part of a community with a shared future when facing the challenge of global climate change. We should adhere to multilateralism, the principle of common but differentiated responsibilities, and the system of nationally determined contributions. We should fight climate change hand-in-hand through adopting broader global cooperation, under which countries would take actions in line with their respective national conditions.