Pitfalls of the EU’s Carbon Border Adjustment Mechanism

Abstract

The European Union (EU), which has led international discussions on global warming, officially announced its plan for the Carbon Border Adjustment Mechanism (CBAM) in July 2021. Many existing studies have indicated the CBAM will curtail greenhouse gases, and will subsequently be positive in terms of reducing global warming. However, serious legal issues and trade disputes are expected in terms of the compatibility of the CBAM with the trade rules of the General Agreement on Tariffs and Trade (GATT). Contrary to the EU’s explanation, the international community has a strong view of CBAM as a new trade barrier under the guise of preventing global warming. Above all, this is because it is an arbitrary measure by the EU and not the one that has been internationally agreed upon. Therefore, this paper tries to identify the pitfalls and estimate the global cost of CBAM, arguing that the mechanism is not in line with international trade rules, and that many countries will not sit back and suffer from it. The world economy will inevitably face a vicious cycle of trade retaliation. The CBAM will drive up trade costs and cause another trade distortion. While the goal of preventing climate change is good, the CBAM scheme is too costly for the world economy.