The WTO’s 14th Ministerial Conference (MC14) concluded recently in Yaoundé, Cameroon. In MC14, developing countries and LDCs (least developed countries) raised significant concerns regarding the EU’s Carbon Border Adjustment Mechanism (CBAM), viewing it as a potentially disguised protectionism that unfairly burdens weaker economies.
While the CBAM is allegedly designed to prevent carbon leakage, its compatibility with WTO law remains widely disputed. Many countries, including India, China, Brazil, and South Africa, have challenged the legality of CBAM at the WTO DSB (Dispute Settlement Body), characterising it as a discriminatory, protectionist measure disguised as climate action. They argue that CBAM violates core WTO principles and unjustly penalises exports of developing economies by imposing high carbon costs on industries such as steel and aluminium.
Is CBAM compatible with the WTO’s non-discrimination principle?
The WTO’s principle of non-discrimination ensures fair global trade through two core rules: Most-Favoured Nation (MFN) treatment and National Treatment (NT).
MFN Treatment: This principle, enshrined in GATT Article I, requires that any advantage granted to the product of one country must immediately and unconditionally be extended to “like products” from all other WTO members. It also ensures the imposition of non-discriminatory tariffs and fees. For instance, if Country A lowers duties on a product from Country B, it must immediately extend the same low tariff on the same product from all other WTO members. Meaning thereby, a country cannot impose more stringent import regulations on products from one member country than on those from another. Also, internal taxes on imported products must not be applied in a discriminatory way based on the country of origin.
Although CBAM is meant to be neutral, in practice, it treats similar products differently by taxing imports based on the carbon emissions generated during their production. It also takes into account whether the exporting country already has a carbon price. As a result, two like products could face different costs depending on the country of origin, violating the fundamental principle of trade that “like products” should be treated alike.
In EC-Seal Products, the WTO Appellate Body (AB) held that any measure that modifies the conditions of competition between like imported products to the detriment of the third-country imported products violates Article I, even if a measure is based on a “legitimate regulatory distinction”.
National Treatment: The principle of National Treatment, enshrined in GATT Article III, requires all WTO members to treat imported products no less favourably than domestic products with respect to internal taxes, regulations, and laws. It prevents protectionism by ensuring imported goods are not disadvantaged once they pass customs. Meaning thereby, imported goods cannot be subjected to higher taxes or stricter regulations than ‘like’ domestic products and hence laws affecting the sale, purchase, or distribution of products must provide equal competitive conditions for imports. For instance, a law taxing imported products more heavily than a ‘like’ domestic product violates Article III.
The EU justifies its compliance with the National Treatment requirement by deliberately tying CBAM to its domestic products. Since under the EU’s Emissions Trading System (ETS) domestic producers already pay a carbon tax, the CBAM aims to apply the same tax to imported products.
Despite closely tying CBAM to the ETS, the mechanism still violates Article III because it differentiates products based on process and production methods (PPM). To determine the likeness of products, the WTO DSB relies on the four-tier test: physical properties, same end use, consumers’ tastes, and international tariff classification. Additionally, the WTO AB has also held that differentiation between production methods does not make products distinct if the four criteria are still met.
How does CBAM fit?
The EU primarily justifies CBAM as a General Exception under GATT Article XX, which allows members to take trade-restrictive measures for environmental protection and the conservation of natural resources, provided the measures are not arbitrary or discriminatory.
The EU argues that CBAM is a measure relating to the conservation of exhaustible natural resources (clean air and stable climate) that falls under Article XX(g). In Canada-Herring and Salmon, the panel defined “relating to” as a measure mainly aimed at conservation of natural resources. While past panel reports like US-Gasoline accepted clean air, living species, and gasoline as an exhaustible natural resource, which the US was trying to protect by controlling air pollution caused by the consumption of gasoline.
For CBAM, the EU must show that by reducing carbon emissions, it is trying to protect an exhaustible natural resource (a stable climate). But since carbon emissions themselves aren’t a resource, it’s uncertain whether a WTO panel would accept this interpretation.
Furthermore, the EU also justifies CBAM under Article XX(b), arguing it protects human, animal, or plant life or health, specifically by preventing ‘carbon leakage.’ As in Thailand-Cigarettes, the panel ruled that a measure is not “necessary” if a less restrictive alternative is reasonably available.
Thus, if challenged, the EU would have to prove that no other less restrictive measures than CBAM could achieve the relevant goal of protecting “human, animal, or plant life or health”.
The writer is teaching faculty, Faculty of Law, University of Delhi
Published on April 7, 2026