Law and Governance of Carbon Border Adjustments

3.1. Qualitative Governance Analysis Cap-and-trade schemes and tariffs are economic instruments directly or indirectly regulating the quantity of (emission-intensive) goods and can effectively address governance problems [9,32]. However, the extent of governance problems avoided and, eventually, the degree to which a given policy achieves its sustainability goal depends on the choice of an appropriate design involving scope, methods for assessing carbon contents, the ambition of the cap, and utilization of the revenues of the carbon border tax [32,113]. The instrument’s coverage, stringency, and timing influence rebound, enforcement, and sectoral, geographic, or resource related shifting effects, such as carbon leakage [9,114,115]. Furthermore, problems of depicting and lack of ambition through overly broad terms, loopholes, and exemptions further limit the effectiveness of any sustainability economic instrument [32,34]. Overall, the wider the sectoral and geographical scope, including upstream production, the more ambitious the caps and the easier governance units can be grasped, the more effective will be a quantity regulating economic instrument [9]. This bears the questions: what does this mean with regard to CBAM? 3.1.1. CBAM as Quantity Governance Instrument First, the CBAM in the CBAM Regulation is an economic instrument regulating quantity to reduce carbon leakage and thus level the competitiveness playing field. The four main policy instruments of environmental regulation are regulatory or “command and control” instruments, voluntary and educational measures, as well as subsidies and market-based or economic measures, and CBAM belongs to the latter [46,116] (on the regulatory nature Recital 20 CBAM Regulation, CBAM Proposal [117]). Among the economic instruments, CBAM can be considered as an additional carbon regulation [115,118] and will require importers of goods into and sold in the EU domestic market [119] to pay a price equal to the ETS imposed by the EU domestic carbon price for the embedded emission arising during the production process upon import beginning 2026 (Article 1 (1), Article 2, Recital 15 CBAM Regulation [120,121,122]). Thereby, if properly designed, CBAM will regulate quantity and impose indirect price pressure on the norm addresses, which are in line with the principles of liberal democracy and guided by the polluter pays principle, free to choose flexibly between efficiency, consistency, and sufficiency [9,32,118]. 3.1.2. Depicting, Shifting, and the Relevance of Scope and Governance Units Second, the scope of CBAM includes its norm addresses, carbon content, sectoral and special scope, and governance units. The literature holds that, generally, the extent to which CBAM captures carbon and a wide range of products while putting an adequate price on imports is key to preventing shifting effects as well as challenges for competitiveness [118]. The norm addressees included in the scope of CBAM [35] are any global importers of cement, electricity, fertilizers, iron and steel, aluminum, and hydrogen (Recital 27 CBAM Regulation) [120,123] or processed products containing these goods, when they are imported from third counties into the customs territory of the Union including any other structure in the exclusive economic zone (12 miles) of a Member state of the European Union, which is bordering said customs territory (Article 2, Recitals 18, 32–40, Annex I CBAM Regulation). The scope of CBAM is thus sector-specific, targeting the industries of “utmost concern” [118,124] (p. 238), and is intended to be gradually extended beyond the six emission-intensive sectors prone to carbon leakage to including other sectors and products vulnerable to this problem (Recital 13 CBAM Regulation) [120] eventually meeting the sectoral scope of the ETS Directive by 2030 to include more emission-intensive sectors (Recital 67 CBAM Regulation) [28,123]. Though, there remains criticism from civil society organizations about the scope of CBAM not being expansive enough [120,125]. The governance units of the CBAM are GHG emissions of the different goods expressed in CO₂ equivalents (Annex IV CBAM Regulation), together with the GHG measurement procedures, which are essential to addressing the governance problem of depicting. This problem describes the challenges of determining and quantifying the amount of GHG of a specific good and, if not addressed, is inducive to other governance problems such as carbon leakage or shifting effects [126]. Hence, the question is which GHGs are included in the scope of the CBAM and to what extent the measurement mechanism proposed accurately captures the GHG emissions of the goods of the three sectors aluminum, steel and iron as well as electricity. The GHGs included in the scope of CBAM are carbon dioxide (CO₂), nitrous oxide (N₂O) and perfluorocarbons (PFC), which is a long living and highly potent GHG (around 7000 to 11,000 times the strength of CO₂) (Annex IV CBAM Regulation) [63,127]. More precise definitions of goods, of the goods falling under the sectors and methods of emission calculation emissions are specified in the Implementing Regulation of the CBAM (Article 7 (1)–(4), Recital 7 (a), Annex IV, CBAM; Annex II and III CBAM Implementing Regulation, as relevant to the calculation of embedded emissions of complex goods, Amendment No. 3 of the European Parliament changing Annex IV, point 3, para. 1, subpara. 5 [38]). These GHGs have different global warming potentials (GWP), that is, the amount of energy that 1t of a specific gas emitted will absorb in x time, compared to 1t of CO₂ [128]. CO₂ has a GWP of 1, whereas N₂O has a GWP of 273 for 100 years, and PFCs range between 0.0004 and 12.400, with overall at least 7.380 [129]. It can be criticized that together with other potent emissions and air pollutants arising from the production of iron and steel, aluminum and electricity, methane, the second largest GHG after CO₂, which accounts for approximately 30% of global warming with a GWP of 29.8 [129] is not included in the scope, especially, as 40% of total methane emissions are attributable to the energy sector (which is limited to CO₂) [86]. This seems largely at odds with the GHG included in the scope of the EU ETS, which also covers Methane, Hydrofluorocarbons (HFCs), and Sulphur Hexafluoride (SF6) and bears the question to what extent imported products receive differential treatments (Annex II, ETS Directive). Moreover, despite extensive research on GHG emission measurements, the problem of accurately depicting GHG persists. Notably, because emission measurements depend on a variety of factors beginning with the methodology [48], conditions of the production site such as type of fuel, climatic circumstances, and technology [83]. Furthermore, due to lagging infrastructure, high-quality measurement and reporting of indirect emissions is limited in several countries [130]. It becomes relevant then to ask how GHG measurement is operationalized in the case of the CBAM. The CBAM covers simple goods, where only input materials are required during the production process, or complex goods (Recital 7 (a), Annex IV (1)). The amount of CBAM certificates depends on imported goods’ embedded GHG emissions (Article 1 CBAM Regulation) [20,131], meaning the direct emissions arising from the production process until the import and indirect emissions generated from the electricity input during the production process calculated based on default values (Articles 2, 7, Recital 19 CBAM Regulation) [124]. Embedded emissions should be actual, and for simple goods, that means the sum of direct and indirect emissions attributable to the installation where a good was produced divided by the amount of goods produced in the installation (Annex IV, 2 CBAM Regulation). In the case of complex goods, the relevant embedded emissions of input materials are also added to the attributed emissions (Annex IV, 3 CBAM Regulation). After the amendments, this calculation no longer includes input materials as relevant to the system boundaries of the production process but only those precursors as listen in Annex I and originating in countries other than those excluded pursuant to Annex III point 1 [38]. Currently, the majority of emissions are captured at the production level and upstream emissions, which is recommended, while in the future, the emission from downstream production may be covered more extensively (Recital 28 CBAM Regulation; exemptions apply for aluminum and steel precursors’ embedded emissions, see below and Article 1 (5), Recital 13 Proposal for CBAM Regulation Amendment). A major critique points to the limited coverage here: currently, these conditions make that no semi-finished or finished goods are included while, especially, semi-finished products in the steel sector [132] are prone to carbon leakage [133]. Importantly, by dispensing with the production process system boundaries, the CBAM excludes and makes the calculation of embedded emissions of complex goods less flexible or adaptive and more shoe-box based. It will be questionable whether this simplifies a challenging process of calculating emissions or whether it makes the CBAM less ambitious and more vulnerable to circumvention practices. The CBAM avoids the common challenge of defining what a direct emission is, as it accumulates the emissions from different outlined production steps, and it will be the importers’ duty to report and verify emissions (see more here [134]). Moreover, emission measurement is facilitated for emission-intensive and trade-exposed sectors covered in the initial phase, where publicly available data is readily retrievable [135]. Additionally, the CBAM’s focus on GHG emissions other than exclusively carbon emissions and the inclusion of process emissions in addition to combustion emissions, if correctly monitored, yields large potential in terms of accurately depicting and preventing carbon leakage for a more complete carbon pricing [135,136]. However, a major limitation to the boundaries of GHG measurement during the initial phase of the CBAM is, that the exclusion of indirect imports also excludes a majority of imported fossil fuel from being captured by CBAM [16,20]. While focusing on capturing the direct emissions of such energy-intensive sectors seems intuitive, this risks incentivizing carbon leakage by outsourcing energy production [131,134]. However, where actual emissions cannot be determined and for the calculation of indirect emissions, default values grounded in the “best available data” should be used (Article 7, Annex IV, 4 CBAM Regulation). Following the Commission Amendment Proposal, default values will be calculated based on the “average emission intensity of the ten countries with the highest emission intensities for which reliable data exists” [137] (p.21). This thus marks a departure from hybrid country-and-goods and installation-based tariffs to a purely country-based one-for-all tariff (Annex IV (4) CBAM Regulation), which simplifies reporting, is less cost-efficient globally and more vulnerable to carbon leakage [18,118]. Moreover, reliance on default factors can diminish incentives to invest in clean energy technologies and risk distorted end results [138]. However, under the amendments, importers will be able to choose between calculating actual embedded emissions or using such default values with a markup, which might yield incentives to prove individual actual emissions along the argumentation of an “individual adjustment mechanism” proposed by Mehling and Ritz [137,138]. The calculation of emissions is delineated for aluminum, steel and iron as well as electricity, complex goods, goods with precursors subject to the ETS and upstream aluminum, iron and steel production stages. In the cases of aluminum, iron and steel, as well as electricity, only direct emissions are included (Annex II CBAM Regulation). To further narrow down the emissions of electricity captured by the CBAM, under the Parliament Amendments No. 1 and 2, electricity generated in the exclusive economic zone of an EAA Member State or upon direct import into the Union customs territory was excluded from the CBAM scope (Article 2 para. 3b new) [38]. Direct emissions of electricity include carbon emissions from the combustion of carbon containing fuels (incl. waste; Annex III. B.9.1. CBAM Implementing Regulation; Article 1 (26) Proposal for Amendment of the CBAM Regulation; see also [137]) and process emissions from flue gas treatment calculated based on default values (Annex II, 3.19. CBAM Implementing Regulation). The exclusion of indirect emissions, in addition to wider use of countries-specific default values, makes the CBAM more vulnerable to cost-shifting and has more negative repercussions for the importers ‘competitiveness and welfare [18]. To avoid double counting, the embedded emissions of complex goods should not include embedded emissions of any precursor or input material if they are subject to an EU ETS or comparable price systems fully linked with the ETS (Article 1 (27), Recital 14 Proposal for Amendment of the CBAM Regulation; [137]). Also, the manufacturing (upstream) stages of some aluminum and steel goods will be excluded from the calculation of actual embedded emissions (Article 1 (13), CBAM Amendment). The rationale, according to the Commission, is that the administrative burden of operators can be reduced because embedded emissions from precursor production, such as bauxite mining and refinement, contribute to the largest extent to the actual embedded emissions of the imported good while the later manufacturing stages have only minor emissions [137] (pp. 21–22). The scope of CBAM is subject to some further limitations. On the one hand, CBAM’s reporting duties will be largely eliminated for small importers (such as individuals and SMEs) of goods below accumulated 50 tones net mass or less than 100 tones of embodied CO₂ emissions annually in the four sectors of iron and steel, aluminum, fertilizers, and cement but not electricity and hydrogen (Article 1 (1) (b) Proposal for CBAM Regulation Amendments) [137,139,140,141,142,143]. The reason was that the baseline expectation of the number of importers subject to CBAM turned out to be 10 times too low. Instead of 20,000 importers, 200,000 were included in the scope of CBAM [137] (p.4). Under the Amendment, the overly large group of addressees will be reduced to facilitate enforcement, exempting 90% of the SME importers and narrowing down the applicability of CBAM to the largest emitters among the importers, thus keeping the scope of embodied emissions covered at 99% and replace the existing exemption of goods below 150 euro thus using a better proxy for embedded emissions than monetary value as previously envisioned [137,140,141,143]. Moreover, large CBAM importers will be able to delegate the capacity to submit CBAM declarations to a third party [137]. On the other hand, CBAM lays out exemptions from the purchasing and surrendering obligation of certificates under three conditions. First, importers from countries where a carbon tax, which is linked to the EU ETS system, results in a carbon price being “effectively paid” on the good are exempted or receive reductions (Article 2 (6) (a–b), Recital 16 CBAM Regulation, see also Article 1 (26) Proposal for Amendment of the CBAM Regulation) [144]). The wording of “effectively paid” currently lacks clarity [145] and likely excludes any non-market based measure and “positive indirect carbon pricing” while welcoming command and control measures as long as any of these are oriented towards the carbon amount of the product and thus more easily verified [146,147] ([148] (p.173)). Alternatively, exemptions apply until 2030 and under specific conditions where an electricity market is fully integrated into the Union’s internal market and where technical hindrances obstruct the application of CBAM (Article 2 (7), Recital 56 CBAM Regulation, see also Article 1 (26) Proposal for Amendment of the CBAM Regulation). Lastly, CBAM declarants are exempt or receive reductions when they have “effectively paid” a carbon price in the embedded emissions country of origin, which may soon also apply to importers of goods who have effectively paid a carbon price in third countries other than the country of origin of the imported good (Recital 17 CBAM Regulation). An annual default average carbon price will be calculated for such a third country to alleviate the burden of companies to calculate the countries price (Article 9 (1), Recital 46 CBAM Regulation; Article 1 (7) Proposal for Amendment of the CBAM Regulation) [140,148]. Reporting duties accompany all three circumstances (Article 2 (8), Article 9 (2)–(3) CBAM Regulation). 3.1.3. Level of Ambition and Timing of Introducing Tariffs Third, the timing of introducing tariffs like CBAM matters [114]. CBAM targets the sectors with the highest potential for impact. First, that is, the greatest risk for carbon leakage, and the regulatory grip tightens from reporting only to the duty to surrender certificates (Article 1, Recitals 30–32 CBAM Regulation) [124,149,150]. Concretely, importers of emission-intensive goods are beginning to become acquainted with CBAM during the transition phase, which started in 2023 and ends in 2025, in which they have to report the embedded emissions of their imported goods (Article 32, Recital 44 CBAM Regulation) and during which reports and amendments concerning products down the value chain can be proposed (Article 30 (3)–(4) CBAM Regulation) [145]. During its “definitive phase” beginning in 2026, authorized CBAM declarants will be under a certification obligation. That is, they are allowed and required to purchase and submit CBAM certificates to the importing authorities for the preceding year until February 2027 (Articles 4–6; Article 22 (1), Recital 45–48 CBAM Regulation; Article 1 (14) Proposal for Amendments of the CBAM Regulation) [30,141,149,150,151]. Article 31 qualifies Article 22, as CBAM certificates are allocated free of charge in correspondence to the gradual phase-out of free allowances available to European producers in the six emission-intensive sectors under the EU ETS until 2034 to avoid favorable treatments of Union goods over imported goods (Article 31 (1), Recital 12 CBAM Regulation) [30,36,119,149]. Moreover, special regulations apply depending on the nature of the imported goods and importer (i.e., “processed goods resulting from the inward processing procedure” and “indirect customs representatives” appointed by the importer) (Article 34 and 35 CBAM Regulation). However, the delayed implementation nine months later than initially suggested by the European Commission in conjunction with the postponed end of the phaseout of the ETS free allowances by 2034 and the recent 1-year delay in the purchasing obligation will push back the point of full effectiveness of CBAM [35,119,151]. 3.1.4. Level of Ambition and Target Stringency Fourth, an important design aspect of carbon tariffs is their level of ambition or the lack of target stringency [115,126]. Authorized CBAM declarants (or their direct customs representative) pay a price that depends on the actual embedded emissions of the imported goods and the weekly average of the ETS allowances auction. Thus tariff differentiation occurs only in relation to actual emissions and not based on the sector or country of origin (Article 21, Recitals 49, 28 CBAM Regulation) [124]. CBAM declarants can apply for reductions received as outlined above to prevent double counting. Moreover, the CBAM certificates cannot be banked and traded, which would incentivize the storage of credits to delay emission reductions. Excess certificates can be repurchased (Article 23 CBAM Regulation) while on the 1 July of every year, all certificates remaining on the CBAM declarant account are cancelled (Article 24 CBAM Regulation). As the price paid by importers depends on actual emissions, and as they will be able to choose between the application of default values or calculation of actual embedded emissions, assuming that the former is high enough, they are incentivized to reduce emissions [16]. When considering the price elasticity of carbon leakage, with increases in carbon price, the marginal reactivity to the adjustment and the marginal reduction in emission rises but then declines, indicating that higher prices are not necessarily more effective [152]. Overall, the literature agrees that to equal competitiveness, the price must be equal to the difference between the regulated and unregulated regions or countries carbon prices [96]. Yet, this would pose problematic in a later WTO law analysis where it is essential that the environmental goal of the CBAM is implemented before and only realized by levelling out competitiveness. Thus, other studies may be worth considering, which find that the price must be high enough relative to the social cost of carbon and the fuels under taxation, which is not fully accounted for under the CBAM and would necessitate a near skyrocketing price increase [153]. This may again be problematic from a WTO law perspective, pointing out that a legally compliant CBAM may not always be the most environmentally effective [154]. 3.1.5. Enforcement Problems Fifth, the question arises whether and how CBAM is effectively enforced and enforceable [35,115]. CBAM is a unilateral EU policy enforced by the respective Member State customs authorities, who, in specific instances, can report to the EU Commission [113]. Also, CBAM is a Regulation and thus directly applicable (Article 288 TFEU) and with direct effect in the Member States (see no need for implementing measures in the Member States as a condition for direct effect in Van Gend & Loos, 1963, para. 17). Problems of enforcement in governance theory arise where “laws or political measures are not effectively implemented in practice” and depend on the norm addresses as well as the complexity of the law or policy measure [34]. Enforcement (problems) can occur in relation to the regulated norm addressees; importers of iron and steel, aluminum and electricity from countries like China, India and Serbia, who need to effectively apply for the status of an authorized CBAM declarant (once), apply and pay for a sufficient amount of certificates (annually) and ensuring that enough certificates are on the importers account (quarterly) [130]. It has been held that the CBAM, as of now, is overcomplex and would impose administrative and financial burdens on SME importers of the aluminum and steel sector, i.e., during the reporting phase, which is why these will be excluded from the CBAM following its amendments [155]. Moreover, an increased use of default values in hard to measure sectors like electricity will ease the administrative burden of accounting for emissions on the side of importers. Importantly, recent literature focused on countries with lower capacities, which will not be able to respond to the incentives set by the CBAM and instead risk falling behind in the global strive for emission reductions [25,30,156]. Norm addressees might prevent the full effectiveness of the CBAM by opposing the unilaterally imposed CBAM, with claims of protectionism and inequality playing a key role [149,157,158]. Based on the amount of exports into the EU and their relative importance to the EU relative to the amounts of exports from the EU to specific countries, Overland et al. predict the greatest resistance from countries like China, India and Russia [159]. This is interesting since the research predicted that the burden shifted to different countries in terms of impact on GDP is positive for China, which might record slight net gains, while countries like Serbia lose to a much greater extent (GDP decrease of 1%) [23] (p. 13). Means of opposition might include negotiations or WTO- based litigation under the Multi-Party Interim Arbitration Agreement for countries with lesser economic weight, while large economies may simply absorb the loss without substantial change and subsidize the national importers, which are subject to the CBAM tariffs [55,145,159]. Moreover, in line with current political tensions between the US government and the democratic West, retaliatory trade measures are likely, especially in the steel sector (see on tariff wars [36,55,149]). Following economic theory, such retaliation may arise wherever the share of exports targeted by the CBAM presents a negligible share of the countries’ total production (as will be the case for India’s steel production) [113] (for further research on potential scenarios of trade retaliation [160]). Moreover, countries in Eastern Europe and Africa might lack the infrastructure to respond to the administrative needs of reporting adequately, thus incurring economic consequences from not being able to prove their lower emissions [23,130,149]. These countries might be impacted to relatively larger extents than countries like China or the US, which have larger investment capabilities to divert the increasing costs by means of carbon efficient and reducing technologies or implementations of carbon pricing systems [23,28,55]. However, research also held that foreign capital investment would be attracted in such cases and lead to improvements in clean energy technology [36]. As CBAM remains an additional cost, the importer might seek to avoid CBAM through circumvention practices, which pose a major enforcement problem [161]. Within the meaning of CBAM, circumvention occurs where trade patterns are changed in order to partially or entirely avoid the CBAM obligations for which there are insufficient other economic reasons through, for instance, the slight modifications of goods or artificial splitting of consignments (Article 27, Recital 66 CBAM Regulation) [137,148,162]. To encounter such avoidance, the EU Commission can adopt delegated acts to expand the scope of CBAM to include modified goods without the administration of penalties [119]. Thereby, more downstream products might be included [137,163]. Moreover, replacing the current consignment-based regime with an annual cumulative mass-oriented de minimis quantitative threshold will address competitive distortions between large-scale one-off and small-scale repeated importers while, thanks to its cumulative nature and continuous monitoring of these exempted importers as “occasional CBAM importers”, address circumvention practices and keep up origin-neutrality ([27] (p. 429)) ([137] (p. 4)). However, circumvention practices vary by sector. For instance, resource-shuffling in the electricity sector occurs when GHG emissions are shifted to other less regulated entities, thereby creating the false appearance of emission reductions for buyers of more regulated regions while net emissions of the product remain the same [164,165,166]. This practice is projected to be adopted particularly by developing countries [29]. In the aluminum sector, “the scrap hole” needs to be addressed, especially as main producers such as China are predicted to enter a “booming aluminum scrap age” ([53] (p.10)) [167]. Currently, ferrous scrap is excluded from the CBAM (Annex I, 72), while pre-consumer scrap should be differentiated from post-consumer scrap and is recommended for the production of aluminum to reduce emissions [73]. Without differentiation, product shuffling is encouraged, whereby scrap content shares are raised to circumvent full payment under the CBAM [168]. Despite the amendments, several cases of circumvention cannot be adequately captured by the CBAM. For instance, cases that go beyond slight modifications of goods where goods are fully transformed into others, for instance, steel into cars, to cases of imports under the inward processing procedure, where goods produced with foreign materials become cheaper than those produced with domestic materials subject to the ETS system or circumvention practices of product mixing or transshipment and dual production or sales practices (see for further explanation [161]. In order to effectively implement CBAM, non-compliance needs to be effectively penalized and reduced [161]. Custom authorities can punish norm addressees under the following three scenarios with administrative or financial penalties (Recital 80 CBAM Regulation). First, where importers or respective indirect customs representatives have not duly fulfilled the reporting obligation during the transition phase (see Article 35 (1–2) and (3–5) CBAM Regulation). Then, the customs authority is required to impose an “effective, proportionate and dissuasive penalty” corresponding to at least 10 Euro per t of unreported emissions (Article 35 (5) CBAM Regulation; Article 16, Recital 13 CBAM Implementing Regulation) [161]. Second, where an authorized CBAM declarant failed to fulfill the certification obligation of CBAM in due time, the penalty consists of a payment of a fine corresponding to those for excess emissions under the ETS Directive, starting with 40 and increased to 100 Euro, which is due per lacking certificate (Article 26 (1), Recital 26 CBAM Regulation). Thirdly, where someone else other than the authorized declarant imported goods into the customs union, penalties increase to up to 5 times compared to the second scenario, taking into consideration the circumstances of the unauthorized import and setting the amount of the penalty high enough to be “effective, proportionate and dissuasive” (Article 26 (1)–(2), Recital 26 CBAM Regulation). All the while, the overdue certificates remain due (Article 26 (3) CBAM Regulation), and specific notification obligations have to be fulfilled by the respective national authority (Article 26 (4), Article 35 (5) CBAM Regulation). That means that all penalties other than the one for underreporting are based on minimal requirements set out by the CBAM Regulation and thus not uniform across MS, while, however, data collection on, for instance, the incorrect reporting during the transition phase is effectively centralized with the European Commission [161]. Moreover, to impose effective penalties, a fine higher than the current ETS price seems adequate, which has reached a peak of 105.73 Euro in 2023, thus making avoidance of the CBAM cheaper than compliance. It has to be noted that the ETS price fluctuates and, as of the state of knowledge in March 2025, is 68.5 € lower than the potential fine with a projected rise in the future [169]. If the ETS price rises beyond the available penalties, the question will be how high penalties will be to be “effective, proportionate and dissuasive”. Major enforcement problems for the governing authorities may be caused by the number of addressees and the monitoring capabilities of the customs authorities. Currently, the CBAM addresses 200,000 instead of the planned 20,000 importers. To reduce this overly large group and facilitate monitoring and controlling activities of the respective national authorities, the European Commission introduced the mass-based de minimis threshold [44,137]. In addition, data gathering, verification, and management pose challenges to the enforcement of import sustainability policies [161]. Calculating the (actual or default value-based) embedded emissions of imports in an age of long and complex global supply chains requires substantial amounts of data and administrative capacities on the side of enforcing authorities, which are often not readily available [113,134]. Focusing on emission-intensive and energy-exposed goods where the potential for carbon leakage is largest is the first step while categorizing them into aggregates subject to the same carbon tariff has been suggested as an effective second step [134]. Yet because this would undermine potential incentives for individual producers to reduce emissions [134], CBAM cuts short on the second step by requiring payments for actual emissions while aggregating goods into categories (Annex I) and employing default values, for instance, in the case of electricity where tracing the emissions to a country of origin is difficult due to the interconnectedness of the energy markets (Recital 52 CBAM Regulation) [22]. However, the extent to which accurate data can be obtained, based on truthful and precise registration in the registry, remains the Achilles heel of successful enforcement of the CBAM [161]. Beyond an increased use of default values, the CBAM Amendment suggests ways to improve communication channels between national and European authorities and enhance the data processing abilities of the Commission. 3.1.6. Can CBAM Avoid Shifting Effects? After having analyzed the design of CBAM and challenges with regard to typical sustainability governance problems of enforcement, ambition, and depicting, including already some remarks regarding shifting effects, the major question remains to what extent the CBAM will address spatial, sectoral, and resource-related shifting effects [9] and rebound effects [9] and how they might be offset by coalition building with equal power and feedback loops [170,171]. Shifting effects can occur on both the consumption and production side where “use of resources or emissions is shifted from the companies and citizens concerned to other areas of life or places or other resources are used more all the more intensively” [9] (p.252). The CBAM seeks to address the case of spatial emission shifting or carbon leakage where “for reasons of costs related to climate policies, businesses in certain industry sectors or subsectors transfer production to other countries or imports from those countries replace equivalent products that are less intensive in terms of greenhouse gas emissions” (European Union, 2023, Preamble, Rec. 9). Leakage can occur through four channels: indirectly through the energy or fossil fuel market [16,118,131,136,145], directly through the competitiveness channel [16,131,145] either operationally for instance through relocation, albeit technically and financially unfeasible [136,172], or through hard to detect investments [172] and depending on regional variations in production emission intensity and international trade [16,96]—and rarely through technology spillovers [16]. In addition, commodity price fluctuations and supply chain disturbances can be considered leakage, though it has to be noted that the complexity of the shifting phenomenon might extend beyond the listed elements [156,173]. If not addressed, leakage will offset the carbon emission reduction and competitiveness target of CBAM and obstruct compliance with the PA [135]. The foregoing analysis provided an understanding of the CBAM elements that might lead to carbon leakage and those that might reduce this risk. Advantageous is the expansive scope of CBAM, especially as free allowances under the ETS are phased out [55], which, together with possibilities of covering more downstream production, the inclusion of non-carbon GHG emissions, albeit incomplete, and the consideration of process emissions in addition to combustion emissions point to a reduced leakage risk under the CBAM. However, the CBAM omits important sources of GHG emissions by excluding indirect emissions for most of the goods covered in the initial phase, which creates incentives for carbon leakage and reduces incentives to adopt environmentally meaningful modes of production (i.e., including a greener energy mix), (see also [16,47]). The mechanism charges imports based on a country and not production-based default value, especially as the production system boundaries were excluded as a means of calculating embedded emissions for complex goods, thereby increasing the risk for carbon leakage. Yet, this effect has to be weighed against the mitigative effect of measurement of emission intensities based on export countries instead of at the industry level([23] citing the EC Impact Assessment). Further downsides of the CBAM are that focusing on imports, as might be the legally most viable solution, risks a substitution effect where exporting countries increase emission-intensive activities in the domestic market and decrease the activity level in the export market, which, theoretically, may be expected following increases in domestic for aluminum in India [174]. While some suggest that the CBAM yields potential for positive spillover effects such as technology transfers through partnerships and resource sharing [175], research showed that such technology spillovers from the EU to non-Eu countries under the CBAM are unlikely [176], which, as demand increases globally, prevents other and developing countries from adopting climate-friendly and green technologies further widening the gap between different countries’ availabilities to realize carbon reductions [177]. Precise measurement of carbon leakage is difficult due to persistent problems of depicting [33]. Carbon leakage has been expressed in terms of change in foreign emissions compared to emissions reduced in the domestic unilaterally regulated area [16,96]. Based on computable general equilibrium models, which are most commonly used in carbon leakage research, it was confirmed that the aluminum and steel industries exhibit high leakage rates (between 20 and 70%) (in reference to the literature [16]). Research investigating the effects of the CBAM on carbon leakage found that despite the limited carbon coverage, the CBAM might save annually 40 million tons of CO₂eq, effectively curbing carbon leakage in adopting countries and generally [23] (for a review of the literature confirming this statement [96,178]). Research on leakage in the international trade of iron and steel confirms these findings, with large declines in CO₂ experienced by India (following Ukraine) [19]. While setting an incentive for GHG emission reductions in steel production, the method most effective to that end, scrap recycling using the EAF method, also yields environmental benefits [104]. To address leakage, the fossil fuel market should be targeted [152], and since the CBAM does not include indirect emissions of most goods, it will not be able to capture structural changes shifting emissions at the electricity generation level [17]. However, recent research summarizing previous studies held that the CBAM is very effective at reducing leakage through the competitiveness channel [96]. Yet, production-based competitive leakage resulting from the aluminum scrap hole and resource reshuffling in general and the energy sector in specific remain a major source of carbon leakage [133]. The ability to report actual emissions might yield an incentive to reduce actual emissions (D.2. CBAM Implementing Regulation) [16]. Recent research summarizing reactions of the export countries included in this analysis implies that CBAM yields positive financial incentives pushing countries towards decarbonization; both India and China either consider expanding or implementing their own ETS like scheme while increasing investments in clean energies, and countries begin shifting their production into areas of clean energy, carbon capture storage, and hydrogen availability to minimize emissions (for confirming literature [156,158]). This, for instance, corresponds to the literature on economic theory suggesting that the Nash equilibrium in light of unilaterally imposed measures will, in different scenarios, not lie with retaliatory but rather adaptive measures like the one laid out above [15]. While literature repeatedly held that under border adjustments, the burden shifted from regulated to unregulated countries [17], the combined policy package of the CBAM and the ETS regulatory cap may discourage relocation of producers to regions with less stringent environmental regulation [179]. Smaller trade partners like African countries otherwise negatively impacted by the CBAM might shift their exports to other markets [149]. Overall, the EU is not projected to suffer economically. As the major trade partners of the EU adopt more green technologies and reduce differences in emission intensities [180,181], there are fewer incentives to relocate, and leakage through the competition channel is reduced [16]. This suggests that the risks of direct carbon leakage through relocation to improve competitive advantages and by redirecting investments, as well as trade diversification and the aforementioned substitution effect, are smaller than expected and that the CBAM can effectively realize emission reductions and level the playing field [156,179]. To counteract shifting problems by additional means, the research suggests “equal powered coalition building” [171] in [115]. Indeed, the CBAM encourages action as part of a “Climate Club”, a coalition of the willing to promote the adoption of carbon pricing, including high-quality monitoring, reporting and verification, and transparency worldwide in a voluntary and inclusive way geared towards high-impact climate action to achieve the goals of the PA (Recital 72 CBAM Regulation). Some argue that opening up the possibility for exemptions of obligations under the CBAM to countries that are linked to the ETS system or where a comparable carbon price has effectively been paid amounts to a rather involuntary de facto Climate Club [182]. However, as the CBAM recognizes command and control instruments in addition to regular market-based domestic instruments, adopting countries may face an additional source of revenues, which may be welcomed by developing countries, together with the potential of rerouting the European revenues to them (reviewing the literature [118,146] ) . Currently, Germany, the US, and Japan are exploring common border adjustments [69]. When comparing different scenarios of such a multilateral Climate Club to unilateral action alone by the EU, even a G7-led Club including the EU and the G7 or a coalition between China, the US and the EU all committed to 33% emission reduction targets will not yield the required emission cuts necessary to meet the PA pathway for 2 or 1.5 degrees [178]—of course, since countries such as Germany already exceeded their budget as shown in the introduction of this article. Furthermore, some researchers held that the CBAM might be more suitable as a temporary solution, as the increasing number of participants in carbon border mechanisms increases the border crossing frequencies and administrative toll of managing different taxation systems while the strategic value of the mechanism reclines([96] reviewing studies). 3.2. Legal Compliance Analysis—Especially with Regard to WTO Law At this point, some additional legal compliance analysis is required, with a special focus on WTO law. After the EU and its Member States signed the PA in 2016, the European Commission set out a strategy for achieving net zero emissions by 2050 in the form of the European Green Deel in 2019 and reaching the PA goals (Recital 1–3 CBAM Regulation) [183]. The EU set itself the target to reduce net GHG by a minimum of 55% compared to 1999 in 2030 (Recital 4 CBAM regulation) [35,184]. This was codified and rendered binding for all Member States in the form of a Regulation called European Climate Law in 2021 (Recital 5 CBAM Regulation) [185]. Thereafter, a legislative package called “Fit for 55” was proposed (Recital 10 CBAM regulation) and created the framework, including the CBAM, to achieve the PA goals. The ETS predates the package but is included therein in a reformed way. The 2003 adopted ETS addresses emission-intensive industries and was revised on multiple occasions. It is considered “paramount” and the point of departure of many countries’ ambitions towards net zero emissions ([21] (p. 295)) [186]. However, shifting effects remained a major problem under the ETS, despite the allocation of free allowances, and as seen in the introduction above, the reduction pathway is clearly insufficiently measured against the Paris target [35,120]. Further EU legislation included a reformed ETS 1 [187], together with the ETS 2 [12], the Social Climate Fund (SCF) [188], and the CBAM which seeks to prevent carbon leakage to reduce emissions and support the PA goals, while incentivizing other third country operators to reduce emissions, complementing the ETS and reinstalling the competitiveness of European producers (Article 1 (1–2), Recital 7 CBAM Regulation) [35,184,189]). The effectiveness of the ETS and the EU in fulfilling its obligations under the PA are thus dependent on massively raising the level of ambition of especially the ETS—and on the success of the CBAM [120,189]. The CBAM is subject to European and international legal requirements and, unless compliant with many of these, risks legal challenges, as initiated by Russia in May 2025 in front of the WTO [190]. The legal basis of the CBAM is Article 192 (1) TFEU, which grants the EU competencies in the adoption of environmental legislation [191]. Where such competencies are conferred to the EU, standards of subsidiarity and proportionality limit their exercise (Article 5 TEU) [192]. Subsidiarity concerns seem easily satisfied in light of the transborder dimension of climate change and carbon leakage, in addition to the trade element of the law [120,193]. The question of proportionality, however, remains more contested, requiring that the content and form of the Union measure should not exceed what is required to achieve prevention of “the risk of carbon leakage” (Article 5 (4) TEU, Article 1 (1) CBAM Regulation) [120,192,193]. Research on the proportionality of the CBAM is rare. Generally, for an EU measure to be proportional, it must be firstly suitable and secondly necessary to the achievement of the legitimate objective, while thirdly also proportional strictu sensu (not imposing an excessive burdens relative to the overarching goal) [194,195]. However, the EU legislation enjoys broad discretion in the interpretation of the proportionality principle in the regulation of environmental problems [193]. Moreover, the European Court of Justice has accepted the legislators wide discretion in areas entailing “political, economic and social choices” (C-558/07, S.P.C.M. and Others; Case C-491/01, British American Tobacco, paras. 123 respectively) [120,196,197]. Therefore, the pending action for annulment brought by Poland in 2023 on grounds of a wrong legal basis of the CBAM (i.e., its contents that the CBAM is a fiscal rather than environmental in nature) will probably not be successful [198]. WTO law poses more important legal challenges to CBAM. Primary general international rules are those other than the specific WTO rules and create international obligations that do contain a State obligation to maintain an equal playing field or competitiveness [123]. While it is relevant to investigate the effect of the CBAM on bilateral trade agreements between the EU and any country, these often make reference to WTO law, specifically provisions of the General Agreement on Tariffs and Trade 1994 (GATT) [199]. For instance, Serbia, India and China are, with some specific conditions applying to China, members of the WTO and subject to the GATT [200]. Thus, the question turns to the compliance with and interpretation of the CBAM in light of the GATT. While the GATT was concluded before the foundation of the WTO, it is now one of its key pillars [201]. The GATT pursues the purpose of fostering prosperity through international trade by reducing trade barriers and by ensuring equal and fairness-based treatment of all WTO/ GATT parties with special consideration of developing countries [202,203]. Global free trade by reducing tariffs and non-tariff barriers is thus only a means to several ends, including “raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services” (WTO Agreement, Preamble) [31,201]. Trade restrictions under the WTO are thus allowed for environmental purposes as long as they are not overly (“excessively”) restrictive [144] (p.150). Taking into account that an ecological race to the bottom between nation states would be harmful even from an economic point of view, the GATT presents an inherent compromise between free trade and unilateral national (non-discriminatory) regulations as long as there are no comprehensive global environmental standards [189]. The two most foundational principles of the GATT are the principle of non-discrimination, which finds expression in the Most Favored Nation (MFN) principle (in Article I) and the National Treatment Principle (NT) (in Article III) [203]. These were raised by Russia as its legal basis. Russia’s challenge also considers several other Articles such as Articles II: 1 (a) and (b), X: 3 (a) and XI: 1 of the GATT and Articles 1.2, 1.3, and 3.2 of the Agreement on Import Licensing Procedures as legal bases for claiming that the CBAM constitutes a trade barrier disguised as “measures disguised to combat climate change” in contravention of international trade law [190] (p.2). Moreover, Russia challenges the legal basis of the ETS, which we will not analyze in greater detail as the present research centers around the legality of the CBAM. We will analyze the legal challenges, focusing on the aforementioned MNF and NT principles in order to cover the most potent legal arguments against the CBAM as reflected in the literature. We will also assess which potential justifications can be raised by considering Article XX, notably XX:g, but also XX:a and XX:b GATT. The first legal question is whether the CBAM creates a situation that amounts to a violation of the MFN principle. Article I GATT stipulates that “customs duties or charges of any kind imposed on [..] importation, […] any advantages, favor or privilege […] granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately to like products originating in […] territories of all other contracting parties” (Article I,1 GATT [199]). That means that all trade benefits must be granted equally to all other trade partners in an immediate and unconditional fashion [122,202,203] (Belgian Family Allowances, para. 3 [204]). If the products in question are like and discriminated against based on their origin, the CBAM would need to be justified under Article XX GATT [146,189,205]. However, formal differential treatment does not constitute less favorable treatment and has to meet minimal provisions (Korea—Various Measures on Beef, paras. 137-8 [206]). Exceptions to this rule are free trade and tariff unions such as the EU (Article XXIV, GATT) [202]. Importantly, the assessments of likeness and the NT principle occur on a case-by-case basis, and thus a final assessment remains with the Courts (Philippines—Taxes on Distilled Spirits, paras. 115, 117 [207]). Likeness is determined based on the Report of the Working Party on Border Tax adjustments (para. 18) [208] and subsequent case law (such as Japan—Alcoholic Beverages, p. 20 [209]), which sets out four criteria: a product’s end uses, consumer habits, the property, nature and quality of the product as well as the classification of the two goods in the tariff regime and the competitive relation of the goods of comparison [189,205]. The latter criterion was added by case law and can be determined with reference to the cross-price elasticity [189] or substitution of the good [203]. It is noted elsewhere that likeness depends on the legal context and thus may require a different analysis under Article I:1 than Article III:2 (Japan—Alcoholic Beverages [209]) [203]. However, case law held that these two are comparable (Indonesia—Automobile Industry, para 14.141 [210]). As of now, it is highly unlikely that the carbon content of a good would suffice to differentiate between two goods [146](summarizing literature [211]). Following WTO case law, such as US—Tuna I (para.5.14 [212]), the notion of differentiating products based on such non-product related production and process methods (NPR PPM) was rejected [31,213]. Thus, the CBAM regulated goods of iron and steel and, aluminum and electricity should be like whether they originate from abroad or from the EU. The only point of contention may be consumer preferences, that is, where two products meet the needs of the consumer in identical ways [214]. While practically, the energy intensity of a product can but often only marginally influence consumer choices [31,215], where a majority of consumers are willing to differentiate between two identical but energy or emission-diverging products, consumer preferences as an indication of likeness would become relevant. Current case law of the WTO might make such a claim likely. In EC—Asbestos (para. 122 [216]), despite marked analysis not showing support, the Appellate Body held that holistically informed consumers would likely treat goods differently based on their health risk being conveyed, noting that the health risk was part of the good’s physical characteristics [205]. Moreover, in Canada—Renewable Energy (para. 5.228 [217]), the Appellate Body differentiated between energy generated from two different sources, which, as energy is a highly interchangeable and eventually similar product, points to an increasing influence of sustainable PPM in the assessment of likeness [218,219,220]. This begs the question of whether electricity will henceforth be excluded as a good from the WTO / GATT jurisprudence concerning the CBAM. The literature shares a strong agreement that product differentiation under the CBAM runs afoul of the MFN principle. Article I GATT does not allow product differentiations if the country of origin’s policies regulating that product does not match the importing countries ones (Belgian Family Allowances, para. 3 [204]). Later case law added nuances to this ruling, holding that de jure discrimination amounts to a breach only once de facto discrimination, presenting a “detrimental impact on the competitive opportunities of like products” can be established (EC—Seal Products, para. 5.88 [221]). Discrimination may also include situations of direct and indirect privilege [203]. Various investigations of the CBAM under the MNF principle show that it differentiates like import goods based on their carbon content, their production methods, whether a carbon price was “effectively paid” in a third country, based on default values grounded in certain countries overall emissions (which will be relevant for carbon values and prices (as suggested in [137]), and exempts countries listed in Annex 3 (especially for the calculation of complex goods under the Amendment), via compliance to the CBAM provisions or because they are neighboring countries which imported electricity directly into the customs territory of the Union [37] in contravention of the MNF principle [123,146,161,202,205,211,220,222,223,224,225]. However, since the carbon price needs to be paid equally and is imposed with a similar mechanism in all countries of origin, especially under a full CBAM covering all ETS regulated sectors or goods, arguments against de facto discrimination have been raised, too [189,226]. In the end, the arguments in favor of a breach could outweigh the counterarguments against a breach. The second legal question needs to be whether the CBAM creates conditions that amount to a violation of the NT principle. It is enshrined in Article III GATT where it says in III:1 that “internal taxes or […] measures affecting the internal sale [etc.] of products, and internal quantitative regulations requiring the […] processing […] of products in specified amounts or proportions, should not be applied to imported [...] products as to afford protection to domestic production”.Art. XI GATT is not relevant in this context, as border adjustments expressly refer to customs duties and, therefore, do not constitute ‘measures other than customs duties’ (whereby Art. III GATT is not superseded by Art. XI GATT, as customs duties are merely an appendage to an intra-EU regulation). Furthermore, Art. II:2a GATT explicitly declares Article III GATT applicable for border adjustments, (see also [31,202,222]). However, the debate on “like products” outlined above, which can also be conducted within the framework of Article III GATT, will not be repeated here. Instead, other problems of the norm with regard to CBAM will be discussed. The national treatment principle seeks to avoid the use of internal taxes and regulatory measures for the purpose of protectionism and thus obliges the contracting states to maintain equal competition between domestic and imported goods (Japan—Alcoholic Beverages II. pp. 16ff [209]). It should be interpreted textually (Japan—Alcoholic Beverages II, pp. 17ff [209]). Article III:1 spells out broad general principles that govern the application of the specified principles in articles III:2 and III:4 GATT, for instance (Japan—Alcoholic Beverages II, pp. 17ff [209]). Imported goods fall under Article if the trade measure “applies to an imported product and to the like domestic product and is collected or enforced in the case of the imported product at the time or point of importation” (Additional Note to Article III). The timing of the measure’s application upon import instead of the tax’ purpose is relevant and is due to an “internal event” such as “the distribution, sale, use of transportation of the imported good” (China—Auto Parts, para. 163 [209]) [222]. This leads to the consideration of the ETS/CBAM connection. The ETS trading system can be considered an “internal measure” (for an explanation of internal measures [205])imposing a carbon price on domestic goods, and the scope of the CBAM is set out to match the scope of the CBAM and is oriented based on the ETS price scheme (Article 31). It is relevant then to investigate the CBAM being a fiscal tax or charge enforced at the border (falling under Art III:2 GATT), an internal or border regulation (falling under Article III:4 GATT). It is unlikely that the CBAM leads to a breach of Article III:2. It deals with directly or indirectly applied “internal taxes or internal charges”, such as the CBAM in any form imposed in excess onto like imported products compared to those taxes or charges imposed under domestic regulation [227]. Such measure should not serve a protectionist purpose (in connection to Article III:1). To find a tax in breach of Article III:2, there needs to be competition between the “taxed product [..] and a directly competitive or substitutable product which was not similarly taxed” (Additional Note para. 2). Thus, the term of likeness is broadened in scope to accommodate considerations of competition (EC—Asbestos, paras 90–100 [216]) [203]. Discrimination would occur where a fiscal measure is imposed in excess, understood in a narrow sense whereby “even the smallest amount of excess is too much” (Japan—Alcoholic Beverages II, page 23 [209]) [31,227] (pp. 8–9). While the CBAM is obviously not an internal tax, it may well be considered a charge (for more details [205]). The Appellate Body in Mexico—Taxes on Soft Drinks (para. 8.66 [228]) set out a three pronged test to find if there was discrimination between domestic and foreign products [203]: first, whether the imported and domestic goods are in competition as defined above. In the case of the ETS/CBAM regulated goods of iron and steel and aluminum, domestic and foreign goods are competing with each other in the internal market, and the Armington elasticity for substitution for import and domestic products under the CBAM is generally positive as energy-intensive products are relatively homogenous (Japan—Alcoholic Beverages [209]) [23,227,229,230,231]. Second, the question is whether the two goods are “not similarly taxed”, which includes proportionality considerations, or no “excess”(Mexico—Taxes on Soft Drinks, para. 8.66 [228]) [205,214]. Takemasa argues that total prices for the same goods under the ETS and the CBAM differ based on production methods [227] (p.9). However, as the ETS carbon price dictates the CBAM price and as also within the EU production methods differ, this concern seems largely unfounded. Moreover, the CBAM actively addresses issues such as double taxation to prevent dissimilar taxation ([137] (p. 31)), (see for detailed analyses [202]) and proposes detailed calculation methods to count actual emissions, thereby curbing cases of unproportional or excessive taxation [214]. Importantly, the exclusion of certain ETS regulated GHG emissions from the scope of the CBAM may make the measure more lenient financially and (see below) administratively than the ETS. Article III:4 makes reference to regulatory, non-fiscal measures and requires “no less favorable treatment than that accorded to like products affecting their sale, offering for sale, purchase, transportation, distribution or use”. The scope of like products is thus broadest yet slightly vague (EC-Asbestos, para. 99 [216]) [203], with a focus on the competitive relationship [227]. If the CBAM was considered an internal regulation applying at the border, for instance, by requiring the registration in the CBAM registry as well as purchased certificates, then similar requirements of no favorable treatment distorting competition apply (see Article III:2) (Korea—Various Measures on Beef, para. 144 [206]) [203,205]. This requires strict equality of the burden placed on domestic and foreign producers at all levels and removing any export rebates to domestic producers which [219]. It has been argued that the CBAM was a “self-standing measure” that applies administrative requirements differently than to ETS-regulated goods [205] and presents thus a de facto quantitative restriction on trade [227]. Others have, however, argued that this is indeed not the case as the procedure for applying and verifying emissions under the ETS was comparable to the CBAM while rebates are allocated in symmetry with the ETS (Article 2, 5 (b) CBAM Regulation) [31,123,214]. This consideration is reinforced when considering the products covered by the CBAM a “group of products”, (for an extensive analysis [227]). However, what may remain contested is whether the CBAM is implemented to effectively accommodate the different carbon pricing methods [226]. The requirement of “effectively paid” seems to include command and control policies, which are allowed for, while non-marked based policies are only marginally considered as a viable carbon pricing method under the CBAM [145,146]. It may also be criticized that this does not fully consider mitigation efforts and different costs relative to the historical contributions of developing countries [172]. However, even where such non-market based measures are in place, the EU has often engaged in bilateral treaties equalizing the set of policies to find a common denominator with the ETS/CBAM requirements [123]. The third legal question is whether violations—if there were any—of Art. I and III GATT could be justified in reliance on the “enumerated legitimate policy objectives” provided by Article XX GATT. This test for exemptions gives room for autonomously restrictive trade measures to protect public morals, including environmental human rights (Article XX:a GATT), human, animal, or plant life or health (Article XX:b GATT), or the conservation of exhaustible natural resources (Article XX:g GATT) for instance [146,189]. The burden of proof of this bifurcated test lies with the defendant [189], and the bottleneck of the assessment is not what is the stated objective of the trade restriction but “the structure of the measure itself and how it is applied” [222] (p.4). Several important criteria are a neutral, transparent, and predictable application, an implementation geared towards due process, equity, and fairness while at the core of the measure must be the principle of sustainable development (US—Shrimp, para. 153, 181, 183 [232]) [122,172,219]. The CBAM may be considered transparent, neutral, and predictable as it lays out specific rules for importers of all countries of origin to verify and apply for certificates. Moreover, the amendments seek to reduce burdens on small importers, which are disproportionately affected by the original CBAM compared to larger importers, to foster fairness and equity, while notification duties apply during enforcement, in respect of due process and transparency principles, while carbon leakage and climate change are inherently connected to sustainable development. After US—Shrimp (para. 133 [232]), extraterritorial measures became eligible for an Article XX GATT assessment provided that a sufficient connection of the State to the legitimate policy objective could be demonstrated [31,146,222]. The CBAM pursues the environmental objective of reducing carbon leakage to curb emissions for environmental protection (i.e., for the conservation of the atmosphere or of carbon emissions themselves) [123,146,189,211,214,225,233]. To meet the requirements of Article XX:g GATT, the CBAM has to be at least related to the objective of environmental protection (relatedness being a lower standard than necessity, China—Rare Earths, para. 5.87 [234]). This requires “a close and genuine relationship of ends and means” (see, for instance, US—Shrimp, para. 136 [232]) while demonstrating even-handedness of trade restrictions in the design and effectuating comparable local production restrictions (see the requirement for “made effective in conjunction with restrictions”, Article XX and understood as “in operation” US—Reformulated Gasoline, p. 20 [235]) [31,222]. The CBAM seems even-handed, corresponding neatly to the scope of the ETS, and is “brought into effect together with“ the ETS, see also [189,227]. When it comes to the means-ends requirement, Bachus argued that the CBAM proposal could not satisfy this requirement as the carbon tax was available as a less restrictive and equally effective measure to achieve the climate ambitious, which may also be preferred by the concerned businesses (EC—Asbestos, para. 168 [216]; Korea—Various Measures on Beef, para. 166 [206]; Brazil—Retreaded Tyres, para. 170 [236]), (see [162,222] (p.5)). However, in line with previous findings, see [31]), the above analysis held that the CBAM indeed effectively addresses carbon leakage, which, in the areas regulated by the CBAM, can contribute more effectively to climate change mitigation (see also [146]). A consumption tax on non-European products might be simpler, but it would be less targeted and would not fit in with the EU ETS. Eventually, the CBAM must satisfy the Chapeau of Article XX GATT, which seeks to prevent abuses of trade measures for protectionist purposes [14]. It states that the measure may “not be applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade” (Article XX GATT, i.e., in Brazil—Retreated Tyres, paras. 217–234 [236]). Based on case law, three analytical steps can be satisfied: First, there is a rational relationship between the imposed financial burden and the CBAM’s climate change mitigating effect [146]. While in that regard, more extensive use of default values and the timely delays as suggested in the CBAM Amendment seem problematic, the CBAM remains an overall effective measure where the calculation of actual emissions always remains an option, thus effectively reflecting the damaging effect of high emissions while showing “sufficient flexibility to take into account the specific conditions prevailing in any exporting Member” (US—Shrimp, para. 149 [232]) [123,146,227] ([211] (p. 23)). Secondly, carbon pricing is not coercively imposed on the WTO States as the unique measure to prevent trade restrictions and other “essentially same polic[ies]” of comparable effectiveness seem to be allowed (US—Shrimp, paras 161–165 [232]) [146] (see analysis before on what constitutes “effectively paid”). Third, there needed to be serious and even-handed negotiations “across the board,” both bi- and multilaterally, to advance the CBAM goal of climate protection and carbon leakage reduction before the adoption of the policy (US—Shrimp, para. 166 [232]) [31,123,146]. Previous affirmative research held that since the PA goals, which were arrived at through intensive international negotiations, do not seem to be met multilaterally, adopting a unilateral measure was plausible and justified [9,31]. Moreover, bilateral treaties recognizing different carbon offsetting and pricing measures depending on whether they are open to other WTO members can satisfy this need [227].