The Von der Leyen Commission is determined to achieve climate neutrality by 2050. To that end it has proposed a roadmap of legislative actions which includes a carbon border adjustment mechanism to reduce the risk of carbon leakage. The article discusses the GATT-compatibility of carbon border adjustment. It starts with a conceptual analysis of the differences between border tax adjustment and carbon border adjustment and concludes that the latter is substantially different from the former. The GATT-compatibility of carbon border adjustment requires a creative and far-reaching interpretation which blurs the traditional GATT distinction between nonadjustable ‘direct’ taxes and adjustable ‘indirect’ taxes. As a consequence, by interpreting the GATT provisions in the same creative manner the EU’s trading partners could also adopt new adjustment mechanisms which, so far, have not been considered possible and which potentially could have a trade distorting effect. With the exception of a carbon tax on domestically consumed products all other carbon adjustment mechanisms discussed by the European Commission do not stand the test of GATT-compatibility. They all violate basic GATT provisions and cannot be justified by the public policy exception of GATT Article XX. In interpreting the chapeau of GATT Article XX, the article develops a ‘Paris-defense’ which the signatories of the Paris Agreement complying with its substantive obligations could use to demonstrate the coercive effect and hence the arbitrariness of the EU’s measure. As a border measure the mechanism to be adopted by the EU will provoke (violent) reactions by the EU’s trading partners. The EU will therefore be well advised to adopt a cooperative approach and negotiate with affected exporting countries a solution before acting. The EU cannot claim to defend the rules-based approach of the WTO and the climate objectives of the Paris Agreement whilst at the same time adopting a unilateral and potentially protectionist measure.
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