PREVENTING CARBON LEAKAGE: a European form of regulatory "creativity"

The mechanism with regulatory "creativity"

The European Union's Carbon Border Adjustment Mechanism, known by its English acronym CBAM (Carbon Border Adjustment Mechanism), of the European Union, was presented as a tool to prevent so-called "carbon leakage", whereby European companies would relocate their production to jurisdictions with lower environmental requirements, thus neutralizing the European bloc's climate efforts. The CBAM imposes economic charges on imports of certain products based on their carbon footprint and has been fully operational since January 2026, becoming a technical barrier to trade disguised as "green".

The carbon price at the EU border is calculated using the weighted average of the weekly auctions on the emissions trading market. In the definitive phase of 2026, this works as an equalizer: if a foreign product has a larger carbon footprint than the European standard, the importer must pay exactly the economic difference.

The DS639 case: Russia takes the EU barrier to the WTO

In July 2023, the Russian Federation formally requested consultations with the European Union at the WTO, challenging the compatibility of the CBAM with WTO rules. With that stage exhausted without a satisfactory solution, the DS639 case moved toward the constitution of a Panel, which was formally established. Moscow's central argument rests on three legal pillars: a. violation of the most-favoured-nation principle, b. incompatibility with the Agreement on Technical Barriers to Trade, and c. distortion of the national treatment principle, all pillars of the General Agreement on Tariffs and Trade (GATT)

The request document submitted by the Russian Federation argues that the CBAM discriminates based on the geographic origin of emissions, and not solely on the carbon content of the product. In its reasoning, Russia maintains that an economy with an energy mix favored by its geography, abundance of gas, coal or hydroelectric power, can produce steel or aluminum with a carbon footprint different from the European one, without this necessarily reflecting a policy of implicit subsidy to emissions. Taxing that differential at the border would amount to penalizing the productive structure of developing economies.

The European position: regulatory autonomy and environmental grounds

The European Union's response at the WTO is based on Article XX of the GATT, which allows exceptions to general trade obligations when it comes to protecting the environment or human health. But at the same time it reproaches Russia for the war against Ukraine, detracting from the technical seriousness of the response.

" Despite having failed to achieve its military and strategic objectives, the Russian Federation has not put an end to its illegal and brutal war of aggression. "

Scientific grounding in matters of environmentally based trade barriers is key, but the EU has given ample evidence of regulatory creativity.

According to Mohammed Chahim of the European Commission;

"an ambitious and efficient CBAM would produce a fourfold benefit with respect to climate change mitigation policies: (1) it would strengthen the price signal of the EU Emissions Trading System, (2) it would replace free emission allowances for sectors at risk of carbon leakage, thereby expanding the number of installations actually covered by the system, (3) it would effectively ensure carbon pricing for the products in question imported into the Union and, finally, (4) it would continue to prevent carbon leakage."

The "equivalence" argument is the core of the legal debate. In theory, if a Brazilian, Argentine or Indian steel exporter can demonstrate that it has already paid a carbon price in its country of origin equivalent to the European one, it is exempt from the adjustment. In practice, however, the mechanisms for certification, verification and recognition of national carbon schemes pose significant administrative barriers, and compliance costs fall disproportionately on exporting companies from emerging economies.

The European Union continues to deepen its regulatory creativity, and on July 17, 2026, the European Commission proposed a targeted revision of the EU Emissions Trading System (EU ETS) to strengthen Europe's industrial competitiveness and support meeting the EU's 2040 climate target.

Argentina as a third party: a concrete interest

The imposition of European national environmental standards, which risk being highly discretionary and selective depending on the country the products come from, can turn into genuine technical barriers to trade.

The participation of Argentina in case DS639 as a third party takes into account the products covered by the CBAM in its initial phase, namely steel, aluminum, cement, fertilizers, electricity and hydrogen, which are sectors of export relevance for Argentina and for MERCOSUR as a bloc. Participating as a third party allows Argentina to file written submissions, set out legal arguments on the impact this may have on the country and on MERCOSUR, and contribute to shaping the jurisprudence of the dispute settlement system on a matter that will be central to the next decade of international trade.

Sources

1. WTO — Case DS639: European Union — Carbon Border Adjustment Mechanism
2. WTO — Request for the establishment of a Panel by the Russian Federation (WT/DS/639-3)
3. WTO — Communication from the European Union in case DS639 (WT/DS/639-4)
4. carbon-pulse.com