Carbon Border Adjustment Mechanism: from a green vision to fading alignment with the WTO and EVFTA: bridging divergences between the EU and developing countries

The Carbon Border Adjustment Mechanism (CBAM) of the European Union (EU) is considered one of the pivotal pillars of the European Green Deal, with the aim of reducing carbon leakage and promoting sustainable development. However, the CBAM, with other unilateral initiatives under the EGD framework, including ‘Renewables Energy Directive Recast’ to 2023 (RED II) and ‘European Regulation on deforestation-free products’, received various negative reactions from EU partners globally, particularly in Southeast Asia. Indonesia and Malaysia, two significant exporters of palm oil to the EU, have initiated claims against the EU’s RED II under the World Trade Organization’s (WTO) dispute settlement mechanism. In this context, the EU’s response to concurrent criticism and disputes within the WTO framework demonstrates clear and consistent strategies aimed at establishing itself as a leader in sustainable development in both global and transcontinental regional trade.

Recent literature also acknowledges that CBAM can be considered the most well-designed EU measure compared to RED II. This is attributed to the EU’s strategic use of the WTO’s temporary impasse and its potential to establish “new norms” through the inclusion of chapters on sustainable development in regional trade agreements. Nevertheless, there is a global debate regarding the compatibility of the CBAM with WTO principles, as it creates disguised trade restrictions and imposes inequitable burdens on developing countries.

In addition, the EU’s implementation of the CBAM imposes regulatory standards beyond its borders, potentially encroaching on other countries’ sovereignty and self-determination in tackling their environmental issues. Notably, the additional carbon tax levied on high-emission imports would nullify the preferential benefits for products from Vietnam from negotiating and signing the EU–Vietnam Free Trade Agreement (EVFTA) and thereby reduce the competitiveness of Vietnamese product exports to the EU market.

This article provides a comprehensive analysis of CBAM regulations, focusing on the development of CBAM from opposition to reluctant acceptance in Southeast Asia, including in Vietnam. Through the lens of the CBAM as a green tax measure and the potential impact of the implementation of CBAM on Vietnam and other Southeast Asian countries, this article clarifies the compatibility of CBAM with WTO legal principles and the justification under Article XX of the General Agreement on Tariffs and Trade (GATT) and discusses the challenges Vietnam may encounter under the sustainable development chapter of the EVFTA once the CBAM is implemented to draw important insights and implications for future developments in policy and legal practice.