Monitoring, Reporting and Verification in a Carbon Border Adjustment Mechanism

The EU has adopted legislation that introduces a Carbon Border Adjustment mechanism (CBAM) to impose similar costs for embedded carbon emissions on imports as those faced by production covered by the European Emissions Trading Scheme (EU ETS). This plan raises complex issues regarding practical and legal feasibility, including potential legal challenges with respect to international trade law. A key aspect of the CBAM are effective rules for the monitoring, reporting and verification, (MRV) of emissions from imports. The creation of such standards has to meet seemingly contradictory objectives: On the one hand, MRV for a CBAM should ideally be as reliable and accurate as it is in the European ETS. If not, there would be a risk of importers declaring less emissions for imported products than is actually embedded in them. This would give competitive advantages to imports, which would exacerbate the risks of carbon leakage - the shift of emission-intensive production to less regulated countries - which the CBAM is supposed to mitigate. Such arguments could speak for applying the EU’s MRV rules to the CBAM. On the other hand, there are strong arguments in favour of applying trans- or international standards: extending EU rules to imports could face opposition based on their lack of political legitimacy, and it might at first sight entail higher legal risks regarding WTO-law. This study analyses this state of affairs in detail and thus develops a general perspective towards a solution that keeps both objectives in mind.