Green tariffs, grey motives? Russia challenges the EU's €2.1 billion carbon tax plan in the WTO - Trade Treasury Payments

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Green tariffs, grey motives? Russia challenges the EU’s €2.1 billion carbon tax plan in the WTO

Russia has just thrown down the gauntlet, and it’s aiming at one of the EU’s most ambitious climate policies ever.  Designed to prevent carbon leakage and level the playing field for EU manufacturers subject to internal carbon pricing, Russia has legally challenged the Carbon Border Adjustment Mechanism (CBAM) in the World Trade Organisation (WTO) over trade restrictions and discrimination.

What is the opening salvo?

Russia’s complaint pulls no punches. In its 14-page legal document submission on May 12 by Russia’s Ministry of Economic Development, Russia calls the EU’s Carbon Border Adjustment Mechanism (CBAM) “highly trade restrictive and discriminatory mechanisms established under the pretext of climate policy.” This marks the first major legal challenge to the EU’s flagship climate initiative at the global trade body.

The complaint specifically targets two EU regulations: 2023/956 (the core CBAM regulation) and 2023/957 (implementing rules). Russia claims these violate at least seven different WTO provisions, including most-favoured-nation treatment principles and prohibitions against quantitative restrictions.

The 60-day consultation clock is now ticking. If no resolution is reached by mid-July, we may witness a full WTO panel dispute.

Reading between the lines of the CBAM and the carbon price gap

The EU’s carbon border tax is a climate tariff with teeth. It requires importers of carbon-intensive goods to purchase certificates based on the carbon emissions produced during manufacturing. The price is tied directly to the EU’s internal carbon market.

Carbon pricing under the EU Emissions Trading System reached an all-time high of €115.96/mtCO2e in 2023 before settling back to around €72/mtCO2e in 2024 ($81.64/mtCO2e). Compare that to China’s national carbon market, where prices were roughly six times lower at around ¥95.96/mtCO2e ($13.33/mtCO2e) in 2024. This massive price differential explains why Russia and other countries are so concerned with the need to pay higher prices for carbon-intensive exports.

On October 1, 2023, CBAM entered its transitional phase, where importers must report emissions but don’t pay yet. However, January 1, 2026, is the date circled in red on calendars across Moscow, Beijing, and other major exporting capitals, as that’s when importers start paying for those carbon emissions.

What and why of Russia’s complaint

Russia’s WTO filing attacks CBAM on multiple fronts. The complaint details an intricate web of trade barriers: complex authorisation processes for “authorised CBAM declarants,” burdensome emissions reporting rules, stringent verification requirements, mandatory certificate purchases, and heavy penalties for non-compliance.

Moscow particularly objects to CBAM’s evolving nature, a moving target that creates uncertainty for exporters. Russia argues the mechanism will only become more restrictive over time through expanding product coverage, increasing certificate prices, and requiring more certificates per shipment. These compounding barriers, Russia claims, reveal CBAM’s true purpose: not climate protection, but trade restriction.

The sectors covered are the big sharks in the tariff ocean, including iron and steel (CN codes 72 and 73), cement (CN code 25), fertilizers (CN code 31), aluminum (CN code 76), electricity (CN code 2716), and hydrogen (CN code 28), and Russia exports most of these to the EU.

Russia was the third-largest trade partner of the EU in 2020, but fell to fifteenth in 2024. In 2021, the total trade between EU and Russia was €257.5 bullion, which reduced to €67.5 billion in 2024, out of which imports to the EU were valued at  €35.9 billion, which includes mineral fuel and other mining products, chemicals, and steel and iron (all of these fall under the CBAM).

This is the result of the EU’s stringent trade policies with Russia and restrictions amid the Russia-Ukraine conflict. The CBAM adds to the Russian trade blow.

Some over the others: Brussels’s preferential treatment

The EU’s carbon tax creates shockwaves well beyond Russia. Russia’s argument that CBAM is discriminatory among georgtrapries as it completely exempts Iceland, Norway, Liechtenstein, and Switzerland. Additionally, it allows special deals with other countries through bilateral agreements.

However, Russia isn’t standing alone. While it’s the first to file a formal WTO challenge, China, which implemented the Carbon Ticket Management System (CTMS)  and the Negative Carbon Trading Market (NCTM), stated that CBAM can seriously affect the willingness and capability of other countries to tackle climate change. China’s export of carbon-intensive products to the EU is around 31.14%.

The BASIC bloc (Brazil, South Africa, India, China) also showcased concern in the past about carbon border taxes and pledged to “coordinate their response to unilateral climate measures that distort trade. These economies account for nearly 42% of global carbon emissions.

South Africa stands to lose 0.8% of its entire GDP, with 16% of steel and 25% of aluminium exports directly threatened. Mozambique faces potential economic collapse, with a staggering 97% of all aluminium exports headed to the EU market.

Brazil, a global iron ore powerhouse with $30.6 billion in exports, sends 12% of its steel to Europe, with carbon intensity (0.37 kgCO2e/$) exceeding EU standards.  On the other hand, India faces one of the greatest challenges. Its coal-powered steel industry runs twelve times the EU standards (2 kgCO2e/$ vs 0.16 kgCO2e/$), putting 23% of its steel exports at serious risk. On the other hand,

These numbers explain the growing coalition against what many see as Europe’s green protectionism. However, amidst this, the EU might be offering some flexibility to allies. There are reports that Ukraine could receive a CBAM delay until 2027, though Kyiv hasn’t yet filed a formal request for this exemption. The US and EU are also engaged in negotiations over the “Global Arrangement on Sustainable Steel and Aluminium” that could provide American exporters some relief from CBAM.

So, what’s next?

Under WTO rules, the EU and Russia will engage in consultations aimed at reaching a mutually satisfactory solution. If these consultations fail to resolve the dispute within 60 days, Russia could request the establishment of a dispute panel. If this happens, the final conclusion may take more time, and in the meantime, CBAM applicability will impact countries across the globe.