The establishment of a World Trade Organization (WTO) panel on September 25, in Russia’s dispute against the European Union concerning its Carbon Border Adjustment Mechanism (CBAM), first initiated in May 2025 marks an important development in the ongoing debate over the WTO compatibility of climate-related trade measures. The dispute will provide an opportunity for the panel to examine whether the design and implementation of CBAM, as well as the alleged export subsidy arising from the EU’s Emissions Trading Scheme (ETS), are consistent with WTO obligations.
At the heart of the WTO system are the two principles of non-discrimination, Most-Favoured Nation (MFN), which requires equal treatment of all trading partners, and National Treatment, which prohibits discrimination between imported and domestic goods. Under Article II, WTO members also commit to tariff bindings, meaning they cannot impose duties above the “bound rates” they have notified. Quantitative restrictions or non-tariff barriers (NTBs) are generally prohibited under Article XI.
Under the Agreement on Subsidies and Countervailing Measures (SCM), financial contributions that confer a benefit may be challenged, and subsidies contingent on export performance are outrightly prohibited.
Under the EU ETS, certain sectors considered particularly vulnerable to carbon leakage have historically received free emissions allowances, assessed through a carbon leakage indicator combining trade intensity and emissions intensity. A sector is considered at risk where the indicator exceeds 0.2. Trade intensity is calculated using the value of exports and imports from third countries relative to the size of the European Economic Area market, while emissions intensity is measured in relation to gross value added.
Russia argues that this system gives rise to a prohibited export subsidy under the SCM Agreement. Its contention is that the criteria used to determine eligibility for free allocation take account of a sector’s exports and therefore make the benefit contingent, at least in part, on export performance. Establishing such a claim would require the panel to address not only whether free allocation constitutes a subsidy, but also whether the relevant conditions establish the type of export contingency prohibited by the SCM Agreement.
Russia also challenges CBAM itself under several legal provisions. On MFN treatment, Russia alleges that the mechanism creates additional costs and administrative requirements associated with CBAM certificates and embedded-emissions calculations that may result in differential treatment among products depending on their origin. Russia further argues that the obligation to purchase CBAM certificates amounts to an additional charge on imports above the tariff commitments contained in the EU’s tariff schedule, thereby violating Article II. The dispute also raises Article XI concerns, since Russia characterises requirements relating to authorised CBAM declarants, emissions monitoring, reporting and registration as prohibited non-tariff restrictions, going beyond permissible tariff measures.
Initially hesitant, the EU has reaffirmed its commitment to the multilateral trading system and agreed to the panel’s establishment. Several WTO members, with diverse positions on this issue, including India, as well as some that are in the process of instituting their own carbon border adjustments, have joined as third parties, underscoring the broader stakes surrounding this dispute.
These proceedings could have wider implications for countries introducing or considering carbon-pricing and border-adjustment measures, particularly regarding non-discrimination, the treatment of imported products and the interaction between environmental objectives and trade rules.
The latter is a particularly critical issue. Many countries critical of CBAM invoke the violation of the principle of Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC), a cornerstone of the multilateral climate regime. Yet this principle lies beyond the scope of WTO covered agreements, creating a legal and normative gap between the two systems.
The panel process is at an early stage, and its eventual findings may lack enforceability without a fully functioning Appellate Body. Nonetheless, the case may ultimately provide greater clarity on the extent to which WTO rules accommodate unilateral climate-related border measures. If the panel finds CBAM or the ETS inconsistent with WTO rules, it could potentially constrain the design of similar measures worldwide. If, however, the EU successfully defends its policies, it may provide other countries to adopt unilateral border adjustments as part of their broader climate strategies.