European Union

Trade Law and Climate Change

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Introduction

The emergence of climate-related legal risks is reshaping trade and corporate governance across the European Union (EU). The EU has adopted increasingly ambitious climate objectives, notably the legally binding targets of net-zero greenhouse gas emissions by 2050 and a 55% reduction by 2030 (relative to 1990 levels). These frameworks impose additional compliance burdens on exporters, importers, and multinational corporations operating within Europe. Specifically, mechanisms such as the EU Emissions Trading System (ETS) and the Carbon Border Adjustment Mechanism (CBAM) seek to reduce EU greenhouse gas emissions through a price on carbon and maintain a level playing field in global trade. The EU has also adopted climate-friendly provisions in its Free Trade Agreements, including the adoption of public policy exceptions modelled on GATT Article XX.

The expansion of climate-related standards, disclosure requirements, and due diligence directives, most notably the Corporate Sustainability Due Diligence Directive (CSDDD), demonstrates the EU’s commitment to integrating environmental objectives into its trade law, while also creating novel risks for corporate actors. Climate litigation in the EU is also increasingly shaping the landscape of international trade, particularly through its influence on corporate accountability, financial risk, and regulatory compliance. Recent landmark cases in Italy, France, and the Netherlands reflect a growing judicial willingness to apply tort law and human rights law to challenge corporate inaction on climate change. The EU’s integration of climate obligations within its trade law and regulatory frameworks presents both opportunities and potential legal risks for businesses. Climate litigation risk is now being priced into corporate finance, especially for firms involved in international trade. The dynamic interplay between legislative initiatives, judicial decisions, and evolving standards will continue to shape the contours of climate governance and trade law in Europe.

Key legislation	Key cases
EU Emissions Trading System (ETS) Carbon Border Adjustment Mechanism (CBAM) Corporate Sustainability Due Diligence Directive (CSDDD) EU Deforestation Regulation (EUDR) Corporate Sustainability Reporting Directive (CSRD)	Greenpeace Italy et al. v. ENI TotalEnergies Litigation (France) Milieudefensie et al. v. Royal Dutch Shell plc. UK-Sandeel (The European Union v. the United Kingdom of Great Britain and Northern Ireland)

How Climate-Related Legal Risks are Impacting Trade

Climate-related legal risks, such as stricter environmental regulations, carbon pricing mechanisms, and litigation, are reshaping trade dynamics. EU trade law increasingly incorporates climate obligations, which creates additional compliance considerations for exporters and importers. Key legislative initiatives within the European Union demonstrate the EU’s strong commitment to ambitious climate objectives. This includes the European Climate Law and the “Fit for 55” package,[1] a comprehensive legislative initiative designed to help the European Union meet its climate target of reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels.

Moreover, the EU establishes climate-related standards for a broad range of goods and services, from textiles to food products, requiring UK businesses with export interests in the EU to comply with current requirements and remain informed about upcoming changes. EU regulations related to climate change, such as sustainability reporting obligations and climate finance rules may also affect multinationals operating within the EU. The Carbon Border Adjustment Mechanism (CBAM) aims to mitigate the potential for the price on carbon under the EU Emissions Trading System (ETS) to cause carbon leakage by making certain imports pay a sum equal to the difference between the carbon price paid under any domestic carbon pricing mechanism and carbon prices paid under the EU ETS – effectively imposing tariffs on imports from countries with less stringent climate policies. Even where there is minimal difference between carbon prices, CBAM may still create an administrative burden for importers.[2] This introduces legal complexity and the potential for disputes under WTO rules.

The intersection of climate policy and trade regulation within the EU is generating a complex legal landscape that presents novel risks for both corporate actors and public authorities. Central to this evolving framework are key legislative instruments such as the European Climate Law, which enshrines binding commitments to achieve net-zero greenhouse gas emissions by 2050 and a 55% reduction by 2030, and the Corporate Sustainability Due Diligence Directive (CSDDD), which imposes obligations on large enterprises to identify, prevent, and mitigate adverse environmental impacts across their operations and value chains.

Litigation and Liability Exposure

Recent developments in European climate litigation underscore a growing judicial willingness to scrutinize corporate accountability for environmental harm. Climate litigation is becoming a strategic lever in shaping trade practices, corporate finance, and global supply chain governance. As European courts continue to advance climate accountability, companies engaged in international trade must adapt by strengthening environmental disclosures, reassessing supply chain risks, and aligning trade strategies with emerging legal standards.

A landmark case in Italy, Greenpeace Italy et al. v. ENI, marks the country’s first climate lawsuit against a privately owned company. Filed in May 2023 by Greenpeace Italy, ReCommon, and twelve citizens, the suit alleges that ENI, alongside its government shareholders, the Ministry of Economy and Finance and Cassa Depositi e Prestiti, knowingly contributed to climate change through its fossil fuel operations. Plaintiffs sought a court order compelling ENI to reduce emissions by 45% by 2030 and to acknowledge violations of human rights, including the rights to life and health. In July 2025, Italy’s Supreme Court of Cassation ruled that national courts have jurisdiction to hear such cases, affirming the legal standing of climate-related human rights claims and setting a precedent for future litigation.[3]

The litigation against TotalEnergies in France was also ruled admissible by the Court of Appeal in 2024.[4] The case directly engages the French Duty of Vigilance Law, highlighting the growing use of legal tools to hold corporations accountable for their climate impacts. This law is one of the first of its kind globally to impose a legally binding obligation on parent companies for due diligence across their value chains. These cases may point towards a broader trend in Europe, where courts are increasingly receptive to arguments linking corporate emissions to specific climate harms and human rights violations. At the very least, by established EU jurisdiction, these cases will pave the road for similar legal challenges.

Another notable example of climate litigation is the Milieudefensie et al. v. Royal Dutch Shell plc. case. The Court of Appeal in The Hague determined that Shell has a legal duty of care to mitigate dangerous climate change based on Dutch tort law, interpreted alongside international human rights instruments as well as EU and international climate law. However, the appeals court overturned part of the previous decision by declining to set a specific emission reduction target for Shell. It found insufficient scientific consensus regarding the exact percentage or pathway for emissions reduction that should be required of an individual company. Therefore, Shell was not given a specific legal obligation to cut emissions by 45% by 2030 compared to 2019.[5]

Regarding Scope 1 and 2 obligations, the court did not impose a specific reduction target but acknowledged that Shell appears to be pursuing its own goal of a 45% reduction by 2035 relative to 2016 levels. For Scope 3 emissions, the Appeals Court recognized that limiting sales of certain products might result in other companies compensating for emissions reduced by Shell. In February 2025, Milieudefensie indicated it would appeal the decision to the Supreme Court of the Netherlands, seeking a designated rate of emissions reductions.[6] The outcomes of these proceedings may significantly influence the contours of climate governance, the enforceability of climate transition plans under EU law and corporate due diligence obligations. A study by the European Central Bank found that firms targeted by climate lawsuits face loan spreads nearly 4% higher than those without such exposure.[7] This has direct implications for trade as exporters and importers with poor environmental records may face higher financing costs, reducing competitiveness. Supply chain partners may also reassess relationships to avoid litigation-linked reputational and financial risks.

As part of the European Commission’s Omnibus Simplification Package, the requirement for large companies to “put into effect” their Climate Transition Plans under Article 22 of the EU CSDDD was removed, effectively reducing the obligation to only documentation rather than actionable implementation. A group of leading European legal scholars argued that this change undermines legal certainty and weakens the EU’s climate commitments under the Paris Agreement. They emphasize that Article 22 was designed as an “obligation of means,” encouraging companies to take responsible steps toward emission reductions. Diluting this requirement could lead to fragmented regulation across Member States, heightened liability exposure for companies, and a rise in greenwashing.[8]

Climate Policy and Trade Competitiveness in the European Union: Legal and Economic Dimensions

The EU’s ambitious climate agenda, anchored in the European Green Deal and the legally binding target of net-zero greenhouse gas emissions by 2050, has introduced a complex interplay between environmental regulation and trade competitiveness. While these policies position the EU as a global leader in climate governance, they also generate significant challenges for energy-intensive industries, which face elevated compliance costs and regulatory burdens compared to competitors in jurisdictions with less stringent climate frameworks.

To mitigate these asymmetries, the EU introduced CBAM, a trade instrument designed to equalize carbon costs between domestic producers and foreign importers. CBAM aims to prevent carbon leakage and protect EU industries from unfair competition, but it has also raised concerns about potential trade disputes and compatibility with World Trade Organization (WTO) rules. Scholars have noted that while CBAM may be legally defensible under environmental exceptions, its implementation must be carefully calibrated to avoid retaliatory measures and ensure procedural fairness.[9]

In response to industry concerns about competitiveness, the European Commission proposed a Clean Industrial Deal in February 2025 as part of a broader competitiveness strategy. This initiative includes €100 billion in funding to support EU-based clean manufacturing and aims to streamline public procurement processes for clean technologies.[10] While there is an overarching alignment with CBAM and circularity, there is growing recognition of economic and political tides pushing aside environmental, climate and sustainability policies amongst the EU’s trading partners. This move also complements loosening of corporate sustainability reporting requirements, reflecting a shift toward regulatory pragmatism amid criticism that EU red tape disadvantages firms relative to counterparts in China and the United States.

In July 2025, the European Commission announced a public consultation to assess the potential extension of CBAM to downstream products, alongside proposals for anti-circumvention measures and revised rules for electricity sector emissions reporting.[11] This consultation reflects growing concern that carbon leakage may occur not only in basic materials (e.g., steel, aluminium, cement) but also in finished goods further down the value chain.[12] The Commission’s initiative also targets circumvention practices, such as re-routing goods through third countries or misclassifying products to avoid CBAM obligations, which threaten the integrity of the mechanism.[13]

In August 2025, the Commission initiated three additional CBAM related consultations concerning: (i) mechanisms for addressing carbon pricing previously incurred in non-EU jurisdictions; (ii) establishing the methodology for the definitive period; and (iii) the treatment of free allowances under the EU ETS. These measures were adopted in October 2025. From a legal perspective, the proposed amendments aim to simplify and strengthen CBAM without undermining its environmental objectives.[14] These changes are consistent with the EU’s broader “Better Regulation” agenda[15] and the Budapest Declaration’s call for a “simplification revolution” to enhance competitiveness and resilience.[16]

However, the extension of CBAM may provoke trade tensions, particularly with countries that view the mechanism as a protectionist tool. The EU will need to balance its climate ambitions with diplomatic engagement and WTO compliance. The ultimate legal architecture of CBAM will have the power to influence global supply chains and determine the EU’s ability to meet its climate targets while maintaining fair competition in international markets.

Integration of Climate Considerations into EU Trade Defence Instruments: Recent Developments and Future Directions

The European Commission has progressively incorporated social and environmental criteria into its Trade Defence Instruments (TDI), including anti-dumping (AD) and anti-subsidy (AS) measures, although a binding regulatory framework is not yet established. Notably, the Commission has considered environmental compliance costs and sustainable production standards in determining target profit prices and in conducting the Union Interest Test. For instance, in the Aluminium Extrusions case, reference was made to an OECD study, demonstrating that European aluminium producers use higher proportions of recycled raw materials and employ more sustainable practices than their Chinese counterparts. This environmental advantage supports the Union’s transition toward a clean and circular economy, as outlined in the Communication on the European Green Deal.[17]

The Commission has also factored in anticipated future costs associated with compliance to Multilateral Environmental Agreements (MEAs) to which the Union is party, thereby adjusting target prices to reflect expected expenses over the duration of the protective measures. In two recent cases involving aluminium converter foil and aluminium flat products, adjustments to injury margins, based on social and environmental compliance costs, resulted in higher levels of duties imposed.[18]

A further evolution in trade defence practice is observed in the integration of projected compliance costs for the EU ETS into the calculation of non-injurious prices for EU producers. This approach aligns with the Union’s broader strategy to fulfil its obligations under multilateral environmental agreements. The estimation of these additional costs has relied on the anticipated price trajectory of EU Allowances over the lifespan of the measures. In 2023, five of six anti-dumping investigations concluding with definitive measures, namely, aluminium road wheels (Morocco), fatty acids (Indonesia), ceramic tiles (India/Türkiye), and polyester yarn (China), incorporated ETS compliance costs, yielding higher non-injurious prices and increased injury margins. It is important to note, however, that the final level of duties in these cases was determined by dumping margins applied under the EU’s Lesser Duty Rule (LDR), which is discretionary and not obligatory under Union law.[19] Consequently, environmental considerations influence the final measures only when injury margins serve as the basis for duty calculation.

Looking ahead, a 2025 study commissioned by the European Parliament recommends substantive reforms to the basic AD/AS regulations to embed environmental and social criteria. The study, “Shortening and simplifying EU anti-dumping and anti-subsidy investigations with a view to practices favourable for SMEs,” advocates for the systematic inclusion of environmental and social dumping criteria in TDI assessments, ensuring that investigations evaluate not only economic harm but also sustainability impacts. Drawing on international best practices, such as New Zealand’s incorporation of environmental effects in public interest tests, the study urges the EU to consider ecological consequences when assessing unfair trade practices. Additionally, the study proposes expanding safeguard measures to address state-sponsored market distortions—particularly in sectors vital to the energy transition, such as critical raw materials like nickel and lithium. These recommendations aim to modernise the EU’s trade framework, rendering it more responsive to global environmental challenges and supporting sustainable economic growth, while maintaining fair competition.[20]

Climate Friendly Trade Measures

Promoting climate-friendly trade requires navigating a complex legal and policy landscape, particularly in reconciling environmental objectives with international trade law. A central challenge lies in ensuring the legal compatibility of climate-related trade measures with World Trade Organization (WTO) rules. While Article XX of the General Agreement on Tariffs and Trade (GATT) provides exceptions for environmental protection (see Section 5), the design of instruments such as carbon border adjustments must avoid arbitrary discrimination and hidden protectionism to withstand WTO scrutiny.[21] Successive US administrations’ decision not to appoint new members to the Appellate Body since 2019 has paralysed dispute resolution through traditional WTO mechanisms. However, the EU may bring, or face, trade disputes under the Multi-Party Interim Appeal Arbitration Arrangement (MPIA), if these disputes relate to one of the fifteen other WTO members which have agreed to this alternative mechanism.

The standardisation of environmental norms across jurisdictions is equally vital, as divergent regulatory frameworks can create trade barriers and undermine the effectiveness of climate measures.[22] The EU has responded by embedding sustainability chapters in its free trade agreements (FTAs), which include binding commitments to international environmental and labour standards, such as the Paris Agreement.[23] One example is the non-regression principle found in Article 391(4) of the EU-UK Trade and Cooperation Agreement (TCA). This principle, part of the TCA’s efforts to create a ‘level playing field’, commits the EU and UK to maintaining the level of environmental protection they ensured at the time of the agreement.

The EU has ratified over a dozen FTAs which include dedicated chapters on trade and sustainable development, which also feature in trade agreements awaiting ratification, such as the EU-Mercosur agreement, as well as in trade negotiations with countries such as India. These chapters are increasingly subject to dispute settlement mechanisms, enhancing their enforceability.

A recent case illustrating the intersection of trade and environmental protection under the TCA concerned the ban on sandeel fishing imposed by the UK and Scottish governments in March 2024.[24] Intended to protect seabird populations, the ban affected EU fishing interests and led to proceedings under Article 739 of the TCA. The EU cited breaches of several TCA provisions, including failures to consider scientific advice and disproportionate measures. In its April 2025 ruling, the Arbitration Tribunal found that the Scottish ban was proportionate and scientifically justified, whereas the English ban lacked sufficient consideration for EU interests and thus violated access rights under Annex 38. The Tribunal clarified that “having regard to” scientific advice and proportionality imposes substantive, not merely procedural, obligations.[25]

Following the ruling, the UK pledged compliance but maintained the English ban after revising its decision-making process. The outcome sets an important precedent for balancing environmental protection with trade rights under the TCA, and highlights the effectiveness of its dispute resolution mechanisms, including the involvement of NGOs and industry stakeholders as amicus curiae.[26]

Finally, the EU leverages trade policy to foster innovation, using instruments like the Innovation Fund and strategic investment frameworks to incentivize low-carbon technologies and green industrial transformation.[27] Together, these efforts reflect a multidimensional strategy to align trade policy with climate imperatives while maintaining legal coherence and global inclusivity.

Climate-related legal risks are reshaping the fabric of international trade within the EU, introducing new compliance challenges, liability exposures, and regulatory complexities. As the EU continues to integrate climate objectives into trade policy, the ongoing tension between environmental ambition and economic interests will remain a focal point for legal scholarship and policy debate.

How trade law can help address climate change

Trade is a key contributor towards climate change. According to the WTO, trade accounts for 20-30% of global greenhouse gas emissions[28], and a 2021 WWF report found that 16% of tropical deforestation linked to international trade in 2017 was attributable to EU imports – representing about 116 million tonnes of CO₂ emissions in that year alone.[29] Trade exacerbates climate change by generating emissions – for example, through the production and transport of goods – however, its impacts are unevenly distributed: studies suggest that high-income countries consume more GHGs than they emit and are therefore importers of GHG emissions. Meanwhile, developing economies tend to be net exporters of GHG emissions. In these countries, production-related carbon emissions have increased, largely due to production for export. On the other hand, production-related carbon emissions in developed economies have largely declined as extraction and manufacturing make up a declining share of many wealthy economies. [30]

At the same time, trade is a vital tool to address climate change. At a basic level, it can help by providing access to technologies and critical goods through the transfer of goods and services; for example, the removal of tariffs or trade barriers on energy-related environmental goods could boost exports and accelerate the adoption of efficient technology.[31] Trade can, however, also be regarded as a potential adaptation mechanism; trade mechanisms can indirectly help countries and economies steer financial resources towards climate change adaptation actions.[32] Novel trading instruments and mechanisms – for example, Article 6 carbon credits – could create new market-based approaches to finance climate action. Finally, trade can also be a multiplier for policy action; when economies act in concert – for example, by pricing GHG emissions – trade can amplify environmental gains.

Implementing trade measures to address climate change is, however, not without its complications. As nations’ climate ambitions increase, unilateral measures designed to address climate change risk could inflame tensions between countries and impose an undue burden on developing countries.

This section examines how trade law can address climate change, with a lens to the EU.

Subsidies and tariffs

Tariffs

Eliminating or reducing tariff barriers could encourage the global transition to net zero by making green technologies more accessible. Import tariffs tend to be lower in carbon-intensive industries compared to clean industries. For example, major importing countries apply average tariffs of between 0.8-1.6% on key fossil fuels such as crude oil; meanwhile, renewable energy equipment faces average tariffs exceeding 3%.[33] The high tariffs faced by renewable technologies are exemplified in the automotive industry, particularly in relation to low-carbon EVs: in 2024, the European Commission announced that it would apply countervailing duties ranging from 7.8%-35.3% on EVs made in China,[34] whilst the US administration imposed a 100% tariff on Chinese EVs.[35] By contrast, conventional combustion vehicles were subject to lower import tariffs.

Rebalancing tariff policies that benefit carbon-intensive sectors and a liberalisation of goods classified as “environmental” can support the low carbon transition and climate adaptation.[36] In the EU, this has been primarily addressed through the introduction of its CBAM, which imposes a carbon tariff on many imported goods (see section 2 below).

Subsidies

Government support mechanisms such as subsidies can help correct market inefficiencies.[37] Key subsidy mechanisms include direct transfer of funds; tax expenditure; induced transfers (market or price support); and transfer of risk to governments.[38] Subsidy-based approaches to reduce GHG emissions have historically been the favoured approach of the United States (primarily in the form of tax incentives) and China, whilst the EU has prioritised carbon pricing.[39]

It is estimated that a global removal of fossil fuel subsidies and subsidy reforms – particularly in the most damaging areas that incentivise exploration and the development of new oil, gas and coal projects – could generate CO2 emission reductions of around 1 Gt per year, roughly 2% from the baseline.[40] The use of subsidies as a mechanism for supporting a transition towards a more climate-friendly economy has increased in the EU, particularly in the context of the green energy transition where subsidies are critical to establish nascent technologies, although fossil fuel subsidies remain high.[41] Examples of this include subsidy auctions to finance low-carbon hydrogen through the European Hydrogen Bank and indirect subsidies through the free allocation of ETS allowances for sustainable aviation fuel. Similarly, the EU’s new State Aid Framework, the Clean Industrial Deal State Aid Framework (CISAF), was adopted in June 2025 and is designed to support the green transition by enabling targeted subsidies in key climate-related sectors.

If not correctly managed, however, subsidies can distort trade and reduce economic efficiency.[42] In particular, fossil fuel subsidies can distort the effectiveness of carbon price signals, putting renewable energy and efficiency investments at a competitive disadvantage. Similarly, the use of trade-distorting measures by other countries – such as the use of aggressive industrial subsidies in China – poses a risk to the EU’s domestic industry.[43] As a result, the EU has increasingly employed trade defence instruments, such as anti-dumping and anti-subsidy measures, to counter unfair trade practices and state-sponsored market distortion. Of these, the EU’s new Foreign Subsidies Regime (FSR) gives the EU significant powers to address market distortions caused by subsidised foreign companies operating within the single market; since its entry into force, the Commission has applied the powers granted to it under the FSR to a number of cases involving foreign companies manufacturing or importing “green” goods, including those involved in renewable energy technologies or equipment such as wind turbines, solar farms, and electric vehicles.

Despite some progress being made towards reform, subsidies are still being used to prop up a number of sectors that contribute towards climate change. According to the EU’s own estimates, “environmentally harmful” energy subsidies amounted to €136 billion in 2023 —representing 38% of all energy subsidies. This is despite the EU’s stated aim to phase out environmentally harmful subsidies.[44] The majority of this support (€93 billion, or 68%) was directed toward fossil fuels. Phasing out these subsidies could unlock significant public funds to bolster energy security and accelerate the clean energy transition. However, national phase-out plans reveal a slow pace of reform: only 43% (€48 billion) of fossil fuel subsidies have been set to end before 2025, with a further 9% (€10 billion) scheduled for phase-out between 2026 and 2030. For the remaining 48% (€53 billion), no clear end-date has been set, or the phase-out is planned for after 2030.[45] The picture remains similar at a global level: fossil fuel subsidies were $7 trillion or 7.1% of GDP in 2022, and are expected to rise to $8.2 trillion by 2030 as the share of fuel consumption in emerging markets (where price gaps are generally larger) continues to climb.[46]

Preventing carbon leakage and accounting for carbon costs: emissions trading systems and carbon border adjustments

The EU became the first major economy to introduce a carbon price and an emissions trading system, the ETS, in 2005.[47] The ETS creates a financial cost for emissions by requiring emitters to surrender allowances for the carbon dioxide they release, thereby incentivising companies to reduce their emissions, if it is more cost-effective than using allowances, through more efficient processes or investment in lower-carbon technologies. Carbon pricing as part of ETSs is an increasingly popular market trading instrument used to mitigate climate externalities; it is estimated that the share of global emissions covered by carbon taxes and ETSs has grown from around 7% in 2013 to 23% in 2023.[48]

The introduction of the EU ETS created the risk of carbon leakage – the shift of production of carbon intensive goods to new locations or “pollution havens”, where producers may be subject to less stringent regulations – and production and export declines for the EU single market. The EU has aimed to address these risks through several safeguards, including the free allocation of allowances to sectors at high risk of carbon leakage. The free allowances help offset the cost of carbon for EU producers, maintaining competitiveness while encouraging gradual decarbonisation. However, progressive reforms to the EU ETS aim to gradually eliminate free emission allowances while simultaneously tightening the overall emissions cap for regulated companies. While this strengthens climate ambition, it also increases the risk of carbon leakage compared to a more flexible system and undermines the global competitiveness of EU industries.

The EU CBAM requires EU importers to pay an adjustment or carbon tax on embedded carbon emissions for emission-intensive goods equivalent to the EU ETS carbon price. The instrument is intended to level the playing field by ensuring that imports into the EU face similar carbon prices as goods produced in the EU, preventing the shift of production overseas and limiting carbon leakage.

The theoretical advantages of carbon border adjustments are twofold. Firstly, they have the potential to prevent carbon leakage by effectively imposing tariffs on countries with weaker environmental regulations, thereby preserving the competitiveness of domestic industries and preventing production from shifting to less regulated regions. Secondly, carbon border adjustments can incentivise other nations to strengthen their environmental policies to avoid the penalties associated with paying these tariffs. It is estimated that without CBAM, for every 1 tonne of CO2e emissions avoided within the EU due to tighter EU ETS, approximately 0.19 tonnes of emissions would “leak” overseas.[49] By contrast, with CBAM, each tonne of CO2 avoided in the EU is mirrored by a decrease of 0.12 tonnes outside the EU.[50]

The EU’s intention to extend CBAM to a wider range of products and tightening enforcement is also significant. The EU seeks to reinforce its climate leadership and ensure that its decarbonisation efforts are not offset by emissions embedded in imports. Simplifications introduced as part of ‘Omnibus I’ initiatives will maintain 99 percent of embedded emissions in-scope, while exempting 90 percent of importers from CBAM obligations. This approach aligns with Article 191 and 192(1) of the Treaty on the Functioning of the European Union, which mandates environmental protection and climate action at the EU level.[51]

Notwithstanding this, the introduction of CBAM has faced criticism as a trade instrument and risks flaming tensions between CBAM and non-CBAM countries or blocs. In particular, carbon border measures have been noted to be at risk of breaching WTO rules if they are demonstrably discriminatory or a form of disguised protectionism.[52] For example, under the “Most Favoured Nation” principle, WTO members are prohibited from treating equivalent imports differently depending on their country of origin. In the context of CBAM, this may be seen by applying different emissions taxes or levies to the same product (such as steel) when imported from different countries. Recent disputes in relation to the implementation of CBAM have focussed on CBAM’s compatibility with the Agreement on Subsidies and Countervailing Measures, the WTO protocol that regulates the use of subsidies and countervailing measures by WTO members, with some nations arguing that the CBAM effectively provides a financial benefit to EU producers by imposing additional costs on imports, thereby distorting competition.[53] Wider trade concerns also include retaliatory action, whereby trading partners introduce tariffs on products from blocs or countries which have introduced CBAMs.

Carbon tariffs have also been accused of undermining climate justice by transferring the financial burden of climate policies in developed countries onto developing nations. Many of the EU’s trading partners exporting carbon-intensive goods, especially developing countries, have raised concerns that the EU CBAM would substantially curtail their exports and competitiveness, limiting the ability of least developed countries (LDCs) to put resources towards climate change adaptation and mitigation.[54] It has been argued that the EU, and other countries who implement a carbon border tax measure, should design CBAM measures in such a way that they either fully exempt LDCs who are also climate vulnerable countries, and have exported goods from sectors covered by the CBAM into the EU, or re-distribute revenue from CBAM towards financing the green transition in LDCs.[55]

Import standards and due diligence requirements promoting climate benefits

Trade policy can contribute to minimising climate change by promoting responsible business conduct. Domestic sustainability concerns within the EU prompted the integration of sustainability as a central goal in the EU’s 2021 trade policy review, along with related measures addressing deforestation, due diligence, and product regulation.^[56] In this regard, the Commission’s recent legislative agenda in relation to the Corporate Sustainability Reporting Directive (CSRD) and CSDDD are particularly noteworthy[57]. The CSDDD seeks to ensure that companies operating within the EU single market actively support the EU’s transition to a climate-neutral economy by requiring firms to establish governance and management systems, and to take concrete steps to identify and mitigate environmental harm across their own operations, subsidiaries, and global value chains. Additionally, the CSDDD aims to ensure the adoption and implementation of climate transition plans aimed at reducing emissions.[58] In tandem, the EU CSRD will require certain large companies in the EU to report their environmental impacts, including in their supply chains.

At the same time, trade policies seeking to “green” the supply chains of important commodities and reduce the climate impacts associated with them are shaping the market for sustainable goods that contribute towards mitigating the impacts of climate change. For example, the EU’s Deforestation Regulation (EUDR) uses market access as a lever to reduce deforestation and land-use change, two of the primary drivers of emissions contributing to climate change. By making access to the EU market for certain “forest-risk” commodities and related products conditional on compliance with deforestation-free sourcing, the EUDR requires producers and exporters worldwide to adopt more sustainable practices. This not only helps mitigate climate change, but also fosters a shift in global supply chains toward greater environmental accountability and transparency. Notwithstanding this, many exporting countries argue that the EUDR acts as a non-tariff trade barrier, unfairly penalising countries in the Global South.

Trade and free trade agreements

Under Article 191(1) of the Treaty on the Functioning of the European Union, the EU is required to promote “measures at international level to deal with regional and worldwide environmental problems and in particular combating climate change”. As the main instruments of EU external policy,[59] EU FTAs are important levers for climate change. Since 2010, most EU FTAs include dedicated trade and sustainable development (TSD) chapters that mandate the effective implementation of international environmental agreements, including the Paris Agreement on Climate Change, and prohibit the weakening of environmental laws to attract trade or investment. These are designed to prevent a “race to the bottom”, and encourage cooperation on transitioning to a circular and resource-efficient economy. EU trade agreements also support climate goals by liberalising trade in environmental goods and services (such as renewable energy technologies) and facilitating sustainable public procurement[60]. Studies show that this approach can work: the European Commission evaluated that the EU-Korea FTA led to an overall net reduction of 4.1 million tons in global CO2 emissions. The reduction was driven by trade diversion in favour of EU and Korean firms from more polluting producers in China and the US[61].

In 2022, the European Commission laid out its plan to enhance the contribution of EU trade agreements in protecting the climate and introduced the possibility of mainstreaming sustainability beyond the TSD chapter of trade agreements and trade sanctions for material breaches of climate commitments, such as non-compliance with the Paris Agreement[62]. The EU-New Zealand FTA, which was signed on 9 July 2023, was the first agreement to integrate the new TSD approach by including a dedicated provision on trade and fossil fuel subsidies reform. The FTA also commits the parties to trade sanctions as a last resort in case of “actions or omissions which materially defeat the object and purpose of the Paris Agreement”[63]. Additionally, the EU’s Aid for Trade program supports infrastructure and capacity-building in developing countries, assisting trading partners meet climate-related trade requirements and benefit from green growth opportunities.[64] For example, the EU-Kenya Economic Partnership Agreement includes the most ambitious sustainability provisions ever signed in an EU trade deal with a developing country. [65]

However, the efficacy of TSDs in FTAs continues to be questioned. For example, it has been noted that if country-specific TSD provisions do not use stronger language, the enforceability of provisions remains an issue. Similarly, the lack of consideration of compliance with multilateral environmental agreements beyond the Paris Agreement is seen as a limiting factor. Commitments from trade partners to implement measures to tackle other priorities linked to climate change (such as sustainable forest management and conservation) should also be encouraged. Key recommendations include applying more ambitious TSD provisions retrospectively to existing FTAs and incorporating a “ratchet” mechanism for strengthened environmental commitments over time[66].

More recently, efforts to embed climate change commitments within trade agreements have faced headwinds under the EU’s drive towards regulatory simplification and the Trump administration’s climate deregulation stance. In the Joint Statement on a United States-European Union framework on a trade agreement released in August 2025, the EU affirmed that its sustainability agenda – including the CSRD, CSDDD, EUDR and CBAM – would avoid placing “undue restrictions” on transatlantic trade[67].

General exceptions

General exceptions under trade law offer a key mechanism for advancing environmental objectives through trade. Article XX of the GATT outlines a set of exceptions to its rules, including provisions for measures deemed necessary to protect public morals, and the health of humans, animals, or plants. These exceptions can serve as a legal basis for justifying green policies and instruments within the framework of international trade.

The European Union’s trade agreements increasingly reflect its commitment to climate action, notably through the inclusion of general exception clauses modelled on Article XX of the GATT. These clauses allow for trade-restrictive measures that pursue legitimate public policy objectives, including environmental protection. A key development in this area is the EU-Mercosur Partnership Agreement, approved by the Council in January 2026. Article XX of the agreement explicitly references the Paris Agreement and the UN Framework Convention on Climate Change (UNFCCC) as ‘essential elements’. This designation is legally significant: under EU treaty practice, essential elements are core commitments whose breach may justify the suspension or termination of trade preferences. This approach reflects a broader EU strategy to align trade policy with climate objectives, reinforcing the legal and political weight of environmental commitments in its external relations. At least in principle, the EU retains the ability to adopt trade-restrictive environmental measures aimed at fulfilling commitments under the Paris Agreement.[68]While the EU-Mercosur Partnership has been provisionally applied, Parliament has requested an opinion on the deal from the CJEU. This request centres on the deal’s legal validity, but environmental issues have been relevant in, for example, concerns that certain provisions may limit the application of the precautionary principle.

Under WTO rules, there must be a clear and robust causal connection between a measure and its environmental objective. When dealing with complex issues like climate change, this link can be demonstrated over time or by showing that the measure makes a meaningful contribution to the goal, e.g. through quantitative projections or well-supported qualitative reasoning based on tested and evidence-backed hypotheses (Brazil – Retreaded Tyres). The WTO has shown a growing willingness to interpret the GATT in a less restrictive manner, with increased recognition of environmental concerns. While earlier rulings – such as in the Tuna/Dolphin case – rejected U.S. measures for imposing extraterritorial restrictions based on production methods, more recent decisions, like in the US–Shrimp case, have upheld measures that support environmental protection and the broader sustainability transition.

However, several key limitations remain that continue to constrain the extent to which the GATT Article XX or similar exceptions can support the net zero transition as trade mechanisms. In some cases, this is due to the drafting. For example, commentators have observed that, unlike the EU-Mercosur Agreement, both the EU-New Zealand Agreement and the EU-UK Trade and Cooperation Agreement avoid referring to the Paris Agreement as an ‘essential element’. Instead, they incorporate more precise and detailed provisions that reduce ambiguity around what constitutes non-compliance. In contrast, the EU-Mercosur Agreement’s use of the term ‘essential element’ sets a relatively low threshold for compliance, leaving significant room for interpretation and potentially weakening enforcement[69]. Furthermore, even if a measure qualifies under one of the listed exceptions, it must also satisfy the chapeau of Article XX, meaning the measure cannot be applied in a manner that would constitute arbitrary or unjustifiable discrimination between countries where the same conditions prevail, nor can it be a disguised restriction on international trade, as illustrated by the Gasoline case. Historically, this has been a very high threshold to meet. Finally, broader difficulties in trade dispute resolution, particularly the paralysed WTO Appellate Body, may limit the extent to which the EU has clarity about the legal status of environmental exceptions.

Nationally Determined Contributions and trade agreements

There is an increasing synergy between trade and Nationally Determined Contributions (NDCs) under the Paris Agreement. In particular, trade has a role to play in the implementation of market-based mechanisms such as Article 6 of the Paris Agreement.

Article 6 of the Paris Agreement facilitates voluntary international cooperation on climate action by allowing countries to trade carbon credits to meet their NDCs. It establishes two key pathways for these transactions: Article 6.2 permits the exchange of Internationally Transferred Mitigation Outcomes (ITMOs) through bilateral or multilateral agreements, while Article 6.4 introduces a centralised system overseen by the UNFCCC, enabling host and buyer countries to trade credits under a standardised framework.

In this regard, the operationalisation of Article 6 could unlock financial flows from developed to developing countries, supporting climate action and sustainable development projects. IETA has estimated that the implementation of Article 6-compatible carbon markets could allow countries to achieve net-zero targets with greater economic efficiency. Specifically, the market value of financial flows between countries could exceed $1 trillion per year in 2050 and reduce mitigation costs by $21 trillion between 2020 and 2050.[70]

The EU does not currently plan to use Article 6 carbon credits to meet its 2030 NDC; instead, it remains committed to achieving its 2030 climate targets primarily through domestic, EU-based emissions reductions. However, the EU has signalled a potential shift in approach for its 2040 climate targets. In July 2025, the European Commission proposed incorporating Article 6 carbon credits into its 2040 climate strategy. If adopted, this would allow the EU to use a limited number of credits under Article 6.2 and Article 6.4, starting from 2036. These international credits may account for up to 3% of the EU’s overall 2040 emissions reduction target.[71]

These developments underscore a central tension in EU climate policy: balancing environmental ambition with economic resilience. While innovation funding and regulatory flexibility may ease the transition for affected sectors, the long-term success of the EU’s climate-trade nexus will depend on its ability to foster industrial transformation without compromising legal coherence or international competitiveness.

[1] https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/delivering-european-green-deal/fit-55-delivering-proposals_en.

[2] Countries may be excluded from CBAM if their emissions trading system is linked to the EU ETS, as is the case in Switzerland.

[3] Recommon.org Press Release, 22 July 2025.

[4] https://www.business-humanrights.org/en/latest-news/total-lawsuit-re-climate-change-france/.

[5] https://climatecasechart.com/non-us-case/milieudefensie-et-al-v-royal-dutch-shell-plc/.

[6] https://climatecasechart.com/non-us-case/milieudefensie-et-al-v-royal-dutch-shell-plc/.

[7] The impact of climate litigation risk on firms’ cost of bank loans, ECB Working Paper Series No 3087.

[8] “Legal Scholars Concerned about the Weakening of Article 22 CSDDD on Climate Transition Plans,” 8 May 2025.

[9] Mehling, M., van Asselt, H., Das, K., Droege, S., & Verkuijl, C. (2019). Designing Border Carbon Adjustments for Climate Policy. Review of European, Comparative & International Environmental Law, 28(2), 61–70.

[10] Clean Industrial Deal – European Commission.

[11] CBAM: Public consultation on the extension of CBAM to downstream products – European Commission

[12] CBAM: Public consultation on the extension of CBAM to downstream products – European Commission