Border Adjustments, also known as Border Tax Adjustments or Border Tax Assessments, are import fees levied by carbon-taxing countries on goods manufactured in non-carbon-taxing countries.
As a starting point, we strongly recommend the 2013 report, Changing Climate for Carbon Taxes: Who’s Afraid of the WTO?, by former WTO appellate officer Jennifer Hillman, published by the American Action Forum and German Marshall Fund. Hillman concluded that both the letter and spirit of WTO trade rules permit countries with carbon taxes to adopt “non-discriminatory harmonizing tariffs.” These would protect energy-intensive trade-exposed industries by eliminating the competitive advantage enjoyed by exports from countries that don’t tax carbon emissions. These tariffs would also create incentives for non-carbon taxing countries to adopt carbon taxes, since harmonizing tariffs represent revenue that the exporting country could garner by imposing its own carbon tax.
Following a thorough analysis of the WTO provisions governing harmonizing border provisions for carbon taxes, Hillman concluded:”… provided that policymakers carefully design a [carbon] tax, keeping in mind the basic requirements of the WTO not to discriminate in favor of domestic producers or to favor imports from certain countries over others … the threat of WTO challenges should not present a barrier to policymakers wishing to adopt a carbon tax system now.”
The impetus behind border adjustments is the desire to ensure a level playing field in international trade while internalizing the costs of climate damage into prices of goods and services. As Columbia University economics professor and Nobel Laureate Joseph Stiglitz wrote almost a decade ago, “Not paying the cost of damage to the environment is a subsidy, just as not paying the full costs of workers would be.” (Stiglitz was chair of president Clinton’s Council of Economic Advisers (1995-97) and Chief Economist and Senior Vice President of the World Bank (1997-2000; full bio here). He and others urge adoption of carbon border adjustments to eliminate the artificial advantage adhering to firms that manufacture goods or provide services for world markets, from countries that fail to tax or otherwise price carbon emissions at prevailing world levels.
In most of the developed countries of the world today, firms are paying the cost of pollution to the global environment, in the form of taxes imposed on coal, oil, and gas. But American firms are being subsidized—and massively so. There is a simple remedy: other countries should prohibit the importation of American goods produced using energy intensive technologies, or, at the very least, impose a high tax on them, to offset the subsidy that those goods currently are receiving.
Actually, the United States itself has recognized this principle. It prohibited the importation of Thai shrimp that had been caught in “turtle unfriendly” nets, nets that caused unnecessary deaths of large numbers of these endangered species. Though the manner in which the United States had imposed the restriction was criticized, the WTO sustained the important principle that global environmental concerns trump narrow commercial interests, as well they should.
But if one can justify restricting importation of shrimp in order to protect turtles, certainly one can justify restricting importation of goods produced by technologies that unnecessarily pollute our atmosphere, in order to protect the precious global atmosphere upon which we all depend for our very well-being.
[A New Agenda For Global Warming, Economists’ Voice, July 2006.]
Stiglitz’s Columbia University Web page has links to his other articles and publications on border tax adjustments and other climate change issues.
John Hontelez, secretary general of the European Environmental Bureau (a federation of 140 environmental organizations based largely in European Union member states), made similar points in a widely-circulated piece from April 2007, Time to tax the carbon dodgers. He wrote:
Border Tax Adjustments (BTAs) might be the answer which allows the EU to develop responsible climate policies without having to wait for other countries. They would result in products imported from the US being taxed to compensate for resulting differences in production costs. Thus EU firms would be protected against unfair, carbon-careless competition from outside.
Bridges, a newsletter published by the International Centre for Trade and Sustainable Development reported in 2006 that then-French Prime Minister Dominique de Villepin suggested that countries that don’t join a post-2012 international treaty on climate change should face extra tariffs on their industrial exports. According to Bridges, de Villepin argued that “Countries like the US and China … should not be allowed to benefit from efforts to reduce climate change without having to shoulder some of the costs or suffer from any related loss in competitiveness.” (The quote is from Bridges rather than from de Villepin himself.)
The Bridges article noted that de Villepin’s proposal has not moved forward, partly owing to concerns that border tax adjustments might be proscribed under World Trade Organization rules: According to the article:
Opinions are divided on whether WTO law permits border tax adjustments for taxable inputs that are not physically incorporated into the final traded product. For instance, it is not clear if an import tax could vary based on the amount of carbon dioxide emitted during a good’s production — WTO rules would have to be interpreted in a way that considers products not to be ‘like’ each other based on their carbon footprints.
The Bridges article quotes several authorities on border tax adjustments and contains useful links to documents on the subject from the 2006 UN Climate Conference in Nairobi at which the issue was aired.
Prof. Joost Pauwelyn, a law professor at Duke University subsequently published U.S. Federal Climate Policy and Competitiveness Concerns: The Limits and Options of International Trade Law, which holds out strong hope that border tax adjustments could pass muster under WTO and GATT (General Agreement on Tariffs & Trades) rules. Prof. Joost Pauwelyn writes:
First, a carbon tax or emission credits requirement on imports could be framed as WTO permissible “border adjustment” of a domestic, US tax or cap-and-trade system (Section V). Crucially, if such “border adjustment” does not discriminate imports as against US products, and does not discriminate some imports as against others, this type of competitiveness provision could pass WTO scrutiny without any reference to the environmental exceptions in Article XX of the General Agreement on Tariffs and Trade (“GATT”).
Second, even if “border adjustment” would not be permitted for process-based measures such as a domestic, US carbon tax, regulation or cap-and-trade system, and/or such “border adjustment” would be found to be discriminatory, the resulting GATT violation may still be justified by the environmental exceptions in GATT Article XX (Section VI). Such justification would then most likely center on whether, under the introductory phrase of GATT Article XX, a US carbon duty, emission credit requirement or other regulation on imports is applied on a variable scale that takes account of local conditions in foreign countries, including their own efforts to fight global warming and the level of economic development in developing countries.
Pauwelyn has recently updated this paper. See Carbon Leakage Measures and Border Tax Adjustments Under WTO Law, (Graduate Institute of International and Development Studies, March 21, 2012).
We also recommend Comparing Policies to Combat Emissions Leakage Border Tax Adjustments versus Rebates by Carolyn Fischer and Alan K. Fox (Resources for the Future, 2009), and The Role of Border Tax Adjustments in Environmental Taxation (1998), by Andrew Hoerner, sustainable economics director of the innovative think-tank, Redefining Progress.
More on Border Tax Adjustments
[Written in response to a question we received about carbon taxation of imported Canadian tar sands oil, March 2013]:
In their seminal Design of a Carbon Tax (Harvard Envt’l Law Rev, 2009), Metcalf and Weisbach suggested (at pp 541-552) imposing additional border charges on foreign goods whose carbon footprint is larger than that of the domestic equivalent product. They point out that such production-based adjustments are needed to avoid creating perverse incentives for carbon “leakage,” specifically offshoring carbon-intensive processes.
They caution that while GATT/WTO rules authorize product-based tariffs, i.e. “like taxes on like products,” WTO’s (evidently less robust) environmental provisions would need to be invoked to support BTA’s based on production processes. Recently, the U.S. set an awful example by blocking the European Union’s carbon charge on aviation fuel which was based on WTO environmental provisions.
In Unilateral Carbon Taxes, Border Tax Adjustments, and Carbon Leakage (2012), Weisbach et al. found by modeling various scenarios that production based BTA’s would be needed to prevent substantial carbon “leakage” of the kind that importation of Canadian tar sands oil (with its much higher carbon footprint) would involve.
And most recently, A Guide for the Concerned: Guidance on the Elaboration and Implementation of Border Carbon Adjustment (International Institute for Sustainable Development, 2012) cautions that “BCA [a Border Carbon Adjustment] is at best a fall-back measure in absence of multilateral agreement, and at worst a divisive and imperfect tool.” While we don’t fully accept that assessment, the paper does sound an important cautionary note.
In short, accounting for differing production processes is complex and fraught with technical, legal and political challenges. But even a U.S.-enacted a carbon tax with only a product-based BCA should eliminate any advantage of Canadian tar sands oil by taxing it at domestic-equivalent levels. An additional (and more controversial) process-based BCA would be needed to account for the additional CO2 emissions from tar sands production above those of conventionally-produced domestic oil.
For more discussion of globalization and trade issues, see our blog posts:
Imagine: A Harmonized, Global CO2 Tax (March 11, 2009)
Trade Expert Is Latest to Endorse Border Adjustments to Carbon Taxes (November 12, 2013)