Border Tax Adjustment to Combat Carbon Leakage: A Myth

Abstract

Discussions about unilateral trade measures as a means to combat climate change have become quite fashionable notwithstanding warnings against unilateralism and protectionism from the leaders of G-8 and G-20 in times of an economic crisis. A system of ‘border tax adjustment’ on imports is suggested in order to countervail the cost of domestic emission trading systems. The proponents argue that without such measures, a country having adopted an emission trading system would not only lose economically but also environmentally. The standard reason given to justify this argument is the notion of carbon leakage, namely, the danger that energy-intensive production would move from countries with domestic policies to reduce greenhouse gas emissions based on a carbon price for emitters to regions that do not have a binding and costly regulatory CO2 regime. Recently, the discussions have been fuelled by the Waxman/Markey Bill, adopted on 26 June 2009 by the House of Representatives and by a French non-paper, presented at the informal EU Environment Council held in July 2009. These two initiatives aim to establish, in the context of a domestic emission trading system, a system of ‘border tax adjustment’ against some imports from some countries, namely, those that are seen as not contributing enough in the fight against climate change. The revised European ETS Directive does not provide for border measures. It instructs the European Commission to submit a report to the Council and the European Parliament no later than 30 June 2010 assessing whether energy-intensive sectors are exposed to a significant risk of carbon leakage and explicitly outlines the inclusion of imports in the European Union’s ETS system as one of several actions. The joint WTO-UNEP paper on trade and climate change has been widely regarded as a justification from a legal point of view of such measures. While there are many proponents for such measures, there remains a considerable amount of skepticism; politicians, business organizations, and scholars have warned against such an approach. The following short note will discuss the feasibility of ‘border tax adjustment’ in relation to domestic climate change legislation as well as some WTO legal aspects along the following questions: (1) Are there target countries for border measures? (2) Would border measures help to combat climate change and could they be administered without too much bureaucracy? (3) How should border measures be qualified under General Agreement on Tariffs and Trade (GATT)?