Carbon Border Tax Adjustment from WTO Point of View

Abstract

The issue of carbon border tax adjustment (CBTA) has been coming up for the last few years as a viable policy alternative from both sides of the Atlantic Ocean. The economic rationale is that when a domestic producer is subject to a domestic carbon emission taxation and faces competition with an import from a country without such taxation, that domestic producer will be in a serious market disadvantage. From the legal point of view, the author is interested in reviewing whether it can be justified under the GATT and the Agreement on Subsidies and Countervailing Measures. (ASCM)The issue of border tax adjustments was firstly dealt with in 1970 in a famous GATT Working Party Report on Border Tax Adjustment (L/3464). In that report, the Working Party did not provide a final answer on the WTO-consistency of border tax adjustment (BTA) under the GATT. However, it did point out that it may be inconsistent to Article III:2 of the GATT if it is applied as a discriminatory taxation between the domestic and foreign producers. The author then considers that the carbon border tax adjustment is likely to be inconsistent with Article III:2 of the GATT. Then whether it can be justified under GATT Article XX is also very crucial.From the ASCM point of view, there are two issues to consider: 1) whether the tax itself can constitute a prohibited subsidy or an actionable subsidy under the ASCM, and 2) how system of distribution of the tax is viewed under the ASCM. However, first question is hard to answer as it is not sure whether CBTA constitutes a “subsidy” under the ASCM. In conclusion, the author considers that States must be more careful to approach the issue of CBTA. One approach may be to reach a multilateral agreement which provides clear sets of rules to exempt certain types of carbon border taxes within or outside the WTO framework.