Implementing carbon tax: from rhetoric to reality

Abstract

Climate change and rising greenhouse gas emissions are the greatest concerns facing humankind today. The year 2019 was a particularly bad year for Planet Earth. The exceptional rise in atmospheric temperatures and raging heat, led to unprecedented and prolonged wildfires–the amazon rainforest fire, the Australian bushfire and a series of wildfires in the Arctic region. Recognising the urgency, the international community has agreed to act collectively. As part of the Paris Climate Agreement, most countries have undertaken carbon reduction targets. As the overall mitigation targets under the Paris Agreement appear inadequate, countries have been exploring additional approaches for carbon mitigation. One option that certain WTO Members have been considering is to impose a price on carbon in the nature of a Pigouvian tax. In the present case, it will be a tax on carbon emissions. However, imposing a carbon tax only on domestic goods will result in issues of carbon leakage as well as decreased competitiveness of the domestic industry. Therefore, WTO Members (such as the European Union) are proactively considering imposition of equivalent taxes on imports also. Such equivalent taxes will essentially be in the nature of a border adjustment taxes under the GATT 1994. This Article examines the compatibility of the border tax adjustments on carbon under the relevant provisions of the GATT 1994, in light of the jurisprudence developed so far. The Article also assesses the possibility for Members to have a recourse to general exceptions under Article XX of the GATT, were a border tax adjustment measure held inconsistent with the substantial obligations under the GATT 1994. In addition to the popular alternatives available under Article XX(b) and Article XX(g) of the GATT 1994, the article has explored the possibility of resorting to Article XX(a), in light of the recent findings in United States - Tariff Measures on Certain Goods from China . Finally, the Article highlights that in order to ensure the overall social and political acceptability of a potential border carbon measure, WTO Members need to be mindful of the multilateral mandate developed in the Paris Agreement.