The Potential of Tariff Policy for Climate Change Mitigation: Legal and Economic Analysis

Abstract

This article addresses a potential role that tariff policy can play in encouraging countries to take part in a multilateral effort to mitigate climate change: it complements discussions on border tax adjustment which in law is limited to domestic taxation. It assesses whether increasing tariffs on products from polluting industries amounts to a violation of World Trade Organization (WTO) rules and whether protectionism in this case can be differentiated from genuine environmental concerns. It argues that while lowering tariffs on environmental goods may serve as a carrot to promote dissemination of cleaner technologies, tariff deconsolidation is a legitimate stick to encourage polluting countries to move towards an international climate agreement. The article further explores this view by undertaking a partial equilibrium analysis to examine the impact of a unilateral 5% tariff increase on the most carbon-intensive imports from countries not committed to climate polices. Our results, however, suggest that plurilateral action would be more effective than countries pursuing tariff policy in isolation, with the former leading to an average 1.4% net reduction in carbon-intensive imports from a 5% increase in their tariffs.