Border Tax Adjustments Research Articles

Emission Taxes and Border Tax Adjustments for Oligopolistic Industries

AbstractWe examine the welfare consequences of an emission tax with and without a border tax adjustment (BTA) for an imperfectly competitive industry, where intra‐industry trade arises between countries. BTA allows a government to impose a pollution‐content tariff on imports and refund an emission tax for export sales. We analyse the structure of an optimal emission tax with BTA when a government chooses its emission tax rate to maximize its national welfare. We show that the optimal emission tax policy with BTA achieves greater national welfare and higher environmental quality than the optimal policy without BTA.

Border Tax Adjustments and Environmental Protection: The Role of Taxes and the GATT Limits

In recent decades environmental protection and more generally global warming have attracted great political concern. In this respect taxes can be some valid governmental tools to pursue specific environmental purposes, as well as to create incentives to change unsustainable patterns of production and consumption into green ones. This paper first discusses about the role that taxes can play as a political instrument to stimulate responsible behaviours and illustrates some internationally shared principles regarding environmental policies. Then it provides for a definition of Border Tax (BTA) in order to focus on whether the application of BTA with a view to implement some friendly-environment policies may be in contravention with international trade law, as provided for in the GATT. The analysis concludes that even if BTA are generally admitted, under the destination principle, in the WTO context, there still remain some difficult issues to be solved. Adjustments imposed by States in order to pursue environmental goals should comply with all the requirements set forth in the GATT, but the lack of clear definitions and the case-by-case approach taken by the WTO case-law cannot give a clear answer to the question as to whether BTA for environmental purposes are consistent with international trade law. A solution to the problem might therefore reside in a case-by-case approach, in a broader international cooperation and in more enhanced market solutions (i.e. consumers should prefer environmental-friendly products to polluting ones).

Carbon tariffs and cooperative outcomes

In the absence of an international environmental agreement (IEA) on climate change, a country may be reluctant to unilaterally implement environmental actions, as this may lead to the relocation of firms to other, lax-on-pollution countries. To avoid this problem, while still taking care of the environment, a country may impose a carbon tariff that adjusts for the differences between its own carbon tax and the other country's tax. We consider two countries with a representative firm in each one, and characterize and contrast the equilibrium strategies and outcomes in three scenarios. In the first (benchmark) scenario, in a first stage the regulators in the two countries determine the carbon taxes noncooperatively, and in a second stage, the firms compete à la Cournot. In the second scenario, the regulators cooperate in determining the carbon taxes, while the firms still play a noncooperative Cournot game. In the third scenario, we add another player, e.g., the World Trade Organization, which announced a border tax in a prior stage; the game is then played as in the first scenario. Our two major results are (i) a border-tax adjustment (BTA) mimics quite well the cooperative solution in setting the carbon taxes as in scenario two. This means that a BTA may be a way around the lack of enthusiasm for an IEA. (ii) All of our simulations show that a partial correction of the difference in taxes is sufficient to maximize total welfare. In short, the conclusion is that a BTA may be used as a credible threat to achieve an outcome that is very close to the cooperative outcome.

Proposal for a national inventory adjustment for trade in the presence of border carbon adjustment: Assessing carbon tax policy in Japan

In this paper we pointed out a hidden inequality in accounting for trade-related emissions in the presence of border carbon adjustment. Under a domestic carbon pricing policy, producers pay for the carbon costs in exchange for the right to emit. Under border carbon adjustment, however, the exporting country pays for the carbon costs of their exports to the importing country but not be given any emission credits. As a result, export-related emissions will be remained in the national inventory of the exporting country based on the UNFCCC inventory approach. This hidden inequality is important to climate policy but has not yet been pointed out. To address this issue we propose a method of National Inventory Adjustment for Trade, by which export-related emissions will be deducted from the national inventory of the exporting country and added to the national inventory of the importing country which implements border carbon adjustment. To assess the policy impacts, we simulated a carbon tax policy with border tax adjustment for Japan using a multi-region computable general equilibrium model. The results indicate that with the National Inventory Adjustment for Trade, both Japan′s national inventory and the carbon leakage effects of Japan′s climate policy will be greatly different.

How large are the impacts of carbon-motivated border tax adjustments on China and how to mitigate them?

There have been growing clamours for carbon-motivated border tax adjustments (CBTAs) targeted at countries that do not accept the carbon emission reduction targets. Currently, China is the largest carbon emitter with large annual incremental carbon emissions and might have to face the challenge of CBTA. Therefore, it is a pressing policy challenge for the government to get prepared for mitigating the negative impacts of CBTAs on China. In this article, we compare the impacts of CBTAs across large developing economies and compare the performances of different policy options to mitigate the negative impacts. The main findings are as follows. First, CBTA would affect different economies and different sectors differently. CBTA would result in a shift of production across sectors and relocation of output from the target countries to CBTA users. Second, CBTA would contribute to world's emissions reduction, but less than expected due to carbon leakage. Finally, policy options, which could reduce the present distorting effects, would be preferred to other policy options that would add additional distorting effects to the economy. Looking ahead, the Chinese government should get prepared for mitigating the negative impacts of CBTAs because its economy could be adversely affected.

Measuring the Carbon Intensity of the South African Economy

AbstractWe estimate the carbon intensity of industries, products and households in South Africa using data from a high resolution supply‐use table. Direct and indirect carbon usage is measured using multiplier methods that capture inter‐industry linkages and multi‐product supply chains. Carbon intensity is found to be high for exports but low for major employing sectors. Middle‐income households are the most carbon‐intensive consumers. These results suggest that carbon pricing policies (without border tax adjustments) would adversely affect export earnings, but should not disproportionately hurt workers or poorer households. Seven percent of emissions arise through marketing margins, implying that carbon pricing should be accompanied by supporting public policies and investments.

Trade effects of alternative carbon border-tax schemes

In industrial countries contemplating emissions reductions, there have been calls for additional border taxes on imports from countries with lower carbon prices. A key factor affecting the impact of any border taxes is whether they are based on the carbon content of imports or the carbon content of domestic production. Our quantitative estimates suggest that the former action when applied to all merchandise imports would address competitiveness and environmental concerns in high-income countries but with serious consequences for trading partners. For example, China’s manufacturing exports would decline by one-fifth and those of all low- and middle-income countries by 15 %; the corresponding declines in real income would be 3.7 and 2.4 %. Border tax adjustment based on the carbon content in domestic production would broadly address the competitiveness concerns of producers in high-income countries and less adversely affect developing country trade.

Is there a case for carbon-based border tax adjustment? An applied general equilibrium analysis

Concern that unilateral Greenhouse Gas (GHG) emission reductions could foster carbon leakage and undermine the international competitiveness of domestic industry has led to growing calls for carbon-based Border-Tax Adjustments (BTAs). This article uses a global general equilibrium model to assess the economic effects of BTAs and comes to three main conclusions. First, BTAs can reduce carbon leakage if the coalition of countries taking action to reduce GHG emissions is small, because in this case leakage (while typically small) mainly occurs through international trade competitiveness losses rather than through declines in world fossil fuel prices. Second, even though the economic effects of BTAs vary somewhat depending on how they are implemented, their welfare impact is typically small, and slightly negative at the world level. Third, and perhaps more strikingly, BTAs do not necessarily curb the output losses incurred by the domestic Energy Intensive-Industries (EIIs) they are intended to protect in the first place. This is in part because EIIs in industrialized countries make important use of carbon-intensive intermediate inputs produced by EIIs in other geographical areas. Another, deeper explanation is that EIIs are ultimately more adversely affected by the existence of a carbon price itself than by any international competitiveness losses. These findings are shown to be robust to key model parameters, country coverage, targets and design features of BTAs.

Direct versus embodied emissions: criteria for determining the carbon coverage for border carbon adjustment

Background: For effective and practical implementation of border carbon adjustment, it is crucial to determine the carbon content of imports/exports. In this paper we discussed two criteria. One is direct carbon emissions, which accounts for direct emissions generated from production. The other is embodied emissions, which accounts for the total emissions generated directly and indirectly in the supply chain. Results/discussion: By simulating Japan’s carbon tax policy and three border tax adjustment measures, we found that Japan’s carbon tax policy cannot effectively address domestic mitigation, nor create real threats to carbon leakage and international competitiveness. Conclusion: To design effective and world trade organization-compatible carbon adjustment measures, it is important to ensure that the emissions criteria are identical to the carbon coverage defined by domestic carbon policy.

Sharing responsibility for carbon dioxide emissions: A perspective on border tax adjustments

Concerns about the equity and efficiency of current allocation principles related to responsibility for carbon dioxide (CO2) emissions have been presented in the recent literature. The objective of this paper is to design a calculation framework for shared responsibility from the perspective of border tax adjustments. The advantage of this framework is that it makes the shared responsibility principle and border carbon taxation complementary to each other; these are important policies for reducing global CO2 emissions, but they are individually supported by developing and developed countries. As an illustration, the proposed framework is applied to data from China in 2007. The empirical results show that for the Chinese economy as a whole, changing from the production-based criterion to the shared responsibility approach would lead to an 11% decrease in its responsibility for CO2 emissions. Moreover, the differences observed between the production-based criterion and the shared responsibility approach are considerable in several sectors; for example, changing from the production-based criterion to the shared principle would lead to a 60% decrease in the responsibility of the textile sector.

Macroeconomic Impacts of the EU 30% GHG Mitigation Target

The reduction of GHG emissions is one of the most important policy objectives worldwide. Nonetheless, concrete and effective measures to reduce them are hardly implemented. One of the main reasons for this deadlock is the fear that unilateral actions will reduce a country’s competitiveness, and will benefit those countries where no GHG mitigation measures are implemented. This kind of argument is also often used to explain why some governments and many business leaders are not in favour of the EU 30% GHG mitigation target that has been proposed to replace the previous 20% GHG emission reduction objective approved by the EU within the well-known 20-20-20 climate and energy package. By developing and applying a recursive, dynamic, very detailed CGE model with energy generation from both fossil fuel and renewable sources, we address this issue by estimating the cost for different EU countries and industries of the EU climate and energy package under a set of alternative international scenarios on global GHG mitigation efforts. Results show that, thanks to the EU economic recession, achieving a 20% GHG emission reduction entails a moderate cost for the European Union – about 0.5% of EU GDP – even in the case of EU unilateral action. This cost could be reduced to almost zero if not only the European Union, but also the other major world economies, comply with the “low pledge” Copenhagen Accord. A 30% GHG emission reduction target would certainly be more costly: the total loss in the European Union would be 1.26% of EU GDP in the case of EU unilateral action, whereas the total cost would be 0.55% of EU GDP if all major economies reduce their own GHG emissions according to the “low pledge” Copenhagen Accord. Both border tax adjustments and free allocation of carbon permits are shown to be successful in reducing some adverse competitiveness effects of the EU GHG mitigation policy into energy intensive sectors, but at the expenses of the other economic sectors.

Internalizing Externalities: the GATT-Legality of Border Tax Adjustments and the Compelling Need for its Implementation

The nations of this world face the intersection of two global dilemmas: enhancing economic welfare and mitigating climate change. With a “point of no return,” for the latter of these predicaments rapidly approaching and evidence that unilateral action on either of these problems haven proved minimally, if it all, effectual, the world faces a pervasive and imminent threat. However, recent international jurisprudence and global sentiment has allowed for a single solution to each of these quandaries in the form of a carbon tax regime. Previous scholarship has focused on structural deficiencies within the World Trade Organization that prevent certainty and encourage inaction or organizational modification, few have looked to the possibilities present within the current regime and how using said structures may enable the efficacy of unilateral action vis-a-vis each of these dilemmas. A carbon tax regime consisting of both domestic carbon taxes and border tax adjustments for those who fail to comply with the international efforts potentially meets both the strictures under the Kyoto Protocol and the World Trade Organization and creates an more efficient market from one that has formerly been woefully inefficient. As commentators note the imminence for a time of action, few if any solutions match the efficacy of a carbon tax regime in complying with the regulatory parameters currently permitted with a small mass of nations serving to effect substantial change regarding climate change mitigation while complying with international trade laws.

Philippines – Taxes on Distilled Spirits:Like Products and Market Definition

AbstractThis paper provides a legal–economic analysis of the Appellate Body decision inPhilippines – Taxes on Distilled Spirits(Philippines–Spirits). InPhilippines–Spirits, the Panel and the Appellate Body had an opportunity to consider again the scope of ‘like products’ and of ‘directly competitive or substitutable products’ under Article III:2 of GATT. The Panel and Appellate Body followed the Border Tax Adjustments factors in order to determine whether the products were sufficiently similar. The Appellate Body explicitly extended its jurisprudence from other areas of Article III to a like-products determination under the first sentence of Article III:2: this analysis is to be focused on the degree of competition between the imported and domestic products. We observe that the effect of different taxation on domestic products is affected by the degree of substitution between products as well as competitive conditions, whereas the Appellate Body seems to focus on the former and ignore the latter. We also question some of the Panel and Appellate Body interpretations of the evidence regarding the degree of substitution between products. Overall, we find that even if there may be a segment in which foreign and domestic products compete, the reported evidence in this case would seem to be consistent with the view that for the bulk of the market, foreign and domestic items are distant substitutes.Putting aside the jurisprudence, a methodologically sound finding regarding substitution (and competition) seems necessary, but not sufficient, for a finding of inefficient discrimination. In order to find inefficient discrimination, there must also be a finding that the nonprotectionist benefits that may arise from the national regulation are not sufficient to justify the discriminatory action, otherwise, rational regulation that is globally efficient might be invalidated, inappropriately restricting the national right to regulate. In the present case, the Philippines articulated no nonprotectionist rationale for its distinctions. Existing WTO jurisprudence in this area prior to the Appellate Body decision inUS–Clove Cigarettes(in the context of Article 2.1 of the technical barriers to trade agreement) has only hinted at the additional focus on the justificatory role of nonprotectionist regulatory benefits, yet an explicit and appropriately contextualized reference to the nonprotectionist rationale, if any, of regulation seems to be a necessary part of decision-making.

Between a Rock and a Hard Place: A Trade-Theory Analysis of Leakage Under Production- and Consumption-Based Policies

Without a comprehensive global climate agreement, carbon leakage remains a contentious issue. Consumption-based pricing of emissions—which could in practice be implemented with a full border tax adjustment (BTA)—has been forwarded as an option to increase the effectiveness of unilateral climate policy. This paper questions the economic rationale behind this approach, using a theoretical $$2 \times 2$$ trade model in which leakage occurs through terms-of-trade effects. We show analytically, first, that consumption-based pricing of emissions does not necessarily result in less leakage than production-based policies. Second, the sign of the optimal unilateral carbon tariff depends on the carbon-intensity differential between the foreign country’s exporting and non-exporting sectors, and not on the differential between home’s and foreign’s exporting sectors, as implied by the full BTA approach. Third, based on empirical data for the year 2004, our model implies that full BTA applied by the European Union on e.g. imports from and exports to China would—by shifting China’s production from the export sector with a relatively low carbon-intensity towards the more carbon-intensive non-export sector—actually increase leakage.

Estimating the Effects of Kyoto on Bilateral Trade Flows Using Matching Econometrics

AbstractMany Kyoto countries fear a loss of competitiveness due to unilateral climate policy efforts; policymakers therefore call for carbon‐related border tax adjustments. With this paper we attempt to estimate the treatment effect of Kyoto commitment on bilateral export flows using regression‐adjusted differences‐in‐differences matching techniques. The gravity and international environmental agreement formation literatures provide guidelines for the choice of matching variables. We find that Kyoto countries' exports are reduced by 13 to 14 per cent due to Kyoto commitment. Trade effects are largest in energy‐intensive, homogeneous industries such as iron and steel, non‐ferrous metals, organic and inorganic chemicals but also in machinery and equipment.

Carbon-Based Border Tax Adjustments and China's International Trade: Analysis Based on a Dynamic Computable General Equilibrium Model

With large shares in global trade and carbon emissions, China's international trade is supposed to be significantly affected by the proposed carbon-based border tax adjustments (BTAs). This paper examines the impacts of BTAs imposed by USA and EU on China's international trade, based on a multi-sector dynamic computable general equilibrium (CGE) model. The simulation results suggest that BTAs would have a negative impact on China's international trade in terms of large losses in both exports and imports. As an additional border tariff, BTAs will directly affect China's exports by cutting down exports price level, whereas Chinese exporting enterprises will accordingly modify their strategies, significantly shifting from exports to domestic markets and from regions with BTAs policies towards other regions without them. Moreover, BTAs will affect China's total imports and sectoral import through influencing the whole economy in an indirect but more intricate way. Furthermore, the simulation results for coping policies indicate that enhancing China's power in world price determination and improving energy technology efficiency will effectively help mitigate the damages caused by BTAs.

Carbon-Based Border Tax Adjustments and China's International Trade: Analysis Based on a Dynamic Computable General Equilibrium Model

With large shares in global trade and carbon emissions, China’s international trade is supposed to be significantly affected by the proposed carbon-based border tax adjustments (BTAs). This paper examines the impacts of BTAs imposed by USA and EU on China’s international trade, based on a multi-sector dynamic computable general equilibrium (CGE) model. The simulation results suggest that BTAs would have a negative impact on China’s international trade in terms of large losses in both exports and imports. As an additional border tariff, BTAs will directly affect China’s exports by cutting down exports price level, whereas Chinese exporting enterprises will accordingly modify their strategies, significantly shifting from exports to domestic markets and from regions with BTAs policies towards other regions without them. Moreover, BTAs will affect China’s total imports and sectoral import through influencing the whole economy in an indirect but more intricate way. Furthermore, the simulation results for coping policies indicate that enhancing China’s power in world price determination and improving energy technology efficiency will effectively help mitigate the damages caused by BTAs.

Unilateral Carbon Taxes, Border Tax Adjustments and Carbon Leakage

We examine the impact of a unilateral carbon tax in developed countries, focusing on the expected size of carbon leakage (an increase in emissions in non-taxing regions as a result of the tax) and the effects on leakage of border tax adjustments. We start by analyzing the problem using a simple two-country, three-good general equilibrium model to develop intuitions. We then simulate the expected size of the effects using a new, open-source, computable general equilibrium (CGE) model. We analyze the extent of emissions reductions from a carbon tax in countries that made commitments under the Kyoto Protocol (Annex B countries), the expected carbon leakage, and the effects of border tax adjustments on carbon leakage, all relative to our baseline projections for emissions. We also perform extensive sensitivity tests on the parameters of the CGE model. Finally, we consider the effects of imperfect border tax adjustments on leakage, such as global or regional schedules of border taxes.

Toshi H. Arimura, Morihiro Yomogida, and Tsuyoshi Kawase (eds.), Climate Change Policies and International Trade: Economic and Legal Analysis of Emissions Trading and Border Tax Adjustment; Toshi H. Arimura and Shiro Takeda (eds.), Economic Analysis of Emissions Trading and Energy Efficiency: Studies on Japanese Firms and Households

Toshi H. Arimura, Morihiro Yomogida, and Tsuyoshi Kawase (eds.), <i>Climate Change Policies and International Trade: Economic and Legal Analysis of Emissions Trading and Border Tax Adjustment;</i> Toshi H. Arimura and Shiro Takeda (eds.), <i>Economic Analysis of Emissions Trading and Energy Efficiency: Studies on Japanese Firms and Households</i>

Climate policy and border tax adjustments: Might industrial organization matter?

En este articulo se analiza el impacto de los ajustes de impuestos fronterizos sobre politicas publicas ambientales orientadas a las emisiones de carbon. Asimismo, se abordan temas de competitividad e industrias intensivas en energia. En comparacion con la literatura relevante este trabajo se situa en un marco de un mercado integrado verticalmente bajo una estructura de oligopolio sucesivo. En particular, se muestra que un ajuste optimo de impuestos fronterizos depende de las politicas ambientales locales, la naturaleza de la competencia entre las empresas proveedoras y compradores y de la forma como se defina la neutralidad de dicho ajuste. Los principales resultados de los ajustes de impuestos fronterizos son dos. Por un lado, si la neutralidad del comercio se define en terminos de volumen de mercado, entonces la competitividad de las empresas domesticas no se puede mantener aunque las emisiones de carbon se reduzcan. Por el otro, si la neutralidad se define como la participacion de mercado, entonces la competitividad se mantiene y las emisiones de carbon se reducen. En ambos casos se incurre en perdidas sociales.