A tangle of carbon taxes


p>At the heart of the inter­na­tion­al prob­lem with bor­der-tax adjust­ments for car­bon emis­sion con­trols is the con­cept of ‘com­mon but dif­ferenti­at­ed respon­si­bil­i­ty’ first invoked at the RIO Con­fer­ence of UNEP in 1992. In brief, it means that devel­op­ing coun­tries, that in the past con­tributed less car­bon to the atmos­phere because they had small­er economies, will have a reduced respon­si­bil­i­ty for clean­ing up the prob­lem in the future. Whether this makes sense or not (con­sid­er­ing some devel­op­ing coun­tries will be very big emit­ters in the future), it is cer­tain that any inter­na­tion­al agree­ments to restrict car­bon emis­sions will embody the con­cept, which is now said to be an estab­lished prin­ci­ple of inter­na­tion­al law. Arti­cle 10 of the Kyoto Pro­to­col, for exam­ple, explic­it­ly invokes the prin­ci­ple (as did Aus­tralia on its own behalf, before Kevin Rudd rat­i­fied Kyoto in 2008).



Bor­der-tax adjust­ments work by levy­ing a tax on imports equal to the dif­fer­ence between an indi­rect tax (e.g. a val­ue-added or con­sump­tion tax) levied in the export­ing coun­try and the indi­rect tax that applies to the same prod­uct when pro­duced (or con­sumed) in the import­ing coun­try. This ‘equal­izes’ the tax bur­den on all prod­ucts, whether import­ed or of domes­tic ori­gin, in the import­ing coun­try. Typ­i­cal­ly, export­ing coun­tries levy zero indi­rect tax­es on exports: the GATT long-ago estab­lished that coun­tries were not oblig­ed to tax exports at the same rate as oth­er production.

Now let’s imag­ine that Chi­na, for exam­ple, is des­ig­nat­ed in a future inter­na­tion­al agree­ment on emis­sion con­trols as hav­ing less­er respon­si­bil­i­ty for tax­ing emis­sions for what­ev­er rea­son you like (the rea­sons are not like­ly to be explic­it in the agree­ment). In this case, the appli­ca­tion of a U.S. bor­der tax adjust­ment to imports from Chi­na at the high­er rate applied in the U.S. to pro­duc­tion of the like prod­uct, will erode the prin­ci­ple of dif­fer­en­ti­a­tion. We can expect to see a bit­ter strug­gle over this point—well in advance of any tax­es actu­al­ly being levied—that could eas­i­ly put an end to any prospects of an inter­na­tion­al agree­ment on emis­sion con­trols. Of course, the high­er U.S. tax would also impose a bur­den on U.S. con­sumers of Chi­nese imports, rob­bing them of the gains from trade; in this case, the ben­e­fits of spe­cial­iza­tion in Chinese/U.S. trade. Fur­ther­more, Chi­na would not be the only ben­e­fi­cia­ry of the ‘less­er respon­si­bil­i­ty’. The Kyoto pro­to­col indi­cates that any coun­try not list­ed in Annex B (a sub-set of OECD coun­tries) should ben­e­fit from dif­fer­en­ti­at­ed status.

A sec­ond major dif­fi­cul­ty with car­bon tax adjustments—that has not been a prob­lem with oth­er ‘indi­rect’ tax adjust­ments such as con­sump­tion taxes—will be the end­less oppor­tu­ni­ty for dis­crim­i­na­tion and pro­tec­tion­ist tax rates. Car­bon tax­es are most unlike­ly to apply, as a con­sump­tion tax applies, to prod­ucts. Rather, they will be embod­ied tax­es derived from the pro­duc­tion meth­ods or pro­cess­ing or man­u­fac­tur­ing meth­ods used for the prod­uct. So the esti­ma­tion of the equiv­a­lent domes­tic tax rate will be a night­mare, made worse by the vari­able tax rates implied by var­i­ous nation­al schemes of ‘cap-and-trade’ restric­tions that will con­tain some prod­uct excep­tions, free dis­tri­b­u­tion of emis­sion rights for cer­tain indus­tries etc. etc.

There are oth­er like­ly legal prob­lems, too, because the GATT rules (apply­ing to goods trade and bor­der-tax adjust­ment) take account of so-called “pro­duc­tion and pro­cess­ing meth­ods” (PPM) to deter­mine ‘like’ import­ed prod­ucts only in very nar­row cir­cum­stances: most­ly in the case of ‘excep­tion­al actions’ under Arti­cle XX. They have also been invoked in the WTO agree­ments on prod­uct stan­dards. Car­bon-tax adjust­ments will be whole new tangle.

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