Climate Change, Trade and Competitiveness

Bor­der-tax adjust­ments an expla­na­tion: Since the 1960s, the GATT trade rules have per­mit­ted coun­tries to levy a duty on imports, above the max­i­mum duty bound in their sched­ules, at a rate equal to any excise, VAT or oth­er indi­rect­tax­es levied on goods pro­duced domes­ti­cal­ly. Under this arrange­ment, if a coun­try levies a car­bon-emis­sions tax on pro­duc­tion, it may exempt or rebate that tax on the export of the goods. An import­ing coun­try may tax the goods at the bor­der, how­ev­er, at the rate that would have been payable had the goods been pro­duced locally.

The head­line paper on bor­der-tax adjust­ments, con­tributed by War­wick McK­ib­bin and Peter Wilcox­en, shows (using their G‑cubed eco­nom­ic mod­els) that bor­der tax adjust­ments on the car­bon con­tent of most man­u­fac­tured prod­ucts would be low. Assum­ing that importers tax the car­bon con­tent of man­u­fac­tures at the local emis­sions-tax rate ($US40 per tonne for exam­ple) EU tax­es on imports from the USA, for exam­ple, less than 1% and US tax­es on imports from Chi­na, around 4%. Only select­ed prod­ucts, such as aluminum—and, of course, fuels such as coal—would see sig­nif­i­cant import duties at a sign­f­i­cant levels.

“We find that the tar­iffs would be small on most trad­ed goods, would reduce leak­age of emis­sions reduc­tion very mod­est­ly, and would do lit­tle to pro­tect import-com­pet­ing indus­tries. We con­clude that the ben­e­fits pro­duced by bor­der adjust­ments would be too small to jus­ti­fy their admin­is­tra­tive com­plex­i­ty or their dele­te­ri­ous effects on inter­na­tion­al trade.” extract from:McK­ib­bin & Wilcox­en

In a detailed com­ment on the M&W paper at the same Brook­ings Con­fer­ence, Nils Axel Braa­then from the OECD Envi­ron­ment Direc­torate reveals some of the results of the OECD mod­el­ing of bor­der-tax adjust­ments. The pre­sen­ta­tion reveals the com­plex­i­ty of the emis­sions- and pro­duc­tion-impacts of a mix of emis­sion-tax­es and bor­der-tax­es in devel­oped and devel­op­ing coun­tries. The most ‘equi­table’ sit­u­a­tion of tax­es all around, how­ev­er, leads to over­all falls in out­put (no surprise).

More intrigu­ing is Braa­then’s rev­e­la­tion that the OECD gen­er­al-equi­lib­ri­um mod­els show sig­nif­i­cant car­bon leak­age as a con­se­quence of emis­sions tax­es on fuels in OECD coun­tries (Kyoto Annex B coun­tries). Their car­bon tax­es cut fuel demand, soft­en­ing glob­al prices and accel­er­at­ing demand and emis­sions growth in devel­op­ing countries. 

There’s lots more in the papers from the con­fer­ence that I haven’t read yet, includ­ing some legal analy­sis of options to ‘main­tain com­pet­i­tive­ness’ through trade measures. 

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