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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