Peter Gallagher

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.