Exempt exports from a carbon tax?

Hen­ry Ergas answers the ques­tions that the Gillard gov­ern­ment has for­got­ten even to ask:

…in terms of Australia’s nation­al inter­est, it is dif­fi­cult to think of a pol­i­cy more harm­ful than such a uni­lat­er­al tax” Extract from Uni­lat­er­al action cre­ates costs with­out ben­e­fits, in The Aus­tralian

But I think Hen­ry might be too opti­mistic about the ben­e­fits of a bor­der adjust­ment approach to exempt­ing exports from the tax.

Final­ly, would these prob­lems be ame­lio­rat­ed were the tax only on domes­tic con­sump­tion, exempt­ing exports but tax­ing imports, as Geoff Car­mody has pro­posed? Of course they would. But that is only because we are act­ing uni­lat­er­al­ly, dam­ag­ing our exports. Shift­ing the bur­den on to domes­tic con­sump­tion reduces the harm. But the harm does not go away: it is just dimin­ished.

I will need to review this more close­ly, but I think the out­come might be much worse than Hen­ry believes. I sus­pect that exempt­ing exports from the tax would force us to choose between large loss­es for Aus­tralian indus­try and con­sumers, or con­tra­ven­tion of the World Trade Orga­ni­za­tion (WTO) rules.

If the Aus­tralian gov­ern­ment exempts goods from a tax on con­di­tion that they are export­ed, the tax-ben­e­fit amounts to a pro­hib­it­ed export sub­sidy under the WTO rules. But a spe­cial WTO rule applies to econ­o­my-wide val­ue-added tax­es (like the GST). These tax­es may be adjust­ed at the bor­der to exempt exports even while the tax is levied on import­ed goods. The levy on imports must be in pre­cise­ly the amounts that would have applied to the pro­duc­tion of such goods had they been man­u­fac­tured in Aus­tralia—even if we do not man­u­fac­ture those goods in Aus­tralia. This is exact­ly what hap­pens now in Aus­tralia with the GST: exports are exempt and imports (of $1000 val­ue or more) are levied at the statu­to­ry rate.

It is like­ly that WTO mem­bers will treat any car­bon tax­es they impose in their own ter­ri­to­ry as a “GST-like” val­ue-added tax under this spe­cial WTO rule. Now, the impo­si­tion of the equiv­a­lent tax on imports is not com­pul­so­ry under WTO rules: it seems to me it would be con­sis­tent with WTO rules to waive the import tax­es com­plete­ly (although, not selec­tive­ly). But what gov­ern­ment would give imports a free ride under a regime where they taxed the local man­u­fac­tur­ers of the same or direct­ly com­pet­i­tive goods? None, ever has, as far as I know.

So, if the Aus­tralian gov­ern­ment exempts exports from the car­bon tax it is very like­ly to have to tax imports of goods import­ed from the rest of the world where they would not oth­er­wise have been taxed.This would be a sig­nif­i­cant increase in import costs, not to men­tion a book-keep­ing night­mare. It will be very dif­fi­cult to deter­mine the required rate of tax on each prod­uct and each deter­mi­na­tion will be open to chal­lenge by importers and by our WTO part­ners. Although the tax rev­enue com­pris­es a trans­fer to gov­ern­ment that could be returned to firms and house­holds by oth­er means, the bor­der duty would lead to large inef­fi­cien­cies in our econ­o­my (and prob­a­bly a reduc­tion in growth and demand).

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