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BTAs & climate change

There have been some inaccurate accounts of how border tax adjustments (BTAs) might encourage countries to mitigate their greenhouse gas emissions.  A recent report by the WTO-UNEP has been seen by some (including Paul Krugman and John Quiggin) to approve of  BTAs. It does no such thing – in the main it carefully restates the conditions required for BTAs to be consistent with the rules of the GATT. 

Bridges Weekly Trade News Digest sorts out the character of this report accurately:

” The report took a cautious approach, describing in detail the way such measures would interact with WTO rules. It stopped short of assessing actual WTO compatibility, although it made clear that much would hinge on the way policies were designed and applied. It also pointed to the practical challenges involved with BTAs: assessing the emissions resulting from a particular product as an inexact science, and carbon prices fluctuate. A country without a carbon tax might still have costly-to-implement technical regulations for energy efficiency, making it hard to evaluate what constitutes “comparable action.”

On the subject of extra import charges, mooted by some governments (and most recently the US House climate bill) as a means of shielding domestic industry from unfair competition and encouraging developing countries to accept emissions targets, the report noted that WTO rules already had detailed rules governing BTAs. Indeed, such adjustments are already commonly used to compensate for sales and other consumption taxes. The debate, the report says, focuses on whether carbon taxes (or cost increases springing from cap-and-trade requirements) would be eligible for adjustment, and whether a tax on fuel used to power the manufacturing of a particular product could be counted as an indirect tax on that product.

“The general approach under WTO rules has been to acknowledge that some degree of trade restriction may be necessary to achieve certain policy objectives, as long as a number of carefully crafted conditions are respected,” the report noted, citing several WTO dispute rulings in which trade restrictions were deemed justifiable for health and environmental reasons.

Even if a “border measure related to climate change” was inconsistent with core GATT obligations, the report suggested that “justification might nonetheless be sought under the general exceptions to the GATT (i.e., Article XX),” such as those allowing trade restrictions to protect human health or the conservation of exhaustible natural resources. To do so, it would have to meet two conditions: “First, the measure must fall under at least one of the GATT exceptions, and a connection must be established between the stated goal of the climate change policy and the border measure at issue,” and second, “the measure must not constitute a ‘means of arbitrary or unjustifiable discrimination’ or a ‘disguised restriction on international trade’.”

The report acknowledged that WTO case law showed that the second requirement “has often been the most challenging aspect of the use of the GATT exceptions.

Most developing countries are strongly opposed to BTAs, not least because they would be the primary targets of such measures. Tariffs on their exports, they feel, would make them foot the bill for mitigating climate change, even though they bear little responsibility for existing levels of greenhouse gas emissions in the atmosphere”.

The possibility of BTAs is a threat directed at non-complying countries. If these threats are made one hopes they would be effective so that the BTAs were never in fact observed.  If they were actually introduced there are a host of issues involved in measuring carbon content, in assessing the tax equivalence of non-tax restrictions on carbon use and so on that are at least as intractable as GATT-rules compatibility. The rules would necessarily be complex and the fear is that this complexity might trigger a world trade war. It would be a disastrous outcome. It is for this reason that President Obama has downplayed the use of BTAs that were included as amendments to the recently passed Waxman-Markey bill.  Obama’s views have been criticised by Paul Krugman on the superficial basis that Obama sees BTAs as a purely political move. Its not just that.

It is also true that it is not sensible to threaten early on in a set of negotiations – ‘threats’ are last resort measures.  But China, India and other LDCs will be aware that the possibility of the US imposing retaliatory tariffs on theirexports is there.

8 comments to BTAs & climate change

  • Uncle Milton

    “But China, India and other LDCs will be aware that the possibility of the US imposing retaliatory tariffs on there exports is there.”

    Which is the whole point.

    Obama sensibly hasn’t threatened anything – yet – but if Chindia are obstructionist at Copenhagen then he might, more in sadness than in anger of course, have to throw the BTA bone to Congress. And while US Administrations are usually reluctant to indulge in protectionist measures, Congressmen and Senators are not.

    Obama might also do Rudd a favour and implicitly threaten Australia’s exports with a BTA if we don’t implement an ETS. Then the acid will really be on the Opposition to pass it the CPRS.

  • John Quiggin

    “approve of’ BTAs. It does no such thing – in the main it carefully restates the conditions required for BTAs to be consistent with the rules of the GATT. ”

    This seems like a distinction without a difference to me. The report stresses the need for global action on climate change. It then makes it clear that BTAs can be consistent with the rules of the GATT and that, provided they are designed with care, BTAs on countries that don’t comply with a global agreement on emissions will pass muster with WTO. That seems like “approval” to me.

  • hc

    John, Approval would require a vote by member countries. That has not occurred and today India (for example) has said it would not support such a decision. Almost all developing countries will oppose such taxes.

    It is exactly the situation as before. There remain questions about whether a discriminatory border tax is consistent with the rules of the GATT. It might be. It will almost certainly be subject to a challenge.

    That was the situation a month ago.

  • John Quiggin

    “Approval would require a vote by member countries”

    Are you sure? I wasn’t aware that there were any voting procedures associated with WTO. And a treaty at Copenhagen won’t be voted on either. It will be drafted by some kind of consensus procedures and countries will choose to sign on, or not. Then the signatories can choose whether or not to tax imports from non-signatories.

    As regards the situation being unchanged, there has of course been no formal change. But the WTO has given a pretty clear indication of the way in which a challenge will turn out, namely that a BTA will be approved if it is designed with careful regard to the rules.

  • hc

    As far as I understand it actually needs a 2/3 vote to change rules but this has never happened – the WTO operates on basis of consensus weighted by economic muscle. There has been no formal rule change and hence no ‘approval’.

    The first paragraph in the Bridges quote says it all. There is no attempt to make a judgement about WTO rules compatibility. There is no claim that taxes are compatible with the rules only a list of characteristics such taxes would need to have. Necessity not sufficiency.

  • The relevant sections of the Waxman-Markey bill are Sections 765-769 of the bill. In my opinion, BTAs should only apply if a country is not participating in, or in compliance with, an international agreement.

    The provisions in W-M are different, and impose other conditions on countries. While I can see the temptation to do that, I don’t think it will help. My suspicion is that the best way to have an agreement being close to socially optimal is through the right sort of bargaining process, and strong penalities for non-participation and non-compliance. Strong penalties for non-participation and non-compliance should prevent a treaty from being based on the lowest common denominator.

  • John Quiggin

    HC, I think this is a tone-deaf reading of the report, and even of the summary you quote. Have you read the whole thing?

    Of course, there has been no change in the rules, and of course there are plenty of cautions, but I think anyone attuned to bureaucratic understatement, reading the report and planning a carefully calibrated border tax on embodied carbon would see a bright green light here.

    Peter Wood, I agree as regards W-M.

  • hc

    The core material on these issues is around pages 98-110.

    Tone deaf, eh? I hope your reading is correct since that improves the prospect of negotiating good outcomes in Copenhagen.

    Of course I hope that such taxes are never introduced since their incredible complexity – both in terms of achieving WTO compatibility and simply of computation – invites abuse and a possible tit-for-tat collapse in world trade.

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