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.