pigouvian-tax, carbon-taxIf we take a global externality such as greenhouse-gas emissions, then one way for a sub-global region to start applying corrective measures would be to internalise the global damage costs of such emissions through a Pigouvian tax - a carbon tax that represents some or all of the estimated damage cost of those emissions.
However, this risks some leakage, with high-carbon-intensity industries relocating from the region in question, so that it can move to somewhere where there is a lower carbon tax, or even carbon subsidies; it can then export its goods (or possibly services) back into the region in question.
Given global constraints on barriers to trade, what can regions do (and historical examples would be very welcome) to prevent such leakage, without undermining the scheme and without incurring the wrath of the WTO?
Border controls are desirable to prevent free-riding, carbon-leakage, and to avoid putting domestic producers at a disadvantage relative to foreign ones. It may be possible, under WTO rules, to introduce some form of border control to prevent leakage from a carbon tax that applies to a sub-global region; but any attempt may well be be challenged.
As a carbon audit for every potential variant of each product would incur very high transaction costs, product-specific benchmarking may well be needed.
A special issue of the journal Climate Policy, considered the role of border measures in carbon trading. Climate Policy, Volume 11, Issue 5, 2011: Special Issue: Consuming the producing carbon: what is the role for border measures?
In that issue, Stéphanie Monjonab and Philippe Quiriona considered A border adjustment for the EU ETS: reconciling WTO rules and capacity to tackle carbon leakage, and said that
an obligation to buy EU allowances is more compatible with WTO rules than one based on a tax
assuming full auctioning (no free allowances) of permits. They discuss several aspects: whether indirect emissions should be included; whether only imports are covered by the border adjustments, or exports too; and whether the adjustment base should be EU, foreign-average, best-available tech, or plant-specific.
A well-structured border adjustment scheme would be completely in line with GATT Article III, by treating imported goods equally favourably with comparable domestic ones.
All content is licensed under CC BY-SA 3.0.