Border tax adjustments and emissions trading: the implications of international trade law for policy design
Border tax adjustments offer a means of addressing the competitiveness impacts of rigorous emissions policies, though their status under international trade law is unclear at best. The legality of border adjustments for energy taxes has long been an unsettled question, and the legal uncertainties only multiply when the concept is extended to an emissions trading scheme. Designing a mechanism to adjust the cost of emissions allowances upon export in a manner that adequately protects international competitiveness without resulting in illegal subsidies would be quite difficult, especially where the actual cost of allowances varies from firm to firm due to, e.g., grandfathering or different experiences in emissions allowance markets. Import adjustment mechanisms would be similarly difficult to design, not only because of the variation in emissions costs borne by destination- country firms, but also because of worldwide differences in emissions profiles within a given industry. Addressing indirect emissions costs and industrial process emissions would add even more complexity. In exploring these issues, this paper seeks to move beyond the fundamental question of whether emissions-related border tax adjustments could be, in principle, legal under the WTO to consider how such an adjustment mechanism might actually be designed.