Border Tax Adjustment and Greenhouse Gas Emissions Research Paper

Introduction

Greenhouse gas emissions are increasing every year, which is fraught with serious consequences and global warming in particular. Currently, the concentration of the greenhouse gas in the atmosphere equals 450-550 ppm and this presupposes a further increase of the global mean temperature by 2-3^oC (Organization for Economic Cooperation and Development 2009). Such temperature increases may lead to significant damage to the environment and, consequently, the world population. Therefore, one of the most important environmental goals at present should be to “slow and stop the present increase in atmospheric CO₂ abundance, stabilizing it at some specified higher level” (Dessler and Parson 2006, 99). Since no unilateral policy as for the CO₂ emission could be worked out by the EU, a completely new approach to the problem had to be developed. This is how the concept of the border tax adjustment (BTA) has emerged. BTAs are commonly referred to as the fees that are imposed by carbon-taxing countries on the products manufactured by countries that do not have carbon taxing (Brainard and Sorkin 2009). The use of such adjustments has been practiced in the USA since 1791 when the first excise tax on distilled spirits has been imposed (OECD 2006). However, it was only in the 1960s that border adjustments became of special interest for policy-makers and it was named the climate change that made the use of this policy instrument so necessary. To present a clear picture of what BTAs involve and which issues they raise, it is necessary to consider the main types of BTA, the necessity of these adjustments, their short-term and long-term effects, as well as the legal status of the BTA under GATT, and alternatives to the BTA, emissions allowance trading, in particular.

BTAs and the Issues They Involve

First of all, it is necessary to pay due attention to BTAs, their types, and necessities. The BTA concept as such “is employed as an instrument to guarantee “trade neutrality” in that a tax is expressly imposed on imported products only to compensate and the equivalent tax imposed on similar domestic products” (Ortino 2004, 140). There exist two major types of BTAs: those on imported products and those on the exported ones. The most commonly used is the first type, which is often referred to as “the destination system” (Hoerner 1998). In this system, the goods are liable to tax in case they are imported; with regards to this tax, the WTO members are entitled to domestically impose taxes on the products when they are imported. As far as the BTAs on exported products are concerned, they are permitted to use only under certain conditions:

Export BTAs cannot be subject to anti-dumping duties imposed on goods that are deemed to be “dumped” (i.e. exported at less than the cost price in the domestic market) nor can they be subject to countervailing duties that an importing country introduces to offset certain subsidies provided in the exporting country. (Tamotti, WTO, and UN Environment Programme 2009, 103)

In addition, the necessity of the BTAs cannot be underestimated. It consists in their ability to eliminate the advantage that the manufacturers have when producing the goods without paying back to the environment. Thus, for instance, the majority of the developed countries is currently paying the price for polluting the environment (Johnson 2004) through the taxes on gas, coal, etc, whereas other countries do not, which is more than unfair because they get profits from selling these products: “Not paying the cost of damage to the environment is a subsidy, just as not paying the full costs of workers is” (Stiglitz, Edlin, and Long 2008, 24). BTAs may help to deal with this artificial disadvantage by making such countries pay for importing their products into other countries. Moreover, this will also help to deal with unfair competition between such countries and the European countries. The BTAs will make the costs for production (in the case with European countries) and production together with importing (in the case with those who do not pay taxes for polluting the environment) equal, thus, creating fair competition in the global market between the products manufactured by these countries. With regards to this, the short-term effect of the BTAs is that they will create equal competition conditions in the world market, while the long-term one is that the BTAs will contribute to the achievement of the collective global goal, namely the reduction of the CO₂ emissions.

It is namely this desire to preserve competitive equality that gives the legal status to the BTA under GATT. For instance, the WTO defines the border tax as the one that is imposed on the imported goods, while the border adjustment tax is “the imposition of a tax on imported products, corresponding to a tax borne by similar domestic products” (WTO-UNEP 2009, 100). Article I of GATT entitles the WTO members to place a border tax on the imported products that are equal to the internal tax on similar goods. Under Article III of the same agreement, “imported products are not to be subject to taxes over those applied to like domestic products” (Ortino and Petersmann 2004, 192). Consequently, a country will be regarded as violating the GATT Article III in case the BTA it imposes on the products will be in excess.

With regards to the BTA on import, there is one most important trade law case related to the United States, namely the United States – Taxes on Petroleum and Certain Important Substances, also known as Superfund case (Hufbauer, Charnovitz, and Kim 2009). In this case, the USA imposed a tax on the substances manufactured from the chemicals that were supposed to be taxed under U.S. law and even managed to defend this tax before the GATT panel. The latter, however, “expressed a concern about a provision in the US Superfund Act that would permit an additional tax on imports when the importer fails to furnish necessary information” (Hufbauer et al 2009, 41) and regarded this provision as contradicting Article III of GATT. Besides, the environmental tax that the USA has imposed on the product was not in conformity with the OECD “polluter-pays principle” (Sands 2003) because the substances imported into the US were not produced there and, thus, the pollution did not occur in the USA. The panel supported the complainants, which further resulted in the abolishment of the discriminatory tax on petroleum in the USA in 1989.

The last thing to mention about the BTAs is that, so far, there is only one decent alternative for them, namely, the emissions allowance trading. Under this alternative, “an importer of products would need to buy emission rights domestically to meet required offsets, and exporters could sell some of their emission permits acquired for production to gain offset” (Whalley 2009, 5). At this, however, there is a top amount of permits that a firm may hold and it is a central authority of each country that defines the number of pollutants that are allowed to emit. This alternative has a dual benefit for the environment. First of all, it allows controlling the general level of pollution through setting the maximum allowed limits. And secondly, it serves as a certain incentive for the firms that can manufacture the goods emitting fewer pollutants into the atmosphere. In this way, the countries that are capable of reducing emissions will have an opportunity to do this quite cheaply, thus, reducing pollution at the cost that will be the lowest for the population.

Conclusion

All things considered, the BTA may be regarded as an effective way to reduce GHG emissions and repay nature for the damage. Not only are the BTAs beneficial for the environment, but they also help to create fair competition in the world market because they make the production costs equal for those manufacturers that pay the price for polluting the environment and for those that do not. The fact that the BTAs have legal status under GATT makes a wide range of countries adhere to them, which unites the entire world in the struggle to reduce environmental pollution. Since quite effective alternatives to the BTAs, such as emissions allowance trading, exist, and new ones emerge daily, this struggle is likely to be successful in the future.

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