The GATT-Legality of Border Adjustments for Carbon Taxes and the Cost of Emissions Permits: A Riddle, Wrapped in a Mystery, Inside an Enigma

Abstract

Much of this analysis was initially presented at a conference on “U.S. Energy Tax Policy” sponsored by the American Tax Policy Institute held in Washington, D.C., Oct. 15-16, 2009.

“Russia . . . is a riddle, wrapped in a mystery, inside an enigma.” – Winston Churchill
“The application of BTAs to energy taxes under the GATT/WTO rules is clouded with uncertainty.” – OECD

With the notable exception of the United States (and, until recently, Australia), developed nations and many nations in transition from socialism made commitments under the Kyoto Protocol to reduce emissions of CO2, the most important greenhouse gas thought to be responsible for global warming. By comparison, the Protocol excused developing countries from the need to cap emissions. Both countries making commitments to reduce emissions and those that have not made commitments, but are considering doing so, are concerned that policies adopted to meet targets for emissions reductions will place their carbon-intensive industries at a competitive disadvantage relative to those in countries not making commitments and induce carbon leakage to those nations which they see as “free riders” in the global effort to reduce greenhouse gas emissions. On the other hand, developing countries resist carbon pricing, both because they do not want to hamper economic development and because they believe that primary responsibility for reducing emissions should lie with the developed countries that emitted virtually all the greenhouse gases now in the environment.2 Moreover, the statement in the 1992 Rio Declaration on Environment and Development that “States have common but differentiated responsibilities” underlies the UN Framework Convention on Climate Change (UNFCCC) and thus the Kyoto Protocol.