WTO and the border adjustment

WTO and the Border Adjustment Laser Talk

In order for a fee on carbon to work domestically and on an international scale, an effective border tax adjustment will be necessary. There is a concern expressed by many legislators that such a border adjustment would violate World Trade Organization (WTO) law, and specifically the General Agreement on Tariffs and Trade (GATT). However, this concern is unfounded [1, 2].

First, a border adjustment has been codified in US law (26 CFR 52.4682-3) since the Montreal Protocol went into effect on Jan 1, 1990. This border adjustments covers ozone-depleting substances, which also happen to be greenhouse gases [3].

Second, there are in fact two provisions in the GATT that make it clear Carbon Fee and Dividend would be WTO-legal:

  • The border adjustment, as proposed by Citizens’ Climate Lobby, doesn’t discriminate against goods from other countries relative to goods produced domestically, nor against one country relative to another. Second,

  • Even if the border adjustment were discriminatory, article twenty, paragraphs b and g (i.e. “Article XX, paragraphs (b) and (g)” in legalese) allows for discriminatory border adjustments for environmental purposes.

So, Carbon Fee and Dividend is double-covered! Getting the border adjustment right is important because it ensures domestic manufactures have no incentive to move operations to a country that doesn’t have an equivalent price on carbon, and that if other countries want to keep using dirty manufacturing processes, they’ll have to pay the American people for the privilege.

  1. Pauwelyn, Joost. “Carbon Leakage Measures and Border Tax Adjustments Under WTO Law”. March 21, 2012. Excerpted chapter from “Research Handbook On The WTO Agriculture Agreement”.

  2. Jennifer Hillman. Changing Climate for Carbon Taxes: Who’s Afraid of the WTO? July 25, 2013. The German Marshall Fund of the United States.

  3. 26 C.F.R § 52.4682–3 “IMPORTED TAXABLE PRODUCTS.”

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