Oxford University Centre for Business Taxation
Taxing pollution across borders: an innovative proposal?
Around one year ago, Lakshmi Mittal – the chairman of ArcelorMittal – published an opinion piece in the Financial Times, in which he called for the adoption of a “carbon border tax” in Europe. Around the same time, the Climate Leadership Council – a US-based conservative organization – issued a paper titled “The Conservative Case for Carbon Dividends” advocating the adoption of a “gradually increasing carbon tax” with “border carbon adjustments”.
These “carbon border taxes” are more generally referred to as (environmental) “border tax adjustments” (BTAs). BTAs are aimed at levelling the playing field between domestic and internationally traded goods. Just as with VAT, imported products are taxed in the same way as domestic products, while exported products are not taxed. The idea gained interest last year well beyond the environmental debate when the US considered the adoption of a Destination-Based Cash Flow Tax (DBCFT).
The use of environmental taxes with BTAs would represent a paradigm shift in the way we currently address global environmental problems. Where, today, pollution is usually tackled at “source” (broadly the location of production), environmental BTAs would make consumers responsible for the pollution costs linked to their consumption. This would avoid some of the drawbacks of traditional environmental taxes, which in particular create an incentive to relocate production to countries with no (or low) environmental standards. The logic here is similar to that of the DBCFT: customers are less mobile than other factors, which make the tax harder to avoid.
Despite the lively debate that took place last year, little progress has been made so far with the idea for traditional and environmental BTAs. But they could play a significant role in the future of tax and environmental policies. Here are three reasons why they could and should attract new media and political attention.
First, arguments against BTAs because they are protectionist reflect an erroneous understanding of the concept. BTAs are not protectionist. They are often confused with tariffs because they apply to internationally-traded goods. However, unlike tariffs, BTAs copy the design of taxes imposed on domestic products and usually treat imports and exports symmetrically. Tariffs and BTAs do not pursue the same goal. Tariffs protect domestic products and producers by raising the price of imports; BTAs guarantee that taxes on domestic products do not distort international trade or domestic competition.
Second, BTAs are often described as unrealistic because they are assumed to be incompatible with international trade law. In fact, WTO law does not forbid the adoption of BTAs. Most tax systems rely on non-environmentally-specific BTAs such as VAT and excise duties. Such taxes are in line with WTO law, which is mainly aimed at ensuring that their design does not discriminate against (and between) internationally-traded goods. In the past, many bills proposing “carbon BTAs” would have better been described as “carbon tariffs” than as BTAs. Under WTO law, this is a key difference. Tariffs and BTAs are not subject to the same provisions: the ones surrounding tariffs are more restrictive. Policy-makers should pay attention to the way they frame their proposals.
Well-designed, genuine, environmental BTAs nevertheless remain controversial. One of the most debated legal issue concerns the possibility, under WTO law, of adopting differentiated taxes that distinguish between products based on emissions released during production rather than on products’ physical characteristics. It is impossible to predict whether future environmental BTAs would be found to be contrary to WTO law. The answer depends not only on the design of the tax but also on whether one WTO member decides to bring the case to the WTO. The enforcement of international trade law is not only a legal question; it is also a political one.
Third, environmental BTAs are criticised because they would penalise developing countries. Goods produced in developing countries are likely to have a higher climate impact. Consequently, imported products from developing countries could be subject to a higher tax than those from developed countries where production processes have a lower emissions’ level. But again, the tax could be designed to solve this problem (including by means of specific rules for the allocation of the tax revenue).
Carbon emissions and pollution are not national issues; they are international issues. Emissions from production in one country harm those in other countries. So attempts to limit emissions should not just be the responsibility of national governments in countries where production takes place. Well-designed environmental BTAs – even though regularly criticised in climate negotiations – could be important in widening the scope of measures to address climate change. The taxation of pollution across borders is an innovative proposal and deserves to be taken seriously.
Recent CBT research:
Back to top of article