A Pragmatic Approach to Carbon Border Measures

Abstract

This article offers the justification for a type of carbon customs union in which countries with a diverse range of high-ambition domestic climate measures would adopt a common external tariff on carbon intensive imports from countries outside the union. We explain why any pragmatic approach to carbon border measures (CBMs) is likely to create problems under prevailing interpretations of the World Trade Organization's (WTO) primary rules. Given the urgency of the climate crisis and the fact that the legality of a CBM – no matter how designed – will be a question of first impression for any WTO dispute panel, WTO consistency should take a backseat to considerations of domestic legal and political feasibility in designing a CBM. Instead of trying to fit a CBM into current understandings of WTO rules, WTO members should renegotiate WTO rules to permit a range of aggressive, but likely trade-restrictive, decarbonization measures. Having said that, we also recognize that WTO negotiations may take longer than optimal from a decarbonization standpoint. We therefore suggest an approach that would allow WTO members to take advantage of flexibilities that existing WTO rules afford.

Border carbon adjustments: Should production or consumption be taxed?

“…One other type of differentiated rate proposal involves carbon clubs, where a set of countries set a common standard of carbon abatement and impose import BCAs on countries outside the club (Nordhaus 2019;Meyer and Tucker 2021). Clearly, such proposals would be likely to result in very serious political conflicts with excluded developing countries when, as noted by Lester (2021), it is today's industrial countries that are responsible for most of the stock of greenhouse gases driving the world's worsening climate crisis.…”

Border Carbon Adjustments: Should Production or Consumption be Taxed?

“…Carbon clubs are an extension of the import-only CTBA approach, where a set of countries set a common standard of carbon abatement, waive BCAs on club members, and impose them on countries outside the club (Nordhaus, 2019; Meyer and Tucker, 2021). If imposed by a group of large countries, it would certainly create incentives for some countries to join.…”