The concept of border adjustment taxes aka border adjustment tariffs aka carbon tariffs is part of a technical discussion in GATT/WTO international trade law concerning how a GATT/WTO member state subject to certain treaty obligations like the “most favored nations” principle in trade law might unilaterally raise its domestic environmental pollution standards without thereby disadvantaging its domestic producers via a higher cost structure compared to imports. This is a highly complex technical problem as a matter of trade law, which red hots may review as a matter of GATT/WTO law in detail by reading Condon & Ignaciuk, “Border Carbon Adjustment and International Trade:  A Literature Review” (OECD Trade & Environment Working Papers 2013/06); Paulwelyn, “U.S. Federal Climate Policy and Competitiveness Concerns: The Limits and Options of International Trade Law (Duke Nicholas Institute, 2007). Suffice it to say that it appears to be lawful as a matter of trade law, but would presumably draw a WTO dispute resolution challenge as discriminatory, if such an import levy actually were implemented.

Putting aside the technical details for the moment, the practical issue is whether a country may levy tariffs based upon the carbon generated by energy consumption in the offshore manufacturing process? So, for example, if (developed) Country X were to declare that its steel producers could not emit more pollution than a certain amount per ton of steel produced, its steel producers might be obligated to replace their “dirty” old coal-fired blast furnaces with “cleaner” modern natural gas-fired or even electric blast furnaces (and ultimately, solar or hydrogen?). The new furnaces and their fuel might cost more, but they would pollute less. Nonetheless, (developing) Country Y perceives its comparative advantage in trade in producing cheaper steel using the old dirtier coal-fired blast furnace (in a classic jobs versus the environment trade-off), so the question from the perspective of Country X is whether its steel industry must suffer a competitive disadvantage vis-à-vis Country Y’s steel industry if Country X unilaterally raises its (carbon) pollution standards?  This sounds technical, but is a common-place as a political matter in conjunction with unilaterally raising national environmental standards. The local business people invariably first object to the increased costs of regulation, but then begrudgingly will say they can accept it on one condition. If government does raise domestic environmental standards and so their costs, the standards must apply to foreigners too so that increased regulation does not make their local industry uncompetitive, with the result that Country X steel jobs move offshore, etc.

Border adjustment taxes were mostly the subject of academic discussions for circa 15 years, but had not been the subject of any real GATT/WTO trade law dispute (like an abstract discussion of aggressive tax strategies in legal terms prior to implementation and the IRS actually challenging them in litigation as tax evasion).  But most recently, the border tax has reared its head in conjunction with the EU’s new “Green Economy Program” under a concrete proposal to take effect in 2026. See Krishnankutty, “How EU’s proposed carbon border tax will work & why India is among the nations opposing it,” The Print (07/27/21). Now the US, UK and Canada are actively considering it too, and China has come out against it, meanwhile the matter will apparently be on the agenda for the November 2021 Glasgow UNFCCC COP 26. See Chaudhary, “India will Oppose ‘Unfair’ Carbon Border Tax Plans at COP26” (Bloomberg Green 06/29/21);  Mohan, “BASIC nations oppose EU’s plan to impose a ‘carbon border tax’” (Times of India 04/10/21).

That is all well and good, but why is the challenge coming at the environmental UNCCC COP26, as opposed to via the economic law GATT/WTO process? After all, this is really a measure theoretically governed by the GATT/WTO agreement rather than the UNFCCC as international environmental treaty. Does not black letter treaty law tell you that the Indians are complaining in the wrong place, and what do you make of the basis for the objections found in the linked articles? Or is this simply the same kind of climate justice issue that sank the Kyoto Protocol in US eyes (differential treatment of developing countries), given that we shall see when we reach formal discussion of the UNFCCC, Kyoto protocol and Paris Agreement that the Paris Agreement as more political rather than legal agreement (because it is based on individual countries transparently declaring their national decarbonization plans and timetables, but provides no real sanctions beyond political embarrassment for failing to meet them).

The reason for bringing this up here rather than later when discussing the UNFCCC directly, is the question whether this is all about distributive or climate justice claims generally, and simply reflects the ideas behind Dr Mahatir’s speech you read for Unit 1?  What do we owe developing countries in the climate change context, if anything? Is it all that simple, and can you propose any red-line solution to separate international economic and trade law from international environmental law?  We shall not really talk about trade law in this course, but one of the issues you should be aware of is that the US would likely challenge in any WTO reform discussions the traditional concept of special and differential treatment for developing countries in trade law, or at least would desire to cut it back to “least developed” countries (in which case countries like India and China in particular would lose special and differential treatment, although the Sudans, Syrias and Laos as least developed countries might still enjoy special treatment and status). 

Are we looking in the environmental context at the same kind of hidden desire to limit special and differential treatment at most to the much smaller number of least developed countries? This matters to developing countries generally in terms of carbon generation, to the extent the preferred national development strategy through the early 2000s involved rapid industrialization and so rapidly rising carbon generation. Countries worked themselves up the export ladder starting with textiles and shoe manufacturing, before advancing to heavy industries alongside consumer electronics, then finally achieving the highest level of precision manufacturing in terms of pharmaceuticals, chemicals and computer chips. So that is why the developing countries care about border adjustment taxes’ potential for making their exports less competitive, but is that really an environmental concern? How are they supposed to become richer, if forced to become greener early in the process? But who has the better part of the argument, scheduled for November 2021 in Glasgow? Is the case the same or different for cutting back on differential treatment in the international environmental law area, as compared to the international trade law area?

Copyright 2020–21 © David Linnan.