Import tax on carbon

The idea of a ‘border adjusted carbon tax’ or import tax on carbon-intensive goods has been floated in various discussions since Kyoto. Such a tax would have two benefits to countries that are seeking big domestic reductions in carbon. First, it would protect the country’s industries from being undercut by foreign rivals that do not have costly carbon legislation. Secondly, it would prevent carbon leakage, which happens when carbon-intensive production moves from those countries with domestic carbon legislation to those who do not. As a result, one country’s domestic reduction in emissions is more then offset by increased emission in another country.

These benefits are indeed appealing. France has been an outspoken proponent of carbon import taxes in the EU ETS and is pushing for these taxes to be included in the upcoming Kyoto successor. The WTO has also toyed with the idea arguing that it falls within the scope of Article XX(g) of GATT. And many US congressmen are advocates of such a move, almost entirely on the grounds of providing a ‘level playing field’ for US industries.

However, such a tax would not be without its problems. Firstly, it is inherently protectionist (albeit with a moral/environmental backing) and protectionism is bad for both the world economy and consumers, not to mention political cooperation. Secondly, even the WTO is quick to point out that the tax would be difficult if not impossible to administer effectively simply because determining the amount (and cost) of carbon that went into the production of every imported good would be a nightmare.

The tax is proving a contentious topic in the lead-up to Copenhagen. On the one hand, advocates, like Sarkozy, argue that developed countries must include or at least threaten to include a carbon import tax in the Copenhagen deal. This would, they argue, push developing countries to sign up, as they would suffer the consequences economically even if they do not agree to take part. On the other hand, such an aggressive tactic may heighten the divide between developed and developing country thinking on climate change. Worse, contention over the tax could make it impossible to reach a sustainable and long-term carbon agreement - which is arguably best way to provide a level playing field and stop leakage.

Clinton’s visit to India last week added to this debate. India’s rather aggressive stance, demanding that developing countries had the right to emit as much carbon per capita as any other country, made some believe that cooperation would not prove fruitful and that a carbon tax would be necessary. But Indian carbon negotiator, Jairam Ramesh, also used the tax to justify its position. He argued that threats of a carbon tax were imperialist and only solidified India’s position that developed countries, who emit the bulk of global emissions, have no place demanding that India sacrifice economic growth.

The question is, do industrialized countries use their ‘big stick’ and economic might to force an ‘international’ commitment to climate change, or do they work with skeptical developing countries to (hopefully) find a universally supported global agreement?