Is There Anything New about Border Tax Adjustments and Climate Policy?

In the current session of Congress, a climate change bill sponsored by Representatives Waxman and Markey was passed by the House in June 2009. 1 Part of this bill contains clear language that, in the absence of any multilateral agreement on greenhouse gas (GHG) emissions, the US should unilaterally implement border adjustments such as “carbon tariffs” for US domestic climate policy. The extent of interest from policymakers, the media, and other observers, might lead one to believe that border adjustments for domestic climate policy are a novel regulatory issue. Whether this is actually the case is the subject of this article, its focus being on four related issues: first, concerns about competitiveness and carbon leakage are discussed in the context of the existing economics literature on trade and the environment; second, World Trade Organization (WTO) rules concerning the use of border tax adjustments (BTAs) are outlined; third, in light of the WTO’s position on trade neutrality and BTAs, some key results from previous economic analysis are laid out and discussed; and fourth, by way of conclusion, some specific issues are noted that add complexity to existing analysis of BTAs.