WTO Law Constraints on Border Tax Adjustment and Tax Credit Mechanisms to Reduce the Competitive Effects of Carbon Taxes

Joel P. Trachtman

National Tax Journal, 2017, vol. 70, issue 2, 469-494

Abstract: Many uncertainties surround the World Trade Organization (WTO) legal rules concerning border tax adjustments in relation to carbon taxes on import and export and concerning tax credits to compensate for carbon taxes. However, it is possible to design an import border tax adjustment that would pose a reduced risk of violating WTO law and, in the event a violation is found, an increased likelihood of satisfying the requirements for an exception. The lowest risk of successful WTO legal challenge would be presented by a border tax adjustment (BTA) in relation to a national product-based tax that does not vary by reference to carbon intensity of production but is set at a fixed rate for specified categories of products. A national carbon consumption tax that varies by reference to carbon intensity of production could achieve many of the same goals as the combination of a national carbon tax on production combined with an import BTA, including the creation of a level playing field within the United States, with a good chance of qualifying for an exception under WTO law. In addition, a national carbon consumption tax would not apply to goods consumed abroad and would thereby assist with competitiveness in foreign markets. If the consumption tax structure is not used, then an export border tax adjustment could address the foreign market competitiveness issue but might significantly reduce the likelihood of the related import BTA satisfying the requirements for a WTO law exception. An alternative to an export border tax adjustment may be to provide domestic subsidies to industries that are expected to experience competitive detriments in foreign markets as a result of a national carbon tax. So long as these subsidies are not contingent on exportation and do not cause specifically defined categories of adverse effects to foreign producers, they are not likely to violate WTO law. Even if a national carbon tax regime with import BTAs and/or export BTAs, or a subsidy to support exports, were to violate WTO law, the formal response by other states would generally (except possibly in the case of export subsidies) be imposed prospectively after a three-year litigation period and would be in the form of suspension of concessions or other obligations in an amount equivalent to the nullification or impairment of WTO rights resulting from the measure found to violate WTO law. As a practical matter, a state may decide to engage in “civil disobedience” or to operate in “efficient breach” in response to this level and type of retaliation. The specific industries targeted for the retaliation could even be supported through subsidies.

Date: 2017
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