The case for a Border Carbon Adjustment tax

First the United States Congress, and now the President of France is talking about instituting border carbon tax regimes to win domestic political support for cap and trade.  These taxes could seriously impact goods from developing countries such as China. 

In a report for the IISD entitled Border Carbon Adjustment Aaron Cosbey (Pdf) wrote:

One policy option that has been repeatedly proposed to deal with such challenges is border carbon adjustment(BCA),2 a trade measure that would try to level the playing field between domestic producers facing costly climate change measures and foreign producers facing very few.While a BCA could conceivably work in conjunction with any number of domestic climate change regimes, it has been proposed to date as a companion to either a domestic carbon tax or a cap-and-trade scheme. In the case of a carbon tax, a BCA would charge imported goods the equivalent of what they would have had to pay had they been produced domestically, in the manner of a border tax adjustment. Such a scheme might also rebate the paid tax to exporters, ensuring that they are not disadvantaged in international markets. In the case of a cap-and-trade scheme, a BCA would force domestic importers or foreign exporters of goods to buy emission permits based on the amount of carbon emitted in the production process, in a requirement analogous to that faced by domestic producers.

BCAs have typically been touted as means to address competitiveness concerns, as noted above. They might play at least two other useful roles. One is to avoid what is known as carbon leakage. That is, if strong domestic action causes firms to relocate to other countries, or to lose market share to those countries, then the emission reduction achieved at home is simply offset to some extent by an increase in emissions abroad. The fear in fact is that they will be more than offset, as production moves to low-standard jurisdictions. While it is closely related to competitiveness, carbon leakage is a distinct concern, focusing on the effectiveness of environmental policy. A final justification for a BCA is that it might act as an effective threat to encourage developing countries to take on hard commitments in the climate change negotiations—in the manner of trade sanctions, or threats of trade sanctions.

Such taxes appear to be perfectly legitimate under WTO rules.  As Columbia University Economics Professor Joseph Stiglitz has noted, "Not paying the cost of damage to the environment is a subsidy, just as not paying the full costs of workers would be." 

Nevertheless, I believe that -- as border carbon adjustments can be perceived to constitute "a threat" they should instituted as a last resort, not an integral part of the architecture of the early preliminary efforts at legislating Cap and Trade by the West.