French President Nicholas Sarkozy announced yesterday in a speech to factory workers that he was ready to impose a new charge on fossil fuel products imported into France. The Financial Times quotes him saying that: "I will not accept a system . . . that imports products from countries that don’t respect the rules [on carbon emission reductions] . . .. We need to impose a carbon tax at [Europe’s] borders. I will lead that battle." Le Monde reports that the proposed legislation would set the tax at a rate of €17 per ton of carbon emissions. Other than providing a fair playing field for French products against imports not similarly taxed in their country of origin, the expectation is that the charge would also help change consumption habits. Not surprisingly, the FT quotes an economist who believes such a measure "would be naked protectionism," and worse, it could endanger a trade deal, as it might be viewed as a unilateral measure.
Yet, from an economic standpoint, countries implementing legislation that limits greenhouse gas emissions from both domestic and foreign sources—by levying internal and border taxes on all products—cannot be rightly called protectionist.
Yet, from an economic standpoint, countries implementing legislation that limits greenhouse gas emissions from both domestic and foreign sources—by levying internal and border taxes on all products—cannot be rightly called protectionist.
Clearly, the carbon tariff would only kick in if the goods had been produced in a country that did not implement similar carbon emission reductions, as Sarkozy clarified. Indeed, without border adjustments, European consumers would have little economic incentive to purchase goods whose production caused emissions that were somehow captured in the purchase price. They would purchase the cheaper foreign product whose emissions remained untaxed. As to unilateralism, presumably, France and its European partners would be acting in concert with other nations under an international agreement on carbon emissions, therefore calling this border tax—one that would further implementation of an international scheme—"unilateralist" would be just too simplistic.
As far as WTO law is concerned, last July, the WTO gave a cautious green light to such measures. In a report co-authored with the United Nations Environment Program, the WTO endorsed the implementation of such border measures so long as this is done for environmental reasons, which is clearly the point here. The report states: "Rules permit, under certain conditions, the use of border tax adjustments on imported and exported products . . . The objective of a border tax adjustment is to level the playing field between taxed domestic industries and untaxed foreign competition by ensuring that internal taxes on products are trade neutral." Some people need to remember that one of the tenets of free trade is the concept of nondiscrimination; carbon tariff border measures, like the one proposed by Sarkozy and already green-lighted by the WTO, can accomplish that.
It will be interesting to see how this plays out. Early European efforts to impose a carbon tax foundered, in part on fears that the WTO would disapprove of border tax adjustments to level the playing field. Also, U.S. cap and trade proposals have analogous adjustments in them.
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