Many proposals for greenhouse gas (GHG) tax legislation in the United States call for border tax adjustments (BTAs)—export rebates and import charges—to defend against GHG leakage and unfair competition in international trade caused by less stringent GHG policies in other nations. For similar reasons, the European Union also is seeking to establish a border tax on imports as it strengthens its GHG policies.
Without such border adjustments, key domestic constituencies in the United States and elsewhere—including labor, business, and communities where affected industries play a major role in regional economies—would oppose the GHG tax. However, trading partners, especially those major developing nations that would be disadvantaged by such a tax, could pose serious challenges, especially if BTAs violate World Trade Organization (WTO) obligations. For example, their opposition could directly impact trade now and, in the longer term, could affect both climate and trade negotiations. While most proposals state that BTAs should be compatible with WTO guidelines, they do not indicate the principal obstacles that obstruct compliance with WTO rules, or how these obstacles can be overcome.
Two years ago, Jennifer Hillman of the Council on Foreign Relations, Matthew Porterfield of the Georgetown University Law Center, Jan Mares of Resources for the Future, and I proposed a framework for WTO-compatible BTAs in the context of an upstream, economy-wide US GHG tax. BTAs for affected products would be determined based on the product’s GHG index (GGI)—a central concept and administrative tool defined in the framework. We intentionally designed GGI as a close analogy to conventional value-added taxes (VATs) because the WTO allows nations to rebate VATs on exported products and impose VATs on imports. GGI evaluates cumulative taxes paid on sources of GHG emissions and applies to the supply and manufacturing chain that’s responsible for transforming natural resources, materials, fuels, electricity, and other purchased products into new, GHG-intensive products. The rates for export rebates and import charges on covered products are determined by multiplying their GGI by the GHG tax rate.
In two new reports, we present a significant update to the original framework proposal, along with policy guidance for US legislation and regulations to authorize and implement the framework. (Hillman presents her excellent perspective in an article published on the Council on Foreign Relations blog.)
The framework update resolves a number of issues discussed in the initial report and extends the proposal in the following ways:
- We now propose explicit criteria for determining the products covered by BTAs—namely, that they should be based solely on their GGI. Those with GGI of at least 0.5 tons of CO2-equivalent per ton of product and, for electricity, 0.25 tons of CO2-equivalent per megawatt-hour would be eligible for export rebates and subject to import charges. We refer to them as GHG-intensive products. Products with GGI below these thresholds would not be eligible for export rebates nor subject to import charges.
- We argue that these criteria more properly identify GHG-intensive products that are the focus of BTAs, while other previously proposed criteria mostly identify energy-intensive, trade-exposed industries based on economy-wide measures for entire sectors—without addressing their related products. The criteria we propose would be more targeted and effective, given that BTAs should apply to products—not sectors or facilities.
- Our proposed thresholds encompass GHG-intensive products of the several dozen conventional US energy-intensive, trade-exposed industries that were identified in a US interagency study at the time of the Waxman-Markey cap-and-trade legislation. Products from other major sectors (notably coal, oil, and gas production; petroleum refining; and electricity) and a few specific GHG-intensive products from other sectors (e.g., liquefied natural gas and some industrial gases) would be covered, too.
- We explain the relationship between GGI and existing international standards to determine GHG emissions from facilities and operations, along with those based on life-cycle analyses for GHG product footprints. While GGI implements relevant factors in the GHG footprint protocols, these standards are not identical. To preserve the analogy with VATs, GGI considers only contributions from factors that are subject to the GHG tax. The GHG footprint standards include contributions from other factors, such as land use change, that are unlikely to be taxed under GHG legislation.
- We provide an extended discussion regarding WTO compatibility of the upstream GHG tax as an appropriate policy for import charges based on Articles II and III of the General Agreement on Tariffs and Trade, and for export rebates based on the Agreement on Subsidies and Countervailing Measures. We broaden the analysis to demonstrate that the framework also would satisfy the environmental exceptions under Article XX of the General Agreement on Tariffs and Trade, which applies to import charges.
- Our analyses that justify WTO-compatible BTAs with the GHG tax also suggest that designing BTAs absent a GHG tax presents serious legal and methodological challenges. For instance, our justification for BTAs in the framework would not apply for BTAs based on regulatory policies such as the EU Emissions Trading System. In addition, many such proposals call for determination of an “equivalent price” for the import charge based on domestic policies as well as a credit to offset the charge based on GHG policies in the exporting nation. The call to determine an “equivalent price” on products raises very serious methodological challenges when domestic policies are based on regulatory policies—especially those that apply to facilities, provide sector-wide mandates, or cover an entire portfolio of approaches. Many nations employ a variety of approaches like these, rather than one explicit GHG tax associated with products.
- Our update continues to emphasize that providing such a credit for nations that export to the United States (or to the European Union) runs the risk of violating the General Agreement on Tariffs and Trade’s most-favored-nation principles of nondiscrimination on the basis of national origin of imports.
- We resolve questions concerning the treatment of recycled materials—also referred to as “scrap”—and combined heat and power, which routinely are used in many affected sectors, such as aluminum, steel, pulp and paper, and refining.
The policy guidance report addresses how BTAs could be authorized and implemented as part of GHG tax legislation. Because of the large number of nations involved, and the many GHG-intensive products exchanged in international trade with the United States, implementing border adjustments of any sort will require a significant, ongoing administrative effort—one which we believe to be feasible, based on the availability of relevant information and our two decades of experience determining and reporting GHG emissions from facilities and operations. Our report offers the following guidance for policymakers on this matter and more:
- Legislation should designate and provide necessary authority to the appropriate federal agencies to develop and administer BTAs. We recommend that the US Department of the Treasury should lead with assistance from the US Department of Commerce and the US Environmental Protection Agency, especially in areas where the agencies already have relevant jurisdiction: the US Treasury on taxation, the Environmental Protection Agency on GHG emissions, and the Department of Commerce on trade-related investigations in foreign nations. We advocate this interagency approach because, today, no single federal agency or combination of agencies currently performs all the tasks required to implement the framework.
- Congress should establish criteria for covered products that are subject to import charges. We recommend that these criteria should be based on the thresholds proposed for GGI in the framework.
- Because it will take time to build the necessary capacity, the program should be phased in, commencing with a prompt start based on available public information that covers the most important GHG-intensive products and nations, and then eventually expanded to full implementation as capacity grows and reliable information becomes available through reports from affected firms in the United States and other nations.
- An essential undertaking for regulators will be to build from existing information and procedures (e.g., those proposed for GGI) and develop authorized guidelines for industrial facilities to allocate their total covered emissions (based on GGI) to the slate of GHG-intensive products they produce.
- Information submitted by US firms for GHG emissions from facilities and operations, along with GGI values for companies’ GHG-intensive products, should be published by regulators. Such information should be subject to audit and sanctions for incomplete, negligent, or fraudulent information.
- Collecting the accurate information required to determine GGI for covered products that are exported to the United States from many nations will be challenging. Our report describes several public sources containing relevant information that could contribute to the determination of GGI values by the regulator during the early days of implementation. By two years after the start of the program, we recommend that relevant information for GGI of imported GHG-intensive products (similar to that required of US firms for export rebates) should be submitted by either the foreign manufacturer or the US importer.
- The regulator should publish information about import charges for GHG-intensive products. These initially would be based on GGI developed by the regulator, and later would incorporate reports from foreign firms or US importers as such information becomes available.
- As an administrative tool to promote continuous improvement and identify questionable information, the program to implement BTAs should include appeals processes that allow domestic and foreign firms, trade associations, and other affected entities to challenge published information and US decisions on covered products, export rebates, and import charges.
As nations attempt to strengthen their GHG policies, we hope that these reports can help inform ongoing policy discussions about formulating BTAs. Over the longer term, we are convinced that international trade and investment must work efficiently and effectively to promote global deployment of advanced technologies that limit GHG emissions and promote resilient development. By addressing concerns regarding GHG leakage and competitiveness, BTAs can help nations take on more ambitious climate policies. And, by finding ways to avoid legal challenges, we hope that WTO-compliant BTAs can help nations promote long-term cooperation through the United Nations Framework Convention on Climate Change and the WTO.
