WTO Compatibility of Carbon Motivated Border Tax Adjustments - Border Adjustability of Carbon Taxes

Carbon taxes are one policy governments might use for reducing GHG emissions. However, unilateral carbon taxes have the effect of hindering competitiveness of domestic products both at home and abroad. One possible solution is to team up carbon taxes with border tax adjustment(BTA). Yet, uncertainties and ambiguities remain as to whether such carbon motivated BTA would be found compatible in the legal framework of WTO if challenged, since BTA is only allowed for taxes levied directly or indirectly on products. Ultimately, the question will turn on how broadly the WTO would interpret the meaning and scope of the phrase "directly or indirectly" for the purpose of GATT Article III:2 and corresponding provisions in the ASCM. While it is generally clear that "indirect taxes," as in taxes imposed on products as such, are eligible for BTA, the question as to whether "indirect taxes" on inputs used in the production of final products are adjustable for the purpose of BTA needs further clarification. And it accompanies the question of whether inputs used in the production process should mean to cover only physically incorporated inputs or also non-physically incorporated inputs. Tax adjustments upon importation and exportation for the purpose of BTA need separate consideration as different legal provisions apply under current WTO rules. Nevertheless, it should be noted that the Working Party on BTA agreed that GATT provisions on tax adjustments applied the destination principle identically to imports and exports. Against this background, Annex II of the ASCM seems to have broadened the range of taxes that are border adjustable by providing that the rebate of PSCI taxes on "energy inputs" of final products is permissible upon exportation. And as one can imply from the Panel ruling of the Superfund case and the legislative history, “indirect taxes” imposed on inputs that are completely consumed in the production process would fall within the scope of "indirect taxes," applied at least "indirectly" to a final product for the purpose of GATT Art. III:2. This interpretation leads to the conclusion that carbon taxes could be framed as border adjustable within the WTO.