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Carbon taxes have recently become a major source of discussion in the Washington, DC policy community. Supporters contend that they offer an efficient way to simultaneously create incentives to emit less carbon dioxide and reduce the budget deficit. Leading think tanks from both the left and the right, including Brookings, the American Enterprise Institute, and Resources for the Future, have hosted dialogues on how to structure the tax and use the revenues. Meanwhile, lawmakers have proposed two carbon tax bills during this congressional session: 1) Senators Boxer (D-CA) and Sanders (I-VT) put forward a plan to assess coal, oil, and gas producers a $20-per-ton carbon tax; and 2) Rep. Henry Waxman (D-CA), along with Rep. Blumenauer (D-OR) and Senators Whitehouse (D-RI) and Schatz (D-HI) released a discussion draft of a bill that would impose a fee of between $15 and $30 per ton on greenhouse gas emissions from power plants, factories, refineries, and other major emitters of carbon dioxide.

Should such a carbon tax be enacted, it will in all likelihood be accompanied by measures to ensure that the U.S. industries that would be most heavily affected by the tax are not placed at a competitive disadvantage with respect to competitor producers operating in countries that have not imposed any restrictions or taxes on carbon usage. Any such efforts to “level the playing field” will raise numerous questions regarding their compatibility with U.S. international obligations, especially their legality under agreed upon rules of the World Trade Organization (WTO) and in particular, the General Agreement on Tariffs and Trade (GATT).

Can such a carbon tax be applied in a way that does not violate U.S. obligations under the WTO Agreements? I believe the answer is yes, provided that policymakers carefully design such a tax, keeping in mind the basic requirements of the WTO not to discriminate in favor of domestic producers or to favor imports from certain countries over others. The key is to structure any accompanying border measure as a straightforward extension of the domestic climate policy to imports. If so designed, there should be few questions about the measure’s consistency with the WTO rules. Even if questions were raised, the United States would have strong defenses within the WTO system. And even if those defenses were somehow to fail, the United States would be able to make adjustments should some aspect of its carbon tax system be found wanting. A non-discriminatory tax enacted in good faith to address climate change should pass muster with the WTO. Therefore, the threat of WTO challenges should not deter policymakers from adopting a carbon tax system now.

Publication Citation

Jennifer A. Hillman, Changing Climate for Carbon Taxes: Who’s Afraid of the WTO? (Climate & Energy Policy Paper Series, July 2013)