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Carbon Motivated Border Tax Adjustments: Old Wine in Green Bottles?

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  • Ben Lockwood
  • John Whalley

Abstract

We discuss emerging proposals for border tax adjustments (BTAs) to accompany commitments to reduce carbon emissions in the EU, the US and other OECD economies. The rationale offered for such border adjustment is that various entities, such as the EU, if making commitments to reduce emissions which go beyond those undertaken in other regions of the world, impose added costs on domestic producers which create a competitive disadvantage for them. Some form of remedy is viewed as reasonable to maintain the competitiveness of domestic industries when responding to global environmental problems. In this paper, we argue that despite its current carbon manifestation, the issue of border tax adjustments and both their rationale and their effects on trade are not new and, despite the present debate (which seems to overlook older literature), have arisen before. Earlier debate on border tax adjustments occurred at the time of the adoption of the Value Added Tax (VAT) in the EU as a tax harmonization target in the early 1960’s. But academic literature of the time showed that a change between origin and destination basis in the VAT would be neutral and hence the use of a destination based tax in the EU to accompany the VAT offered no trade advantage to Europe. Here we argue that essentially the same arguments also apply for carbon motivated BTAs, and in the current debate there seems to be a misconception between price level effects and relative price effects stemming from a BTA, which needs correcting. We also argue that the impact of border tax adjustments should be viewed as independent of the motivation of the adjustments.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14025.

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Date of creation: May 2008
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Publication status: published as Ben Lockwood & John Whalley, 2010. "Carbon-motivated Border Tax Adjustments: Old Wine in Green Bottles?," The World Economy, Blackwell Publishing, vol. 33(6), pages 810-819, 06.
Handle: RePEc:nbr:nberwo:14025

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  1. Gary Clyde Hufbauer & Carol Gabyzon, 1996. "Fundamental Tax Reform and Border Tax Adjustments," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa43.
  2. Roland Ismer & Karsten Neuhoff, 2007. "Border tax adjustment: a feasible way to support stringent emission trading," European Journal of Law and Economics, Springer, vol. 24(2), pages 137-164, October.
  3. Krauss, Melvyn B & Johnson, Harry G, 1972. "The Theory of Tax Incidence: A Diagrammatic Analysis," Economica, London School of Economics and Political Science, vol. 39(156), pages 357-82, November.
  4. Susanne Dröge & Claudia Kemfert, 2005. "Trade Policy to Control Climate Change: Does the Stick Beat the Carrot?," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 74(2), pages 235-248.
  5. Whalley, John, 1979. "Uniform domestic tax rates, trade distortions and economic integration," Journal of Public Economics, Elsevier, vol. 11(2), pages 213-221, March.
  6. van Asselt, Harro & Biermann, Frank, 2007. "European emissions trading and the international competitiveness of energy-intensive industries: a legal and political evaluation of possible supporting measures," Energy Policy, Elsevier, vol. 35(1), pages 497-506, January.
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