Research / Funded Research Projects / Project - 5 - Consumption Based Carbon Taxes: feasibility and WTO consistency

Project - 5 - Consumption Based Carbon Taxes: feasibility and WTO consistency

Location: University of British Columbia
Reserach team: Carol McAusland and grad student
Duration: January 2012 - December 2013

 

Project overview

Many countries are concerned that imposing carbon taxes on domestic producers will disadvantage local firms in trade-intensive sectors, particularly when our trade partners do not pursue comparable climate policies themselves. One proposed solution is the use of carbon-based border taxes, also known as Border carbon adjustments (BCAs) and Border Tax Adjustments (BTAs). There is a question, though, as to whether BCAs are consistent with free trade rules such as those administered by the World Trade Organization (WTO). Although the WTO seems to be onside with the general principle that importers can require that imported goods be on a level-playing field with domestic products when it comes to embodied carbon, there are many questions as to what sorts of BCAs will ultimately be acceptable to the WTO. If, for example, Canada were to impose a tradable permit system and grandfather, say, 50% of the permits, would this mean that we would only be allowed to charge a BCA equal to 50% of the equilibrium permit price? Would we need to exempt goods imported from countries that have ratified the Kyoto agreement and are meeting their commitments, but have much weaker obligations than Canada? Do we need to exempt goods imported from countries that meet similar national-level reduction targets as Canada, but which are produced in industries that have been exempted in those countries? Can we only charge BCAs on goods that are deemed to be produced in a more carbon-intensive fashion than in Canada? Can the BCAs we impose differ according to country of origin, based on perceived carbon-intensity?

One policy that might circumvent WTO concerns about discriminatory treatment is to eschew production taxes and border adjustments entirely and instead pursue an economy-wide carbon added tax (CAT) akin to a value-added tax. CATs would be applied at the point of sale and apply to all goods sold in Canada, regardless of where they are produced. My reading of the legal literature and a brief discussion with a WTO lawyer suggests that a CAT would indeed be WTO-legal provided it was applied consistently. The devil-in-the-details, though, is how to calculate the carbon footprint of each product. Economic efficiency requires that each product have its own CAT based on its carbon intensity. These would vary across countries, firms, and plants. If we want to get precise, footprints can even vary with the time of day when a good is produced, depending on whether the grid is using wind or fossil-fuel generated electricity. Clearly, the computational difficulty associated with calculating plant-specific footprints would be insurmountable. Recognizing this, most policy analysts have rejected the idea of CATs without further consideration.

This project would investigate whether a modified CAT might be viable. Specifically, what if, instead of calculating individual footprints, we instead had two or three footprint classes for each category of goods. Specifically, each product class (e.g. carrots) would be assigned a baseline footprint which is based on the largest footprint in the (global) industry. Every pound of carrots sold in Canada would be applied this baseline CAT unless its producer was certified as meeting a smaller pre-determined footprint. The definition of producer may simply be the farm that grew the carrots, or it might be the region where the carrot is grown, depending on whether carbon intensity depends primarily on production decisions made at the farm level (e.g. tillage decisions) or the nature of the electricity grid in that region. Getting certified as meeting the smaller-footprint would be something like getting certified organic. We can think of this variant as a tiered-CAT.

 

Research stages

The proposed work will include four stages.

Stage 1
During the first stage we will examine whether a tiered-CAT is legally feasible in the context of the GATT and other multilateral agreements such as NAFTA. We will achieve this by examining the relevant case law regarding VATs and labeling schemes such as Organic and ISO14001 certification.

Stage 2
In the second stage we will assess the feasibility of the proposed tiered-CAT policy by providing case-studies assessing the computational and logistical requirements of calculating and implementing CATs on a sample of products drawn from four different categories:

    • agricultural products,

    • renewable and nonrenewable resource-based products, and

    • manufactured goods.

As noted above, the viability of a CAT or tiered-CAT system depends on whether footprints can be calculated in a straightforward and transparent manner, and whether taxes can be applied at the point of sale without unduly burdening manufacturers, retailers and consumers. Accordingly, we see the case study portion of this research to be one of the central contributions of the proposed work.

Stage 3
During the third stage we will use standard economic theory to assess the economic efficiency of a footprint-based tax relative to several competing alternatives such as a domestic cap and trade system paired with border tax adjustments.

Stage 4
During the final stage of the project, we will prepare a policy brief to be disseminated via LEARN. If, as a result of our work in stages one through three, we deem that a tiered-CAT is indeed logistically feasible and WTO-legal, we will also prepare a policy brief to be distributed to policymakers in Canada and abroad, including Canada’s Minister of Environment, the US’ Deputy of Energy, and their counterparts in Europe and elsewhere.

Finally, we will prepare a scholarly summary of our work for publication in a leading economics journal such as the Canadian Journal of Economics or the Journal of Environmental Economics and Management.

 

Research Team

The research team consists of Dr. Carol McAusland, and the graduate student Nouri Najjar.

McAusland is the Canada Research Chair (Tier II) of Trade and Environment and an Associate Professor in the Faculty of Land and Food Systems at the University of British Columbia. Her research focuses on the overlap between international trade and environmental quality and policy, and has been published in journals such as the American Journal of Agricultural Economics, Journal of Environmental Economics and Management, and Journal of International Economics. She is a co-editor of the Journal of Environmental Economics and Management and has served as an elected member of the Association of Environmental and Resource Economists’ Board of Directors. This project aims to develop a market-based carbon policy that will be consistent with the rules of the World Trade Organization (WTO). Consistency between environmental regulations and trade agreements is a theme that appears in many of her published works. She has also taught graduate and undergraduate classes on the economics of trade and the environment, using case studies of conflicts between domestic environmental policies and trade agreements such as NAFTA, GATT, and TRIPs.

Nouri Najjar is a graduate student. He received his BSc (Honours Economics) from the University of Victoria, recently completed his MA (Economics) at the University of British Columbia and will be entering the PhD program at UBC in fall 2012. Sept-Dec 2011 he will be traveling in Asia. He will return to British Columbia to begin work on his dissertation research in January 2012. He has studied extensively in the field of environmental economics, taking courses in the field at both the graduate and undergraduate level, as well as writing his senior thesis in this subject area. His undergraduate transcript is exceptional, and his performance in Dr. McAusland’s  graduate course was the best  seen in 11 years of her instructing graduate students, some of whom have gone on to faculty positions at universities such as John Hopkins and UC Davis. Najjar is also well trained for the project at hand. He has served as a research assistant to Dr. McAusland at UBC and to Prof. Martin Farnham at University of Victoria. He has also worked in the private and public sector as a data analyst in the related areas of education and health. Najjar’s training in both theoretical and data analysis, as well as his personal interest in environmental and public policy, makes him an excellent candidate for executing the proposed research.

Najjar is a email address is npmnajjar@gmail.com.

 

 

Deliverables

Stage 1
Review of literature, including WTO/GATT precedents regarding:

  1. value added taxes

  2. certification programs, including Organics, GMO-free and other labeling schemes

  3. ISO14000 and descendents

Delivery Date: March 31, 2012

Stage 2
Case Studies of CATs in select product groups, including exported and import-competing agricultural, natural resource, and manufactured products.
Delivery Date: March 31, 2013

Stage 3
Theoretical analysis of tiered-CAT versus full-CAT and other market-based climatepolicies such as Cap & Trade with Border Carbon Adjustments.
Delivery Date: March 31, 2013

Stage 4
Policy Brief summarizing results of research program, to be submitted to LEARN. If we deem the tiered-CAT as logistically feasible, we will also prepare and submit a proposal to Federal level policymakers; we will also prepare a scholarly summary of the research conducted for submission to a leading economics journal.
Delivery Date: December 31, 2013