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A Primer on the Legality of Border Adjustments for Carbon Prices: Through a GATT Darkly

Charles McLure


Carbon prices (carbon taxes or the requirement to hold emissions permits) could induce carbon leakage or adverse competitive effects, unless applied to imports and rebated on exports, through “border adjustments”. This article, aimed primarily at those interested in aspects of carbon and climate policy other than international trade law, examines the “GATT-legality” of border adjustments for carbon prices, highlighting legal uncertainties. Border adjustments for carbon taxes may not be allowed under the basic trade rules, especially if applied only to trade with countries not limiting emissions. Carefully designed adjustments for imports (but not exports) might qualify for an exception under GATT Article XX, most likely the environmental exception, but might fail to satisfy the conditions stated in the “chapeau” (headnote). If the cost of emissions permits an emitter purchases from its government is deemed equivalent to a tax, the above conclusions would be applicable to adjustments for the cost of permits. The adjustability for the value of permits received without payment or bought on secondary markets is more uncertain. Uncertainty is compounded by the fact that many important emitters, especially electric power companies, do not themselves export or face competition from imports.


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