The Peterson Institute has published an interesting paper by two very good economists, Aaditya Mattoo and Arvind Subramanian, about trade and climate mitigation.bit.ly/ZQLATw While as a matter of economics I rather like the Joe Stiglitz conceptualization of the problem better than theirs, then again I am not an economist myself and so shouldn't be too much judging between them, I guess. Mattoo and Subramanian make a strong case that liberalizating WTO rules on subsidies could be useful in facilitating climate mitigation. This is an idea that I developed several years ago, in a study for IISD: http://bit.ly/Y7F9e3. Odd that Matto and Subramanian, though suggesting export restraints on fossil fuels, don't deal with the challenge of reducing or eliminating fossil fuel subsidies, the climate mitigation gains of which the IMF has recently shown to be dramatic.
On border adjustment, they are simply confused about the law. They assert with respect to Article III:2 GATT: "Even if border tax adjustment is permitted on inputs that are consumed but not incorporated in the final product, it is not clear whether it should be based on the carbon content of domestic production
or foreign production." While they admit there is no WTO jurisprudence on this point, they mention the GATT Superfund case. But the mere fact that the GATT Superfund case was about a situation where the inputs were incorporated into the final product, it is simply a non-sequitur to suggest that the case can stand for the idea that border adjustment is only permitted in that situation. There is certainly no language in the decision to support such a limitation. The panel obviously addressed the input as incorporated in the product because in that particular situation it was! What is really important in Superfund for purposes of carbon border adjustment is the following statement of the panel, which implies opposite to what Mattoo and Subramanian suggest, that there are no intrinsic limits to the use of border adjustment for the policy purpose of addressing carbon externalities that occur in the production of the product: “the tax adjustment rules of the General Agreement distinguish between taxes on products and taxes not directly levied on products they do not distinguish between taxes with different policy purposes. Whether a sales tax is levied on a product for general revenue purposes or to encourage the rational use of environmental resources, is therefore not relevant for the determination of the eligibility of a tax for border tax adjustment." In sum, what matters is the purpose of the tax, internalizing carbon externalities, and it is irrelevant to that purpose whether the externalities are associated with the production of some input in the production process that stays in the product, or whether the burned fuel in the production process is itself considered as the basis for the tax. It is sometimes suggested that the emissions are on output rather than an input, and that taxes on outputs can't be border adjusted, but as I explain in a recent paper presented at a Yale conference on climate policy (I'm now revising it), this is just semantics. In all cases a border tax will in fact be on or applied to products, but addressed to the carbon externalities of the product, as noted, an entirely permissible purpose of a border tax adjustment under WTO law.
Finally for state-of-the-art economics that shows the very signficant carbon mitigation gains from doing border adjustment, see the article Joshua Elliott, Ian Foster, Sam Kortum, Todd Munson, Fernando Perez Cervantes, David Weisbach, “Trade and Carbon Taxes” American Economic Review 100 (2010).