Former AB Member Jennifer Hillman has a new paper on carbon taxes and WTO rules. Some excerpts:
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.
If Congress enacts a carbon tax to address climate change, streamline domestic energy policy, raise revenues, or reduce distortions in the tax system, it must be ready to address the competitiveness concerns of U.S. companies. It could do so by applying the same tax to imports coming into the United States as they apply to domestic goods in order to ensure that everyone competes on a level playing field and that everyone has the same incentive to reduce their carbon footprint. To ensure that U.S. companies are not disadvantaged when they try to export their products to foreign markets, the carbon tax could be rebated to U.S. companies whenever they export the products on which the carbon tax was assessed.
Each of these steps is permitted under the WTO rules provided: 1) that the tax is designed to fall within the parameters of an “indirect” tax on products rather than a direct tax on the producers themselves; and 2) that any parallel taxes on imports or rebates on exports do not discriminate in favor of U.S. products. Policymakers have sufficient latitude within this framework to design and implement a carbon tax system that represents a good faith effort to reduce carbon emissions while encouraging all other countries to cut their emissions too, all while preserving the competitive position of U.S. companies. Policymakers can be bold. The WTO will recognize genuine climate change measures for what they are and is unlikely to find fault with such measures, provided they do not unfairly discriminate in favor of U.S. companies.
As a WTO legal matter, that all sounds right to me.
But what about the issue of PPMs, which a friend of mine raised? There is a view out there that discrimination against like products based on their production or processing method violates WTO rules.
I don't know what Jennifer's thoughts are on this, but in my view recent WTO jurisprudence makes it fairly clear that measures will not violate WTO law simply because they affect the production or processing method. I don't want to get into all the provisions that might possibly come up in this regard, but just speaking very generally, it seems to me that if you can show a legitimate objective for the measure and it is applied in an even-handed manner, then basing a measure on PPMs does not inherently lead to a violation. (And even if it did, it would likely satisfy an exception, if we are talking about a GATT claim).