From a speech by Peter Mandelson:
The elephant in the room when we talk about trade incentives for the right climate policy is of course the idea of a carbon border tax. This is intended to punish free-riders who don't sign up to a global climate deal and who therefore don't bear the competitiveness costs of paying for the carbon they emit. In the jargon they benefit from 'carbon leakage' – carbon that is used without being paid for. The Commission recognised the potential risks of free riding in its January package - in particular in relation to energy intensive industries.
Clearly the best way to stop carbon 'leaking' out of a global regulatory system is to make sure that nobody stays outside of the system. That is why the Commission's priority has always been a comprehensive international climate agreement that has no free-riders.
There are also numerous potential complications with a carbon tax. Border measures may provide some relief to energy intensive industries, but there would be pitfalls and negative side effects for other sectors and consumers. Measures would be extremely difficult to administer and enforce. Input prices for industry would rise, which would in turn push up prices of European exports and reduce competiveness.
Border measures could also invite retaliation and provoke a negative spiral of protectionism, under the pretext of environmental protection. Quite aside from the fact that it is technically difficult to design a measure that is WTO compatible.
Most importantly, we cannot really address the problem of free-riding until we know the extent of it. So first we must be sure we have done everything we can to secure a globally inclusive climate change package for the post-2012 period, with all the key players inside.
It is clear that the problem and the debate on carbon leakage won't go away. But right now we should be focusing on building a global coalition for a new global climate treaty. Tough talk on a climate tax will only alienate the very partners we need to get on board. I think the Commission's action reflects this reality.
(emphasis added) There's a lot in here, but I wanted to focus on the WTO compatibility issue. Maybe I'm being naive, but I'm not convinced it's that hard to design a WTO compatible carbon tax. Here's one thought in this regard. First, set up a labeling system, under which the amount of carbon emissions is identified for each product. Then, put together a related tax regime, with higher taxes on products with higher carbon emission. I think this could possibly be consistent with GATT Article III, but even if not, could be justifed by Article XX(g).
Granted, the labeling part would not be easy, but I think it could be done. From what I gather, various private and public entities are already trying it in some areas.
Am I missing anything here, in terms of the legal issues? Is this less likely to be consistent with WTO rules than I am suggesting?
On the other hand, maybe he is not referring to the legal design by itself, but rather the political task of coming up with a carbon tax that all the relevant players can agree to. That might be difficult.
