Analyze the Tensions and Potentials behind
Carbon Tax: a Comparative Perspective
By
Chong Li
Student NO. 10635866Master thesis Political Science specialization in International
Relations
Thesis Supervisor: Dr. Sara Kendall
Graduate School of Social Science
University of Amsterdam
Table of Content
l Introductionl Chapter 1: Backgrounds
l Chapter 2: Economic mechanisms of Carbon tax 2.1 Defining carbon tax
2.2 Carbon related Border Tax Adjustment under the GATT/WTO Framework
2.3 The economical analysis on effectiveness of Carbon tax as domestic policy
Conclusion
l Chapter 3: Comparison through legal and political lenses
3.1 Examine the legality of carbon tax under WTO/GATT framework 3.2 The development of the carbon-‐related legal consensus on environment in soft law
3.2.1 Precautionary Principle
3.2.2 Common but Differentiated Responsibilities 3.2.3 The principle of Sustainable development
3.3 Political Games and the development of international environmental consensus behind carbon related policies.
3.3.1 Realist model
3.3.2Game theory/rational choice theory approach 3.3.3 Social constructivist approach
l Prospects and Conclusion l Bibliography
Introduction
Carbon policies nowadays drew a lot of tensions and power games in the world politics. The discussion of whether to implement carbon tax on those countries that do not have domestic cutting down carbon emission policies on trading the carbon-‐intensive products has never calmed down. The developed countries want the fast developing countries to take responsibility on cutting down the carbon emission. While the developing countries also hold the opinion that the international carbon tax may jeopardizing their own wellbeing. The collision of different interests behind the carbon policies reflects the fact that the fast rising eastern world challenges not only the power balancing of the western-‐led world politics, but also increases the tension between the two worlds. There is no doubt that all countries have the same goal that is to protect our environment, so the international cooperation framework underlines the effectiveness of controlling global warming.
As the fast process of urbanizing and industrializing, the huge emission green house gases are considered as the main reason of global warming and climate change. The severity of the effects that climate change caused on economy and society requires all people and countries to take measures before things get worse. Issues between trading and environment drew more and more attention of global society and scholars, and it is becoming a significant factor affects domestic policy-‐making and international relations.
In 1997, based on the ‘common but differentiated responsibility’ principle of United Nations Framework Convention on Climate Change (UNFCCC, 1992), the conference established a series of treaties, known as Kyoto Protocol, require developed countries take practical action on reducing Greenhouse gases emissions to reach their binding targets, while developing countries do not have binding targets. The Protocol has two commitment periods: the first commitment period applies to emissions between 2008-‐2012, requires the Parties included in Annex I, which include developed countries such as EU
countries, Canada and Australia, “shall, individually or jointly, ensure that their aggregate anthropogenic carbon dioxide equivalent emissions of the greenhouse gases listed in Annex A do not exceed their assigned amounts, calculated pursuant to their quantified emission limitation and reduction commitments inscribed in Annex B and in accordance with the provisions of this Article, with a view to reducing their overall emissions of such gases by at least 5 percent below 1990 levels in the commitment period 2008 to 2012.” The second commitment period applies to emissions between 2013-‐2020, during which developing countries should take responsibility to reduce emissions. The purpose of this protocol is to avoid the threat of climate change on human being.
However, in 2009, the Copenhagen Climate Change Conference only achieved a non-‐binding agreement among parties. This conference suggests that although climate change is becoming a threat to the steadiness of human society, which more has been paying attention to, there still are non-‐reconcilable contradictions between parties, interest groups, and countries in a short time. Those contradictions involve all kinds of issues related to diplomacy, domestic laws and policies, international responsibilities, etc. It also requires a more positive and up-‐to-‐date international cooperated legal-‐binding framework that needs to be supported by a series of more efficient institutions and policies. Carbon tax can be seen as a means to force developing countries to voluntarily reduce the carbon emissions.
As mentioned before, Carbon tax was designed to cut down carbon emissions to slow down the global warming. European Union is devoted to advocate carbon tax as an effective economic method to urge countries to reduce its carbon emissions. The purpose of the carbon tax was described as to internalize externalities associated with anthropogenic climate change. (Metcalf and Weisbach, 2009) According to the United Nations Framework Convention on Climate Change 1992, and Kyoto Protocol 1997, all the countries share common but differentiated responsibility of reducing carbon emissions. An approach suggests that since climate change is a function of global CO2 emissions, an
efficient strategy for controlling emissions would be to impose the same price wherever they occur. (Elliot et al., 2010) However, such an approach also presents a free-‐rider problem that not every country likes to comply while enjoying the benefits of the reduced emissions. More over, because of the distributive concerns and claims about past emissions, most of the developing countries are unwilling to pay the same price as developed countries. (Elliot et al., 2010) The contradiction between developing and developed countries on this issue aroused opposite opinions. On one hand, as EU and US advocated, the carbon tax was designed to urge the countries that mainly export carbon intensive industries to take responsibility of climate change. On the other hand, the developing countries such as China and India hold the opinion that carbon tax is a new method of raising tariffs of international trade, controlling the trading price of exports. It is in against with the GATT principles and the fairness of global market.
Thus, it is quite obvious that the multinational implementation of carbon tax is becoming a hotly debated issue in international relations.
This thesis means to look at the bigger picture behind the carbon tax itself, which means it focuses on political and international legal effects it bring rather than intertwining with its technical details. Due to the complexity and interdisciplinary of this issue, instead of sticking with one theory, I choose to use different theoretical approaches from economy, law, and international relations, to analyze its nature, characteristics, and effect. In this thesis, I will mainly discuss the legality of carbon tax through legal and political lenses, by comparing the contradictory opinions and interests and figuring out the tensions between developed and developing countries, and the main argumentation between different schools of IR scholarship, followed by a prediction of the possibility of the application of carbon tax world widely. In short, this thesis contains different theoretical approaches to observe the carbon tax through different lenses, in order to improve the comprehensive understanding of the greening issue in international relations.
Chapter 1: Backgrounds
Carbon tax in this thesis is mainly in the context of Border Tax Adjustment, which means to impose tax on account for emissions attributable to imports from nations without a carbon price to balance the competitive losses due to one country introducing a carbon tax while another country does not. (Farrahi at al. 2013) Thus, carbon tax as an economic adjustment means has its own mechanisms, such as taxation on greenhouse gases emission, and emission trading schemes. The mechanisms of carbon tax reflect the nature and functions in adjusting state’s behavior on reducing greenhouse gases, but also on its international trading policies. So the mechanisms are the start point of the further analysis of the legality.
In legal terms, carbon tax as boarder tax adjustment is closely related to the development of international trade & tax law and environmental law. Due to the specialty of the sources of international law, which require state practices and
opinio juris, the implementation of carbon tax also has administrative problems
on practicing. Consequently, carbon tax was mostly taking places in domestic level, while there were no practical cases of carbon tax as boarder tax adjustment. But in 2012, EU decided to enforce carbon taxes upon all the flights using EU airspaces. This action is taking place though it is under the pressure from a lot of critiques and arguments. This case could be seen as the first practice of carbon tax, which stepped forward to promote the application of carbon tax. However, the implementation of carbon tax on a global scale is still remaining uncertain.
In the world politics perspective, the carbon tax that involves changes in international law and world politics, its application can deeply influence the world trading structure and political status. On one hand, some developed countries that have more power and bigger influence on world politics such as EU countries, Canada, and Australia has a long history of domestic legislation on carbon tax within its own territory. On the other hand, developing countries that
have been at a disadvantageous status of international relations don’t have those domestic laws on managing carbon emission and industry developments. However, the meteoric rising of some developing countries such as China and India caused the transformation of the structure of world politics, shaking the long existing western led world political frame. Consequently, the resurgence of developing countries that mainly exports industrial products without effective greening means may lead to a spillover effects and free rider problems. So the developed countries advocate the developing countries especially fast rising countries such as China and India to take their responsibility on international environment conservation even though the current law documents such as Kyoto Protocol do not has binding obligation or period targets on developing countries. On the other hand, developing countries especially China and India are in constant objection of legislating domestic carbon tax policies and laws, and considers its an western threat and an imposing obligation aims to transfer its own pressure on reducing carbon emissions. It means the political games behind carbon tax itself counts more than the carbon policy itself. So far it is quite obvious that the tensions between different parties may cause difficulty in international cooperation, and yet the cooperation of all the countries is necessary and is the only solution towards this issue.
In the following chapters, I will elaborate specifically on economic, legal and political tensions between countries and researches on carbon tax.
Chapter 2: Economic mechanisms of Carbon tax
2.1 Defining carbon tax
Under the framework of UNFCCC and Kyoto protocol, there are mainly three international flexibility mechanisms, namely, international emissions trading, joint implementation, and the clean development mechanism. (Baranzini et al, 2000) (Zhang and Baranzini, 2004) And yet in the Kyoto Protocol, the Articles, which not only defined the flexibility mechanisms, also suggested that their use had to be supplemental to domestic actions. (Zhang and Baranzini, 2004) Thus,
the domestic policies do take important parts in the mechanisms.
In domestic policies on cutting down green gas emission, the carbon tax is regarded as a feasible and direct measure of controlling carbon emission, which means to price the Carbon Dioxide emission by taxation. Now many countries such as Finland and the Netherlands already practice it in their domestic taxation policies. This kind of carbon tax is designed according to the emission amount of carbon dioxide when the fuel burns. (Zhang and Baranzini, 2004) (Baranzini et al, 2000) Different fuel produced different amounts of CO2, generally, the traditional fossil fuel like coal and petrol will produce more CO2 for its use, so the producer have to pay a higher price on the tax. On the other hand, the new technological fuels like gas or bio-‐fuel are less taxed. Generally, carbon tax is an economic measure taken by authorities that based on market to control the carbon emission. According to Baranzani et al, (2000), once the governments or the administrative authority has set the tax rates, emissions-‐intensive products will accordingly “have higher market prices and/or lower profits.” Then in a consequence, the market will function in an effective way to cut down emissions in two incentive ways. First is a direct way that through the increase of the price, stimulating the transition in investment of energy efficiency technology, fuel and products switching, then switches in consumption and production structures. The other is indirect effect way that the consumption and production patterns may change through the recycling of the collected fiscal revenues which reinforces the previous effect.
Generally speaking, carbon tax is implemented in either of the two ways: the consumption taxes or producer taxes, the latter includes production or processing taxes. The consumption taxes are implemented on the sale of final goods to consumers. The producer taxes has three different bases, the first is taxed on the outputs of the producer; the second is based on measured or estimated emissions (on production); the third is in relation to their inputs in business activities (on processing). (OECD, 2001. P25)
No matter the tax is implemented in which way, the effects of carbon tax is to stimulate its needs on transition in fuels, then enforce the changes in the environmental effects of taxation and its costs. According to the report of OECD (2001, P72), in most of the OECD countries which already introduced carbon tax, the taxation is imposed on consumptions.
In some developed countries the carbon taxes have already been introduced. Especially in EU countries such as Finland, Norway, and Sweden already began its taxation on carbon emissions in the 1990s. Usually, the taxation was imposed on the combination of carbon emission based tax and energy source based tax. The difference between the two types of tax lies in the base of taxation. Carbon tax is levied based on carbon emission, while energy tax is based on the different types of energy, in other words, energy tax can be levied on various energy sources, which means not only on fossil fuels but also on other energy sources that do not produce carbon emissions. According to Pischas(1994), the energy taxes contains two parts: one part is based on the amount of the emission of CO2, which is the same as carbon tax; the other part is based on the calorific value of the energy source during the combustions. Therefore the energy taxes are also effective on cutting down emissions of CO2, and it is named by OECD as “implicit carbon taxes”. However, by contrast, carbon taxes are more cost effective on the purpose of reducing carbon emission than energy taxes. By observing from two aspects: price induced energy conservation and fuel transition. Carbon taxes are imposed mostly on carbon intensive fuels such as petrol or diesel, which is in relatively inelastic demands of consumers. So it has direct influence through both their price mechanism effects on energy consumption and fuel choices. While energy tax has the incentive for the reductions in CO2 emissions will be mainly achieved by price-‐induced energy conservation. Thus, in order to reach the same reduction targets, it may ask for higher energy taxes than carbon tax, which means it is more costly for implementing energy tax than carbon tax on reducing carbon emissions. (OECD, 2001) (Zhang and Baranzini, 2004) (Jorgenson & Wilcoxen, 1993) (Pischas, 1994)
By imposing those carbon taxes or energy taxes are in no doubt increased the cost of production in energy-‐intensive industries. Under the UNFCCC framework, developed countries take those domestic measures on cutting down carbon emissions and slowing down the pace of climate change, if developing countries take no responsibility on mitigating emissions without appropriate policies, the vulnerable energy intensive industries of developed countries will be at a disadvantageous position in the competition of international market. Thus, some of the developed countries advocate adopting border tax adjustment to balance the competing environment. (Goh, 2004) (Pischas, 1994)
2.2 Carbon related Border Tax Adjustment under the GATT/WTO Framework
The legality of carbon tax as BTA should not be examined without analyzing the framework of GATT/WTO. The reason to consider this issue under the GATT/WTO framework lies in two aspects, firstly is the specialty of the environmental issue, according to OECD (2001, P116), there is no existing commercial abatement (end of pipe) solution for CO2, even though there are abatement solutions for other greenhouse gases emissions. Therefore there is only one solution that is to mitigate emissions at source. But it is obvious that due to the marginal costs of decreasing emissions vary from country to country, a cost-‐effective pattern will not be achieved without trading with Annex 1 Countries in Kyoto Protocol, which includes most of the developed countries. Secondly is about the fact that GATT/WTO framework is the most significant institution dealing with international trade in the world. Regarding its concern on global environment issues starts in the 1990s, yet it did not have any effective impact on the relations between environment and international trade. And that is why its current stage is still the starting point of analyzing the issues relating to environmental actions influencing trade. (Pischas, 1994)
The Carbon Tax in this thesis is mainly discussed as a measure of Border Tax adjustment (hereinafter BTA). In order to explain and analyze the legality of carbon tax, the mechanism of being a measure of BTA should be examined first. According to the definition of BTA applied by OECD which GATT Working
Party Report on Border Tax Adjustments (1970) also used, Border Tax Adjustment are regarded "as any fiscal measures which put into effect, in whole or in part, the destination principle (i.e. which enable exported products to be relieved of some or all of the tax charged in the exporting country in respect of similar domestic products sold to consumers on the home market and which enable imported products sold to consumers to be charged with some or all of the tax charged in the importing country in respect of similar domestic products)" So it can be concluded that BTA can be applied in both exports and imports process.
To be specific, BTA would allow countries to abolish free allocation, with all its implied distortions, yet without risking leakage. The principle of border-‐tax adjustment is that a charge is imposed on imported products into the country that is equal to the charges payable when producing in that country. (Ismer& Neuhoff, 2007)
Furthermore, the economic goal of BTA is to create a fair competition environment between the domestic industries, which are levied taxes, and foreign import competitors, which do not pay taxes, known as “leveling the playing field”, and at the same time prevent the carbon leakage which is led by the transmission of those industries to countries which do not have reducing policies. (House et al, 2008) In carbon tax mechanisms, the trading measures are most likely imposed on imported goods proportionate to the carbon amounts it embedded, while abate or exempt the tax on its export goods which contains carbon. So the internal taxation on products can be “ trade neutral”. (Goh, 2004) (Pischas, 1994) (Zhang and Baranzini, 2004) But not all kinds of internal taxation can be adjusted. Therefore the clarification of the eligibility of the application of BTA is necessary.
Usually, the internal taxes have two types: one is direct taxes, which is levied on producers; the other is indirect taxes, which is levied on products. In fact, there is no exact definition of the term “direct tax” in WTO Articles, therefore the ambiguity of the definition leaves a space for interpretation and led to “differing
tax adjustment practices for similar types of taxes”. (Lang et al,. 2005. P354) (GATT Report on BTA, 1970) but the Report on BTA (1970) concluded clearly that the destination principle BTA can be applied to indirect taxes, which means the taxes directly levied on products such as specific exercise duties, sales or value added taxes and cascade tax are eligible for tax adjustment, but not to direct taxes, such as the corporate income or social security tax. In other words, indirect taxes can be imposed at the border on imports, and abated or exempted on exports, but no explicit adjustments can be made for direct taxes. (Carlson et al, 1976) (GATT Report on BTA, 1970) Then the Report also points out that there are divergences on practices. Besides, tax adjustments do not have to take place at the border, and imports may be taxed during the process of sale or consumption. For example,
"Taxes occultes’ which the OECD defined as consumption taxes on capital equipment, auxiliary materials and services used in the transportation and production of other taxable goods. Taxes on advertising, energy, machinery and transport were among the more important taxes which might be involved. It appeared that adjustment was not normally made for taxes occultes except in countries having a cascade tax”
Therefore, likewise, there is no clear answer to the question that whether the carbon tax or energy belong to indirect tax, which is determinant to its eligibility as BTA. However, the Report did not investigate further on this question. And so far, the case law did not offer effective sources and contribution on clarifying this issue as well. Goh (2004) suggested that normally a tax as border tax adjustment is applied as “final goods”, and there is nothing conceptually deterring any country from applying BTA on inputs used in the production process. He further explains with an example that a BTA applied on imports of aluminum for taxes on energy in production process. The tax here on embedded energy in the final goods that are adjusted, as opposed to taxes on the final good itself.
Moreover, scholars also have discussed the efficiency of carbon tax as BTA. Ismer& Neuhoff (2007) regards it is a feasible way to encourage international
participation in reducing emissions, and BTA for the emissions trading scheme is an economically viable approach to address leakage effects.
Grossman(1979) and Lockwood (2010) discussed the relations between BTA and international trade. And both of them think that there is simply no effect on trade flows because the move between the origin and destination basis, while having price-‐level effects, has no relative price effects in these simple cases. (Lockwood and Walley, 2010)
However, there are also contradictory opinions against today’s discussion of carbon-‐generated BTA. Lockwood and Walley (2010) suggest that the current literature discussion about carbon-‐related BTA is just old wine in the green bottle, the seeming relative price effects themselves may not even have an impact on trading patterns if the production technology is sufficient. The current debates must seemingly separate out the price level and relative price effects involved in assessing the impacts of BTAs, and also separate out the motivation for their use from assessment of impact. They also pointed out that BTAs are not the only instrument available for the current policy designs.
Therefore the discussion on the legality of carbon tax as BTA drew a lot attention. I will explain it further in chapter 3 on its compliance with GATT/WTO framework.
2.3 The economical analysis on effectiveness of Carbon tax as domestic policy
So far we have discussed the mechanisms of carbon tax as a measure of border tax adjustment under the framework of GATT/WTO. But is it economically feasible for the implementation? And is it the best way of reducing greenhouse gases? I think before moving further on the legality, its economic efficiency should be examined, because the economic effectiveness has great influence on the policy choice of authorities. Some scholars tested the effectiveness and feasibility of carbon tax in economic models, and explained its effectiveness is related to the technology level, social welfare and economic dividend.
designing reducing emission policies was based on the mix of these three factors: technology policy, evolving institutional and regulatory frameworks and internalization of CO2 costs. Depending on its own economic, political and social situation, a country may vary its emphasis on different instruments. Metcalf (2009) also claims that “The carbon tax rate should be set, ideally, to maximize social welfare, taking into account the dynamic nature of the problem as well as the interaction between the carbon tax and the various distortionary taxes currently in place.” Usually there are two approaches that governments would imply either of them: carbon taxation and carbon trading schemes.
Firstly, it is necessary to define its economic nature of carbon tax. Carbon tax is introduced as a kind of Pigovian tax. Because the o-‐zone layer belongs to public resource; it has the characteristics of competitiveness and non-‐excludability, and it risks highly on being tormented and misused, which led to negative externality. Pigou (1924) points out that natural environment lacks market and pricing schemes, and these types of incomplete information lead to externality effects. Governments can levy on the activities which borne negative externality, and subsidies the actions which bring positive externality to internalize the externality. (Elliot et al, 2004)(Metcalf, 2009) (Metcalf and Weisbach, 2009) In other words, governments can tax on the industries which marginal private net products exceeded the marginal social net products, to improve its price and decrease the scale of production and sales; at the same time subsidies the industries which marginal private net products is under the marginal social net products, to diminish the gap between social and private net products, then increase social welfare. (Pigou 1924, Ch9-‐10). Baumol and Oates (1971) discovered that there are problems of practicing against Pigovian taxes due to the lack of information that led to the difficultness of calculating the marginal social costs (benefits), therefore it is not be able to set the required levels of tax and subsidies. They then developed Pricing and Standard Approach from the research on environmental policies, pollution control, pollutes taxes and costs of general pollution. Pricing and Standard Approach is based on a
predetermined set of standards for environmental quality and then imposes unit taxes adequate to achieve those standards. As the spreading of the principle of “polluter pays”, Burrows (1979) proposed a variable production processes, which allows policy makers to adjust pigovian tax rates accordingly to reach the optimal environmental benefits under an information inadequate circumstance.
Second is regarding national economy and international cooperation on reducing emissions. Weber and Neuhoff (2010) studied the economic model of one country of carbon tax and found out that firstly, carbon prices create incentives for innovation in mitigating emission technologies. “A welfare-‐optimal carbon policy targets an emissions level at which the innovation-‐enhanced marginal mitigation cost curve (considering expected innovation) intersects the damage curve that includes the additional benefits from incentives for innovation.” Consequently, the optimal carbon price a region with innovation can be higher than the region that is without innovation. Second, the model shows that with promoting innovation, price controls are tightened when marginal environmental damage costs are low, and increased when these costs are high. Innovation creates opportunities for mitigation, which reduce the inclination of the mitigation cost curve and thus make the optimal instrument seem more like a cap.
Cai et al (2013) further developed the theory of Weber and Neuhoff (2010), discovered that the change of optimal carbon price and its effects on social welfare under the two circumstances (with cooperation and without cooperation) and different technological innovation levels. They concluded that innovation decreased the significance of carbon tax on mitigating emissions, and at the same time increase the incentives of seeking internal cooperation on mitigation; however, when the larger the gaps on technological levels between countries, the less the willingness on cooperation. When the two countries are under similar responsibility or existing cooperation offsets, it tends to enhancing of welfare, and achieving international cooperation on mitigation.
Thirdly, the question of the effectiveness of the revenues brought by implementation of carbon tax is also hotly debated. Pearce (1991) proposed the “double dividend” theory in his research on carbon tax effectiveness on adjusting global warming. On “double dividend”, he explains that it means if environmental tax corrected or replaced the distorted incentives that other taxation brought, there would produce “double dividend”: one is green dividend, which would be achieved by adjusting the externalities of market; the other is blue dividend, which promoted social welfare through decreasing taxation distortion, and improving efficiency. Feldstein (1999) further developed that the dividend additionally also brings a reduction in the overall economic cost of raising government revenues.
Goulder (1995) brings out that the “double dividend” is achieved in weak and strong patterns. The strongest double dividend may improve the economy and environment at the same time, so carbon tax is the optimal choice of replacing distorted taxation. On the other hand, the weakest double dividend means that the replacement that carbon tax brought by returning tax revenues through cuts in distortionary taxes leads to cost savings relative to the case where revenues are returned lump sum. As further explained by Babiker et al (2003), the weak double dividend means “the welfare improvement from a tax reform where environmental taxes are used to lower distorting taxes must be greater than the welfare improvement from a reform where the environmental taxes are returned in a lump sum fashion.” They further conducted empirical research on the situation of Europe, and pointed out that the strong version of double dividend is unlikely to reach, the weak double dividend may exist, but it is likely to disappear under the multiple distortionary environments. (For example, the high rates of fuel tax and individual income tax schemes).
Zhang and Baranzini (2004) hold the view that comparing to the macro factors like labor costs and international fluctuations in exchange, the impacts that carbon tax posed on the competitiveness of corporates is less than what it is usually assumed, and it is more an ideal solution. And regarding the
commitments to future emissions reductions may imply higher carbon/energy tax rates, with more potential effects on competitiveness, income allocation and social welfare than in the past. In that case, revenue recycling can be a useful way to offset these side effects, rather than the exemption or abatement of tax. Fourthly, the regressive effect of carbon tax also causes problems in domestic economic environment. Symons et al (1994) examined how carbon tax affects final demands and consuming patterns and its social influences. It shows that the implementation of carbon tax has great regressive effects that the carbon tax leads to the increase of price of household energy, transports, and possibly, food, which will pose more negative effects on low earners rather than high earners due to the higher ratio that low earners spend on household energy. Metcalf (2009) also discovered that the increase of carbon tax rate is in fact influencing the costs of social welfare. But the regressive effects are overestimated. In further research, Metcalf and Weisbach (2009) figured out that other policy instruments should also be considered whilst implementing carbon tax, to eliminate the reallocation effects that brought by carbon tax, such as adjusting income tax system.
As what we have discussed above, some economists started their research on carbon tax from pigovian tax aspects, and proposed the primary design of implementation. As the practices of carbon tax taking place in European countries, the research on the impact of carbon tax increased greatly. The scholars structured their research from building CGE models, simulation of circumstances and static and dynamic analysis to analyze the general effects or effects of different taxation designs of carbon tax. The effects of carbon tax can be concluded from two perspectives: the analysis of direct effects aims at pricing the carbon amounts borne with the energy combustion, CO2 emission, and influences on climate changes; the indirect effects means although carbon tax does not levy on the “end of pipe”, it causes changes in other public fields such as economy development, industry structures, and welfare allocation etc. The scholarship and literature regarding the effects that carbon tax brought, as far as
I am concerned, can be categorized into pros and cons. Some scholars suggest that carbon tax is an effective measure on cutting down emissions, it has less negative impacts on competitiveness of corporates, national economy and social welfare, and its implementation may benefit low-‐income groups through its tax abatement system. On the other hand, some scholars hold the opinion that the incentive mechanism of carbon tax is not ideal, which may lead to the escalation of price on electricity, and fossil fuels, which may hinder the development of industries; it may decrease the living standard because of the punitive taxation, the regressive effect of carbon tax may also expand the gaps of incomes. Generally, due to the difference between different countries and regions, and the lack of sufficient empirical data, the researches on the effects of carbon tax mainly are theoretical, exists divergences. But the evaluation of the effectiveness of carbon tax generated taxation system is valuable and necessary towards the development of environmental economy, international law and politics, and it may also encourage the international cooperation on dealing with climate change issues.
Conclusion
In this chapter, I elaborated the economic mechanisms of carbon tax from both international trading level and its effects as domestic policy. I began with the definition and nature of carbon tax, explored its definition and current developments and practices. Then I elaborated the current literature and discussion about the feasibility of that carbon tax as border tax adjustment dealing with mitigation of emissions, and rebalancing the trade neutrality as an international instrument. In the third part I examined the current researches on the effectiveness of carbon tax and its domestic effects.
These developments on the internal mechanism of carbon tax enrich the understanding of the economic nature of carbon tax, and it also built the foundation of the further discussion on the compliance with international law and the negotiation between different political powers in the world politics.
Chapter 3: Comparison through legal and political lenses
Carbon tax or carbon related tariffs or BTA themselves in the context of international negotiations and arguments have both trading and environmental characteristics. The implementation of carbon tariffs raised questions from not only economic analysis, but also legal and political points of view. Its complexity drew a lot of attention from all sorts of scholars from different aspects. Although there is no certain conclusion to ensure whether the carbon tax is legal and applicable or not, it is widely acknowledged that this issue has great economic, social and political value. As we have discussed the economic mechanisms of carbon tax in the last chapter, this chapter aims to evaluate the pros and cons toward carbon tax within the legal framework and political theories provided. In this chapter, there will be two main sections of reasoning from legal and political aspects. In the legal part, there will be firstly a discussion of the compliance of carbon tax in current legal framework; secondly it will be extended into the compliance and development in the soft law and legal customs. In the political part, the focus will be on different theoretical approaches to carbon tax related issues and the main tensions between developing and developed countries.
3.1 Examine the legality of carbon tax under WTO/GATT framework
In the last chapter, I elaborated the economic mechanism of carbon tax as Border Tax Adjustment. In the international trading context, the legality of carbon tax as part of BTA to keep the trading neutrality and to regain balance and fairness of international market has drawn a lot attention. Some scholars such as Ismer and Neuhoff (2007) suggests that BTA is a feasible way to support “stringent emission trading”, due to the mechanism of BTA, the compliance with GATT/WTO can be looked at from two aspects: refunds for exports must not constitute an outlawed subsidy, whereas taxes charged on imports must not represent an illegal discrimination. But there are also other scholars such as Wang (2011) hold the opposite opinion that the carbon tax is raising the international tariff, which is in offensive with the basic principle of WTO. After
examining the scholarship, I will discuss the legality of carbon tax as BTA under the framework of WTO by categorizing the tensions by principles of WTO/GATT. As is the current Articles of WTO are not intact, and the case law does not help clarify this issue, as Goh(2004) and Biermann & Brohm (2004) had been extensively analyzed. While the advocacy by EU on implementation on carbon tax in 2012, it drew a lot attention and discussion from scholars from all backgrounds. There are a lot of scholars examined the compliance of carbon related BTA under the legal framework of GATT/WTO. There are similarities and differences.
One of the consensuses among scholars that GATT Article II 2(a):
“Nothing in this Article shall prevent any contracting party from imposing at any time on the importation of any product: (a) a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of Article III* in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part” allows BTA to be used in international trading, so a country may freely to use border tax adjustment as its policy under international law. (Ismer & Neuhoff,2007) (Pischas, 1994)
The different opinions on the legality of carbon tax as BTA under WTO framework could be categorized based on the basic principles of GATT/WTO. Firstly, the principle of “Trade without discrimination” reinforces the function of the trading system of WTO. The compliance of BTA under WTO framework cannot be discussed while neglecting the non-‐discriminatory principle.
The non-‐discriminatory principle starts with Most Favored Nation principle that means to treat other people equally. When a WTO country favored to another contracting party, such as lowering the tariffs when doing exports and imports business, the country should also give all other contracting parties the same favor. According to Article I (1) of GATT, the contracting parties “any advantage, favour, privilege or immunity granted by any contracting party to any
product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.” So it requires the border tax adjustment not to constitute discrimination between contracting parties. Generally, carbon tax as BTA is designed for the import products from those countries, which do not have effective climate policies; otherwise it will lead to re-‐taxation. But if do so, the implementation of BTA will breach the principle of non-‐discrimination of Article I of GATT, which requires the contracting parties to not treat differently to the like products originated from all other contracting parties. The supporters of carbon tax as BTA regards that BTA is feasible under WTO principles think that the carbon related BTA is not discriminatory due to the basis of taxation of carbon tax lies in the producing process of a product, rather than the origin of the product. (Pischas, 1994) The difference of treatment is because of the different climate policies implemented among countries. However, the most favored country principle is unconditionally obeyed within WTO, and it is vastly applied in other Articles and cases, if BTA is only applied to some countries, it is not flawlessly comply with international law.
Furthermore, hypothetically, WTO framework allows the different treatment on this matter, the evaluation of the effectiveness of climate policies is unlikely to be easily taken. The current effective carbon measurement and trading system is EU-‐ETS, which only covers some European countries, and some of the European countries implemented carbon tax and CO2 abatement at the same time. And some countries like Japan, the government avoids market schemes of carbon trading, instead, the carbon-‐intensive industries directly follow the carbon limit required by government. Thus we can safely suppose that the adjustment of taxation system of a country may not function effectively on reduction of GHGs but lead to trading barriers. For instance, if a country reduced the import taxation rate on fossil fuels, and applied carbon related taxation, the total cost of producing for those energy intensive industries may remain still. (Cai et al, 2013) The primary purpose of carbon tax, which is to cut down emissions, cannot be
