Framework Proposal for a US Upstream GHG Tax with WTO-Compliant Border Adjustments: 2020 Update

The original Framework (2018) described how to design BTAs in the context of a US upstream GHG tax. Rules of the World Trade Organization (WTO) allow nations to rebate value-added taxes (VATs) on exported products and impose them on imports. For that reason the Framework explicitly defined the GHG-index (GGI) in close analogy with VATs as its basis for BTAs. GGI tracks taxed sources of GHG emissions along supply and manufacturing chains to produce GHG-intensive products. BTAs for products are determined by their GGI multiplied by the US GHG tax. Justification for WTO-compatibility relies on Articles II and III of the General Agreement on Tariffs and Trade (GATT) for import charges, and on the Agreement on Subsidies and Countervailing Measures (ASCM) for export rebates.

• The Framework referred to covered products as those in conventionally defined energy-intensive, trade-exposed (EITE) industries. The update proposes criteria to qualify GHG-intensive products (those eligible for export rebates and subject to import charges) based solely on GGI.
• Proposed thresholds for GGI would qualify major products of EITE industries as well as those from coal, oil, and gas production, petroleum refining and electricity, and specific GHG-intensive products such as liquefied natural gas (LNG) and some industrial gases in other sectors.
• The update describes how the Framework would satisfy the environmental exceptions under Article XX of the GATT that apply to import charges.
• Challenging legal and procedural barriers to WTO-compatibility exist for BTAs not based on a domestic tax on products. BTAs based on regulatory procedures would not satisfy criteria used in the Framework. Even if they were compliant in principle, they face significant methodological challenges to evaluate objectively an “equivalent cost” to assign to BTAs for exports or imports.
• Many US and EU proposals call for providing a credit against the import charge for domestic policies in nations that export to the United States (or European Union). We continue to advise that such a credit runs the risk of violating the GATT’s Most Favored Nation Principle.
• The update resolves treatment of several crosscutting issues identified in the original Framework, in particular, those concerning treatment of recycled materials (also referred to as scrap) and combined heat and power that are extensively utilized in several major sectors.

To view the original research by Research for the Future, please click here.