Climate Policy and Border Adjustment Regulation: Designing a Coherent Response

By Feaver, Donald; Sheehy, Benedict | Melbourne Journal of International Law, November 2012 | Go to article overview

Climate Policy and Border Adjustment Regulation: Designing a Coherent Response


Feaver, Donald, Sheehy, Benedict, Melbourne Journal of International Law


The Australian Government's Clean Energy Legislative Package includes the legislative infrastructure for a carbon tax which came into full effect in July 2012. Although the legislation is comprehensive, we argue that it lacks a mechanism that adequately deals with the competing policy objectives of: (a) achieving reductions in greenhouse gas emissions; (b) not impairing national economic growth; and (c) ensuring that international obligations regarding response measures, suck as a carbon tax, do not adversely affect developing countries. The potential policy frictions between these objectives might have been reduced had the Government included a well-known trade mechanism which could have provided a more coherent interface for these competing policy objectives. That mechanism is the 'border tax adjustment'. This paper explores a range of misunderstandings surrounding the use of border tax adjustments, which may well explain why they were not implemented. Furthermore, this paper will explain how, if properly understood, border tax adjustments could make a significant contribution to a consistent climate policy that balances the competing concerns of climate change, trade, economic and developmental policy objectives.

CONTENTS

I   Introduction
II  Legal and Operational Context
      A Relevant Legal Characteristics
          1 Import-Side
          2 Export-Side Rebate
          3 Product v Process
      B Operational Characteristics of Border Adjustments
III Applying Border Adjustments to Climate Change Policies
      A The Unit of Analysis Problem
          1 Adjusting for Carbon Tax or Carbon Price?
          2 Disassembling the Carbon Price
      B Selective Targeting: Ignoring the Rules
          1 The General Rule: Art I--Most Favoured Nation
          2 The Art XX Exception
      C The Problem of Calculating the Adjustment
IV  Response Measure Issues and International Obligations
V   Coherent Policy Design: Summary and Conclusions

I INTRODUCTION

In Australia and other countries, an intense public debate regarding which domestic policies to implement for the purposes of addressing anthropogenic climate change has been underway. (1) Although the science clearly demonstrates that immediate and dramatic cuts in greenhouse gas emissions are required to avoid catastrophic climate change in the latter half of this century, (2) policies such as carbon taxes or emissions trading schemes are resisted due to the perception that such policies will impact negatively on national economic performance. (3) Industry and other lobby groups argue that the competitiveness of domestically-produced goods and services will be severely challenged, both at home and abroad. (4) Unsurprisingly, the debate has become highly politicised and is beset by both misinformation and distortion.

Despite this debate, on 9 December 2011, the Australian Governor-General gave Royal Assent to a collection of 21 bills known as the Clean Energy Legislative Package ('Package'), which enacted the Gillard Labor Government's policy response to climate change. The centrepiece of the Package is the Clean Energy Act 2011 (Cth), which provides the regulatory infrastructure necessary to implement carbon taxes. (5) Although the Package is comprehensive with respect to domestic matters, the Government has failed to take advantage of a mechanism sanctioned under international trade law that provides a more coherent means of interfacing these conflicting policy objectives. Balancing competing policy objectives requires achieving reductions in greenhouse gas emissions in a manner that does not impair national economic interests, whilst simultaneously upholding Australia's international obligation to ensure that response measures such as a carbon tax do not adversely affect developing countries.

The trade policy mechanism that the Government could have incorporated in the Package that enables a balancing of these competing policy objectives is the 'border tax adjustment' ('border adjustment') mechanism.

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