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This paper discusses emerging proposals for border tax adjustments (BTAs) to accompany commitments to reduce carbon emissions in the European Union, the United States and other OECD economies. The rationale offered for such border adjustments is that various entities, such as the EU, if making commitments to reduce emissions that go beyond those undertaken in other regions of the world, impose added costs on domestic producers which create a competitive disadvantage for them. Some form of remedy is viewed as reasonable to maintain the competitiveness of domestic industries when responding to global environmental problems. The authors argue that despite its current carbon manifestation, the issue of border tax adjustments and both their rationale and their effects on trade are not new and, despite the present debate (which seems to overlook older literature), have arisen before. Earlier debate on border tax adjustments occurred at the time of the adoption of the Value Added Tax (VAT) in the EU as a tax harmonization target in the early 1960s. But academic literature of the time showed that a change between origin and destination basis in the VAT would be neutral and hence the use of a destination-based tax in the EU to accompany the VAT offered no trade advantage to Europe. Here we argue that essentially the same arguments also apply for climate change-related BTAs, and there also now seems to be a misconception between price level effects and relative price effects stemming from climate change-related BTAs. The paper also argues that the impact of border tax adjustments should be viewed as independent of the motivation of the adjustments.

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