Waterloo, Canada - Recent proposals for border tax adjustments to accompany commitments to reduce carbon emissions in the European Union, United States and other OECD economies could interfere with the global trade system, slow economic growth and incite violations of WTO commitments. These findings emerge from recent research from the Centre for International Governance Innovation (CIGI).

CIGI's newest policy brief, Climate Change-Related Border Tax Adjustments, examines the effects of proposed border tax adjustments (BTAs) as part of commitments in a post-Kyoto global arrangement to reduce carbon emissions. CIGI's research finds the case for climate change-related BTAs - the rationale offered for them and their effects on trade - is weak in some critical respects.

While there may be justification for a country-specific trade-based remedy to maintain the competitiveness of domestic industries when responding to global environmental problems, the authors argue that current BTA proposals ignore previous experiences and may not achieve the effects intended. Specifically, the research points to the earlier debate on Value Added Tax (VAT) in the EU.

"The trade measures resulting from BTAs could retard world trade, slow growth and lead to violations of WTO commitments," says John Whalley, CIGI distinguished fellow and co-author of the paper. "In addition, lower-income countries in Africa, South America, Asia and Europe, and especially in Russia, view these measures, which would restrict their market access and cause major dislocation of their trade, as threatening to their well-being."

The policy brief concludes that any evaluation of climate change-related BTAs must specifically distinguish between the price-level effects and relative price effects of these measures, and separate the motivation for their use from an assessment of their actual impact. What may appear as an offset to competitiveness effects of environmental policies may in fact not be so.

Climate Change-Related Border Tax Adjustments was written by John Whalley, CIGI distinguished fellow and fellow of the Royal Society of Canada,  and Ben Lockwood, professor of economics at the University of Warwick, UK.

For more information about this policy brief or other CIGI research please visit: http://www.cigionline.org/publications.

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