Joe Stiglitz has suggested imposing countervailing duties on the “hidden subsidies” provided to US firms by America’s non-participation in the Kyoto Protocol. The EU wants to do something like that:

Commission advisors are considering slapping a tax on imported goods from countries which do not impose a CO2 cap on their industry, according to a draft paper seen by European Voice (5-11 October). The paper will be presented to a top group of industrialists, member-state and civil- society experts who help the Commission shape policies in the field of environment and energy – the high-level group on competitiveness, energy and the environment. The idea, known in academic circles as a “border tax adjustment”, is understood to have emerged from expert discussions on long-term energy scenarios at a September meeting of the competitiveness sub-group.

Note that the Commission didn’t take Kyoto as the climate change gold-standard and decided to suggest slapping tariffs on imports from any country without CO2 caps. This means the EU can target nations that have weaker obligations under Kyoto:

Cembureau President Paul Vanfrachem welcomes the idea, saying that the tax would help offset the competitive disadvantage that the ETS forces on the European cement industry. “What we are seeing today is [cement] imports increasing a lot, especially imports from China where there is no carbon constraint,” says Vanfrachem.

Dan Drezner predicted China-bashing to be a likely outcome of declaring war on “hidden subsidies.”

Now, what the heck is a “border tax adjustment” and how does it differ from Stiglitz’s countervailing duty?

Brief definition: “Rebate of indirect taxes (taxes on other than direct income, such as a sales tax or VAT) on exported goods and levying of them on imported goods. May distort trade when tax rates differ or when adjustment does not match the tax paid.”

If you think “border tax adjustment” sounds ugly, you could use “tax adjustments applied to goods entering into international trade” as suggested by a GATT working party in 1970.

Here’s some more info (pdf; hat tip to Jonathan Alder):

Under the “destination system” of border tax adjustments (BTAs), traded goods are subject to the taxes of the importing (“destination”) country and exempted from the taxes of the exporting (“origin”) country. For instance, gasoline trucked from Toronto to Buffalo is exempted from
paying gasoline tax in Canada and subject to gasoline tax in New York, at the combined New York/federal tax rate. BTAs are a necessary part of a tax on national or in-state consumption, and are a nearly universal feature of sales, excise, value added and other taxes. Because BTAs are required for consistent treatment of a consumption tax base they are regarded as a normal part of the tax and not as a form of local favoritism…

BTAs should be distinguished from tariffs and other forms of industry protection. Energy-intensive manufacturers (e.g. basic chemicals, aluminum) already undertake large investments in developing countries that sometimes displace American production and jobs. Various factors make such investments attractive including lower resource costs and the prospect of winning large new markets. A BTA ensures that job displacement is not accelerated by the FCCC, but does not favor domestic over foreign production or otherwise alter underlying market conditions. Aluminum or ethylene production that already would have been shifted overseas, for example, will still be shifted. But it won’t be shifted because of climate protection policies.

Relevant literature on BTAs to counter non-participation in emissions permit trading schemes:

* Javier de Cendra “Can Emissions Trading Schemes be Coupled with Border Tax Adjustments? An Analysis vis-à-vis WTO Law” 2006
* R. Ismer & K. Neuhoff “Border Tax Adjustments: A feasible way to address nonparticipation in Emission Trading” 2004
* Philippe Quirion & Damien Demailly “Leakage from climate policies and border tax adjustment: lessons from a geographic model of the cement industry” 2006

Having learned what a BTA is about fifteen minutes ago, I have no opinion on this topic and will leave the punditry to others.