There is currently broad consensus that the most cost-effective instrument to address the global warming problem is a worldwide carbon tax with a uniform rate since the reduction in carbon dioxide emissions will take place where abatement costs are lower. However, if this solution is not feasible in the short run, since some major countries cannot accept the same increase in energy taxation, unilateral initiatives are needed. In this case, border tax adjustments should be adopted to prevent the protection of the global commons from aggravating competitive conditions for the most environmentally-friendly countries.
Furthermore, taxing goods at the border according to their carbon content is a prerequisite for the political acceptability of the carbon tax, ensuring that environmental protection does not significantly damage economic growth. This paper emphasises that the border tax adjustment not only increases global welfare, but also could be shaped so that it is compatible with WTO rules.
by Alberto Majocchi
