Carbon Motivated Border Tax Adjustments: Old Wine in Green Bottles?

by Ben Lockwood and John Whalley

- This paper discusses emerging proposals for border tax adjustments (BTAs) to accompany commitments to reduce carbon emissions in the EU, the US and other OECD economies. 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 1960’s. 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 it is argued that essentially the same arguments also apply for carbon motivated BTAs, and in the current debate there seems to be a misconception between price level effects and relative price effects stemming from a BTA, which needs correcting.

Lockwood, B. and J. Whalley (2008). "Carbon Motivated Border Tax Adjustments: Old Wine in Green Bottles?" NBER Working Paper No. 14025, May 2008.