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Plan B? How a green tariff could save the carbon price

Here’s a way to save the carbon price; levy a green tariff at the border, so Australian industry doesn’t suffer. Critics say that would breach international trade law, but hold on — Crikey has found that’s not necessarily the case.

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Worried the carbon price is hurting industry and costing jobs? There’s a neat solution no one’s talking about — and it doesn’t involve axing the tax.

Australia could levy a carbon tariff so domestic goods don’t suffer for being produced under a carbon price. The tariff could be levied on imports at the border, or rebated on exported goods.

That would mean if you paid for the pollution generated by a tonne of Australian steel, the same tax would be levied on a tonne of Chinese steel as it entered the country. It’s a level playing field and an incentive to others to price pollution.

Carbon pricing has been a heated, divisive issue in Australia for years. We’ve had a carbon price since 2012, but the new Coalition government has vowed to scrap it this year, saying the “great big new tax” cripples industry and pushes up prices. The lack of a credible policy successor has some experts worried Australia will not be able to significantly address climate change.

A green tariff on the carbon price could be a way out of this political fight, but it’s been laughed down by critics who say it would flout international trade law. A Crikey investigation has found that’s not necessarily the case. It is possible to design a carbon tariff with a decent chance of passing the World Trade Organisation.

It would be an experiment; there is no carbon tariff operating anywhere. But if it worked it would remove one of the major reasons the Coalition government opposes the carbon price while possibly helping the world out of the climate policy doldrums. The UN’s bright idea on climate change is that the world should rein in its emissions of heat-trapping greenhouse gases via interlocking national and regional emissions trading schemes, but many big-emitting countries have baulked, claiming this would hurt their domestic industries. A carbon tariff could make an ETS trade neutral, lessening the perceived first-mover climate disadvantage that is stymying efforts to reduce greenhouse gas emissions.

Why should Tony Abbott care? This is what the then-opposition leader told Barrie Cassidy in 2012 on the emissions trading scheme:

… it will act as a reverse tariff. If it’s a unilateral carbon tax or a unilateral emissions trading scheme, it puts up our prices vis-a-vis our competitors, it hurts jobs in this country and effectively protects jobs in other countries.”

Abbott is now prime minister, and when the new Senate settles onto the red leather from July, it’s quite likely he’ll get his carbon price repeal bills through Parliament. That doesn’t mean the idea of a carbon price with an accompanying green tariff is dead — why, it might appeal to a Coalition led by Malcolm Turnbull or Joe Hockey. If you think that sounds far-fetched, read up on the US Republicans’ interest in a green tariff.

Here’s some background. The carbon price started in July 2012 and sits at a fixed (and relatively high) A$24.15 per tonne of pollution. It’s due to switch to a floating (read: cheaper) price this year or next. Some business chiefs don’t like it because many competitor countries don’t have one. There’s no carbon tariff here; instead, the government gives free permits to some industries.

Supporters of a carbon tariff include the Australian Council of Trade Unions, quite a few US politicians, French President Francois Hollande, and economist Paul Krugman. Critics like the Institute of Public Affairs say a tariff would start a trade war, breach the WTO’s rules and push up prices.

The WTO polices the (arguably unfair and stagnant) rules set up to try to make trade free, the 1947 General Agreement on Tariffs and Trade. The WTO heartily dislikes trade protectionism and cracks down on it when the law allows — and unlike some other “enforcers” of international law, the WTO has teeth. If Australia brought in a carbon tariff, someone would probably challenge it through the WTO.

But here’s what the IPA won’t tell you. The GATT explicitly allows a country to apply an internal tax to imports, and it explicitly allows countries to take trade measures to conserve the environment. You just have to do it in a certain way. The WTO and the UN put out a paper in 2009 showing how a carbon BTA might be legal (see page 98).

Under GATT rules, there’s a series of hoops an Australian carbon tariff would have to jump through. It can’t actually be called a tariff — so it’s a Border Tax Adjustment (BTA). The WTO allows these, and they’re already levied on alcohol, cigarettes and fossil fuels.

Crikey’s investigation has yielded two legal arguments Australia could mount to defend a carbon BTA before the WTO. Warning: this is about to get very geeky. And no one has tried a carbon BTA before, so there is no case law.

This argument also applies to the European Union’s ETS, operating since 2005. The EU and Australian schemes were supposed to link up soon  — could a joint BTA apply?

Even if the carbon price is dumped, it’s likely to rise from the dead at some point … A carbon tariff could make that option more palatable.”

Plan A: argue that the BTA does not violate anything in the GATT

Article 11 2a of the GATT says a country may impose on imports:

” … a charge equivalent to an internal tax imposed consistently with [the National Treatment article] in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part.”

But there are two extra hoops Australia would have to jump through. A BTA could not violate Article I1, known as “most favoured nation treatment”. That means products must be treated the same way, regardless of which country produces them. This is tricky because we might want to levy a BTA on products from “brown” countries but not on “green” countries — which could violate Article I1. We could try arguing the products are not the same, or we could levy the same BTA on everyone and expect countries with a carbon price to rebate it.

We’d also have to not violate Article III, known as “national treatment”. Imports:

” … shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products.”

The nub is a country can’t treat imports worse than domestically produced goods. We’d have to be careful to give imports a fair go — if domestic goods get free permits under the carbon price, then imports should, too, and the emissions from imports should be fairly estimated.

Plan B: the “get out of jail free” card

Even if Plan A were to fail, the GATT contains an interesting get-out clause that says a country can use trade measures to protect the environment — even if that breaches other GATT rules. It’s buried in Article XX:

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures … relating to the conservation of exhaustible natural resources …” (italics added).

It’s pretty easy to argue that biodiversity, a clean atmosphere, and healthy forests, rivers and oceans — all threatened by climate change — are exhaustible natural resources. The WTO has accepted that argument over dolphins and turtles.

The trap is the first bit in Article XX — we’d have to show the BTA was genuinely aimed at protecting the environment and was not cloaking protectionism in a green disguise. We’d have to show we’d tried other ways of addressing climate change, and the BTA’s design would have to be fair.

If Abbott can persuade coal baron and lower-house MP Clive Palmer (and his Senate cronies) to make carbon pollution free once more — a task that logic dictates should not be difficult — then he can scrap the tax from July. But the Parliament may display its characteristic unpredictability on climate policy. And even if the carbon price is dumped, it’s likely to rise from the dead at some point — whether that’s under Labor or the Coalition. A carbon tariff could make that option more palatable.

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  • 1
    leon knight
    Posted Monday, 6 January 2014 at 1:49 pm | Permalink

    What an interesting concept - well worth pursuing.
    Good article, thanks Cathy.

  • 2
    Roger Clifton
    Posted Monday, 6 January 2014 at 1:54 pm | Permalink

    Bravo! “Carbon tariff” is the answer to the anti’s plea of “Trade exposed products”.

    To earn a rebate, the carbon content of each exported product would be accounted and a certificate assigned to the product. If the importing country has a carbon tax, it would be imposed on the import according to its certificate. Other exporting countries would find they are competing on carbon content, whether they have have their own carbon tax or not.

    We wouldn’t actually need an international carbon price. Different countries could apply different carbon taxes on the same carbon certificates. But the certification process would need international agreement.

  • 3
    Scott
    Posted Monday, 6 January 2014 at 2:58 pm | Permalink

    Sure, it could be legal, though I wouldn’t guarantee it. (international law is about as foggy as it gets).
    The better question is whether it is advantageous for a country like ours to put up more trade barriers.
    Australia is at it’s best when we can get access to global markets with minimal barriers(as our 20 odd million people don’t provide enough domestic demand for our major minerals/agriculture/education/services/research sectors). All our FTA’s try to encourage that.
    We benefit when the world lowers their barriers, so I don’t believe we should be putting up the shutters ourself, especially for the dubious benefit of keeping a carbon tax operational.

  • 4
    Dawson Colin
    Posted Monday, 6 January 2014 at 4:19 pm | Permalink

    @Scott, I vigorously disagree that the carbon tax is of “dubious” benefit - it has been at least partly responsible for a slow-down in emissions. Our major problem of high dollar value has nothing to do with a carbon tax. However, I suspect you are onto something with the FTA. Our trade minister is furiously signing away sovereign rights at this moment. Daring to insist on our right to low-carbon production would not go down well with our great and powerful trading partners.

  • 5
    Andybob
    Posted Monday, 6 January 2014 at 4:58 pm | Permalink

    You are assuming that the Coalition’s opposition to the carbon tax is rational and that overcoming one of their expressed objections will lead them to re-consider.

  • 6
    CML
    Posted Monday, 6 January 2014 at 5:01 pm | Permalink

    I seem to remember that a ‘tariff’ clause was included in the original carbon pricing scheme proposed by Kevin Rudd’s first government. It was to be introduced in the future, depending on the number of countries who did something about carbon pollution.
    I always understood that some form of tariff would be needed to create/maintain a ‘level playing field’ for those countries who introduced carbon pricing. Maybe that part of the original Rudd scheme was removed by the Gillard/Green agreement on carbon pricing? I’ve certainly read/heard about this before, but it was some years ago now. Not only is it a good idea, but mandatory for those countries who have put a price on carbon.

  • 7
    Aidan Stanger
    Posted Monday, 6 January 2014 at 5:53 pm | Permalink

    It would probably be costly to administer and while it may help our domestic competitiveness it will do nothing to help our exports.

    Factors like the high dollar are causing a lot more damage than the carbon tax ever did, so it’s better to deal with these, leave the unilateral carbon tax in place, and concentrate instad on producing low carbon alternatives.

  • 8
    The Pav
    Posted Monday, 6 January 2014 at 7:47 pm | Permalink

    What? You expect rational economic policy allied with caring for the environment from the Abbott govt.?

    Yeah Sure! And Corey Bernardi will support women’s rights

  • 9
    Mental Anarchist
    Posted Monday, 6 January 2014 at 9:00 pm | Permalink

    I have been preaching this solution ever since pricing carbon was proposed. The fact it has not been a serious discussion topic says much about our politicians, economists and MSM.

  • 10
    CML
    Posted Tuesday, 7 January 2014 at 1:02 am | Permalink

    @ Mental Anarchist. As I said above, I read/heard about this as part of the original proposal some years ago. The idea is not new.

  • 11
    AR
    Posted Tuesday, 7 January 2014 at 7:52 am | Permalink

    Good as Plan B but as noted by many above, it presupposes that TT & his tory Uglies are susceptible to rationality - see exhibit A, Corey Bernadi.

  • 12
    Cathy Alexander
    Posted Tuesday, 7 January 2014 at 8:50 am | Permalink

    That’s interesting CML, I wasn’t aware that a proposal for a tariff clause was contained in any of the Australian carbon pricing proposals / legislation. Does anyone have a URL? I’d be fascinated to see what they were proposing.

    I’ve also heard the previous ALP federal government received some legal advice to definitely not pursue a carbon BTA with the carbon price. I’d love to know more from any moles out there …

    And Aidan, as you correctly point out, a carbon tariff would be very complex to administer - perhaps prohibitively so. To design a BTA in a way that would likely pass the WTO would not necessarily be the most logical or effective BTA.

  • 13
    Putto
    Posted Tuesday, 7 January 2014 at 9:57 am | Permalink

    Cathy (and CML) - Border Tax Adjustments were discussed in relation to assistance or protection for Emissions Intensive Trade Exposed industries during the development of the CPRS back in 2008. The final policy adopted an allocation of free permits for EITE industries rather than BTAs. The CPRS Green Paper and submissions would be the place to start.

    In addition to discussing the option of BTAs as part of our carbon pricing, it is important to consider the implications of other countries with carbon prices (40-odd and counting) applying BTAs to our exports if the carbon price is abolished. This needs far more attention than it has been getting.

  • 14
    Roy Inglis
    Posted Tuesday, 7 January 2014 at 10:47 am | Permalink

    Logical and better than a domestic cost on carbon / ETS but that won’t mean a jot to the current government.
    Don’t expect much from Labor either.
    I recall during lead up to the current policy, someone from the Labor Cabinet making a firm statement that Labor would never consider such a thing.

  • 15
    Putto
    Posted Tuesday, 7 January 2014 at 11:10 am | Permalink

    More on the CPRS Green Paper - it can still be found at a number of places online (eg. http://www.dpac.tas.gov.au/__data/assets/pdf_file/0004/162688/CPRS_Green_Paper_-_doc_No_1.pdf ).

    Section 9.2 - the government’s preferred position is to provide assistance via free permits rather than exemptions, BTAs or cash payments.

    The justification for excluding BTAs is given as: “Since it would be difficult to make such assessments simple, transparent and verifiable, the risk is that if they were widely adopted, border adjustments could be used to pursue protectionist policies and constrain global trade. This could be very costly for a small, open economy like Australia.”

    While the original consultation website has long disappeared, many individual submissions can still be found online (eg. https://www.google.com.au/?gfe_rd=cr&ei=JUPLUrfIOKuN8Qea_ICADg#q=carbon+pollution+reduction+scheme+green+paper+submissions).

    Looking through this older material is a handy indicator of exactly how far the climate policy debate has deteriorated. Back in 2006-9, the public understood the difference between a carbon tax and an ETS, and there were detailed public discussions about particular complications, such as how to deal with leakage and trade-exposed industries. Then it all became about a great big new tax.

  • 16
    bobcats
    Posted Tuesday, 7 January 2014 at 1:25 pm | Permalink

    It’s refreshing to see a proposal that may reflect some level of national aspiration-apparently the better health of the planet is a value that is currently sovereign and ‘free’ trade agreements are the natural enemy of sovereignty. Scotts’s (above) assumption that our exports are compromised by tariff barriers doesn’t hold for minerals- we have too much and can sell too cheap to worry about tariffs and agriculture is continually stymied by a myriad of international barriers and subsidized product-particularly from the U.S. who can be very selective about how the rules apply to them. The WTO is a unelected, unrepresentative nest of corporate lawyers. Trade policy since the ascendency of the WTO is written for international corporate capital. Those nations that would aspire to reasonable social policy, environmental protection and labour standards do so at their peril in the current value-free interantional marketplace and the feckless threat of corporate mobility.

  • 17
    Cathy Alexander
    Posted Tuesday, 7 January 2014 at 2:11 pm | Permalink

    I read that with interest Putto.

    I also take your point about us abolishing our carbon price, and other countries with a carbon price perhaps adopting a BTA. The EU could do it, or possibly countries within the EU that adopt an additional carbon pricing mechanism on top of the EU ETS (France?). China may have a national carbon price in some years’ time, and they could levy a BTA. Similarly, the US - if they were to go down the path of a carbon price, may go for a BTA. They are perhaps the most likely country to do it.

    In some ways a BTA’s real use could be in making a carbon price more palatable to a domestic audience, rather than the actual assistance it would offer to domestic industry or pressure it would put on other countries.

  • 18
    CML
    Posted Tuesday, 7 January 2014 at 7:14 pm | Permalink

    Many thanks, Putto. I didn’t know where to find the information, but was sure I had read/heard something about this before. My recollection is that it was something to be considered in the future, as a response to those countries who refused to ‘put a price on carbon’.
    Also thought it was an argument used in the domestic debate about repealing the carbon price legislation. In other words, Australia may become subject to some form of ‘import/export tariff’ from our trading partners if/when they introduce their own carbon pricing scheme.
    Makes sense, but don’t remember where I heard about it. Please forgive a senior citizen!!
    PS: Thank you also to Cathy Alexander for your response.

  • 19
    Putto
    Posted Tuesday, 7 January 2014 at 8:23 pm | Permalink

    Cathy and CML - glad to help. I knew I kept all that old stuff around for a reason.

    The CPRS development and consultation process was actually very detailed involving a diverse range of people. The filter of politics limited what made it through to the final proposal, and eventually to the current carbon price, but it covered a lot of ground to get there.

    I really don’t think it’s possible to overestimate the issue of BTAs being applied to Australia rather than by Australia. The industries that have been campaigning so hard to have the carbon price repealed could easily find that they have to pay an equivalent carbon price anyway, in another jurisdiction, and without the generous compensation and transitional arrangements they currently have in the domestic scheme. Before too long, the same crowd will be campaigning for the re-introduction of a domestic carbon price, but it will need to start faster and harder and will hurt far more. The issue gets a mention every now and then but the message doesn’t seem to have sunk in.

  • 20
    Roger Clifton
    Posted Wednesday, 8 January 2014 at 9:51 am | Permalink

    Protectionism is infectious. It would be a neat event in history for China to take the lead and install their own carbon tariff, to be followed in turns by the rest of the world.

  • 21
    Cathy Alexander
    Posted Wednesday, 8 January 2014 at 2:06 pm | Permalink

    Roger Clifton, did you know China levies an export tax on its own exports of fossil fuels? I think the idea is to keep energy resources for domestic use thereby shoring up supply.

    It’s an interesting measure that many people don’t know about. And quite the opposite to trade protectionism! If anyone knows more about it they’re welcome to post a URL in this thread.

  • 22
    Roger Clifton
    Posted Wednesday, 8 January 2014 at 6:37 pm | Permalink

    So the Chinese are taxing their coal exporters to protect supply? They may be keeping pressure off their (choked) rail system, too.

    If the Chinese were to establish a carbon tariff, they would be competing with countries like Korea, who have a low carbon content in their electricity system due to their higher proportion of nuclear supply. It would be logical for the Chinese to claim that their most recent exports were created by their most recent electricity supply, of improved carbon efficiency and increasingly nuclear. The accounted energy content of the product could easily end up as “100% nuclear”, so may have to pay no carbon tariff at all.

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