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Environmental Border Tax Adjustments and International Trade Law

Fostering Environmental Protection

Alice Pirlot

This timely book brings clarity to the debate on the new legal phenomenon of environmental border tax adjustments. It will help form a better understanding of the role and limits these taxes have on environmental policies in combating global environmental challenges, such as climate change.
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Index

Fostering Environmental Protection

Alice Pirlot

ability-to-pay principle 277

absolute advantage theory (Smith)

normative comparative advantage vs. 90–91

revised theory and environmental BTAs 85–86, 88–89, 97

traditional BTAs and 14, 31, 44–47

adjustment concept

in environmental BTA tax design 122–124

in traditional BTA tax design 102–103

Agreement on Subsidies and Countervailing Measures (ASCM) 165, 177, 192–195, 222

Annex I, footnote 58179, 195–196, 229

Annex I, footnote 61203–204

Article 1.1/1.1(a)(1)(ii) 178–179, 196–197

Article 3.1(a) 177, 178–180, 197

Article 8 246

direct vs. indirect taxes 179

exemptions from national regulations 234

indirect taxes, definition 195–196

aim-and-effect test 214–215

anti-dumping measures 97, 98, 120, 153, 177–178

Australia

carbon pricing mechanism 85

Clean Energy Act (2011) 83, 84–85

Customs Tariff Act (1995) 124

tax system and environmental BTAs 83–85, 129

averaging, in tax rates 32, 73, 80–81, 194, 206, 236–238, 252

aviation sector 78–80, 125, 262–263, 267–268

Belgium

carbon equalisation mechanism 77

energy taxes 128

BEPS (Base Erosion and Profit Shifting) project (OECD) 20, 284

bilateral/double tax agreement/convention 1, 279

border carbon adjustment, use of term 49–50, 121–122

border concept

in environmental BTA tax design 119–120

in traditional BTA tax design 101–102

border tax adjustments (BTAs)

overview 1–5

definition 23–25

neutrality of 28–29, 33–34

tax models and 181–183

British thermal unit (BTU) energy tax, proposed 72–73

Canada

carbon taxes 128

disposal fees and BTAs 56–57

carbon equalisation mechanism 76–79, 148

carbon/pollution leakage 2, 50–51, 66, 68, 76, 82, 145, 247, 254

carbon taxes 64, 75, 91–92, 127–129

model based on environmental excise duty 133–137

carbon-added tax (CAT) 137–146

carbon value vs. purchase price 139–142

comparison to VAT system 139–142

critique of 144–146

environmental BTAs and 236–238

green-added tax and 142–143

retail carbon tax (RCT) and 147–148

carbon-related BTAs 68–69

cascade taxes 32, 41–42, 106–107, 206

certification systems 150, 153–154, 237–238

Common but Differentiated Responsibilities (CBDR) principle 268–274

comparative advantage theory (Ricardo) 184

general vs. specific taxes 25–26

in the efficiency-relevant sense (Howse) 91

normative comparative advantage vs. 91

OECD report citation of 59

revised theory and environmental BTAs 85–88, 97, 189–190

tax neutrality 15–16, 28

traditional BTAs and 12–17, 30–31, 44, 45, 103

competitive advantage vs. 17

competitiveness argument 2, 66

absolute advantage theory (Smith) 46

adoption of environmental BTAs and 58–59, 62–63, 88–89, 97, 132–134

double dividend hypothesis and 156

environmental border taxes and 50–51

in EU 75–76, 81

excise taxes and 127–128, 226–227

subsidies and 158

see also legitimate absolute advantage theory

conflict diamonds 154, 244–245

consumption taxes 26–31, 107–114, 189, 225–228, 277–278

see also individual types

Convention on Biological Diversity 266–267, 274

Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) 275

corporate income taxes 190–191

countervailing measures 49–50, 97–98, 120

see also Agreement on Subsidies and Countervailing Measures (ASCM)

customs duties 24–25, 97, 98, 102–103, 110, 120, 153

customs value 139–142, 151, 166–167

Denmark

carbon taxes 127–128

energy taxes 127

value-added tax (1960s) 18

destination principle 23–24, 33, 39–43, 74, 80–81, 108, 115, 184–188

destination-based corporate taxes (de la Feria and Devereux) 187–188, 194

destination-based X tax (Bradford) 182–183

developing countries 268–271

adoption of BTAs and 33–34, 69, 71–72, 145, 203–204, 236, 256–257

CBDR principle and 268–271

polluter-pays principle and 273–274

direct vs. indirect taxes 13, 26–32, 39–40, 179, 188

see also legal framework, of environmental BTAs; legal framework, of traditional BTAs

directly competitive or substitutable (DCS) products 218–222

discriminatory taxes 34, 41, 80–81, 210–211

see also legal framework, of environmental BTAs; legal framework, of traditional BTAs

dissimilar taxation concept 222

double dividend hypothesis 156

double taxation concept 59, 109–111, 117, 123, 239–240, 245, 278–281

economic allegiance 187–188

electricity (taxes on electricity) 65, 72–73, 80–82, 127–128

energy taxes 83, 127–128

energy-intensive products 73, 74, 75–76, 91–92, 128–129, 133–137, 145, 148, 203–204, 252

environmental border tax adjustments (BTAs)

overview 1–5, 287–288

background of 56–57

call to political actors/stakeholders 286–288

Critical Legal Studies approach to 4–5, 282–284

definition 58

economic foundation of 49–53

summary conclusions 282–288

environmental border taxes 50–53

environmental BTA history, and GATT-WTO/OECD 48–98

background of 56–57

definition 58

direct/indirect and production/product taxes as eligible for adjustments 60–63

economic foundation of environmental border taxes 49–53

EU views on 74–82

externalities to be internalised 91, 95–96, 97

externality costs 92–94

GATT/WTO Notes (1997) overview 57–58

interactions between traditional/environmental BTAs foundations 96–98

Japanese reports on 82

legitimate absolute advantage theory 60, 85–86, 89–92, 95, 97, 285

OECD Note (1994) overview 57–58

other international developments 66–69

rationales for 58–60

reception of OECD/GATT reports 65–66

revised absolute advantage theory 85–86, 88–89, 97

revised comparative advantage theory 85–88, 97

role of GATT in tax matters 55

role of OECD in tax matters 54

summary conclusions 98

Swiss proposals for 82–83

taxes on inputs as eligible for adjustments 63–65

US views on 70–74

environmental law principles, and environmental BTAs 265–276

environmental tariffs 50

see also countervailing measures

environmental taxes

with cross-border character 278–280

distinguished from traditional taxes 224–225

fiscal nature of 122

market-based measures vs. 121–122

on producers 148

regulations vs. 3, 231–235

revenue from 155–158

environmental value of products 149–151

environmental VAT model 143–144, 146–147

equalisation taxes see border tax adjustments (BTAs)

European Coal and Steel Community (ECSC)

Community of Experts, Tinbergen report 39–42

European Court of Justice (ECJ)

on compatibility with domestic electricity duty with EU law 80–81

on inclusion of aviation sector into EU ETS 262–263, 267–268

on polluter-pays principle 272

see also Table of Cases

European Economic Community (EEC)

Commission White Paper (1985) 42–43

tax harmonisation working group reports 40–44

European Union (EU)

Aviation Directive 78–80, 125, 262–263, 267–268

carbon equalisation mechanism 76–79

Directive on energy products and electricity 81

emission-trading scheme (ETS) 76–78, 121, 125, 148, 232, 234

excise taxes 43–44, 112–114

release for consumption, definition 112–113

VAT system 35, 41–43, 105, 107–112, 172, 198, 229–230, 237

views on environmental BTAs 74–82

views on traditional BTAs 38–44, 78

excise taxes

competitiveness argument and 127–128, 226–227

during 1960s 106–107

in EU 43–44, 112–114

as models for environmental BTAs 125–129, 229–230

ODC taxes and 129–137, 236

see also individual types

exhaustible natural resources 253–255

externalities, definitions 92–94

externality costs 90, 92–96, 146

extraterritoriality 258–263, 278

fair international trade concept 90

Finland, electricity taxes 80–81

fiscal sovereignty principle 278

fixed exchange rates 30

France

carbon equalisation mechanism 77

TVA taxes 26, 106–107

free-rider issues, and MEAs 78

General Agreement on Tariffs and Trade (GATT) (1947) 11

Article I, most-favoured nation 11, 166, 238–240, 243, 245, 256–257, 268–269, 271, 280

Article II/II:2(a) 167–177, 180, 192, 199–201, 204, 242, 283

Article III/III:1/III:2/III:4167–177, 180, 184, 192–193, 199–202, 204–223, 231, 234, 242, 283

Article VI 177–180

Article VII 166–167, 199

Article XIX 243–244

Article XVI 177, 180, 192–193, 195–196

Article XX 242–257, 274–276

Article XXI 243–244

Article XXIII 177

Article XXIV 243–244

certification systems 154

Havana Charter 184

‘Industrial Pollution Control and International Trade’ (1971) 55, 56, 61

Subsidies Code 177

‘Trade effects of Environmental Measures’ (1993) 61–62

Working Party on BTAs 21–24, 33–34

see also Agreement on Subsidies and Countervailing Measures (ASCM); legal framework, of environmental BTAs; legal framework, of traditional BTAs; Table of Cases; traditional BTA history, and GATT/OECD; World Trade Organisation (WTO)

General Agreement on Trade in Services (GATS)

advertising services 201–202

Article XIV 245

exceptions provisions 243–245

taxes on services 104–106

GHG emissions 68, 124–125, 134, 142, 230, 264, 267

goods and services

in environmental BTA tax design 124–125

in traditional BTA tax design 103–106

green economy concept 248

green labelling 3, 152

green VAT (De Camillis and Goralczyk) 143–144, 235

grey emissions taxes 82–83

hazardous chemicals 70–71, 75, 135–136, 156–157

see also Superfund taxes, in US

human, animal or plant life or health, protection of 250–253

inputs, taxes on 63–65, 135–136

internalisation policies 95–96, 150–151

International Civil Aviation Organisation (ICAO) 78, 267

International Court of Justice (ICJ)

exclusion of soft law disputes 269–270

request for advisory opinion on climate change by small island states 264

International Maritime Organization 267

international public law, and environmental BTAs 257–265

ISO 14067 150

Japan

‘Utilization of Economic Instruments in Environmental Policies – Taxes and Charges’ (1996) 82

views on environmental BTAs 82

Kimberley Process Certification Scheme 154

Rough Diamonds 154, 244–245

Kyoto Protocol (1997) 83, 141, 145, 266, 267–268

legal framework, of environmental BTAs 224–281

environmental law principles 265–276

MEA limits on BTA adoption 266–274

MEA support for BTA adoption 274–276

GATT Article XX provisions 242–257, 274–276

ASCM/TBT/SPS 245–246

conditions of applicability 246–257

GATT/GATS exceptions provisions 243–245

general GATT provisions 242–243

XX, chapeau provisions 255–257

XX(a), protection of public morals 247–250, 252

XX(b), protection of human, animal or plant life or health 250–253

XX(g), conservation of exhaustible natural resources 253–255

international public law 257–265

state exceptions and countermeasures 263–265

unilateral and extraterritorial measures 258–263, 278

summary conclusions 280–281

tax law principles 276–280

domestic tax laws 276–278

environmental taxes with cross-border character 278–280

WTO law and rules 225–240

consumption vs. production taxes 225–228

direct vs. indirect taxes 228–230

environmental taxes vs. regulations 231–235

MFN 238–240

national treatment (NT) principle 235–238

taxes occultes 230–231

see also individual provisions

legal framework, of traditional BTAs 165–223

general GATT provisions

border charges vs. internal charges 170–177

directly competitive or substitutable (DCS) products 218–222

dissimilar taxation concept 222

legal consequences 174–177

like products concept 208–217

most-favoured nation principle 166

national treatment (NT) principle 166, 167, 206–222

taxes in excess concept 217–218

valuations rule 166–167

OECD 1968 report

BTA history 19–34

BTA practices 106–107

definition of destination principle 184–188

WTO law and rules 167–180

arguments over eligibility of direct taxes on imports 183–193

arguments over ineligibility of direct taxes on exports 194–198

BTAs on exports 177–180

BTAs on imports 167–177

eligibility of taxes occultes198–206

national treatment (NT) principle 206–222

practical consequences of eligibility of direct taxes 193–194

tax models and BTAs 181–183

see also individual provisions

legality principle, and domestic taxes 276–277

legitimate absolute advantage theory 60, 85–86, 89–92, 95, 97, 285

life-cycle assessment (LCA) 94, 142, 150, 235

like products concept 208–217

Marrakesh Agreement Establishing the World Trade Organization (1994) 55

Article IX (waivers) 243–245

see also World Trade Organisation (WTO)

Mill, John Stuart 10, 190, 228

Montreal Protocol on Substances that Deplete the Ozone Layer (1987) 71, 83, 239, 267, 275

most-favoured nation principle (MFN) 11, 166, 238–240, 243, 245, 256–257, 268–269, 271, 280

multilateral environmental agreements (MEAs) 51–52

Common but Differentiated Responsibilities (CBDR) principle 268–274

free-rider issues 78

as limitation to adoption of environmental BTAs 265–274

sic utere tuo principle and 263–264

as supportive of environmental BTA adoption 274–276

third countries and 60

unilaterality and 258

Multilateral Fund for the Implementation of the Montreal Protocol 160

national treatment (NT) principle

CBDR principle and 268–269

directly competitive or substitutable (DCS) products 218–222

dissimilar taxation concept 222

environmental BTAs and 235–238

like products concept 208–217

taxes in excess concept 217–218

traditional BTAs and 166, 167, 206–222

necessity test 248–252, 254, 264–265, 281

negative externalities (Pigou) 92

neutrality of BTAs 28–29, 33–34

non-retroactivity principle 277

normative comparative advantage (Regan) 90–91

Organisation for Economic Co-operation and Development (OECD)

BEPS (Base Erosion and Profit Shifting) project 20, 284

BTA concept, definition 1–2

Centre for Tax Policy and Administration 19

Committee on Fiscal Affairs 19, 54, 56

Environment Policy Committee 54, 56

‘Environmental Taxes and Border Tax Adjustments’ (1994) 48

Joint Session on Taxation and Environment 54

‘The Political Economy of Environmentally Related Taxes’ (2006) 66, 71

role in tax matters 19–20

see also environmental BTA history, and GATT-WTO/OECD; traditional BTA history, and GATT/OECD

Organisation for European Economic Co-operation (OEEC) (1948) 19

origin principle 33, 39–43, 186–187

ozone-depleting chemicals (ODC) taxes

environmental excise duty models based on 129–137, 236, 285

exemption regime of 239

imported taxable products, definition 129

in US 71–72, 127, 129–132, 134–136, 151, 154–155, 226–228, 231, 239

similarity to Australian taxes 83–85

Paris Agreement (2015) 286

physical incorporation test 204

Pigou, Arthur C. 91, 92, 95

Pigouvian theory 95

polluter-pays principle 75, 93–94, 126, 272–274, 277

process and production methods (PPMs)

adoption of BTAs and 278

assessment of environmental value and 149–153, 237–238

like products concept and 208, 212–213, 216

necessity test and 248–250

political arguments over 252–254, 283

tax design and 256

producers, environmental tax design and 148

product taxes vs. general taxes 189

product vs. production/process taxes 60–63

public morals, protection of 247–250

relationship requirement see necessity test

release for consumption, in EU 112–113

residence principle 187–188

retail carbon tax (RCT) 147–148

retail sales taxes, in US 36, 106–108, 114–116

Ricardo, David 10, 11

On the Principles of Political Economy and Taxation16

On Protection to Agriculture12–13

see also comparative advantage theory (Ricardo)

Rio Declaration 272

sales taxes

adoption of BTAs and 229–230

during 1960s 106–107

sic utere tuo principle 263–264

single tax principle (Avi-Yonah) 279–280

Smith, Adam 10, 14

see also absolute advantage theory (Smith)

soft law principles 257, 269–270

source principle 187–188

sovereignty principle 257–263, 278

Subsidies Code (WTO) 177, 192–193, 202–203, 206

Superfund taxes, in US

allocation of revenue from 156–157

as double adjustment 226

environmental excise duty models based on 70–71, 129–133, 236

as form of revenue generation 88

product list 130

taxes occultes and 231

Sweden

questions on BTAs 60, 65

requests GATT Note on BTAs (1993) 56, 57–58

Switzerland

proposals for BTAs 82–83

views on environmental BTAs 82–83

synthetic greenhouse gases (SGG) taxes 83–85, 129

tariffs, history of 10–12

tax concept

in environmental BTA tax design 120–121

in traditional BTA tax design 102

tax design, of environmental BTAs 119–161

adjustment concept and 122–124

allocation of environmental BTA revenue 158–161

allocation of revenue 155

anti-abuse measures 153–155

border concept and 119–120

carbon tax model 133–137

carbon-added tax (CAT) 137–146, 236–238

environmental taxes on producers 148

environmental VAT model 143–144, 146–147

fiscal nature of environmental taxes 122

goods and services and 124–125

models based on retail sales tax 147–148

model based on US Superfund and ODC taxes 129–133

revenue from environmental taxes 155–158

summary conclusions 161

tax concept and 120–121

tax evasion and 151–155

taxes vs. other market-based instruments 102, 121–122

traditional excise duty model 125–129

valuation and environmental proxies 149–151

VAT-based models 137–147

tax design, of traditional BTAs 101–118

adjustment concept and 102–103

border concept and 101–102

export/import practices during 1960s 106–107

general consumption taxes, EU VAT 107–112

goods and services and 103–106

retail sales taxes, US 114–116

specific consumption taxes, EU excise duties 112–114

summary conclusions 116–118

tax concept and 102

tax evasion 151–155

tax law principles, and environmental BTAs 276–280

tax neutrality (Ricardo) 15–16, 28

tax shifting 30–33

tax sovereignty 46, 65, 87, 198

taxes in excess concept 217–218

taxes occultes concept

averaging of tax rates and 32, 206

environmental taxes on producers and 148

lack of clarity in reports 27–28

legal grounds for 175–177

OECD report definition 27–28, 199

Superfund and ODC taxes vs. 131–132

taxes on inputs and 63–65, 135–136

taxes on services and 104

WTO and environmental BTA eligibility 198–206

WTO law and traditional BTA eligibility 230–231

territorial sovereignty 257–263

theory of absolute advantage see absolute advantage theory (Smith)

theory of comparative advantage see comparative advantage theory (Ricardo)

third territories, under TFEU 109, 110, 112

Tinbergen report (ECSC) 39–42

traditional BTA history, and GATT/OECD 9–47

absolute advantage theory (Smith) 14, 31, 44–47

background of reports 20–23

comparative advantage theory (Ricardo) 12–17, 30–31, 44, 45–46

definition of BTAs 23–25

EU views on 35–44, 78

first use of BTAs 18

fiscal vs. non-fiscal factors 33

GATT on developing countries 33–34

history of tariffs and 10–12

interim conclusions 47

rationales for/against BTA adoption 28–30

role of GATT in tax matters 20

role of OECD in tax matters 19–20

tax shifting as basis for BTAs 30–33

taxes eligible for BTAs 25–28

Treaty on the Functioning of the European Union (TFEU) 80, 109, 272

turnover taxes

ECSC study on 39–42

in Germany 20–21, 26

TVA taxes, in France 26, 106–107

UN Conference on Environment and Development, Agenda 21266

UN Conference on Trade and Development (UNCTAD) 69, 233

UN Conference on Trade and Employment, Preparatory Committee (1947) 199–200

UN Convention on the Law of the Sea (UNCLOS) 267

UN Convention to Combat Desertification 274

UN Environment Programme (UNEP) 160

WTO/UNEP Report, Trade and Climate Change (2009) 68

UN Framework Convention on Climate Change (UNFCCC) 83, 94, 230–231, 274

see also Kyoto Protocol (1997)

UN Stockholm Conference on Human Environment (1972) 55

United States (US)

Border Tax Equity Act, proposed 38

British thermal unit (BTU) energy tax, proposed 72–73

extension of BTA system to direct taxes and export companies, proposed 35–36

Fair Tax Act, proposed 37

ODC taxes 71–72, 127, 129–132, 134–136, 151, 154–155, 226–228, 231, 239, 285

proposed amendments to Internal Revenue Code 74

proposed climate action bills 73–74

retail sales taxes 36, 106–108, 114–116

Superfund taxes 70–71, 88, 129–133, 156–157, 226, 231, 236

upstream carbon tax proposal 127

views on environmental BTAs 70–74

views on traditional BTAs 21, 29, 198

Whiskey Act excise tax (1791) 18

upstream carbon taxes 127, 133–137, 144–145

US Council for International Business 203–204

US Customs 116

valuations rule 149–151, 166–167

VAT systems

in EU 35, 41–43, 105, 107–112, 172, 198, 229–230, 237

national treatment (NT) principle and 236–238

proposed for US 36–37

VAT-based models, for environmental BTAs 137–147

carbon-added tax (CAT) 137–146

environmental VAT 143–144, 146–147

Vienna Convention 276

welfare factor 52

World Customs Organization

Authorized Economic Operator Programmes 153–154

World Trade Organisation (WTO) 12

Agreement on Agriculture, the Agreement on Technical Barriers to Trade (TBT) 240–241, 245–246

Agreement on the Application of Sanitary and Phytosanitary Measures (SPS) 240, 245–246

anti-tax evasion abuse measures 153–155

binding of tariffs 11

carbon-related BTAs 68

Critical Legal Studies approach to 282–284

Customs Valuation Agreement 152

Dispute Settlement Bodies 269–270

product vs. production/process taxes 62–63

as successor to GATT (1995) 20

‘Taxes and Charges for Environmental Purposes – Border Tax Adjustment’ (1997) 58

Tokyo Round Subsidies Code 177, 192–193, 202–203, 206

Uruguay Round 57–58, 177, 202

WTO/UNEP Report, Trade and Climate Change (2009) 68

see also Agreement on Subsidies and Countervailing Measures (ASCM); environmental BTA history, and GATT-WTO/OECD; legal framework, of environmental BTAs; legal framework, of traditional BTAs; most-favoured nation principle (MFN); Table of Cases