@NiskanenCenter's @SXPomerleau is out with a good overview of design considerations for border carbon adjustments. https://twitter.com/SXPomerleau/status/1288887554767491073

For these interested in legal questions around border carbon adjustments, this thread points out some subtleties the paper did not focus on.

There are two potential paths to WTO compliance for a border carbon adjustment.

One is to position the carbon tax as a product tax like a value-added or sales tax, which is border adjustable under WTO rules pursuant to the destination principle, which holds that products are to be taxed where they are consumed.

Under this path, a border adjustment would have to be consistent with the core of the General Agreement on Tariffs and Trade (GATT), including the principles of most-favored-nation (MFN) and national treatment.

The main limitations of this path are that it depends on the WTO ruling that a carbon tax is indeed a product tax (this is likely, but not certain) and it is difficult to use to border adjustment carbon emissions policies other than taxes.

The second path is GATT Article XX(g)'s environmental exception, which allows an exception from other GATT requirements for measures "relating to the conservation of exhaustible natural resources...

if such measures are made effective in conjunction with restrictions on domestic production or consumption.”

Border adjustment of a carbon tax clearly qualifies as such a measure. However, all of Article XX's exemptions are qualified by the chapeau, which requires that:

"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."

This requirement is distinct from the MFN and national treatment provisions that Article XX provides exceptions to. Instead of prohibiting discrimination with respect to treatment of “like products” the chapeau focuses on “countries where the same conditions prevail.”

This has been interpreted by the WTO Appellate Body to disfavor attempts to coerce “specific policy decisions made by foreign governments.”

This suggests that, under Article XX, a border carbon adjustment that accounts for exporting country policies might be safer than one that does not, but that it would have to account for all carbon or GHG emissions policies, not just taxes.

@SXPomerleau rightly suggests that this would be difficult, but I proposed a methodology for doing so in my article, The Carbon Price Equivalent: A Metric for Comparing Climate Change Mitigation Efforts Across Jurisdictions. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3537823

For a deeper analysis of some of the legal issues involved in border carbon adjustments, please also check out my 2018 article, Incentive Compatible Climate Change Mitigation: Moving Beyond the Pledge and Review Model. https://scholarship.law.wm.edu/wmelpr/vol42/iss3/6/