World Bank: Border Taxes Could Violate Trade Rules

1 November 2007

The International Trade and Climate Change report released by the World Bank in October 2007 found that carbon taxes do not hurt countries’ international industrial competitiveness. However, these policies have often been accompanied by increased exports by energy-intensive industries, lending weight to the notion that the subsidies and exemptions that most countries have granted to affected industries are overcompensating. Of specific energy-intensive industries in OECD countries, only the cement sector has seen trade reduced by the imposition of a carbon tax.

The report also noted that border tax measures on products from countries that do not have carbon restrictions would potentially risk violating WTO rules, and raise issues related to process and production methods (PPMs). Simulation analysis suggested that the ‘Kyoto tariff ’ on US imports that some European leaders have called for could reduce US exports to the EU by about 7 percent, or even more as trade is diverted to countries that do not face the additional duties.

On the other hand, the report found energy efficiency standards – implanted by many developed and developing countries – to be more likely to hurt industrial competitiveness. The metal and transport equipment industries were found to be particularly affected by such requirements.

Liberalising trade in low-carbon goods, including via the WTO, could be beneficial, the World Bank suggested, proposing a focus on specific sectors that could yield quick benefits, such as renewable energy and energy efficiency technologies.

For the climate regime, the report singled out efforts to develop a uniform approach to the pricing of greenhouse gas emissions as the most important priority. It identified a number of tariffs and non-tariff barriers in developing countries as huge impediments to the transfer of climate-friendly technologies, and encouraged them to strengthen intellectual property protection to stimulate the diffusion of clean technologies.

In addition, the report examined whether OECD countries’ climate change policies had resulted in ‘carbon leakage’, i.e. the relocation of energy-intensive industries to developing countries. While the study pointed to a gradual shift of energy-intensive production to the latter – partly due to climate change mitigation measures in developed countries – it also noted that the trend was not pronounced.

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