- Email: [email protected]
International trade and environmental taxes
Renewable Energy, Vol.5, Part I~ pp. 1293-1299, 1994 Elsevier Science Lid l'rimed in C,reat Britain 0960-1481/94 $7.0040.00
Pergamon
INTERNATIONAL TRADE AND ENVIRONMENTAL TAXES Richard A. Westin Professor, University of Houston Law Center A. BACKGROUND The environmental crisis has provoked a number of tax proposals to control damage to the planet. Taxes can be a strong ally of the alternative energy industry because they can deliberately burden undesirable forms of energy and free desirable forms from taxation, driving capital and consumption in favor of the preferred form.* These enviornmental tax proposals are attractive, but they are subject to contentious debate because, among other things, they can have a significant impact on foreign trade patterns. That in turn implicates an obscure body of international trade law that arises under multilateral treaties to which many nations, including all the prosperous nations, are parties. These treaties are taken seriously by politicians, statesmen and bureaucrats, so they must be inspected carefully before environmental taxes are considered. The remainder of the paper considers the relationship of international trade treaties and a carbon tax proposal that the EU is considering. The considerations are common to other environmental tax issues in an international trade setting. B. CARBON TAXES AND THEIR IMPLICATIONS One of the broadest proposals is for a serious tax on carbon out put. At present, a number of EU countries have such taxes, but they are generally more in the nature of revenue raising devices than serious efforts to restrict global warming. More recently, the European Commission has proposed a carbon energy tax, which is discussed below. The problem is that such a tax, while a noble effort, has "lumpy" effects. One obvious effect is that energy inputs increase in costs, with resultant increases in the cost of transportation an manufacturing. Countries like the USA, which do not propose such taxes, would benefit in terms of comparative costs of outputs if there were not a way to remit a carbon tax at the border of the EU, or to impose a comparable levy on goods entering the EU. That subject forms the essence of this paper.
The subject is not
* I am personally a strong believer that the US needs an oil import duty of about $i0 per barrel of petroleum in order to maintain a stable import price of say $25 per barrel, gradually over time, thereby weaning the US of its dependence on cheap oil, assisting the domestic oil and gas industry and encouraging alternative energy providers to enter the market more aggressively.
1293
1294
one that has been tackled in depth yet by international o r g a n i z a t i o n s , but it is h i g h ont he a g e n d a of items that the n e w W o r l d T r a d e O r g a n i z a t i o n (GATT enlarged) will address. The s u b j e c t is a c o n t e n t i o u s one. For one thing, p o o r e r c o u n t r i e s can be e x p e c t e d to c o m p l a i n t h a t this sort of tax is too e x p e n s i v e for t h e m and w o u l d k n o c k t h e m b a c k of t h e i r feet, or some c o m p a r a b l e metaphor. Symmetrical questions arise with respect to subsidies for e n v i r o n m e n t a l l y d e s i r a b l e behavior. For example, if G e r m a n y w e r e to o f f e r a g r a n t to c o m p a n i e s t h a t p r o d u c e d a d v a n c e d solar panels, w h i c h w e r e later m a n u f a c t u r e d as a r e s u l t of the grant, h o w w o u l d one level the p l a y i n g field to a s s u r e t h a t the panels d i d not have an u n f a i r a d v a n t a g e ? S h o u l d one do so? W h a t general s t a n d a r d s s h o u l d be a p p l i e d in c o n s i d e r i n g the issue? The O E C D t r e a t y also has a b e a r i n g on this. The n e x t piece
of this p a p e r
concerns
C. EU C A R B O N
the EU proposal.
TAX PROPOSAL 2
The p r o p o s e d EU directive, s t y l e d C o m m i s s i o n Proposal for C o u n c i l D i r e c t i v e i n t r o d u c i n g tax on c a r b o n d i o x i d e e m i s s i o n s and e n e r g y 3 p r o p o s e s to tax a n u m b e r of e n e r g y sources. The sources i n c l u d e coal, lignite, gas, peat, mineral oils, certain types of electricity* as well as m e t h y l and ethyl alcohol. The tax w o u l d fall on the e x t r a c t i o n or m a n u f a c t u r e of the products, or on t h e i r i m p o r t a t i o n into the EU, s u b j e c t to ad hoc relief for firms t h a t are b u r d e n e d w i t h h i g h e n e r g y c o n s u m p t i o n or that are h u r t by competitive problems in the EU m a r k e t p l a c e . It is c l e a r l y a m u d d l e d concept, a w k w a r d l y b a l a n c i n g e n v i r o n m e n t a l and e c o n o m i c interests. Worse, f r o m b u s i n e s s e s ' p o i n t of view, the p r o p o s l s fail to p r o v i d e t h a t the t a x is r e m i t t e d w h e n e n e r g y p r o d u c t s (say coal) or t h i n g s w i t h an e n e r g y c o n t e n t (say V o l k s w a g e n s 5) are e x p o r t e d f r o m the EU. In addition, of course, the e x p o r t e d item m a y be s u b j e c t to an import d u t y w h e n it come into the c o u n t r y of importation. That
2 The f o l l o w i n g m a t e r i a l s are d i s c u s s e d in an e x c e l l e n t paper p r e s e n t e d by Raoul S t e w a r d s o n at an O E C D Workshop, "Trade and Environment: PPMs Issues", Helsinki, Finland, 6 April 1994 ( h e r e i n a f t e r "Stewardson"). The s t r u c t u r e of the rest of t h i s p a p e r t r a c k s the S t e w a r d s o n paper. 3 ECOJ
1992 C196/I.
4 T h e r e t h e o r y here is t h a t the inputs to p r o d u c e e l e c t r i c i t y are exempt, so the tax s h o u l d fall on e l e c t r i c a l output m a d e w i t h such e x e m p t inputs.
made
5 I a s s u m e in all cases t h a t in G e r m a n y from G e r m a n parts.
the V o l k s w a g e n s
I discuss
are
1295 doubly disadvantages the item. That burden may translate into lost jobs, investment and government revenues. However, from an economist's point of view, that may be a correct result in the sense that the products come closer to bearing their full implicit environmental costs. The worse problem would be flight of investment capital. For example, companies may shift to producing coal outside the EU or making Volkswagens in countries with no comparable taxes, and exporting at least some of them to the EU. Obviously, the level of the tax will have a major bearing on this decision-making; the decision-making will occur firm by firm, and will be very difficult to predict. Firms that are asked if they would shift their activities to outside the EU as a result of the tax can be expected to exaggerate the tax's impact, so getting objective information will be difficult. This is where the EU's directive favoring companies with high energy consumption that are seriously affected b y t h e tax comes in. Note that it only helps if there is trouble on the EU market; trouble abroad is not touched. Thus, if all EU car makers are equally affected, the result is that they will get no relief from the tax even if the tax harms their US sales. Another obvious hole in the system is that there is no tax on energy intensive goods that are imported into the EU. This is weak from an environmental perspective and (stated from the safe vantage point of a university in the USA) timid from an international trade perspective. C. GATT RESTRICTIONS The General Agreement on Tariffs and Trade is the mechanism for regulating international trade. It recently changed its bureaucratic title to the World Trade Organization. Among its other functions, it is obligated to sort out trade conflicts among member States. The underlying concept of GATT is to reduce barriers to international trade, thereby increasing the wealth of all the participants, along the lines propounded by Adam Smith in The Wealth of Nations in 1776. GATT has virtually no environmental goals aside from some reservations in the treaty in favor of actions by member States to protect their environmental interests. Accordingly, one should expect little relief from GATT. Nevertheless, there are some sanctuaries from the pure "free trade" dogma of GATT i. As to exports: There can be no export subsidies for products. Article XVI:6.
RE 5: 8-1(J(
But
1296
there is a loophole in that under Article VI:4 indirect taxes" can be remitted with respect to a product when it is exported. Also, Article VI:4 prohibits anti-dumping or countervailing duties imposed on the importation overseas (say in Canada) of products from a GATT signatory in cases where the country of export (say England) remitted or exempted the product from its home tax. T The more complex problems concern energy inputs that find their way into final products, for example, the carbon tax component of a Volkswagen. The Uruguay Round Final Act contains an Agreement on Subsidies and Countervailing Duties which lets countries make adjustments for cumulative indirect taxes (e.g. VAT) on energy, fuels and oil used in the production process, to the production process as well as on single stage taxes, which the carbon tax is likely to be. a. Conclusions as to eneray Products One implication is that when coal is exported from the EU, the carbon taxed imposed on it can be remitted. Another is that the importer cannot slap on countervailing taxes or claim "dumping". b. Conclusions as to final Products Can an EU country remit the carbon tax on an exported Volkswagen? I believe so, whether the carbon tax is set like a VAT or as single stage tax. 2. As to imports: Article III:2 of GATT provides: "The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly of indirectly, to like domestic products."
" An indirect tax means a sales tax or VAT, etc., but not an income tax, Social Security contribution, or the like. "No product of the territory of any contracting party imported into the territory of any other contracting party shall be subject to anti-dumping or countervailing duty by reason of the exemption of such product from duties or taxes borne by the like product when destined for consumption in the country of origin or exportation, or by reason of the refund of such duties or taxes."
1297
The EU directive does not propose to place a tax on competing foreign goods (say Toyota automobiles from Japan) to make up for the fact that the foreign (non EU) manufacturer does not have a carbon tax. The big question is could it? A good case can be made that it can. Article III:2 allows the importing country to impose taxes on imported goods to account for taxes that were directly or ~ imposed on comparable domestic products. It is a fair reading that this permits an import duty to account for the carbon tax content of Volkswagens and other EU cars. Article II:2(a) embellishes on Article III:2 by providing that articles that embody imported materials are subject to the same opportunity for taxation. For example, it seems to mean that if Toyota made the bodies and tires of its cars (as opposed to merely assembling them) in the EU, but it exported its motors and electrical parts to the EU, then the EU could tax the final product on the electrical and engine parts, using some kind of proration system. a. Conclusions as to eneray p~od~cts The EU can apply compensating taxes to imported products, such as coal, to equate the foreign coal to the domestic level of carbon taxation, with no obligations to determine whether a similar tax was imposed on the imported product in the home (export) country. b. Conclusions as to final products The EU can impose taxes on imported goods that are not subject a carbon tax in the country of origin, and this tax can fall on the entire product (the Toyota) or its components, as the facts may dictate. F. OECD TREATY The OECD treaty is essentially the articles of membership of a club consisting of the wealthy nations of the world. The treaty contains variety of blandishments, but minimal enforcement provisions. The imposition of environmental taxes to reflect the full economic costs of particular activities and products (the "full costing principle") is a subject that falls within the OECD treaty's jurisdiction. The full cost pricing proposal is consistent with the all-important
1298
" p o l l u t e r pays" p r i n c i p l e a d o p t e d by O E C D members." The p r i n c i p l e is l e g a l l y in force as o f f i c i a l EU policy. 9 The p r i n c i p l e calls for g o v e r n m e n t s to avoid p r o v i d i n g s u b s i d i e s to polluters, and i n s t e a d to i n t e r n a l i z e e n v i r o n m e n t a l costs I°. The basic c o n c e p t is that the p o l l u t e r should b e a r the c o s t of m e a s u r e s to reduce p o l l u t i o n d e c i d e d on by p u b l i c a u t h o r i t i e s to assure that the e n v i r o n m e n t is in an " a c c e p t a b l e state". For example, if the US p r o p o s e d a s u r t a x on i m p o r t e d oil to fund its federal c l e a n - u p program, E u r o p e a n t r a d i n g p a r t n e r s p r o t e s t e d that the tax v i o l a t e d the p o l l u t e r pays p r i n c i p l e b e c a u s e it imposed a tax at a h i g h e r level on i m p o r t e d oil t h a n on US oil. The issue was p l a c e d b e f o r e the G A T T Council, w h i c h ruled the US was in v i o l a t i o n of the treaty. ~ There are i m p o r t a n t limits to the p o l l u t e r pays principle. First of all, the O E C D e n c o m p a s s e s a l i m i t e d n u m b e r of r e l a t i v e l y p r o s p e r o u s countries. Also, the p r i n c i p l e is w e a k in that it c o n t a i n s s i g n i f i c a n t exceptions. 12 Still, as the n u m b e r of OECD s i g n a t o r i e s
" The p r i n c i p l e was a d o p t e d in the OECD's " D e c l a r a t i o n on E n v i r o n m e n t a l R e s o u r c e s for the Future". The O E C D refers to the Organization for E c o n o m i c Co-operation and Development. The o r g a n i z a t i o n is the result of a t r e a t y among the c o u n t r i e s t h a t are t y p i c a l l y t h o u g h t of as the i n d u s t r i a l i z e d world. The O E C D has c o m m i s s i o n e d several studies of non c o m m a n d and control m e t h o d s for c o n t r o l l i n g e n v i r o n m e n t a l damage, e s p e c i a l l y E C O N O M I C I N S T R U M E N T S FOR E N V I R O N M E N T A L P R O T E C T I O N (J. O p s c h o o r & H. Vos. 1989). See aenerallv, Gaines, The P l l u t e r Pays PrincDle: F r o m E q u i t y to E n v i r o n m e n t a l Ethos, 26 Texas Int'l L a w J. 463 (991). " " D e c l a r a t i o n on E n v i r o n m e n t and the Environment, Paris, 1986.
Resources
for the Future",
OECD
•o Since then, it has lost it p u r e l y e c o n o m i c m e a n i n g and was i m p l i c i t y r e d e f i n e d to go b e y o n d p r e v e n t i v e m e a s u r e s a g r e e d u p o n in advance. ~i See 18 B N A Env. R p t r 659 (1987) i n c o n s i s t e n t w i t h GATT A r t i c l e XXII.I). p o l l u t e r pays p r i n c i p l e was not g e r m a n e m a t t e r f a l l i n g u n d e r GATT.
(US oil import fee h e l d The US p o s i t i o n was t h a t b e c a u s e the issue was a
12 A c c o r d i n g to Vos and Opschoor, the R e c o m m e n d a t i o n on the I m p l e m e n t a t i o n of the P o l l u t e r - P a y s P r i n c i p l e e x c e p t i o n s apply if c e r t a i n s p e c i f i e d c o n d i t i o n s w e r e met, i n c l u d i n g only limited to w e l l - d e f i n e d t r a n s i t i o n periods. As the authors point out, there w e r e n u m e r o u s ambiguities, such as the m e a n i n g of the t e r m "an a c c e p t a b l e state of e n v i r o n m e n t , " the length of t r a n s i t i o n periods, the t r e a t m e n t of a d m i n i s t r a t i v e costs, the a c c e p t a b i l i t y of c h a r g e s plus g r a n t s and so forth. In 1981 the O E C D E n v i r o n m e n t C o m m i t t e e r e v i e w e d a n u m b e r of these a m b i g u i t i e s and other p r o b l e m s and revised the c o n c e p t to a c h i e v e more effective use of p o l i c y instruments, p u r s u a n t to w h i c h p o l l u t e r s w o u l d bear the costs of
1299
increases, and as general sensitivity to environmental concerns mounts, the principle is likely to be of increased importance. Moreover, in this author's opinion it is a worthy principle; it should be considered on its merits, regardless of OECD membership. It is appropriate both as a moral and economic matter that polluters should pay for damages done. Adapting the principle -even in the absence of a treaty obligation -- reduces suspicions about the seriousness of a country's serious plans to join the fraternity of countries that want to control environmental degradation. In a nut shell, the OECD treaty is a friend to improving the environmental component of international trade when one considers burdening trade, but not when one considers subsidizing polluters, for example, by providing tax credits for pollution control equipment. That violates the polluter-pays principle. E. CONCLUSIONS First, a disclaimer: what has gone before is a brief analysis on one proposed tax. It is not a systematic study of the relationship of environmental taxes to international trade law and policy 13. Nevertheless, the picture that emerges is encouraging from the point of view of the alternative energy industry and government policy makers. As to GATT: The key facts are that the legal ability to impose an energy tax on imported goods means that energy products and manufactured goods with significant energy components and to the power lift the tax at the border, thereby assuring that EU goods are not handicapped when they are exported. Better, this seems to be equally true of energy products (coal) and energy-intensive output (Volkswagens and Toyotas). A bad feature is that there is still no alobal balance. Toyota and Volkswagen may conclude that they are better off selling into markets where are no such taxes. To do so, they may shift their manufacturing offshore. On the other hand, they will not be able to sell their products back to EU cheaply, so at least the EU territory's carbon tax system cannot be subverted by overseas manufacturers. As to OECD: the alterative energy industry has a sense that the OECD treaty in effect encourages taxes, but an enemy in that is discourages government polluters that choose to use alternative energy over energy inputs.
friend in the environmental subsidies for their present
keeping environmental quality at some publicly determined level, normally ruling out subsidies. Vos and Opschoor at pp. 27-28. 13 I am privileged to be involved in such a study, which is underwritten in part by the Center for Global Change. The Preliminary Report should be out fairly soon.
Pergamon
INTERNATIONAL TRADE AND ENVIRONMENTAL TAXES Richard A. Westin Professor, University of Houston Law Center A. BACKGROUND The environmental crisis has provoked a number of tax proposals to control damage to the planet. Taxes can be a strong ally of the alternative energy industry because they can deliberately burden undesirable forms of energy and free desirable forms from taxation, driving capital and consumption in favor of the preferred form.* These enviornmental tax proposals are attractive, but they are subject to contentious debate because, among other things, they can have a significant impact on foreign trade patterns. That in turn implicates an obscure body of international trade law that arises under multilateral treaties to which many nations, including all the prosperous nations, are parties. These treaties are taken seriously by politicians, statesmen and bureaucrats, so they must be inspected carefully before environmental taxes are considered. The remainder of the paper considers the relationship of international trade treaties and a carbon tax proposal that the EU is considering. The considerations are common to other environmental tax issues in an international trade setting. B. CARBON TAXES AND THEIR IMPLICATIONS One of the broadest proposals is for a serious tax on carbon out put. At present, a number of EU countries have such taxes, but they are generally more in the nature of revenue raising devices than serious efforts to restrict global warming. More recently, the European Commission has proposed a carbon energy tax, which is discussed below. The problem is that such a tax, while a noble effort, has "lumpy" effects. One obvious effect is that energy inputs increase in costs, with resultant increases in the cost of transportation an manufacturing. Countries like the USA, which do not propose such taxes, would benefit in terms of comparative costs of outputs if there were not a way to remit a carbon tax at the border of the EU, or to impose a comparable levy on goods entering the EU. That subject forms the essence of this paper.
The subject is not
* I am personally a strong believer that the US needs an oil import duty of about $i0 per barrel of petroleum in order to maintain a stable import price of say $25 per barrel, gradually over time, thereby weaning the US of its dependence on cheap oil, assisting the domestic oil and gas industry and encouraging alternative energy providers to enter the market more aggressively.
1293
1294
one that has been tackled in depth yet by international o r g a n i z a t i o n s , but it is h i g h ont he a g e n d a of items that the n e w W o r l d T r a d e O r g a n i z a t i o n (GATT enlarged) will address. The s u b j e c t is a c o n t e n t i o u s one. For one thing, p o o r e r c o u n t r i e s can be e x p e c t e d to c o m p l a i n t h a t this sort of tax is too e x p e n s i v e for t h e m and w o u l d k n o c k t h e m b a c k of t h e i r feet, or some c o m p a r a b l e metaphor. Symmetrical questions arise with respect to subsidies for e n v i r o n m e n t a l l y d e s i r a b l e behavior. For example, if G e r m a n y w e r e to o f f e r a g r a n t to c o m p a n i e s t h a t p r o d u c e d a d v a n c e d solar panels, w h i c h w e r e later m a n u f a c t u r e d as a r e s u l t of the grant, h o w w o u l d one level the p l a y i n g field to a s s u r e t h a t the panels d i d not have an u n f a i r a d v a n t a g e ? S h o u l d one do so? W h a t general s t a n d a r d s s h o u l d be a p p l i e d in c o n s i d e r i n g the issue? The O E C D t r e a t y also has a b e a r i n g on this. The n e x t piece
of this p a p e r
concerns
C. EU C A R B O N
the EU proposal.
TAX PROPOSAL 2
The p r o p o s e d EU directive, s t y l e d C o m m i s s i o n Proposal for C o u n c i l D i r e c t i v e i n t r o d u c i n g tax on c a r b o n d i o x i d e e m i s s i o n s and e n e r g y 3 p r o p o s e s to tax a n u m b e r of e n e r g y sources. The sources i n c l u d e coal, lignite, gas, peat, mineral oils, certain types of electricity* as well as m e t h y l and ethyl alcohol. The tax w o u l d fall on the e x t r a c t i o n or m a n u f a c t u r e of the products, or on t h e i r i m p o r t a t i o n into the EU, s u b j e c t to ad hoc relief for firms t h a t are b u r d e n e d w i t h h i g h e n e r g y c o n s u m p t i o n or that are h u r t by competitive problems in the EU m a r k e t p l a c e . It is c l e a r l y a m u d d l e d concept, a w k w a r d l y b a l a n c i n g e n v i r o n m e n t a l and e c o n o m i c interests. Worse, f r o m b u s i n e s s e s ' p o i n t of view, the p r o p o s l s fail to p r o v i d e t h a t the t a x is r e m i t t e d w h e n e n e r g y p r o d u c t s (say coal) or t h i n g s w i t h an e n e r g y c o n t e n t (say V o l k s w a g e n s 5) are e x p o r t e d f r o m the EU. In addition, of course, the e x p o r t e d item m a y be s u b j e c t to an import d u t y w h e n it come into the c o u n t r y of importation. That
2 The f o l l o w i n g m a t e r i a l s are d i s c u s s e d in an e x c e l l e n t paper p r e s e n t e d by Raoul S t e w a r d s o n at an O E C D Workshop, "Trade and Environment: PPMs Issues", Helsinki, Finland, 6 April 1994 ( h e r e i n a f t e r "Stewardson"). The s t r u c t u r e of the rest of t h i s p a p e r t r a c k s the S t e w a r d s o n paper. 3 ECOJ
1992 C196/I.
4 T h e r e t h e o r y here is t h a t the inputs to p r o d u c e e l e c t r i c i t y are exempt, so the tax s h o u l d fall on e l e c t r i c a l output m a d e w i t h such e x e m p t inputs.
made
5 I a s s u m e in all cases t h a t in G e r m a n y from G e r m a n parts.
the V o l k s w a g e n s
I discuss
are
1295 doubly disadvantages the item. That burden may translate into lost jobs, investment and government revenues. However, from an economist's point of view, that may be a correct result in the sense that the products come closer to bearing their full implicit environmental costs. The worse problem would be flight of investment capital. For example, companies may shift to producing coal outside the EU or making Volkswagens in countries with no comparable taxes, and exporting at least some of them to the EU. Obviously, the level of the tax will have a major bearing on this decision-making; the decision-making will occur firm by firm, and will be very difficult to predict. Firms that are asked if they would shift their activities to outside the EU as a result of the tax can be expected to exaggerate the tax's impact, so getting objective information will be difficult. This is where the EU's directive favoring companies with high energy consumption that are seriously affected b y t h e tax comes in. Note that it only helps if there is trouble on the EU market; trouble abroad is not touched. Thus, if all EU car makers are equally affected, the result is that they will get no relief from the tax even if the tax harms their US sales. Another obvious hole in the system is that there is no tax on energy intensive goods that are imported into the EU. This is weak from an environmental perspective and (stated from the safe vantage point of a university in the USA) timid from an international trade perspective. C. GATT RESTRICTIONS The General Agreement on Tariffs and Trade is the mechanism for regulating international trade. It recently changed its bureaucratic title to the World Trade Organization. Among its other functions, it is obligated to sort out trade conflicts among member States. The underlying concept of GATT is to reduce barriers to international trade, thereby increasing the wealth of all the participants, along the lines propounded by Adam Smith in The Wealth of Nations in 1776. GATT has virtually no environmental goals aside from some reservations in the treaty in favor of actions by member States to protect their environmental interests. Accordingly, one should expect little relief from GATT. Nevertheless, there are some sanctuaries from the pure "free trade" dogma of GATT i. As to exports: There can be no export subsidies for products. Article XVI:6.
RE 5: 8-1(J(
But
1296
there is a loophole in that under Article VI:4 indirect taxes" can be remitted with respect to a product when it is exported. Also, Article VI:4 prohibits anti-dumping or countervailing duties imposed on the importation overseas (say in Canada) of products from a GATT signatory in cases where the country of export (say England) remitted or exempted the product from its home tax. T The more complex problems concern energy inputs that find their way into final products, for example, the carbon tax component of a Volkswagen. The Uruguay Round Final Act contains an Agreement on Subsidies and Countervailing Duties which lets countries make adjustments for cumulative indirect taxes (e.g. VAT) on energy, fuels and oil used in the production process, to the production process as well as on single stage taxes, which the carbon tax is likely to be. a. Conclusions as to eneray Products One implication is that when coal is exported from the EU, the carbon taxed imposed on it can be remitted. Another is that the importer cannot slap on countervailing taxes or claim "dumping". b. Conclusions as to final Products Can an EU country remit the carbon tax on an exported Volkswagen? I believe so, whether the carbon tax is set like a VAT or as single stage tax. 2. As to imports: Article III:2 of GATT provides: "The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly of indirectly, to like domestic products."
" An indirect tax means a sales tax or VAT, etc., but not an income tax, Social Security contribution, or the like. "No product of the territory of any contracting party imported into the territory of any other contracting party shall be subject to anti-dumping or countervailing duty by reason of the exemption of such product from duties or taxes borne by the like product when destined for consumption in the country of origin or exportation, or by reason of the refund of such duties or taxes."
1297
The EU directive does not propose to place a tax on competing foreign goods (say Toyota automobiles from Japan) to make up for the fact that the foreign (non EU) manufacturer does not have a carbon tax. The big question is could it? A good case can be made that it can. Article III:2 allows the importing country to impose taxes on imported goods to account for taxes that were directly or ~ imposed on comparable domestic products. It is a fair reading that this permits an import duty to account for the carbon tax content of Volkswagens and other EU cars. Article II:2(a) embellishes on Article III:2 by providing that articles that embody imported materials are subject to the same opportunity for taxation. For example, it seems to mean that if Toyota made the bodies and tires of its cars (as opposed to merely assembling them) in the EU, but it exported its motors and electrical parts to the EU, then the EU could tax the final product on the electrical and engine parts, using some kind of proration system. a. Conclusions as to eneray p~od~cts The EU can apply compensating taxes to imported products, such as coal, to equate the foreign coal to the domestic level of carbon taxation, with no obligations to determine whether a similar tax was imposed on the imported product in the home (export) country. b. Conclusions as to final products The EU can impose taxes on imported goods that are not subject a carbon tax in the country of origin, and this tax can fall on the entire product (the Toyota) or its components, as the facts may dictate. F. OECD TREATY The OECD treaty is essentially the articles of membership of a club consisting of the wealthy nations of the world. The treaty contains variety of blandishments, but minimal enforcement provisions. The imposition of environmental taxes to reflect the full economic costs of particular activities and products (the "full costing principle") is a subject that falls within the OECD treaty's jurisdiction. The full cost pricing proposal is consistent with the all-important
1298
" p o l l u t e r pays" p r i n c i p l e a d o p t e d by O E C D members." The p r i n c i p l e is l e g a l l y in force as o f f i c i a l EU policy. 9 The p r i n c i p l e calls for g o v e r n m e n t s to avoid p r o v i d i n g s u b s i d i e s to polluters, and i n s t e a d to i n t e r n a l i z e e n v i r o n m e n t a l costs I°. The basic c o n c e p t is that the p o l l u t e r should b e a r the c o s t of m e a s u r e s to reduce p o l l u t i o n d e c i d e d on by p u b l i c a u t h o r i t i e s to assure that the e n v i r o n m e n t is in an " a c c e p t a b l e state". For example, if the US p r o p o s e d a s u r t a x on i m p o r t e d oil to fund its federal c l e a n - u p program, E u r o p e a n t r a d i n g p a r t n e r s p r o t e s t e d that the tax v i o l a t e d the p o l l u t e r pays p r i n c i p l e b e c a u s e it imposed a tax at a h i g h e r level on i m p o r t e d oil t h a n on US oil. The issue was p l a c e d b e f o r e the G A T T Council, w h i c h ruled the US was in v i o l a t i o n of the treaty. ~ There are i m p o r t a n t limits to the p o l l u t e r pays principle. First of all, the O E C D e n c o m p a s s e s a l i m i t e d n u m b e r of r e l a t i v e l y p r o s p e r o u s countries. Also, the p r i n c i p l e is w e a k in that it c o n t a i n s s i g n i f i c a n t exceptions. 12 Still, as the n u m b e r of OECD s i g n a t o r i e s
" The p r i n c i p l e was a d o p t e d in the OECD's " D e c l a r a t i o n on E n v i r o n m e n t a l R e s o u r c e s for the Future". The O E C D refers to the Organization for E c o n o m i c Co-operation and Development. The o r g a n i z a t i o n is the result of a t r e a t y among the c o u n t r i e s t h a t are t y p i c a l l y t h o u g h t of as the i n d u s t r i a l i z e d world. The O E C D has c o m m i s s i o n e d several studies of non c o m m a n d and control m e t h o d s for c o n t r o l l i n g e n v i r o n m e n t a l damage, e s p e c i a l l y E C O N O M I C I N S T R U M E N T S FOR E N V I R O N M E N T A L P R O T E C T I O N (J. O p s c h o o r & H. Vos. 1989). See aenerallv, Gaines, The P l l u t e r Pays PrincDle: F r o m E q u i t y to E n v i r o n m e n t a l Ethos, 26 Texas Int'l L a w J. 463 (991). " " D e c l a r a t i o n on E n v i r o n m e n t and the Environment, Paris, 1986.
Resources
for the Future",
OECD
•o Since then, it has lost it p u r e l y e c o n o m i c m e a n i n g and was i m p l i c i t y r e d e f i n e d to go b e y o n d p r e v e n t i v e m e a s u r e s a g r e e d u p o n in advance. ~i See 18 B N A Env. R p t r 659 (1987) i n c o n s i s t e n t w i t h GATT A r t i c l e XXII.I). p o l l u t e r pays p r i n c i p l e was not g e r m a n e m a t t e r f a l l i n g u n d e r GATT.
(US oil import fee h e l d The US p o s i t i o n was t h a t b e c a u s e the issue was a
12 A c c o r d i n g to Vos and Opschoor, the R e c o m m e n d a t i o n on the I m p l e m e n t a t i o n of the P o l l u t e r - P a y s P r i n c i p l e e x c e p t i o n s apply if c e r t a i n s p e c i f i e d c o n d i t i o n s w e r e met, i n c l u d i n g only limited to w e l l - d e f i n e d t r a n s i t i o n periods. As the authors point out, there w e r e n u m e r o u s ambiguities, such as the m e a n i n g of the t e r m "an a c c e p t a b l e state of e n v i r o n m e n t , " the length of t r a n s i t i o n periods, the t r e a t m e n t of a d m i n i s t r a t i v e costs, the a c c e p t a b i l i t y of c h a r g e s plus g r a n t s and so forth. In 1981 the O E C D E n v i r o n m e n t C o m m i t t e e r e v i e w e d a n u m b e r of these a m b i g u i t i e s and other p r o b l e m s and revised the c o n c e p t to a c h i e v e more effective use of p o l i c y instruments, p u r s u a n t to w h i c h p o l l u t e r s w o u l d bear the costs of
1299
increases, and as general sensitivity to environmental concerns mounts, the principle is likely to be of increased importance. Moreover, in this author's opinion it is a worthy principle; it should be considered on its merits, regardless of OECD membership. It is appropriate both as a moral and economic matter that polluters should pay for damages done. Adapting the principle -even in the absence of a treaty obligation -- reduces suspicions about the seriousness of a country's serious plans to join the fraternity of countries that want to control environmental degradation. In a nut shell, the OECD treaty is a friend to improving the environmental component of international trade when one considers burdening trade, but not when one considers subsidizing polluters, for example, by providing tax credits for pollution control equipment. That violates the polluter-pays principle. E. CONCLUSIONS First, a disclaimer: what has gone before is a brief analysis on one proposed tax. It is not a systematic study of the relationship of environmental taxes to international trade law and policy 13. Nevertheless, the picture that emerges is encouraging from the point of view of the alternative energy industry and government policy makers. As to GATT: The key facts are that the legal ability to impose an energy tax on imported goods means that energy products and manufactured goods with significant energy components and to the power lift the tax at the border, thereby assuring that EU goods are not handicapped when they are exported. Better, this seems to be equally true of energy products (coal) and energy-intensive output (Volkswagens and Toyotas). A bad feature is that there is still no alobal balance. Toyota and Volkswagen may conclude that they are better off selling into markets where are no such taxes. To do so, they may shift their manufacturing offshore. On the other hand, they will not be able to sell their products back to EU cheaply, so at least the EU territory's carbon tax system cannot be subverted by overseas manufacturers. As to OECD: the alterative energy industry has a sense that the OECD treaty in effect encourages taxes, but an enemy in that is discourages government polluters that choose to use alternative energy over energy inputs.
friend in the environmental subsidies for their present
keeping environmental quality at some publicly determined level, normally ruling out subsidies. Vos and Opschoor at pp. 27-28. 13 I am privileged to be involved in such a study, which is underwritten in part by the Center for Global Change. The Preliminary Report should be out fairly soon.