How a green tariff could save the carbon price

Crikey

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. 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.

Originally published by Crikey on January 6. Reproduced with permission.