TOWARDS OVERCOMING THE CONFLICT BETWEEN ENVIRONMENTAL TAX LEAKAGE AND BORDER TAX ADJUSTMENT CONCESSIONS FOR DEVELOPING COUNTRIES

Abstract

Border tax adjustments (BTAs) may be able to alleviate concerns of reduced competitiveness for countries introducing environmental taxes and standards, while limiting the risk of companies relocating to developing countries to exploit lax environmental regimes—known as leakage. 1 However, the ability of industrialized nations to offer developing countries special trade privileges for developmental purposes, including border tariff exemptions on exported goods, provides what is referred to in this article as a “leakage loophole.” This scheme allows relocating companies to produce goods in developing countries at high environmental cost and sell them in the industrialized country they relocated from with no adjustment at the border at a potentially lower cost than domestically produced goods which have internalized their negative environmental externalities. This article considers tax methods that counter the ability of such trade privileges benefitting those wishing to relocate and exploit them as to prevent leakage and ensure any concessions are only available for whom they are intended. In light of current academic debate, this article uses the “best available technology” (BAT) standard to exemplify the potential grounds for adjustment exemption. Further, it considers the uses of border tax adjustments for any legitimate environmental goal, not simply for carbon emissions. This article is divided as follows, with the presumption that this article applies where World Trade Organization (WTO) law is prevalent. Part I provides a background on unilateral environmental objectives. Part II summarizes reasons why nations may take unilateral action for environmental purposes and how it may impact other nations. Part III introduces the concept of border tax adjustments as a potential trade-neutral environmental measure. Part IV identifies that some environmental taxes may aim to alter the production methods used to make a good instead of concentrating solely upon the environmental qualities of the final product. Part V introduces the notion that any tax incentives used to alter production methods could be dependent upon a producer using the BAT. Part VI explains how nations may withhold the introduction of domestic environmental taxes if they believe it would place their industry at a competitive disadvantage internationally. Part VII explains that some developing countries’ exported goods are exempted from border tariffs upon import into industrialized countries as a form of development aid and also attempts to identify the perceived intended beneficiaries of this aid. Part VII also examines how this exemption offers multi-national enterprises the opportunity to register in developing countries in order to exploit the concession, which is in contradiction of the exemption’s intended purpose. Part VIII proposes and critically assesses a number of original solutions to solve this real problem. Finally, this article summarizes and concludes by identifying the most effective solution.