Border Tax Adjustments for Carbon Taxes — The ODC Model

The killer problem for carbon taxes is that they favor foreign manufacturers, and we want manufacturing jobs. Any carbon tax will provoke calls for border adjustment taxes – or border tax adjustments (BTAs). The difficulty in imposing BTAs is great. Professor Peter Barnes of Duke has guided my thinking on the issues involved, and some of this comes directly from him.  But this is my primitive thinking, for which he is not to blame.

How can we distinguish between imported goods that were manufactured using coal-generated electricity and goods manufactured using solar energy?  To create the right incentives, we should make that distinction.  But administering the distinction is impossible.   

Consider, for example, a firm exporting from a nation with a variety of energy sources: its response to BTA might be simply to claim that the firm used low carbon energy sources to produce export goods to avoid BTA in a country with stricter policies. Is that a killer argument?

Furthermore, carbon emission (or any other bad item) is not equally bad to the US.  (The item may be equally bad to the world, but not to the US.)  For instance, air pollution generated in India or China from the use of coal eventually affects the US, but in a diminished way because of distance, compared to air pollution in Mexico or Canada (or Ohio).  Do we make those distinctions?

Maybe we should just settle for pretty good. There are “widely held views among climate change specialists that [BTAs] should be provided for only a few carbon-intensive basic products that are subject to stiff international competition. To go further would simply not be cost-effective because of the administrative and compliance costs involved.” Could VAT Techniques Be Used To Implement Border Carbon Adjustments?, Charles McClure, https://www.ibfd.org/IBFD-Products/Journal-Articles/Bulletin-for-International-Taxation/collections/bit/html/bit_2012_08_int_3.html.

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Meanwhile, a template for border tax adjustments exists – for chlorofluorocarbons and other ozone-depleting chemicals, in this IRS document: https://www.irs.gov/pub/irs-mssp/ozone_depleting_chemicals.pdf. Material below is from that document.

“Imported Taxable Product

“An imported taxable product is defined as any product (other than an ODC) entered into the United States for consumption, use, or warehousing, and is listed in the current Imported Products Table set forth in Treas. Reg. §52.4682-3(f), if any ODC was used as material in the manufacture or production of such product. [IRC §4682(c) and Treas. Reg. §52.4682-3(b)(1)].”

“[T]he tax due is computed as:

Base tax rate
Times
Ozone depletion factor for ODC
Times
Number of pounds of ODC
Equals
Total tax due. “

Here are the three factors:

  • “[T}he base tax amount on the sale or use of an ODC after 1995 is $5.35 per pound. In each year after 1995, the base tax amount is increased by 45 cents per pound.”
  • Ozone Depletion Factor
    “The ozone depletion factor reflects the potential ozone depletion that results from one kilogram of a given chemical compared to the ozone depletion that results from one kilogram of CFC-11 (trichlorofluoromethane). The . . . table [on page 8 of https://www.irs.gov/pub/irs-mssp/ozone_depleting_chemicals.pdf] is reproduced from IRC section 4682(b).”
  • Appendix C of https://www.irs.gov/pub/irs-mssp/ozone_depleting_chemicals.pdf provides the Table listing ODC weights.

Further reading:  Carbon Border Tax Adjustment (CBTA) from WTO point of view, Sungjin Kang, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1628718

 

 

 

 

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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