Taxing the Carbon Footprint

Many countries are concerned that unilateral restrictions on carbon emissions will hurt the competitiveness of domestic firms and induce carbon to leak to non-regulating countries. Academics and lawmakers alike have suggested that domestic emission policies be paired with border carbon adjustments (BCAs) – taxes levied on imports according to their embodied carbon content. Legal precedence suggests that pairing regulations that govern domestic producers with taxes on imported products would violate World Trade Organization rules, particularly National Treatment. Carol McAusland proposes that governments eschew cap and trade policies and emission taxes in favour of destination-based carbon policy. In particular, she proposes that governments tax domestic consumption of goods based on their carbon footprints. Such an approach would protect the competitiveness of domestic firms and (likely) satisfy WTO constraints. The downside to such a policy lies in implementation. A pure CFT – in which the unique carbon footprint of every good is calculated – would be prohibitively costly. Exempting some classes of goods from the CFT would reduce costs, as would the use of default footprints (whereby producers may opt to have their goods taxed based on a product-class specific baseline rather than their product’s actual footprint). Each of these approaches, however, would generate inefficiencies.

During her stay at CESifo, Ms McAusland will be building a theoretical model (or series of models) to address these inefficiencies (and hopefully identify solutions). Some of these inefficiencies are predictable. For example, consumers of goods taxed according to the default would not internalise the full social costs of these products. Other inefficiencies arise due to the vertical nature of many supply chains. An example of this is unravelling, whereby carbon-intensive upstream firms eschew socially desirable carbon mitigation because they know that their (carbon-unintensive) downstream users will ultimately choose to be taxed according to the relevant default CF. Similarly, over-processing may arise when supply-chains are global: exempting a downstream industry encourages multinationals to keep out of the regulated country all points in the production chain that are upstream of the exempt industry.

In addition to her current work on destination-based carbon policy, Ms McAusland is also interested in international trade and the environment, the relationship between public goods and skilled-labour migration as well as obesity policy. Her current research projects include the politics of environmental regulation and the incidence of green subsidies.

Carol McAusland is Associate Professor at the University of British Columbia and Canada Research Chair in Trade and Environment. Before joining UBC, she held faculty positions at the University of Maryland and the University of California, Santa Barbara. She has an MA and PhD in Economics from the University of Michigan as well as an MA and BA from the University of British Columbia. She served as a co-editor of Journal of Environmental Economics and Management (JEEM) from 2009 to 2012 and currently serves on the editorial boards of JEEM and the Journal of the Association of Environmental and Resource Economists (JAERE).