The Key Stone in the Carbon Tariff Wall: the Alberta Oil Sands and the Legality of Taxing Imports Based on Their Carbon Footprint

Abstract

Can one nation – consistent with international trade law – tax imports or otherwise treat them differently based on the CO2 emitted in another country during production of the import? This paper analyzes the General Agreement on Tariffs and Trade (GATT), relevant World Trade Organization (WTO) decisions, and the considerable scholarly analysis that exists with respect to BTAs generally in concluding that such treatment of imports is legally permissible. In early 2013, the EU will vote on a proposed rule that seeks to classify crude oil coming into EU refineries based on “life-cycle greenhouse gas emissions,” including CO2 emitted during extraction. Canada, seeking to protect the crude being pumped from Alberta’s massive bitumen deposits (the same crude that would feed the controversial Keystone XL pipeline), has threatened to challenge the legality of the proposed EU rule before the World Trade Organization (WTO). The proposed EU rule would have significant implications, as technological advancements have allowed for a new boom in oil extraction from unconventional sources such as bitumen in Alberta and shale in North Dakota. These new extraction techniques emit more carbon dioxide than conventional oil drilling. As such, the proposed EU rule would affect many nations’ exports. Perhaps more significantly, the proposed EU rule would be the first to base its treatment of an imported product on greenhouse gas emissions that occur in another country. In that sense, it implicates the oft-floated idea of broader Border Tax Adjustments (BTAs) pursuant to which a carbon-conscious nation would tax all imports based on carbon consumed or greenhouse gases emitted during production. Finding such a production-based carbon BTA to be legal would provide a tool for carbon-pricing nations, frustrated by post-Kyoto climate negotiations, to begin taxing imports from nations (such as the U.S. and China) that have not adopted carbon pricing policies. This paper concludes that both the proposed EU rule and a broader production-based carbon BTA are legally permissible. Prior analyses reaching a contrary conclusion (or, more commonly, reaching no conclusion at all as to the legality of a production-based carbon BTA) have created obstacles to the legality of such a system where none exist.