A paper released today by the United Nations Environment Program and the World Trade Organization acknowledged that cap and trade legislation would be expected to have significantly harmful economic consequences, likely including a serious loss of international competitiveness. In response, governments considering such a policy would likely want to consider a border tax adjustment (BTA) system to mitigate the loss of competitiveness. The report goes on to say that such a BTA system would be permissible under the world trading system.

While it’s shocking in and of itself that a group like the UN Environmental Program is admitting that cap and trade is economically harmful, the report raises a good point concerning the BTA system that should be addressed by Congress.

A BTA system allows a tax to be levied on imports and an export rebate to be given on exports to reflect the influence of a tax on the relative prices in the domestic economy. Most countries with Value-Added Taxes (VAT), such as those found in Europe, employ BTA systems to prevent the VAT from putting their countries at a competitive disadvantage at home or abroad. Page 22 of the report states:

A number of WTO rules may be relevant to carbon taxes and cap-and-trade systems and related border measures, including core trade disciplines, such as the non discrimination principle. The provisions of the Agreement on Subsidies and Countervailing Measures SCM) may also be relevant to emission trading schemes for instance if allowances are allocated free of charge.

Moreover, detailed rules on border tax adjustments (BTAs) exist in the General Agreement on Tariff s and Trade (GATT) and the WTO SCM Agreement. These rules permit, under certain conditions, the use of BTAs on imported and exported products. Indeed, border adjustments on internal taxes are a commonly used measure with respect to domestic indirect taxes on the sale and consumption of goods, such as cigarettes or alcohol. The objective of a border tax adjustment is to level the playing field between taxed domestic industries and untaxed foreign competition by ensuring that internal taxes on products are trade neutral.”

The release of this report is a stunning development for two very important reasons:

1) It acknowledges de facto that cap and trade has harmful economic consequences. Again, this is co-written with the UN Environment Program, an adamant supporter of emission reduction targets, a firm believer in the IPCC report and that manmade emissions are significantly contributing to global warming and a firm believer that all nations, especially the developed ones should be “combating global warming.” If cap and trade is a jobs program, as President Obama and certain policymakers purport it to be, why are the harmful consequences on net so extensive that a country would need to offset their anti-competitive effects?

2) It raises a major new consideration that has previously escaped domestic debate. The House of Representatives is currently debating a massive, 1,200 page cap and trade bill on the floor. Whether one supports or opposes the bill, all participants in the debate have an interest in addressing this important new dimension of the debate. Before debating an incomplete bill, the House should consider whether a BTA regime is needed, and if so, task the appropriate Committees with its design. Legislators should seriously address this new development before debate concludes.