Design of the BTA determines the leakage debate and CP ground

The third design issue relates to trade in carbon-intensive goods. We argue that border tax adjustments for a carbon tax are necessary and appropriate. There is, however, no simple and clearly legal method of implementing a system of border tax adjustments to prevent so-called carbon "leakage," the shifting of production to countries without a carbon pricing mechanism. The key problem is that to set the border tax adjustment, information is needed about the particular production technology and sources of energy used to produce an item. In contrast, border tax adjustments under a value-added tax ("VAT") require only readily available data: for imports, knowledge of the item's price, and for exports, verification of export. n7 The necessary information may be difficult to obtain for a carbon tax. We consider a number of possible options and their legality, recommending a system of presumptive border tax adjustments that allow individual firms to provide evidence of lower emissions. The presumptive border tax can be based on average emissions from the production of like products in either the exporting or importing country. Using information from the exporting country is preferable, but obtaining that information may be more difficult, and using it raises additional trade-related legal issues. n8