The case for taxing carbon at the border

What is the macro-economic case for border measures? A central tenet of economics is that the imposition of a border tax (a tariff) will always reduce global welfare. This holds even in the untypical case that a tariff increases the welfare of the country that imposes it. However, the existence of a global external effect like the one arising from GHG emissions overturns this rule. The imposition of an import tax on the CO2 content (including embedded carbon) of all goods imported into the EU from countries without carbon pricing or regulation would arguably reduce global carbon emissions and increase global welfare. The net effect of this action is to transfer, at least partially, carbon pricing across the globe. Border measures could be designed in a World Trade Organisation (WTO)-compatible way. The equity considerations enshrined in the United Nations Framework Convention on Climate Change (UNFCCC) could be addressed by rebating tax revenues according to the level of development. Analytical tools to establish responsibility and capability exist in the form of benchmarking and, more recently, commercial carbon foot-printing schemes.