Climate policy and border adjustment regulation: Designing a coherent response

The Australian Government's Clean Energy Legislative Package includes the legislative infrastructure for a carbon tax which came into full effect in July 2012. Although the legislation is comprehensive, we argue that it lacks a mechanism that adequately deals with the competing policy objectives of: (a) achieving reductions in greenhouse gas emissions; (b) not impairing national economic growth; and (c) ensuring that international obligations regarding response measures, such as a carbon tax, do not adversely affect developing countries. The potential policy frictions between these objectives might have been reduced had the Government included a well-known trade mechanism which could have provided a more coherent interface for these competing policy objectives. That mechanism is the 'border tax adjustment'. This paper explores a range of misunderstandings surrounding the use of border tax adjustments, which may well explain why they were not implemented. Furthermore, this paper will explain how, if properly understood, border tax adjustments could make a significant contribution to a consistent climate policy that balances the competing concerns of climate change, trade, economic and developmental policy objectives.