Will the Price Ever be Right? Carbon Pricing and the WTO

Abstract

Since the creation of the GATT and later WTO, the global trade governance system has served multiple related purposes – the reduction of tariffs and other trade barriers, the creation of norms around international trade, and dispute resolution. Climate change provides an opportunity to extend the role of norms in global trade governance, because of the central role that carbon pricing plays in reducing emissions. For carbon pricing to be effective and not lead to a “race to the bottom”, it has to be applied across all trading countries at a similar level. We show that a system of carbon taxes and border carbon adjustments (BCAs) that equalizes the price of carbon across all traded goods and services is compatible with the letter and practice of the WTO. In fact, given the inherently global nature of climate change, such a system will only function if it is centered within the multilateral trading system. Thus a global institution is used for the purpose global institutions are created for – enabling the production of a global public good, a cleaner environment.

Keywords: trade, climate, WTO law, carbon pricing

JEL Classification: K, K32, K33, Q27, Q28, Q48, Q54, Q56, Q58