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Crimp, Mary Kate --- "Environmental taxes: can border tax adjustments be used to counter any market disadvantage?" [2008] NZJlEnvLaw 3; (2008) 12 NZJEL 39

Last Updated: 15 February 2023


Environmental Taxes:

Can Border Tax Adjustments be used to Counter Any Market Disadvantage?

Mary Kate Crimp*

The object of this research paper is to analyse the use of environmental taxes as a mechanism through which to regulate environmental pollution. In particular, it focuses on the criticism that the use of environmental taxes reduces domestic market competitiveness and drives producers to relocate to non-taxing countries known as “pollution havens”. The paper questions whether this criticism can be addressed through the use of Border Tax Adjustments and analyses whether such an approach would be consistent with World Trade Organization law. It concludes that it is important for New Zealand to consider alternative methods of addressing environmental pollution. In this respect, environmental taxes may be of some assistance. While acknowledging that environmental taxes would open New Zealand up to some risk of businesses moving to “pollution havens”, it concludes that this risk, although minimal in the first place, could be further minimised through the implementation of Border Tax Adjustments. It does note, however, that in order for a Border Tax Adjustment to comply with World Trade Organization law, it cannot be calculated based upon the production process methods utilised in the production of the products in question.

*This paper was written for the LLM seminar Environmental Legal Issues (Laws 544) for the Faculty of Law at the Victoria University of Wellington 2008.


Almost all of the Earth’s ecosystems have been appreciably transformed through human behaviour “causing widespread degradation of ecosystem services”.1 For this reason, environmental awareness, responsibility, and sustainability have become important issues worldwide. Despite this understanding, however, the quality of the environment has continued to deteriorate in most parts of the world.2 This was recognised at the Johannesburg World Summit on Sustainable Development where it was declared that “[t]he global environment continues to suffer”.3 The object of this paper is to explore the use of tax as a regulatory mechanism to enhance Earth’s environmental wellbeing. In particular, it will focus on the criticism that environmental taxes will reduce market competitiveness and drive producers to relocate to non-taxing countries. Specifically, it questions whether this criticism can be addressed through the use of Border Tax Adjustments (“BTAs”).

The paper initially discusses why New Zealand should consider using environmental taxes as a means to protect the environment and encourage environmental sustainability. Specifically, the following section traverses the traditional methods for regulating environmental matters and discusses why other countries have shifted to the use of economic instruments, and in particular environmental taxes, as a means of achieving sustainable development. An overview of environmental taxes and how they can benefit society and the environment is then provided. In contrast, the subsequent section identifies the perceived disadvantages to the use of environmental taxes, focusing on the concern that their use will lower market competitiveness and drive industries overseas to non-taxing countries. The paper next discusses whether or not BTAs can be utilised to counter any market disadvantage created by environmental taxes. In particular, it questions whether BTAs based upon environmental taxes are consistent with, or can be justified under, World Trade Organization (“WTO”) law. Finally, it briefly asks whether BTAs are in fact necessary.

The conclusion drawn is that it is important for New Zealand to consider alternative methods of addressing environmental pollution. In this respect, environmental taxes may be of some assistance. While it is acknowledged that environmental taxes would open New Zealand up to some risk of businesses moving to “pollution havens”, it is concluded that this risk, although minimal in the first place, could be further minimised through the implementation of BTAs. It is noted, however, that in order for a BTA to comply with WTO law, it

  1. Benjamin J Richardson & Stephen Wood (eds), Environmental Law for Sustainability (Hart Publishing, Portland, 2006) 1.
  2. Ibid.
  3. UN Department of Economic and Social Affairs, “Johannesburg Declaration on Sustainable Development” (4 September 2002) A/CONF 199/20, para 13.

cannot be calculated based upon the production process methods utilised in the production of the products in question.


Protection of the environment is an important issue worldwide. This section considers whether environmental taxes should be used in New Zealand as a means to protect the environment and encourage environmental sustainability.

2.1 Traditional Regulation of Environmental Matters

Traditionally, environmental matters have been regulated through the “command-and-control” technique. This has been described as referring to the prescriptive nature of regulation, where a command is issued and is then followed up by a negative sanction, the control.4

Command-and-control regulations are generally characterised by centrally set standards implemented through environmental licences or permits.5 Such standards tend to be set at levels that are politically acceptable.6 For example, within New Zealand, the f ishing industry is regulated through a quota management system which aims to ensure commercial fish stocks are managed in a controlled and sustainable way.7 In terms of recreational fishers, the quota management system sets size and quantity limits on fish caught. It is a criminal offence for a recreational fisher to exceed these set requirements.8

2.2 The Problem with Regulation by way of Command-and-Control

Command-and-control regulations have been criticised for their cost and their failure to stimulate significant innovation.9 In particular, the cost of enforcing command-and-control regulations lies with the Government and therefore the public in general. Furthermore, by setting a limit on the appropriate level of

  1. Carolyn Abbot, “Environmental Command Regulation” in Richardson & Wood, supra note 1, at 61.
  2. Ibid.
  3. Richard L Ottinger & William B Moore, “The Case for State Pollution Taxes” (1994) 12

Pace Environmental Law Review 103, at 104.

  1. Ministry of Fisheries, at <> (accessed 4 May 2008). 8 Ibid.

9 Michael Bothe, “Economic Instruments for Environmental Protection: Introduction to the European Experience” in Klaus Bosselmann & Benjamin J Richardson (eds), Environ- mental Justice and Market Mechanisms: Key Challenges for Environmental Law and Policy (Kluwer Law International, London, 1999) 251.

pollution or harm, command-and-control regulations alone arguably do not encourage the development of technology to reduce pollution or harm levels lower than necessary.10 Businesses, however, may attempt to achieve better than current standards where command-and-control regulations are supported through consumer pressure.11

In addition to the above criticism, it is also noted that, despite the use of command-and-control regulations,12 New Zealand’s greenhouse gas (“GHG”) emissions are still increasing. Specifically, as illustrated in the table below, New Zealand’s GHG emissions (excluding those from the land use, land use change, and forestry sector) were 26 per cent higher in 2006 than the 1990 level.13


This is significant given the fact that New Zealand ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change14 (“the Protocol”) on 19 December 2002.15 The Protocol itself came into force on 16 February 2005.16 Pursuant to Article 3 and Schedule 2 of the Protocol,17 New Zealand has committed to reducing its carbon emissions to 1990 levels.

  1. Ottinger & Moore, supra note 6, at 105.
  2. Tony Clayton, Anthony M H Clayton & Nicholas J Radcliff, Sustainability: A Systems Approach (Earthscan Publications Limited, London, 1996) 117.
  3. See for example the Ozone Layer Protection Act 1996.
  4. Ministry for the Environment, New Zealand’s Greenhouse Gas Inventory 1990 – 2006: An Overview (Ministry for the Environment, Wellington, 2008) 5.
  5. Kyoto Protocol to the United Nations Framework Convention on Climate Change (1998) 37 ILM 22.
  6. United Nations Framework Convention on Climate Change (9 May 1992) 1771 UNTS 107.
  7. Ibid.
  8. Kyoto Protocol to the United Nations Framework Convention on Climate Change, supra note 14, Art 3 and Schedule 2.

Accordingly, regulation by way of command-and-control does not appear to sufficiently meet the environmental needs of New Zealand. Therefore, it is important for New Zealand to establish alternative methods by which environ- mental use, and in particular pollution, can be regulated more efficiently.

2.3 Economic Regulation of Environmental Matters

In an attempt to adopt more cost-effective and efficient environmental policies,18 other countries have implemented economic instruments to regulate environ- mental matters. These are intended to “induce relevant actors to observe an environmentally friendly behaviour in a more cost-efficient way”.19 In other words, economic regulations are aimed at achieving environmental improve- ment in a cheaper manner.

Taxes on environmentally undesirable behaviour are amongst the economic instruments that are considered appropriate for environmental regulation. This form of taxation is known as environmental tax. It is also known as eco- tax. Such taxation has been used for a long time within Central and Eastern European countries where pollution charges and penalty rates were introduced as early as the 1970s.20 In the last decade, environmental taxes have also been used extensively across the rest of Europe.21 In particular, countries have introduced an increasing number of:22

  1. Michael Bothe, “Economic Instruments for Environmental Protection: Introduction to the European Experience” in Bosselmann & Richardson, supra note 9, at 251.
  2. Ibid.
  3. Agnieszka Laskowska & Frank Scrimgeour, “Environmental Taxation: The European Experience” in Conference Papers — New Zealand Agricultural and Resource Economic Society Annual Conference (2002) (Blenheim, 5–6 July 2002) 5.
  4. Ibid, at 18.
  5. Ernst-Ulrich Petersmann, “Environmental Taxes and Border Tax Adjustment” in Richard L Revesz, Philippe Sands & Richard B Stewart (eds), Environmental Law, and Economy, and Sustainable Development (Cambridge University Press, Cambridge, 2000) 138.

Such use of environmental taxes is proving to be environmentally effective.23 By way of example, the imposition of a sulphur tax in Sweden in 1991 has caused a reduction in the sulphur content of fuel oils by almost 40 per cent below the legal standards set, and a carbon dioxide tax in Norway has reportedly reduced emissions from stationary combustion by up to 21 per cent per year.24

2.4 Summary

It is necessary for New Zealand to consider alternative methods of regulating environmental damage, especially given the fact that command-and-control regulations do not encourage polluter responsibility. Furthermore, despite its obligation under the Protocol to reduce carbon emissions to 1990 levels, New Zealand’s carbon emissions are in fact increasing from year to year.

Given the success that overseas countries appear to have had in reducing pollution through the use of environmental taxes, perhaps New Zealand should consider utilising them as an alternative environmental regulatory mechanism.


3.1 How can Environmental Taxes be Utilised?

Environmental taxes can be utilised as both a positive incentive and a negative incentive. As a positive incentive, environmental tax subsidies enable those who improve their environmental practices to earn money doing so.25 For example, in the United States, the Maryland Clean Energy Incentive Act 2000 offers a set of tax incentives to Maryland residents and businesses to use energy-efficient and renewable energy products.26

In contrast, as a negative incentive, environmental taxes impose a tax on those who cause environmental damage. For example, many Scandinavian countries have used energy and carbon taxes to limit the harm incurred through the use of fossil fuels. These taxes have included:27

  1. Volker Röben, “Alternatives to Direct Regulation” in Fred L Morrison & Rüdiger Wolfrum (eds), International, Regional and National Environmental Law (Kluwer Law International, The Hague, 2000) 659.
  2. Laskowska & Scrimgeour, supra note 20, at 5.
  3. David Dreisen, “Economic Instruments for Sustainable Development” in Richardson & Wood, supra note 1, at 284.
  4. Rosemany Lyster & Adrian Bradbrook, Energy Law and the Environment (Cambridge University Press, Melbourne, 2006) 190 & 191.
  5. Ibid.

[T]axes on the energy content or the energy source; carbon taxes based on the carbon content of the fuel, sulphur and nitrogen taxes on the sulphur dioxide and nitrous oxide content of the fuels, as well as an excise on electricity production and consumption. Estimations of the impact of these taxes indicate decreases in carbon dioxide of between 3 [per cent] and 15 [per cent].

The purpose of such tax is, of course, to place a burden on people who wish to carry out activities that society wants to discourage.28

3.2 The Advantages of Environmental Taxes

Theoretically, environmental taxes benefit society by allocating the burden of the cost of the environmental harm caused on those who are responsible for the harm in question. Accordingly, it can be said that environmental taxes are more compatible with the Polluter Pays Principle (“PPP”) than command-and- control regulations.29 In particular, the PPP promotes the idea that those who are responsible for harming the environment should bear the cost of avoiding, eliminating, or compensating for such harm.30 It is primarily an economic principle, intended to guide the allocation of costs between government and the private sector for domestic pollution and the protection of national environments.31 Environmental taxes are therefore consistent with the PPP because they shift the burden of financing environmental measures from taxpayers in general to those who are responsible for environmental harm.32

Furthermore, environmental taxes can act as both a deterrent and an incentive to polluters. In effect, the aim of a PPP tax is to internalise the cost of environmental pollution. Notionally, this means that producers will be deterred from increasing any pollution output and will aspire to improve the waste profile of their products as a means of lessening any tax imposed.33 This structure should act as an incentive for producers to lower any undesirable emissions as much as possible to reduce any tax charged. For example, energy and resource taxes should continuously encourage all operators to improve their energy productivity and resource use efficiency, and continuously discourage them to permit inefficient practices that waste energy or materials.34

  1. Ottinger & Moore, supra note 6, at 105.
  2. Kalle Maatta, Environmental Taxes: An Introductory Analysis (Edward Elgar Publishing, Cheltenham (UK), 2006) 76.
  3. Roda Mushkat, “Environmental Sustainability: A Perspective from the Asia-Pacific Region” (1993) 27 U BC L Rev 153, at 174.
  4. Ibid.
  5. Maatta, supra note 29, at 76.
  6. David Dreisen, “Economic Instruments for Sustainable Development” in Richardson & Wood, supra note 1, at 284.
  7. Clayton, Clayton & Radcliff, supra note 11, at 117.

Moreover, environmental taxes should act as an incentive for producers to create cleaner production methods and pollution-reduction technologies so as to reduce their environmental tax payments.35 This can be contrasted with the command-and-control regulations, where there appears to be little inducement for parties to lower undesirable emissions below the set standard. Accordingly, an environmental tax should create an economic incentive for polluters to achieve higher standards than are required by command-and-control regulations.36 In addition to affecting behaviour, environmental taxes also generate gov- ernment revenue. The generation of this revenue would then create a source from which government-funded environmental clean-up operations could be paid.37 In contrast, such revenue would not arise under the command-and- control regulations except to the extent that fines are imposed for a breach of regulation.38 In reality, it seems unlikely that such fines would exceed the

administrative cost of enforcing the regulation in question.

The generation of government revenue then raises the possibility of some- thing called a “double dividend”. This refers to the double benefit that may be obtained from imposing environmental taxes: the environmental benefit from charging the full cost of environment resources and the economic benefit from a reduction in other taxes.39 This allows revenue from environmental taxes, which produce the first environmental dividend, to then be able to be used to reduce other taxes, thereby producing the second tax efficiency dividend.40

Finally, environmental taxes also offer greater flexibility to polluters. In particular, pursuant to an environmental tax regime, polluters would remain free to react to the tax imposed in any way they see fit.41 Specifically, it is up to the polluters to determine what they view as the most cost-effective manner to address the pollution they are creating.42


Despite these apparent benefits, environmental taxes have not been used more widely. This is due to a number of perceived disadvantages. In particular, it is

  1. Ernst-Ulrich Petersmann, “Environmental Taxes and Border Tax Adjustment” in Revesz, Sands & Stewart, supra note 22, at 138.
  2. Clayton, Clayton & Radcliff, supra note 11, at 117. 37 Ibid, at 116.
  3. Ernst-Ulrich Petersmann, “Environmental Taxes and Border Tax Adjustment” in Revesz, Sands & Stewart, supra note 22, at 139.
  4. Laskowska & Scrimgeour, supra note 20.
  5. The Treasury, at <> (accessed 4 May 2008).
  6. Ernst-Ulrich Petersmann, “Environmental Taxes and Border Tax Adjustment” in Revesz, Sands & Stewart, supra note 22, at 138.
  7. Ibid.

possible that environmental taxes may not be paid by the polluter because any additional production cost may be passed on to consumers by raising the cost of the end product.43 This in turn could negate any incentive for producers to reduce their pollution, whether by reducing emissions or through the creation of a more environmentally friendly process.

A further criticism of environmental taxes is how to determine what tax rate should be applied. Naturally, any tax rate applied should be high enough to prevent pollution at levels which cause damage to society by encouraging the use of cleaner processes.44 However, where the cost of such processes is more than the tax imposed, it would be economically sounder for the producer to pay the tax instead of addressing the environmental damage being caused.45 Environmental taxes are also viewed as legitimising or condoning environ- mental damage by those who are willing and able to pay the tax involved.46 It is argued that in this light, environmental taxes are inferior to traditional command-and-control regulations which ban activities, at least from a certain level, outright.47

Finally, a major concern about the use of environmental taxes is that such taxes might reduce the national competitiveness of affected businesses by increasing industry costs.48 By way of example, the domestic taxation of CFC emissions would increase the cost of producing and selling refrigerators. This in theory would lead to domestic consumers purchasing refrigerators from importing countries that do not impose a tax on CFC emission. It is this fear that this research paper intends to focus on.

As stated by Ralph Nader before the US Senate Finance Committee on the results of the Uruguay Round of WTO negotiations:49

The Uruguay Round is crafted to enable corporations to ... pit country against country in a race to see who can set the lowest wage levels, the lowest environmental standards, the lowest consumer safety standards ... nations do not violate the GATT rules by pursuing too weak consumer, labour ... and environmental standards ... Any demand that corporations pay their fair share of taxes, provide a decent standard of living to their employees or limit their pollution of the air, water and land will be met with the refrain, “You can’t

  1. Clayton, Clayton & Radcliff, supra note 11, at 117. 44 Ibid.
  2. David Dreisen, “Economic Instruments for Sustainable Development” in Richardson & Wood, supra note 1, at 284.
  3. Australian Government Department of the Environment, Water, Heritage and the Arts, at

<> (accessed 4 May 2008).

  1. Ibid.
  2. Lyster & Bradbrook, supra note 26, at 190 & 191.
  3. Frieder Roessler, “Environmental Protection and the Global Trade Order” in Revesz, Sands & Stewart, supra note 22, at 114.

burden us like that. If you do, we won’t be able to compete. We’ll have to close down and move to a country that offers us a more hospitable business climate”.

This has occurred within New Zealand. In 2005, the multinational minerals company Rio Tinto Alcan (known as Comalco) indicated that in light of New Zealand’s commitment pursuant to the Protocol it may be forced to close its Tiwai Point aluminium smelter in Southland, which then employed 800 people.50 More recently, the same company has threatened again to close its Tiwai Point aluminium smelter, move its production offshore, and dismiss approximately 3,500 workers if the New Zealand Government’s proposed emissions trading bill, which effectively taxes all GHGs, is passed in its current form.51

It has been stated that should pollution-intensive industries move overseas to non-taxing countries, New Zealand would suffer an economic loss but the planet would be no better off because the pollution is still occurring, albeit in a different part of the world.52 Accordingly, on the face of it, the concern that businesses will move to non-taxing countries should environmental taxes be implemented is a real one. It would be unpractical and uneconomic for a company to stay within New Zealand if it were cheaper for the company to manufacture the same goods overseas in a non-taxing country and import them here. This in turn would not seem to meet the aim of protecting the environment.


It has, however, been suggested that this concern can be addressed by the imposition of a BTA. In particular, it has been stated that BTAs will assist in eliminating the “artificial advantage adhering to firms that manufacture goods or provide services for world markets, from countries that fail to tax or otherwise price carbon emissions at prevailing world levels”.53

In its simplest form, a BTA consists of the imposition of a tax on imported products that is equivalent to the tax borne by like domestic products. Exported products are usually exempted from the taxes of their country of origin.54 By

  1. Chris Mole, “Talk of Comalco’s Departure ‘Premature’”, NZ Energy and Environment Digest (23 March 2005), at <> (accessed 6 June 2008).
  2. Martin Kay, “Emissions Bill ‘puts smelter at risk’” (13 May 2008) Dominion Post, Wellington, at <> (accessed 6 June 2008).
  3. Brian Fallow, “Don’t Bother with Emissions Trading Law, Business Lobby tells MP” (17 April 2008) New Zealand Herald, Auckland, at <> (accessed 8 June 2008).
  4. Carbon Tax Centre, at <> (accessed 2 July 2008).
  5. Ernst-Ulrich Petersmann, “International Trade Law and International Environmental Law: Environmental Taxes and Border Tax Adjustment in WTO Law and EC Law” in Revesz, Sands & Stewart, supra note 22, at 141.

way of example, New Zealand can impose an import fee or tax on products that enter New Zealand from Australia that is equal to a domestic tax on the same product. Conversely, if the same product was exported from New Zealand to Australia, New Zealand would exempt the product from domestic taxes because it would be taxed at the Australian rate.

Accordingly, the purpose behind a BTA is to maintain the national competi- tiveness of markets internationally. For New Zealand products sold in Australia to remain competitive, they cannot be burdened with an additional tax. On the other hand, for New Zealand products to remain competitive within New Zealand, like products imported from non-taxing countries must be subject to the same tax.


Arguably, however, a BTA in respect of environmental taxes may contravene WTO trade law. In particular, for a BTA on imports to be acceptable under WTO law, it must comply with Articles I, II:2(a), and III of the General Agreement on Tariffs and Trade55 (“GATT”).

GATT is an international agreement that governs the international trade in goods between its 152 member states, including New Zealand.56 The GATT is a treaty that has evolved through a series of trade rounds aimed at achieving a reduction in tariffs and other trade barriers.57 Although the WTO replaced the GATT in 1994, the GATT still exists as the WTO’s umbrella treaty for trade in goods.58

6.1 Article II:2(a)

The primary provision in the GATT relating to BTAs is Article II:2(a). This states that:59

Nothing in this Article shall prevent any contracting party from imposing at any time on the importation of any product:

  1. General Agreement on Tariffs and Trade (30 October 1947) 55 UNTS 187.
  2. World Trade Organization (“WTO”), at <> (accessed 5 May 2008).
  3. John H Jackson, The World Trade Organization: Constitution and Jurisprudence (Routledge, London, 1998) 12.
  4. WTO, supra note 56.
  5. General Agreement on Tariffs and Trade, supra note 55, Art II:2(a).

(a) a charge equivalent to an internal tax imposed consistently with the provi- sions of paragraph 2 of Article III* in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part;

Accordingly, charges on imports (e.g. a BTA) that are equivalent to an internal tax are not subject to the GATT Article II provisions on tariffs.60 In effect, Article II:2(a) therefore contains an exception to the general rule contained in Article II:1 of the GATT which states that “[e]ach contracting party shall accord to the commerce of the other contracting parties treatment no less favourable than that provided for” in the schedules of concession.61

6.2 Article III:2

As stipulated in Article II:2(a) of the GATT, any charge imposed pursuant to Article II:2(a) must comply with Article III:2 of the GATT.62 This states that:

The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.*

Paragraph 1 of Article III contains the non-discriminatory discipline of national treatment. Specifically, it prohibits internal discrimination against imported merchandise in comparison to domestic “like” products on the basis of internal taxation or regulation.63 Therefore, while Article II appears to allow the use of a BTA, Article III requires any tax charged to be consistent with the tax charged on domestic goods of the same kind. Accordingly, a violation of Article III will occur where a foreign product is subject to a tax “in excess” of the tax imposed

  1. Pauwelyn Joost, “U.S. Federal Climate Policy and Competitiveness Concerns: The Limits and Options of International Trade Law” (Working Paper, Prepared by the Nicholas Institute for Environmental Policy Solutions, Duke University, April 2007) 18.
  2. General Agreement on Tariffs and Trade, supra note 55, Art II:1. 62 Ibid, Art II:2(a).

63 Richard Westin, Environmental Tax Initiatives and Multilateral Trade Agreements: Dangerous Collisions (Kluwer Law International, Cambridge (United States), 1997) 6 & 7.

on the same domestic product. Such an approach is consistent with the overall objective of the GATT, namely to reduce barriers to trade. Without Article III, a BTA could be used for protectionist purposes to create an advantage for local producers of goods.

It is noted that Article III:2 of the GATT was considered in the Appellate Body case of Canada — Certain Measures Concerning Periodicals.64 In particular, the Appellate Body determined that Article III established a two- tiered test. Firstly, it has to be determined whether the products in question (the imported product and the domestic product) are “like” products. If the answer to this is yes, then an analysis must be undertaken to determine whether or not the imported goods are taxed “in excess” of the domestic products.65

6.3 Article I

Also relevant to the implementation of BTAs is Article I of the GATT. This contains the General Most-Favoured-Nation Treatment principle (“the MFN principle”), which requires:

any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country ... [to] be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.

The effect of this principle is to spread negotiated trade concessions amongst WTO members irrespective of their level of development.66 Article I:1 of the GATT prohibits both de jure and de facto discrimination between WTO members.67 De jure discrimination occurs where measures are imposed that distinguish between goods on the basis of their origin. De facto discrimination occurs where measures imposed are not openly discriminatory, but which, in practice, do impose heavier burdens on goods on the basis of their origin.68

  1. Canada — Certain Measures Concerning Periodicals (30 July 1997) WT/DS31/AB/R (Panel, WTO).
  2. General Agreement on Tariffs and Trade, supra note 55, Art III.
  3. Mitsuo Matsushita, Thomas J Schoenbaum & Petros C Mavroidis, The World Trade Organization: Law, Practice, and Policy (2nd ed, Oxford University Press, New York, 2006) 146 & 147.
  4. Canada — Certain Measures Affecting The Automotive Industry (31 May 2000) WT/DS139/ AB/R (Appellate Body, WTO) para 78.
  5. Matsushita, Schoenbaum & Mavroidis, supra note 66, at 148.


A potential conflict between the GATT provisions described above and a BTA based on environmental taxes depends upon how the environmental tax is structured. In particular, it would seem obvious to say that in terms of environmental taxes, such taxes should be linked as closely as possible to the source and amount of pollution created. Accordingly, it would be ideal for polluting emissions arising during the production or consumption process to be taxed directly.69 In terms of imported products, a BTA would therefore seek to impose a tax on those products based upon the production processes and methods utilised, and environmental damage caused, in another country. Accordingly, although two imported products may appear identical, due to the production process methods adopted, one product may be taxed at a higher rate than the other.

Alternatively, such direct taxation of polluting emissions through environ- mental taxes may not be feasible. For example, it may be difficult to identify the source of pollution or accurately quantify the volume of polluting emissions. In such cases, environment taxes may be charged on the final product “the production or consumption of which gives rise to the pollution in question”.70

In the latter situation, an adjustment for an environmental tax that is levied equally on both the domestic and imported final product is defensible under world trade law.71 This is because the same tax is being applied to the same end products whether the product is created domestically or imported. The issue that remains, however, is whether taxes on products that are consumed in the production process (e.g. energy) are permissible pursuant to Articles II and III of the GATT.72


In terms of Article III:2 of the GATT, a BTA cannot be imposed on an imported product unless it relates to an “internal tax or other internal charge ... applied, directly or indirectly” to a domestic product. Furthermore, the products in

  1. Ernst-Ulrich Petersmann, “Environmental Taxes and Border Tax Adjustment” in Revesz, Sands & Stewart, supra note 22, at 139.
  2. Ibid.
  3. Frank Biermann & Rainer Brohm, “Implementing the Kyoto Protocol without the USA: The Strategic Role of Energy Tax Adjustments at the Border” (2005) 4 Climate Policy 289, at 293.
  4. Javier de Cendra, “Can Emissions Trading Schemes be Coupled with Border Tax Adjustments? An Analysis vis-à-vis WTO law” (2006) 15(2) RECIEL 131, at 141.

question must amount to “like” products, and the BTA applied cannot exceed the domestic internal tax or charge.

Accordingly, Article III:2 establishes three issues. Firstly, does a tax on pollution amount to an internal tax or charge applied indirectly or directly to a domestic product? Secondly, are the products in question “like” products and, thirdly, is the tax applied to the imported products “in excess of ”73 the tax on the like domestic products?74

8.1 An Internal Tax Applied Directly or Indirectly to a Domestic Product

Prima facie, one would think that a pollution tax would amount to a tax that is applied indirectly to products; therefore, it would amount to a tax that is covered by Article III of the GATT. In fact, given the use of the word “indirectly” in Article III, it is hard to imagine that any charge or tax would be excluded from its scope.

This issue was touched on by the GATT Working Party on Border Tax Adjust- ments 1970 (“the Working Party”).75 In particular, the Working Party agreed that taxes directly levied on products (e.g. sales, value-added, and excise taxes) were eligible for tax adjustments pursuant to Article III.76 In contrast, the Working Party stated that certain taxes that were not directly levied on products (e.g. payroll or income taxes) were not eligible for tax adjustments.77

The examples of adjustable and non-adjustable taxes, as identified by the Working Party, clearly draws a distinction between product taxes (e.g. sales, value-added, and excise taxes) and producer taxes (e.g. payroll or income taxes). This distinction was confirmed by the WTO Dispute Panel in United States

— Income Tax Legislation (DISC).78

Product taxes are therefore adjustable, the assumption being that these kinds of taxes are borne by consumers. In particular, it is thought that a tax- payer will shift the cost of these taxes “forward” so that they are eventually reflected in the final price of the product.79 On the other hand, producer taxes are not adjustable. The rationale behind this is that these taxes are supposedly

  1. General Agreement on Tariffs and Trade, supra note 55, Art III. 74 Ibid.
  2. Report of the Working Party on Border Tax Adjustments (20 November 1970) L/3464, paras 14 & 15.
  3. Ibid, at para 14.
  4. Ibid.
  5. United States — Income Tax Legislation (DISC) (1977) BISD/23S/98 (Panel, WTO). 79 De Cendra, supra note 72, at 138.

borne by manufacturers. Specifically, it is assumed that such taxes are shifted “backwards” and so are not reflected in the final price of the product.80 It is noted that this characterisation, however, seems unnatural given that it is unlikely a manufacturer would not pass on some or all of their expenses, including payroll expenses, to consumers where possible. Despite this, the issue becomes whether environmental taxes should be classified as a product tax or a producer tax, the latter being excluded from the scope of Article III of the GATT.

The Working Party in its report adopted on 2 December 1970 did touch briefly on taxes that were not easily categorised. However, it stated that it could not reach agreement on whether or not “[t]axes occults” including taxes on “advertising, energy, machinery and transport” were eligible for BTAs.81 It further stated that although “[i]t was generally felt that while this area of taxa- tion was unclear, its importance — as indicated by the scarcity of complaints” did not warrant further examination.82

A comparison, however, between environmental taxes on pollution and producer taxes indicates that such environmental taxes could be described as product taxes that are applied indirectly to products. In particular, environ- mental taxes relate to a tax on the energy used during, or pollution created from, the product production processes. Accordingly, it is still linked directly to the product. In comparison, income tax is a tax on the income received by a taxpayer. It is not necessarily linked directly to one product, nor is it determined by the sale of products only. Instead, a number of variables can affect the amount of income received by a manufacturer.

Furthermore, the WTO Dispute Panel has confirmed that “materials” used for the manufacture of domestic products may be taken into account in the imposition of BTAs. In particular, in the case of United States — Taxes on Petroleum and Certain Imported Substances83 a dispute arose when the United States implemented legislation84 dealing with the clean-up of hazardous waste sites.85 In basic terms, this legislation imposed a domestic tax on certain chemicals and imposed a tax on imports that were produced or manufactured using those same chemicals.86 The legislation in question required each importer to provide information as to the use of the taxed chemicals in their production processes. The tax was then calculated based upon how much tax the importer

  1. Ibid, at 139.
  2. Report of the Working Party on Border Tax Adjustments, supra note 75, para 15. 82 Ibid.
  3. United States — Taxes on Petroleum and Certain Imported Substances (17 June 1987) BISD/34S/136 (Panel, WTO).
  4. United States Superfund Amendments and Reauthorization Act of 1986.
  5. United States — Taxes on Petroleum and Certain Imported Substances, supra note 83, para 2.1.
  6. Ibid, at paras 2.1 to 2.6.

would have had to pay had the chemical been produced within the United States.87 Where an importer refused to provide the information requested, the tax imposed was based upon the predominant production method employed in the United States.88 In this case, the WTO Panel held that the United States was allowed to impose an import tax on imports that had used the chemicals, “as materials in the manufacture or production” of those imports, which were the subject of a domestic tax.89 More importantly, however, the Panel did not specify whether or not the chemicals had to be physically present in the imported product.

Another argument in support of the adjustability of environmental taxes on inputs and pollution lies in the reason for the imposition such taxes. In particu- lar, an environmental tax is imposed in order to internalise the social cost of pollution, so as to provide an incentive to both manufacturers and consumers to limit the use of pollution-intensive products and encourage the use of cleaner production methods. As the very reason for an environmental tax is to make pollution-intensive products more expensive, the tax should necessarily shift forward to consumers and therefore could be said to be adjustable at the border; hence, BTAs on environmental taxes should, in principle, be permitted.90

On the other hand, it is noted that the Panel in United States — Taxes on Petroleum and Certain Imported Substances determined that the reason for imposing a tax — for example, whether the tax was levied to encourage the sensible use of environmental resources or for general revenue purposes — is irrelevant.91 This statement was, however, made after the Panel had determined that the tax in question was subject to a BTA. It was stating that the policy behind the tax did not change its nature. It does not follow, however, that the purpose behind the tax will not assist in determining the nature of the tax in the first place, where the nature is unclear.

Furthermore, of importance is the fact that growth in economic activity, as encouraged by the WTO through the liberalisation of trade, is likely to result in increased pollution levels worldwide and the unsustainable consumption of natural resources.92 In particular, if the “production and/or consumption of a product is polluting, an expansion in the global output of that product is

  1. Ibid.
  2. Ibid.
  3. Ibid, at paras 2.5 & 5.2.4.
  4. Joost, supra note 60, at 20 & 21.
  5. United States — Taxes on Petroleum and Certain Imported Substances, supra note 83.
  6. Duncan Brack, “Balancing Trade and the Environment” (1995) 71(3) International Affairs

497, at 499.

likely to lead to greater environmental degradation”.93 In addition, growth in international trade will also result in an increase in transport costs worldwide. Since the transportation of goods unavoidably involves the burning of fossil fuels, this will also detrimentally affect the environment.94

Accordingly, trade and environmental sustainability are inextricably linked. Taking this into account, it would be wrong for the WTO to prioritise its goal of trade liberalisation without any allowance for environmental considerations. This would open the WTO up to criticism that it prevents countries and the world from attaining higher environmental standards.95 On this basis, it would therefore be appropriate for the WTO to interpret WTO law, and in particular, Article III:2, in a broad manner so as to encompass environmental taxes which are essentially product taxes, albeit applied indirectly to products.

8.2 Like Imported Products which are not Taxed “in excess of” Domestic Products

Having determined that environmental taxes should be adjustable pursuant to Article III:2 of the GATT, it is necessary to then determine to what extent one can differentiate between products that are, to the naked eye, exactly the same or substantially similar.

In particular, as noted above, Article III:2 states that the BTA applied to an imported product cannot exceed the tax applied to the like domestic product. Accordingly, if “likeness” is determined by looking at the final product only, “then all products must regardless of how they were made be considered as homogeneous”.96 This would mean that the tax applied to the imported product must not, regardless of the production process methods utilised, exceed the tax applied to the domestic product. Such an approach could result in a product manufactured in an environmentally unfriendly way being taxed at a lower rate than the “like” domestic product which was created through the use of cleaner technology.

The same situation may also arise as between imported products that are,

  1. Oren Perez, “International Trade Law and the Environment” in Richardson & Wood, supra note 1, at 386.
  2. Brack, supra note 92, at 500.
  3. Frieder Roessler, “Environmental Protection and the Global Trade Order” in Revesz, Sands & Stewart, supra note 22, at 110 & 111.
  4. Roland Ismer & Karsten Neuhoff, “Border Tax Adjustments: A Feasible Way to Address Nonparticipation in Emission Trading” in DAE Working Paper Series (CMI Working Paper 36, University of Cambridge) 15.

apart from their production process methods, identical. Any differentiation between such products would then breach the MFN principle in Article I of the GATT which requires like products, as between all other contracting parties, to be treated in the same way.

It has been suggested that if “likeness” is determined in this way, the only way to introduce a BTA would be to take the lowest charge incurred by domestic producers and apply this as a BTA.97 By utilising this method, a foreign producer would then be assumed to have equally low emissions, regardless of their product process methods.98 This would not, however, equalise trade as between domestic and international producers “as foreign producers would regardless of their production technology be assumed to have produced with the best available technology”.99

Such an approach would be consistent with Article III:2 of the GATT as discrimination against domestic producers is allowed and a foreign producer cannot claim discrimination when it is assumed that the technology used to produce the product in question was more environmentally friendly than it really was.100

If, on the other hand, product process methods are relevant to the issue of “likeness”, then “there would be as many different products as there were substi- tutable production processes”.101 This approach would allow the same tax to be applied to all products created using a specific production process method. However, such an approach would mean that even if this were the case, it would be hard, if not impossible, to enforce a BTA based upon polluting emissions where a significant number of different production process methods exist.

Furthermore, this could also raise an issue of de facto discrimination pur- suant to Article I of the GATT. Namely, even if one could base a BTA upon production process methods, certain countries may not have access to cleaner technology, or alternatively, producers located within competing countries may have cheaper materials or means available to them which would enable them to reduce their tax more readily. For example, such producers may be able to use untaxed refillable product containers as opposed to taxed non-refillable containers.102

  1. Ibid.
  2. Ibid.
  3. Ibid.
  4. Ibid.
  5. Ibid, at 16.
  6. Grant Hewison, Reconciling Trade and the Environment: Issues for New Zealand (The Institute of Policy Studies, Wellington, 1995) 36 & 37.

The Working Party did consider how the term “like or similar products” should be interpreted.103 Although the Working Party indicated that the term needed to be examined on a case-by-case basis, it suggested three criteria that could be considered in determining whether products are similar, namely:104

It is unlikely that production process methods would succeed as a basis for distinguishing products that are otherwise the same on the basis of these criteria unless perhaps the different production process methods applied resulted in products of different quality.

This issue was considered by the WTO Dispute Panel in Japan: Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages.105 In this case, the European Communities challenged a Japanese law that imposed different taxes, pursuant to Article III:2 of the GATT, on various types of alcoholic beverages.106 Ultimately, the European Communities alleged that Japan’s tax made a fundamental distinction between “Western-style” liquors and Japanese “traditional” alcoholic beverages.107 The Panel confirmed that minor differences — for example, differences in taste, colour, and other properties — did not prevent products from qualifying as “like products”.108 Furthermore, it upheld the Working Party’s criteria in that it found that “like products” should include products with similar qualities or serving substantially identical end-uses. The Panel did not support the view that consumer habits could provide grounds for differentiation.109 In light of this decision and the Working Party report, it seems unlikely that the WTO will interpret likeness to allow differentiation between products on the basis of different product process methods.

The Panel decision of United States — Measures Affecting Alcoholic and Malt Beverages is also relevant.110 In this case the Panel considered not

  1. Report of the Working Party on Border Tax Adjustments, supra note 75, para 18. 104 Ibid.
  2. Japan: Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages (l0 November l987) BISD/34S/83 (Panel, WTO).
  3. Ibid, at para 3.2.
  4. Ibid.
  5. Ibid, at para 5.6.
  6. Ibid, at para 5.7.
  7. United States — Measures Affecting Alcoholic and Malt Beverages (19 June 1992) DS23/R

– 39S/206 (Panel, WTO).

only whether the products in questions were “like”, but also whether the BTA differentiated between products for protectionist purposes.111 Such an argument “could be seen as a step towards a stricter examination of the environ- mental motives behind a measure”.112 This argument would not, however, be successful where the true purpose behind the imposition of a BTA based upon an environmental tax or charge is for the purpose of maintaining industry competitiveness between states and the imported products were not charged more in tax than domestic products.

8.3 Summary

In summary, it is likely that an environmental tax on pollution would fall within the scope of Article III:2 of the GATT in that it amounts to a product tax applied indirectly to products. This conclusion has been reached on the basis that environmental taxes are more similar to the product taxes identified by the Working Party than producer taxes. In addition, it is likely that such taxation will be passed on to consumers and, in any case, given the role that the WTO plays in encouraging trade liberalisation and the effect that trade liberalisation has on the environment, the WTO should interpret Article III:2 liberally to include environmental taxes on pollution.

Despite this conclusion, however, the requirement that the tax be imposed in respect of “like” products creates a significant hurdle. Both the Working Party and WTO case law indicates that the quality of the products in question and their end-uses is a significant factor that needs to be considered when looking at “likeness”. If this is correct, then products will be found to be “like” each other despite their production process methods. Articles I and III would then prohibit any differentiation in tax applied as between products originating from WTO member states, except to the extent that domestic products may be charged a higher tax than imported products.

On this interpretation, the only way that a BTA can be found to be consistent with Article III:2 is if BTAs are imposed on imported products on the basis that those products have utilised the best available technology to mitigate their pollution. Although this would not enable a country to tax imports on the actual pollution emitted, it would be better than imposing no BTA at all.113

  1. Ibid, at para 5.74.
  2. Frank Biermann et al, “The Polluter Pays Principle under WTO Law: The Case of National Energy Policy Instruments” (2003) 76/03 TEXTE 1, at 38.
  3. Ismer & Neuhoff, supra note 96, at 15.


Having determined that a BTA based upon actual pollution emitted cannot be imposed on imported goods pursuant to Articles I, II, and III of the GATT, consideration must be given to the general exceptions contained in Article XX of the GATT.114

In particular, pursuant to Article XX(b) of the GATT, WTO members are allowed to impose measures “necessary to protect human, animal or plant life or health”.115 Furthermore, pursuant to Article XX(g) of the GATT, WTO members are allowed to impose measures “relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption”.116 Accordingly, although a BTA based on actual pollution emitted may be inconsistent with general GATT provisions, such a BTA may still be justified pursuant to Article XX(b) and (g).

These provisions are, however, limited by the introduction to Article XX. This is known as the chapeau. This prohibits WTO members from imposing measures in a way that constitutes arbitrary or unjustified discrimination between countries or as disguised restrictions on international trade.117 The purpose of the chapeau is to avoid the abusive or illegitimate use of Article XX.118 In contrast to Articles I and III of the GATT, Article XX does not refer to “like” products. Therefore, as long as parties apply the same measures consist- ently across all WTO members, it is unlikely that an accusation of differential treatment will be successful. However, where states have implemented their own measures to address the polluting emissions that are the target of a BTA, it is arguable that the import tax imposed may be considered to be a disguised

restriction on trade on the basis that such a restriction is not necessary.

Necessity is of course an element of Article XX(b) of the GATT. Although Article XX does not provide any guidance on the meaning of necessity, the WTO Appellate Body in European Communities — Measures Affecting Asbestos and Asbestos Containing Products has interpreted it to mean that there is no other measure available which is less restrictive and which can achieve the desired goal.119 Where, however, importing states have established a domestic method to address pollution, it could be argued that no BTA is required to achieve the desired goal of reducing pollution. Any BTA would merely reflect an added

  1. General Agreement on Tariffs and Trade, supra note 55, Art XX. 115 Ibid, Art XX(b).
  2. Ibid, Art XX(g).
  3. Ibid, Art XX.
  4. Ismer & Neuhoff, supra note 96, at 22.
  5. European Communities — Measures Affecting Asbestos and Asbestos Containing Products

(12 March 2001) WT/DS135/AB/R (Appellate Body, WTO), paras 164 to 175.

benefit to the domestic producers who may not be subject to the importing states’ domestic measures.

Putting this aside, it is likely that a BTA based on environmental grounds will otherwise meet the requirements of Article XX(b) and (g). In particular, given the international recognition that the world’s ecosystems are deteriorating, it should be relatively easy for a state to establish pursuant to Article XX(b) that a pollution tax was designed to protect human, animal or plant life or health.120 In terms of Article XX(g), this was considered in United States — Standards for Reformulated and Conventional Gasoline.121 Specifically, the Panel stated that:122

[T]he policy in respect of the measure for which the provision is invoked must be related to the conservation of a natural resource ... the measure itself must be related to the conservation of natural resources ... [and] the requirement that such measures must be made effective in conjunction with restrictions on domestic production or consumption.

Again, these criteria should be easily met given the international recognition that the world’s ecosystems are deteriorating, coupled with the fact that domestic products have been subjected to a domestic tax, albeit at a different stage in the production process.

Accordingly, it is likely that a BTA based upon environmental pollution would be justifiable pursuant to Article XX(b) and (g) of the GATT. However, where the importing country is already addressing the same pollution domestically through alternative regulation, it could be argued that such a BTA is unnecessary.


This research paper has attempted to traverse the issues that surround the imposition of BTAs based on environmental taxes. However, perhaps a perti- nent question is whether or not a BTA is actually necessary at all.

As noted above, the reason for imposing a BTA would be to maintain the competitiveness of domestically manufactured goods which are subject to environmental taxes with goods that are imported from other countries. Despite this, however, there is little evidence to indicate that businesses would be significantly disadvantaged by the use of environmental taxes to regulate

  1. Ismer & Neuhoff, supra note 96, at 19.
  2. United States — Standards for Reformulated and Conventional Gasoline (29 April 1996) WT/DS2/AB/R (Appellate Body, WTO).
  3. Ibid, at 13 to 30; Ismer & Neuhoff, supra note 96, at 20 & 21.

environmental matters.123 Neither is there evidence of businesses locating to “pollution havens”.124

It is likely that this is because many other factors influence a business’s decision to locate itself within a particular country or to relocate to another country. Factors would include the size and growth of potential markets, the political stability of other non-taxing countries, the competence of the available labour force, the ease of access to raw materials or markets, and the adequacy of local infrastructure.125 This would indicate that despite the threat that businesses would relocate to a “pollution haven” should an environmental tax be imposed on the production of domestic products, it is unlikely that a significant exodus of business will in fact occur.


Overall, it is important for New Zealand to consider alternative methods of addressing environmental pollution, especially given its international under- taking pursuant to the Protocol to reduce its GHG emissions to 1990 levels. In this respect, environmental taxes may be of some assistance. These have been used, with success, extensively across Europe for some time.

It is acknowledged, however, that environmental taxes would open New Zealand up to some risk of businesses moving to “pollution havens”. Why would a business stay in New Zealand if it is cheaper to produce its products elsewhere and imported products have a competitive advantage over them? However, this risk appears to be minimal. In particular, tax represents only one consideration for a business when it is looking at the most cost-effective country within which to manufacture its products.

Furthermore, this risk can be mitigated further through the imposition of a BTA. As New Zealand is a party to the WTO, however, any BTA imposed must be GATT compliant. Although there is no case law directly on point, an analysis of the relevant GATT provisions indicates that a BTA calculated on the basis of actual pollution emitted would not comply with the GATT. Such a BTA would also be difficult, if not impossible, to administer, monitor, and enforce without the co-operation of other countries.

In contrast, however, a BTA could be imposed across imported products consistently on the assumption that those imported products have utilised the best available technology to mitigate their pollution. Technically this is not the most ideal way to tax pollution in that it would not reflect the actual pollution

  1. Laskowska & Scrimgeour, supra note 20, at 8.
  2. Ibid.
  3. Ibid.

emitted; however, from an administrative and enforcement perspective, this approach seems the most practical. Furthermore, it is noted that although this approach would not completely neutralise any advantage that imported products receive, it would reduce such an advantage.

Alternatively, New Zealand could impose a BTA based on the actual polluting emissions and attempt to justify such a tax pursuant to Article XX of the GATT. Although it seems likely that New Zealand would meet the require- ments of Article XX, it is open to argument that such BTAs are not necessary. In addition, as noted above, from a practical point of view such a tax would be difficult to implement.

The optimal solution would be to make BTAs redundant in the first place through the harmonisation of environmental prior-stage taxes across WTO member states. The universal application of such taxes would then eliminate the need for BTAs. This would, however, require extensive international co- operation.126 Given the fact that the Protocol has yet to achieve this, it is unlikely that the WTO would be any more successful.

  1. Biermann et al, supra note 112, at 39.

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