The Republican BAT's Impact on US Carbon Leakage: The Complications of Fighting Emissions through Trade

Abstract

In 2016, the House Republicans released a policy plan that includes a description of corporate tax reform. This tax reform plans to restructure America’s corporate tax into a Destination-Based Cash Flow Tax, or DBCFT. The DBCFT includes a “border adjustment” component that has become known as a “Border Adjustment Tax (BAT).” There have been several papers written on the economic impacts of the BAT component of the DBCFT. The ability of the BAT to influence US trade raises the possibility that it could affect US carbon leakage – GHG emissions “lost” through trade. This paper will examine the potential impact of the BAT on US carbon leakage with the help of pre-existing research on carbon BTAs. I argue that the BAT could be transformed into a policy tool to fight emissions by including nation-based exemptions. These nation-based exemptions would probably not pass WTO scrutiny. Smaller multilateral agreements could be an alternative starting point for trade-based emission abatement, but this system also faces challenges.