I have talked to EPA officials, staff in bill-drafting senators and house members’ offices and two presidential advisors on this matter on a number of occasions, including in the last week.

Every time I ask about the role of tax measures in any North American continental carbon/energy market design, they respond that these are revenues, not emission reduction measures. Obviously, if emission taxes are generating revenues then, by definition, they are not resulting in emission reductions.

The US representatives, like most other governments, are keen on securing any new revenues they can, especially through taxes that are indirect, spread out and which are not going to be specifically itemized on taxpayer invoices. But when it comes to cross border considerations in US climate change law, the US is not willing to assign a "credit" against the standard carbon tariff for any Canadian exports that have been "taxed" in Canada or internationally.

Again, this gets back to the fact that a tax can either be revenue generating or drive emissions down, but not both.

Governments can elect to price the tax sub-optimally (as BC and Quebec have done) to generate revenues or max out the tax to change behavior.

The US decision-influencers tell me they don’t want to get into trade disputes centering on the question of whether taxes are high enough to be legitimate emission control measures or are just revenue tools. So they are all agreed that when it comes to establishing GHG factors to determine the volume of US GHGs, US importers of Canadian products shall be required to buy, or any direct carbon-based tariffs on Canadian exports, the US authorities will ignore any and all taxes that might be paid by those exporters in Canada or to international agencies. And they expect Canada to treat US exports the same way. 

If Canada’s tax regime proves an effective mechanism to change behavior, they say, then Canadian GHGs will decline and the US trans-border charges on our exports will decline accordingly.  Though the US rules in development do not leave room for gaming between exports and domestic consumption of GHG-intensive goods and services.

Please also note the aid/international tax game that the US is now playing and Japan initiated in 2002.

UN treaty language insists that all CDM CER (developing credit) spending and any new international taxes that might be agreed have to be paid over and above national commitments to Official Development Assistance (ODA, aid). The UN envisions that the UN will collect all of the new international taxes and use the revenues to fund new UN assistance projects in developing nations.

But between 1999 and 2002, directly preparing to ratify the Kyoto Protocol, Japan cut its ODA budget by a full US$4 billion, and put $2 billion in a CDM CER account. They put $1 billion in an account to fund new UN Human Resource initiatives. Then, they said, the last $1 billion would offset Japanese corporations’ CER purchases. They put a domestic tax credit in place to offset Japanese corporations’ costs of buying CERs.

The Japanese government was open and transparent that they were cutting ODA to finance their Kyoto Protocol commitments.

While this was an obvious breach of the Kyoto Protocol, the UN did not call Japan on it.  I find members of the Obama administration now pretty open about their intention to let the UN find new sources of revenues, but then to cut back the US’s continuing direct support for the UN proportionately. The big difference between the Bill Clinton and Obama administrations is there appears to be little love lost for the UN in the current White House.

What is A Better Path Forward?

The question of whether the UN/World Bank and other supra-national institutions should be able to tax certain international activities to raise revenues should be considered in isolation, and should be recognized, formally, as a strategy to replace funding that the UN is likely to lose over the next few years.

Any final international climate change treaty should oblige:

• participating nations to prepare GHG inventories for their direct and indirect aid portfolios and add the aid account to their official national GHG inventories and progress reports and

• large supra-national to publish and manage their aid and lending portfolio GHG inventories and adopt GHG reduction commitments just as if they were sovereign national parties to the treaty.

Rather than fighting over whether spending on developing nation credits (over 80% of which are "hot air") is incremental to our existing aid budgets, we should subject our aid budgets to the same GHG accounting and reduction targets that we adopt for all other national activities.