(Environmental) border tax adjustments in respect of energy taxes: Between limits and possibilities

The design of today’s energy policies usually reflects three main issues and objectives: competitiveness, energy security and sustainability (environmental protection, in particular climate change). Similarly, these three issues influence the adoption of energy taxes significantly – which are also part of the energy policy framework. Against the background of current environmental global challenges, energy taxes are praised as an efficient tool to foster environmental goals. However, at the same time, energy taxes are sometimes blamed for the risk of loss of competitiveness that they may lead to for national enterprises by raising energy costs. This loss of competitiveness could even neutralize the hoped-for positive environmental impact of energy taxes if national enterprises subsequently decided to relocate to countries where no energy taxes apply (called “pollution havens”). Finally, energy taxes may be seen as a risk to energy security since energy-endowed countries usually disapprove of other countries raising energy costs through taxes applied on imported energy sources. Proposals in favour of the adoption of border tax adjustments (BTAs) in respect of energy taxes are directed at the competitiveness and environmental challenges related to the introduction of energy taxes. On the one hand, BTAs in respect of energy taxes are assumed to reduce the risk of loss of competitiveness deriving from the unilateral implementation of energy taxes. On the other hand, such BTAs are supposed to support the environmental objectives pursued by domestic energy taxes by preventing national enterprises from relocating to countries where no similar energy taxes apply. Nevertheless, the adoption of BTAs in respect of energy taxes may also lead to discontent in the international community, which may put energy security at risk. This chapter does not focus on the various – mostly economic – assumptions and hypotheses (e.g. the carbon leakage hypothesis) on which arguments in favour of environmental BTAs are based. Rather, this chapter discusses the main limits and opportunities surrounding the adoption of BTAs on imports in respect of energy taxes, focusing on tax design and international trade law.