A salient point

"[T]he French President Nicolas Sarkozy was right to suggest that the EU threaten to tax imports from countries that have neither a carbon tax nor a cap and trade permit system.¹² If the threat were carried out, and the EU taxed imports’ embodied carbon emissions at a rate equal to the price of an EU Allowance, this would be equivalent to introducing these countries’ export sectors into the EU’s permit system, and would reduce emissions in exactly the same way.

Taxing 'dirty' imports would have other advantages too: it would reduce emitters’ incentives to flee the EU for laxer jurisdictions;13 it would solve any problem of EU firms being disadvantaged relative to non-EU competitors; and it would therefore also greatly weaken the case for giving free permits to firms,14 thus enhancing the EU’s ability to raise revenues for other climate change mitigation activities.

Many economists argue that import taxes undermine free trade. They are wrong in theory because the absence of any charge for carbon emissions is effectively a
subsidy, which the import taxes simply compensate for. And they are also wrong to argue this in practice, because we should care more about carbon emissions than about the health of the WTO.

Of course, the practical problems of implementation would be substantial. So we would very much hope never to have to carry out this threat. But if the EU promised not to tax imports from countries that introduced their own carbon taxes or permit systems for their exports, many countries would likely introduce these things; the exporting country, rather than the EU, would then collect the revenues from the taxes or permit sales. And having introduced tax or permit systems for exports (and benefited from the revenues), developing countries might later extend them to other parts of their economies."

¹² See, e.g., the International Business Times, 15 January 2008.
Source: "What is the Top Priority on Climate Change? (Draft)" p.5–6, Paul Klemperer, 2009
(accessed July 3, 2009)