Abstract:
Border Tax Adjustments (BTAs) resurfaced recently in national policy debates as a
possible measure to counter the anti-competitiveness effect of unilateral
environmental taxes. There seems to be no consensus in the literature on the
effectiveness of BTAs under environmental taxes. This paper aims firstly to provide a
theoretical Heckscher-Ohlin analysis that not only challenges the effectiveness of
BTAs, but also proposes an alternative approach to mitigate the welfare effects of
environmental taxes. Secondly, the paper evaluate the effectiveness of the
alternative approach, to negate the economic impact on competitiveness of an
electricity generation tax, without sacrificing the environmental benefits of the tax, in
the case of South Africa.
Using conventional Heckscher-Ohlin methodology, in a small country, we show that
policy makers should, instead of implementing BTAs, consider the opposite of BTAs
to mitigate the welfare effects of environmental taxes. We show that gains from trade,
due to a reduction in import tariffs, could, under certain assumptions, offset the initial
tax induced welfare loss.
The paper then applies the Global Trade Analysis Project (GTAP) model to evaluate
the impact of an electricity generation tax on the South African, SACU and SADC
economies and explores the possibility to reduce the economic impact of the
electricity generation tax through traditional border tax adjustments. The results show
that an electricity generation tax will lead to a contraction of the South African gross
domestic product. However, traditional BTAs are unable to address these negative
impacts. The paper then test the proposed reversed BTA approach where gains from
trade are utilised to negate the negative impacts of an electricity generation tax, while
retaining the environmental benefits associated with the electricity generation tax.
This is achieved through a reduction in import tariffs, as this reduction will reduce
production costs and thereby restore the competitiveness of South Africa. The
reduction in import tariffs not only negates the negative GDP impact of the electricity
generation tax, but most the CO2 abatement from the electricity generation tax is
retained.
