To deal with the competitiveness problem, one proposal is to levy a carbon tariff on imports, set at the equivalent domestic rate. Such a tariff would “level the playing field” by eliminating foreign producers’ tax advantage.

But the idea raises a thorny question: Is it legal, under the rules and regulations of the World Trade Organization (WTO), to impose tariffs selectively on imports, on the basis of their believed upstream CO2 emissions?

Climate-change policies target the process and production methods a firm employs and their subsequent emissions. The WTO Appellate Body — a standing body that hears appeals from reports issued by panels in disputes brought by WTO members — has opened the door to permitting trade measures based on how products are made, and if challenged by another WTO member, a country could defend a carbon tariff in two principal ways.

First, a border tax adjustment — a kind of tariff — such as a value-added or sales tax, is simply an extension of the domestic carbon pricing policy to foreign exporters. The tariff must not, however, discriminate against imports from specific countries or against imports to the benefit of domestic industries.

Second, if the measure does not meet the criteria above and is found to be inconsistent, a carbon tariff could be justified under the environmental exemptions. This approach was tested in the case known as Shrimp-Turtle, when a U.S. ban on imports of shrimp and shrimp products caught without using “turtle excluder devices” was challenged.

The issue came up again in the so-called Brazil-Tires case, where Brazil argued that an import ban on retreaded tires was necessary to prevent the spread of mosquito-borne illnesses. Although in both cases the ban was found to be WTO inconsistent, the principles set out by the Appellate Body gave governments considerable flexibility in using trade measures to protect life or health, and by extension, issues related to trade and environmental protection.

What this implies is that a carbon tariff should take the form of a VAT, applied to all imports at the border and equal to the rate applied to domestic goods. Differential tax rates for countries with no or lax environmental policies would be challenged by WTO members.

Second, a carbon tariff could reasonably be levied only on raw materials or basic products. A tax on final goods, such as consumer products, automobiles and toys, would be cumbersome, given that goods can be assembled from inputs from several countries, and would raise the prospect of rules of origin governing carbon tax assessments.

Third, we should model bilateral or multilateral treaties using precedents set by existing tax treaties. Mutual recognition of carbon policies will prevent dual taxation, as exports would receive an exemption from domestic taxes when facing a tariff in an importing country.

Yes, this means that the carbon tax and tariff could require a supporting network of carbon tax treaties, with low-carbon tax and high-carbon tax signatories. There could be tax treaty shopping on the part of producers, and carbon tax havens.

Debate will continue on the pros and cons of a carbon tax or tariff regime. But whether or not a carbon tax is a desirable environment policy measure, it seems likely that a carbon import tariff would stand a decent chance if challenged at the WTO, so long as it was compliant with the general rules described above.

But make no mistake: the billable hours incurred by lawyers, economists and consultants, in devising treaty networks and defending measures in international courts, will drive a growth industry for years to come.