Climate Change and the WTO: Cap and Trade versus Carbon Tax?

In the rush to enact cap and trade, major World Trade Organization (WTO) concerns have been overlooked. These problems are not necessarily final, but fixing them would have political costs. Free emissions allowance rebates to trade-intensive industries represent a WTO-illegal export subsidy, which may make a US cap-and-trade system unworkable for export-dependent economies like Japan, Germany, and China. The best interim solution would be a carbon or energy tax that is imposed on imports and rebated oil exports to ensure a level playing field. Such a system could be implemented under the WTO's existing border tax adjustment rules even in the absence of a multilateral climate agreement.