Brazilian domestic production, regardless of the final market? One might argue that it should be the latter since carbon emissions have global rather than local environmental effects. But in all scenarios, one would have to determine how much steel of each type is produced in each country so that averaging does not fully obviate the need for detailed information about foreign firms’ behavior and production techniques.

There are also problems from the standpoint of WTO consistency. Since the U.S. would be treating all foreign firms within each affected country alike but allowing the burden on domestic firms to vary across enterprises based on the individual emissions, the Chinese and Brazilian governments might have a strong case at the WTO dispute similar to the arguments found in the U.S.-Gasoline case (i.e. a violation of Constraint 3). In addition, both types of Chinese firms and Brazilian EAF firms would be earning less than either of the U.S. firms using the same technology so that they would likely support a WTO case. Foreign firm support for the policy also would be unlikely given the substantial compliance costs (violation of Constraint 1b).

# **Scenario 4:  Border Tax Based on Average Domestic Emissions**

Mattoo _et al._ (2009), recognizing the informational constraints as well as the high resulting tariffs associated with CBTAs based on foreign information, have suggested instead that foreign producers be charged based on average _domestic_ carbon emissions in the targeted industry. This reduces significantly the informational burden since domestic authorities would be in a much better position to acquire data and even audit the data from domestic firms and thus more likely to pass Constraint 4.

Under this proposal (Scenario 3), the average of carbon emissions for U.S. steel would be based on three different basic production types: BOF, EAF (Scrap), and EAF (DRI). The unweighted average would be 1.2 CO2 tonnes per steel tonne based on the OECD 2002 estimates in Table 1. This would result in an equal tax burden of $30 per tonne for all types of Chinese and Brazilian steel, with net marginal revenue of $510 per tonne of HRC for both countries. In this case, BOF producers in both countries would be better off compared to either scenario based on foreign carbon footprints. Not surprisingly, carbon efficient EAF producers receive less unit revenue. For the Chinese EAF firms, revenue is only slightly below the situation where the tax burden is based on their own emissions ($510 vs. $518). Brazilian EAF producers, with the smallest carbon footprint of all firms, would face 4.3 percent lower revenues ($510 vs. $533).

This option certainly has some advantages, most notably relatively low informational costs and ease of implementation. However, there would still be some practical problems. For example, the average domestic carbon emissions are not unchanging---it depends on the composition of U.S. steel output. Is this historical? Based on what period? In 1991, minimills represented only 24 percent of U.S. crude steel production (Moore, 1996) compared to 58 percent in 2008. Using the earlier period for assessing the weighted average would increase the burden on foreign firm. U.S. firms might argue that using this earlier period would better reflect contemporary Chinese production patterns and insist on its use. Chinese producers would prefer 2008 U.S. production patterns be used. Which in the end would be used? Would it change over time?

There certainly could be a potential WTO challenge to this system. All foreign firms would be treated identically while domestic firms would see their carbon charge burden vary depending on their own decisions. This would run afoul of the WTO requirements of national treatment (i.e. violates Constraint 3). This system also provides no incentives for foreign firms to alter their carbon footprint since they are burdened equally (Constraint 2). Indeed, since 16