Carbon tariffs on Canadian exports?

The US Senate began deliberating bill S. 3036 today, a bill that would set up a cap and trade system to reduce greenhouse gas emissions. It is not expected to become law, but there are some important policy ideas that could become established and implemented later by the new US government that takes power in 2009. One of them is that the US could impose tariffs on imports from other countries that do not put a price on carbon. I quote the New York Times today:

The measure directs the president to negotiate agreements with those countries to ensure they are imposing binding limits on carbon emissions on their own industries. If they fail to do so, the United States will impose unspecified tariffs on carbon-intensive products like steel, paper, concrete and glass from those countries. The provision was included at the behest of labor unions and American companies in those industries who would not support the bill without such a cost equalizer.

and a little further on,

Mrs. Clinton and Mr. Obama, courting labor support, favor tough carbon-based tariffs.

It would appear that WTO/GATT rules permit a country to impose 'border tax adjustments' when it imposes a domestic environmental tax and imports from countries that do not. Because the proposed cap and trade system does not give out emissions credits for free but instead requires emitter to pay for them, it could be considered a domestic environmental tax, and the United States would be entitled to impose a carbon tariff on imports.

These WTO/GATT rules have not been put to the test yet, but European countries are interested in giving it a try and the theoretical foundation seems solid.

If we already had systems in place to put a price on carbon, whether it be a cap and trade system or a carbon tax shift, it would be a lot easier to parry the threat of a carbon tariff imposed by other countries on our exports.