Canada, UK and US should create ‘border carbon’ scheme, report finds

By on 20/07/2021 | Updated on 04/02/2022
Wasted effort? Canada’s climate goals could be undermined if emissions are simply transferred elsewhere. Credit: Laura Penwell/Pexels

Canada should collaborate with the US and EU to design a set of ‘border carbon adjustment’ plans, a think tank has argued – warning that failing to do so could weaken both domestic industries, and Canada’s contribution to tackling climate change.

Border carbon adjustments (BCAs) involve placing additional taxes on imports from high-emitting industries – such as iron, steel and petrochemicals – to ensure that imports are subject to the same carbon pricing mechanisms as a country’s domestic industries. This helps both to ensure that manufacturers in countries with strict environmental targets are not put at a competitive disadvantage, and that nations cannot show falling domestic emissions while indirectly driving climate change via spiralling imports.

The report, Enabling Climate Ambition: Border Carbon Adjustment in Canada and Abroad, was published last week by the International Institute for Sustainable Development (IISD). It was released just before the EU set out its proposals for a Carbon Border Adjustment Mechanism (CBAM). Under these rules, tariffs would apply to imports from five industries, including steel, cement and electricity, from 2026.

The report urges Canadian policymakers “to figure out how to reconcile its climate ambition with the need to protect the competitiveness of domestic industry and prevent carbon leakage.”

“Canada will not achieve its climate ambition if our policies just end up shifting emissions from domestic firms to their foreign competitors,” said Aaron Cosbey, co-author of the report and senior associate at the IISD.

Plugging the leak

The IISD pointed to a growing global momentum for BCAs as a way of preventing “leakage” as countries grapple with how to remain competitive while reducing carbon emissions. “Leakage” refers to when companies operating in countries with strict emissions policies import carbon-intensive products, rather than pay the premium in the domestic market. The worry is that domestic markets become uncompetitive and greenhouse gases are displaced elsewhere, undermining efforts to reverse climate change.

As countries ramp up their environmental commitments, the risk of leakage will grow, the report says – and a BCA is an effective method of curtailing it. “BCAs are challenging to get right, and they’re no silver bullet. But it’s hard to see how we can successfully decarbonise without them,” says Cosbey.

The EU has made it clear that its CBAM mechanism is designed primarily to prevent leakage. The Biden administration in the US has also indicated its interest in introducing a BCA-style mechanism, while the UK prime minister, Boris Johnson, has reportedly asked all government departments to put forward proposals for carbon pricing.

Carbon co-ordination

The IISD says there is “little time to waste” and urges Canadian policy makers to start designing their BCA regimes now. BCAs would be highly complex and could take years to formulate, it notes. Co-ordinating with key trade partners would ensure countries could collaborate on policy development and share approaches.

This may also be crucial to overcome World Trade Organisation laws. “Whatever form a BCA takes, if it is effective, it will almost certainly violate some WTO law and will need to be saved by exceptions in that law for environmental measures,” the report states. For example, if revenues from a BCA were given to domestic companies to help them decarbonise, this could be seen as protectionism. The EU has already said that its mechanism does not violate WTO rules, but this is yet to be tested.

Countries designing BCAs need to consult widely with industry and stakeholder groups and mechanisms should be kept simple by “resisting the temptation” to create one for each industry or trading partner, according to the IISD. It recommends “future proofing” BCAs by ensuring they can work with existing environmental regulations as well as any likely future scenarios.

The IISD also says Canada needs to look at the geographic scope of its BCA, and consider issues such as whether it should include developing countries – whose own carbon emissions are relatively tiny. It also needs to consider the reach of a potential BCA. The EU CBAM, for example, covers the embodied carbon of a product – the greenhouse gases emitted during its production – as well as during its use.

But there is optimism about the lever. “If Canada acts wisely, and coordinates with its international peers, it can help to accelerate the day when enough major economies have established domestic carbon pricing, or its equivalent, to make concerns about leakage and competitiveness insignificant,” the report notes.

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