To meet its climate goals while remaining competitive, Canada needs a scheme to levy a charge on the carbon content of imports

Originally published by the Toronto Star

A few weeks ago, the European Commission introduced the world’s first charge on the carbon content of imports — the EU Carbon Border Adjustment Mechanism. Border carbon adjustment (BCA) regimes like this could play a big role in the future of global climate action, with important implications for Canada.

The new EU system, set to take effect in 2023, will apply to imported steel, iron, cement, fertilizers, aluminum and electricity, imposing charges based on the greenhouse gases emitted in producing them. The objective is to protect European producers against unfair competition from countries with less ambitious climate policies, which can cause production to shift to jurisdictions where it’s cheaper to pollute. This phenomenon is called “carbon leakage,” and preventing it, while protecting domestic competitiveness, is one of the primary objectives of a BCA regime.

Canada’s trade with the EU is relatively meagre, so the new BCA system isn’t expected to have a big impact on Canadian exporters, in and of itself. That limited impact will be further mitigated by the fact that the EU regime looks likely to exempt exports from countries with carbon pricing systems like Canada’s.

But Canada should still take notice. The EU’s new BCA highlights a major challenge in store for us, because it’s hard to see how Canada meets its climate targets without a BCA system of our own.

Over the past year, the federal government has set some ambitious goals: a 40-45 per cent reduction in emissions by 2030, relative to 2005 levels, leading up to a 2050 net-zero target that’s now enshrined in law. Hitting our 2050 target means we have to reduce emissions by as much as we did during the pandemic — every year, for the next 29 years.

Reducing emissions from heavy industry will be a big part of the challenge, as this sector accounts for more than a third of Canada’s total output. Right now, Canada applies a discounted carbon price to industrial firms in order to protect them from being undercut by competitors abroad that aren’t subject to carbon pricing. But keeping those protections will make it much harder to meet our decarbonization goals.

Modelling by Navius Research commissioned by my organization shows that Canada would get 50 per cent more emissions reductions by removing the discount and instead applying the full carbon price to heavy industry.

A move like this would only be feasible, however, if we can keep domestic firms on a level playing field with their international competitors, using BCAs. It’s pointless, for example, to force Canadian steel producers to pay for the carbon they emit from their blast furnaces if producers in countries without carbon pricing can export cheaper steel into Canada. The result could be to put Canadian steelmakers out of business, without reducing the overall emissions from global steel production.

Getting the BCA design right and bringing industry along are easier said than done. The EU’s new system won’t fully remove protections for industry from its own pricing scheme until 2035. Canada can’t afford to wait that long.

Beyond protecting domestic industry, using a BCA with a full carbon price is the best approach for exporters, too. Applying the full carbon price to industry, including our oil and gas sector, will help ensure that our exporters avoid new carbon border charges that may soon appear around the world.

Other countries are already eyeing border carbon adjustments. While the effects of the EU BCA regime may be muted in Canada, BCAs imposed by the United States could have a bigger impact. Senate Democrats have recently put forward a BCA plan that would complement ambitious new U.S. climate measures and, unlike the EU system, their system includes a fee on oil and gas.

What about exports to countries that don’t impose carbon charges at the border? We have a good reason to switch to a BCA with full pricing there, too. That’s because only a full carbon price would allow Canada to refund carbon costs to our exporters when shipping products overseas. If we tried to rebate the carbon tax under our current discounting system for industry, it would almost surely be illegal under World Trade Organization rules.

In short, we need to decarbonize heavy industry, and the best way to maintain competitiveness in the process is with a BCA. Setting up an effective border carbon adjustment regime will likely be complicated under Canada’s federal system. It’s urgent that the federal and provincial governments sit down with industry representatives right away to work out a BCA plan that will accelerate the transition to full economy-wide carbon pricing. This is the most viable path to achieving our climate goals while also protecting our economy.

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