LASER TALK: Carbon Border Adjustment Mechanisms

LASER TALK: Carbon Border Adjustment Mechanisms

Our Carbon Fee and Dividend policy has a provision built in to protect trade competitiveness: a “Carbon Border Adjustment Mechanism” (CBAM) imposed on carbon-intensive trade-exposed goods [1] that cross our border in either direction. Products imported from a country that does not bear a carbon price equivalent to ours will have to pay a surcharge to make up the difference. Conversely, a Canadian-made product exported to such a country will get a refund for the carbon fee associated with its carbon footprint.

This CBAM prevents Canadian manufacturers from being put at a competitive disadvantage in global markets because of the fee. It will also remove the incentive for them to relocate overseas to avoid the carbon fee. In addition, it will encourage foreign countries to adopt their own carbon fee, so they would get the money instead of us. Carbon Fee and Dividend’s BCA is designed to comply with international trade law. [2,3]

Note that exported fossil fuels don’t get any special border treatment. Our proposal does not include a refund for Canadian-produced fossil fuels that are exported, and imported foreign oil has the same carbon fee placed on it as domestically produced oil. The CBAM applies only to carbon-intensive products, not fuels.

border tax adjustments.fw

An illustration of how CCL’s border adjustment works. Boxes in blue are subject to the fee, boxes in green are subject to the border adjustment. Carbon-intensive goods produced domestically that stay in Canada are not touched; it is assumed they will bear the burden of higher fossil fuel costs because of the upstream assessment point for our fee.

UPDATES

On December 12, 2020, the federal government released its most ambitious climate ever [4]. Included in the document was the following statement: Explore the potential of border carbon adjustments, and work with like-minded economies—including the E.U. and Canada’s North American partners. Subsequently, there have been several federal documents signaling the government’s intentions to enact border carbon adjustments.[4][5][6][7]

On March 16, 2022, the European Council reached an agreement on the border carbon adjustment regulations, which is one of the key elements of the European Union’s Fit for 55 package [8]. Although the proposal still needs to be adopted and the BCA certificate purchase requirement would not come into effect until 2026, some of the EU’s trading partners are already responding with their own border measures and/or threats of legal action [9].

 On May 16, 2022, Canada and the EU issued a joint declaration [10]confirming the willingness of the EU and Canada to coordinate on respective approaches to carbon pricing and carbon border adjustments to prevent carbon leakage. They also confirmed the intention of the EU and Canada to work together to engage international partners to expand the global coverage of carbon pricing.

REFERENCES:
1)  Provincial Carbon Pricing and Competitiveness Pressures.  Canada’s Ecofiscal Commission (November 2015) http://ecofiscal.ca/wp-content/uploads/2015/11/Ecofiscal-Commission-Carbon-Pricing-Competitiveness-Report-November-2015.pdf
2) Pauwelyn, J. “Carbon Leakage Measures and Border Tax Adjustments under WTO Law.”(21 Mar 2012) In Research Handbook on Environment, Health, and the WTO.
3) “Climate and carbon: aligning prices and policies.” OECD Environment Policy Paper No. 1 (Oct 2013).
4) Carbon Pricing For Paris: Closing the Gap with Output-Based Carbon Pricing (Oct 2020)
https://www.pbo-dpb.gc.ca/web/default/files/Documents/Reports/RP-2021-019-S/RP-2021-019-S_en.pdf
5) Ottawa is taking great interest in Border Carbon Adjustments, Adam Radwanski, Globe and Mail (October 2020)
https://pressreader.com/article/281930250466337
6) Joint press release: EU-Canada Leaders’ Virtual Meeting (October 29, 2020) https://pm.gc.ca/en/news/news-releases/2020/10/29/joint-press-release-eu-canada-leaders-virtual-meeting
7) A Healthy Environment and Healthy Economy (12 Dec 2020)
https://www.canada.ca/en/environment-climate-change/news/2020/12/a-healthy-environment-and-a-healthy-economy.html 
8)  EU countries support plan for world-first carbon border tariff
https://www.reuters.com/world/europe/eu-countries-back-plan-world-first-carbon-border-tariff-2022-03-15/
9) The EU CBAM: What the Proposed Regulation Covers, What Happens Next, and What Companies Should be Thinking About Now
https://www.steptoeglobaltradeblog.com/2021/07/the-eu-cbam-what-the-proposed-regulation-covers-what-happens-next-and-what-companies-should-be-thinking-about-now/
10) Joint declaration following the third EU-Canada Joint Ministerial Committee meeting https://www.consilium.europa.eu/en/press/press-releases/2022/05/16/joint-declaration-following-the-third-eu-canada-joint-ministerial-committee-meeting/