LASER TALK: Carbon Border Adjustment Mechanisms

LASER TALK: Carbon Border Adjustment Mechanisms

CCL’s Climate Income 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. Climate Income’s CBAM 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.

An important underlying principle as carbon pricing rolls out internationally is that CBAMs must abide by common but differentiated responsibilities as we decarbonize the global economy. 

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.

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][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 [7].  Currently the following goods have been proposed to be in scope of the CBAM: iron and steel, cement, fertilisers, aluminium, electricity, and hydrogen. Further scope extensions to include additional products (such as chemicals and polymers) are to be determined by 2026, and the full inclusion of all EU ETS products is planned by 2030. [8]

On May 16, 2022, Canada and the EU issued a joint declaration [9] 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.

1)  Provincial Carbon Pricing and Competitiveness Pressures.  Canada’s Ecofiscal Commission (November 2015)
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) A Healthy Environment and Healthy Economy (12 Dec 2020)
5) Carbon Pricing For Paris: Closing the Gap with Output-Based Carbon Pricing (Oct 2020) PBO
6) Joint press release: EU-Canada Leaders’ Virtual Meeting (October 29, 2020) Office of the Prime Minister of Canada
7)  EU countries support plan for world-first carbon border tariff (March 16, 2022) Reuters
8) EU Carbon Border Adjustment Mechanism (CBAM) Deloitte
9) Joint declaration following the third EU-Canada Joint Ministerial Committee meeting European Council of the European Union