News that congressional Democrats in the U.S. are pushing for a tariff on exports from countries with high greenhouse-gas emissions could benefit Canada’s participation in a global effort to make international trade more climate-friendly.
Environment Minister Jonathan Wilkinson told iPolitics in April that Canada would only adopt an import levy if the U.S adopts one too. The 2021 budget said the government would begin consulting key stakeholders and international partners on how to design and implement such a policy.
The $3.5-billion Democratic plan includes “polluter import fees,” but doesn’t go into detail. The controversial bill isn’t guaranteed to pass, and would likely be negotiated both within the party and between Democrat and Republican lawmakers.
Democrats have, however, signalled their intention to use the reconciliation process that allows them to pass a bill through Congress without Republican support, as long as all Democrats vote in favour.
A “carbon border adjustment” was also mentioned in the U.S. Trade Representative’s 2021 annual report.
The adjustment refers to fees, similar to a tariff, applied to imports from countries that don’t have a carbon-pricing system or similar pollution-mitigating policies, or their systems are deemed inadequate. It’s meant to protect domestic industries in countries taking action to fight climate change. It would, in theory, incentivize other countries to reduce emissions so their exports aren’t subject to the additional costs. It would also make it more costly for industries to move from one country to another that isn’t taking the required measures against climate change.
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Despite Wilkinson’s comments, advancing a North American price on emissions at the border will be difficult, if not impossible, said Aaron Cosbey, an economist with the International Institute for Sustainable Development.
“The U.S. can’t really do a border carbon adjustment, because it doesn’t have a carbon price,” he said.
But there are ways around it, Cosbey told iPolitics on Friday. For instance, the U.S. could apply low-carbon standards to specific industries, and apply the same standard to the border, he said.
Accepting different policies, whatever they are, might be the best strategy, given the urgent need to fight climate change, said Jennifer Winter, an economics professor at the University of Calgary who specializes in environmental policy.
“It’s a situation of the perfect (being) the enemy of the good,” Winter said. “Ideally, there would be complete consistency in policy, but we’re not in that world. So, in the interest of moving policy forward, (we’ll have to accept) compromises and differences.”
While moving ahead without the U.S. is risky, Canada can’t afford to wait, Cosbey said.
“As unfortunate as it would be to move out of sync with our biggest trading partner, we can’t wait for that,” he said. “There’s no way you can wait for the U.S. to put in place their system, if they ever get one, for us to act in Canada.”
The European Union also announced a carbon border adjustment of its own, putting it ahead of all other jurisdictions. The policy must still be negotiated by the EU’s 27 member states and governmental bodies.
At last week’s G20 meeting, Finance Minister Chrystia Freeland had a conversation on carbon border adjustments with Paolo Gentiloni, her EU counterpart.
If implemented, the EU’s adjustment will first target emissions-intensive industries such as steel and cement, because their emissions are easier to track. It will be difficult to apply border adjustments to products whose manufacturing process and supply chains produce pollution that’s hard to quantify.
Canada will likely be insulated from any extra fees on exports to Europe because of our federal carbon price, Winter said.
The move by the EU, and other countries, is seen as a way to target China, the world’s largest exporter and emitter of greenhouse-gases (GHGs).
To that end, China on Friday opened its first nationwide carbon-trading market. It’s part of China’s plan to be carbon-neutral by 2060, which Chinese President Xi Jinping announced at the UN in September.
The regime sets GHG emissions quotas for companies, and is similar to a cap-and-trade system. If a company exceeds its quota, it must buy a permit from a more energy-efficient company.
The nascent regime only applies to China’s energy industry, which is responsible for about 40 per cent of the country’s GHGs. Overall, China emits about 10 gigatonnes a year of GHGs, twice what the U.S. emits, and 20 times what Canada does.
Despite the quick progress in Europe and the U.S., other countries are skeptical of the proposals.
After a meeting they held in April to discuss climate change, China, India, Brazil, and South Africa all expressed “grave concern” about “the proposal for introducing trade barriers,” including carbon border adjustments.
The adjustments could also run into problems at the World Trade Organization (WTO), because the latter prohibits countries from implementing discriminatory trade policies. Some could make the case that a border adjustment is equivalent to protectionism, which runs afoul of the WTO’s rules.
In a recent report, the European Parliament presented a plan for border adjustments that’s compatible with WTO rules.
“It will be found (to be) discriminatory, but will be saved by (the WTO’s) Article 20, which allows for environmental measures,” Cosbey said.