13 may 2021

Carbon Border Adjustment Gains Ground as Countries Weigh Emission Cuts, Global Trade

May 13, 2021 The Energy Mix
The reference to a carbon border adjustment in the latest federal budget was one sign that countries with relatively strong carbon prices are keen to avoid becoming the new “Rust Belt”, CBC business columnist Don Pittis writes in a recent analysis.

“The idea of a border charge is to address concerns that in countries with a price on carbon, like Canada, domestic players making, say, aluminum are at a disadvantage compared to imported goods from countries without those regulations,” Pittis explains. “The fear is, that could entice companies that need aluminum to source it from the U.S. or somewhere else that doesn’t have a carbon tax because it’s cheaper than Canadian-made aluminum.”

With that in mind, a carbon border adjustment “got its very own subheading” in Finance Minister Chrystia Freeland’s 724-page budget document, Pittis writes. It says Ottawa will “make sure that regulations on a price on carbon pollution apply fairly between trading partners,” a move that “levels the playing field, ensures competitiveness, and protects our shared environment.”

Just be sure to call the border adjustment a levy. Not a tax.

“Maybe don’t say cross-border carbon taxes,” Canadian border carbon adjustment expert Aaron Cosbey of the International Institute for Sustainable Development told Pittis in an email. “From a [World Trade Organization]-legal perspective a tax, a tariff, and a regulation are really different things, and the current Canadian regime is probably not a tax—it’s a regulation.”

Much as the wording matters in the rarified air of the WTO, “exactly what to call it may be one of the lesser worries for those trying to hammer out an international agreement on the scheme that is expected to raise stiff opposition from countries, including China, asked to pay the levy,” Pittis says. “But what is almost certain is that without a new set of rules to equalize the economic cost of fighting climate change across national boundaries, countries like Canada and the U.S. or trade blocs like the European Union will be at a huge trade disadvantage to those like Russia or Brazil where climate rules are light or non-existent.”

Pittis goes through a detailed explainer on the twists, turns, and complexities of a carbon border adjustment. So far, the European Union has taken a lead on the issue, though its border levy plan has been subject to repeated delays. The United States is back in the discussion, after President Joe Biden supported border adjustments on the campaign trail and expressed renewed interest a couple of weeks ago. Epic carbon polluter Australia, to no one’s surprise, is less enthusiastic.

While negotiations are likely to be slow and complex, National Bank of Canada geopolitical analyst Angelo Katsoras told Pittis a carbon border tax is becoming increasingly inevitable.

“For Europe it’s a matter of economic survival,” he said, and the same will be increasingly true for countries like the U.S. and Canada as they toughen up their emissions policies. “I think it has become politically unsustainable to continue to put in stringent targets without a carbon border tax.”

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