A tool you’ve probably never heard of may be the key to enabling Canada’s climate ambition. It’s called carbon border tuning and it could change the way we go about decarbonisation.
Canada has been on a roll for the past year. The liberal government introduced a legislated net zero target, backed by a plan to raise the price of carbon to $ 170 per tonne by 2030. The Conservative Party answered with its most robust climate plan to date, designed to achieve the goals of Canada’s Paris Agreement. For the first time, all federal political parties appear to be focused on serious emission reductions.
It is not just governments that are getting ambitious. Along with their international peers, Canadian industry players have issued a rapid succession of zero net commitments. About 90 percent of western oil sands production is now covered by a net zero midcentury goaland sectors like steel, cement and mining are also proposing big cuts in emissions. A steadily rising national carbon price offers a powerful incentive for Canadian companies to reduce their emissions.
The problem that we must urgently tackle now is that not all countries have the ambition to reduce carbon pollution. Canadian companies face some international competitors who enjoy lower production costs because the countries where they operate are not prioritizing climate action. This means that the price of emissions in Canada could have the effect of moving production to places where it is cheaper to pollute, a phenomenon called “carbon leak. “We need to plug this leak before it becomes a flood, both to protect our economy and to make sure we meet our climate goals.
The European Union is a few steps ahead of Canada in meeting this challenge. On July 14, the European Commission announced his proposed solution: The carbon border adjustment mechanism. The new policy would apply charges for greenhouse gases emitted in the production of imported steel, iron, cement, fertilizers, aluminum and electricity. The good news for Canadian exporters is that the EU is proposing to subtract any carbon prices that foreign producers have already paid, which means much less of an impact for countries, like ours, with strong carbon pricing regimes.
Other countries with large climate commitments are also moving in this direction. The UK and US have said they want to implement Border Carbon Trim (BCA). After their June summit, G7 leaders announced in a release that they would work together to address carbon leaks.
Last week’s move by the EU gives us a clearer picture of the choices Canada will have to make as we take climate action more and more seriously and begin to consider the emissions embedded in our imports. Canada’s ambitious schedule for carbon pricing makes this even more urgent.
The sooner we step up our efforts, the better, because the details of BCA are complicated and the potential pitfalls are many. How do we determine how much carbon was used to produce the goods we import? How do we reflect our complex national greenhouse gas regulations with a regime that is enforced at the border? Do we give foreign producers any credit if their home country has some kind of carbon price? Do we provide any relief to Canadian exporters, and if so, how do we do so without violating World Trade Organization rules?
These are some of the main questions that we will have to address; there are many more. We cannot be intimidated by them. It is encouraging that Canada is entering this process with one great advantage: our ambitious carbon pricing system. Not only does the carbon price help us profitably decarbonize our economy, but, as we saw in the leaked draft of the EU proposal, it offers the best hope of reducing the impact of foreign BCAs on our exporters.
Our new report It has shown us that BCA is a complicated tool to do well, it is challenging to square with the spirit of multilateralism, and even at best, it is not a perfect or complete solution. To be effective, it must be accompanied by other policies to boost the competitiveness of our industries as they decarbonise and secure markets for their green products. Yet for all the BCA challenges, it’s hard to see how we could successfully decarbonize without it.
Canadian leaders must begin designing our BCA system now, beginning with close consultation with affected industries, to keep our economy competitive and our climate ambition on track.
Canadian leaders must start designing our border carbon trim system now to keep our economy competitive and our climate ambition on track, write @bernstein_micha and @AaronCosbey. #BCA #CBAM #EUGreenDeal # NetZero2050
Michael Bernstein is the CEO of Clean Prosperity.
Aaron Cosbey is a development economist with 30 years of experience in sustainable development law and economics.