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Tariffs are a hot topic these days. US President-elect Donald Trump says it is “a big believer in tariffs,” and threatened 25 percent tariffs on products from Canada and Mexico unless they curb the flow of drugs and migrants across the border.
Trump says tariffs are “a powerful tool not only economically, but to get other things outside of the economy.”
Could it involve getting countries to cool the planet?
Canada and the US are among those debating carbon tariffs or carbon limit adjustments as a way of protecting local industry and simultaneously achieving climate goals.
But do they work? Where are they spent? And what will it do to trade and the cost of living?
Here’s a closer look.
What is a carbon tariff?
A tariff is a tax or fee on goods and services imported from another country, often based on the value of the import. The goal is usually to increase the price of imports relative to domestic goods and services to give those produced at home a competitive advantage. Tariffs also generate revenue.
A carbon tariff or carbon cap adjustment (CBA) may also be applied to imports, based on the carbon emissions produced by the imported goods or services.
US President-elect Donald Trump said on Monday that he will sign an executive order imposing 25 percent tariffs on all products coming into the United States from Mexico and Canada.
Why would countries want to implement them?
There are also economic and environmental reasons.
Places like Canada and Europe have put a price on carbon to encourage companies to invest in decarbonisation. This raises production costs for emissions-intensive industries such as steel.
Many such industries face stiff competition from countries that produce products more cheaply because they do not have carbon prices.
Carbon trim adjustments are fees specifically designed to level the playing field and make domestic products more competitive.
Aaron Cosbey, a senior fellow at the Winnipeg-based International Institute for Sustainable Development, said technically CBAs are not tariffs, which are largely limited by international trade agreements (although “CBA” is sometimes used as a synonym for “carbon tariff,” a more general term). .
Instead, CBAs are border fees that correspond to domestic taxes, which are generally allowed under international trade rules (similar border fees exist to adjust to Canada’s GST, he notes).
Laurie Durel, Canadian postdoctoral fellow at Oeschger Center for Climate Change Research of the University of Bern, studied CBA in the context of international trade law. She says that without some sort of import price adjustment, the production and sale of goods such as steel could simply shift to countries with dirtier production at the expense of countries with stricter regulations.
“Then there will still be (basically) the same amount of greenhouse gas emissions into the atmosphere, but just without the jobs in (places like) the EU.”
This shift, the so-called carbon leakage, could cause an increase in global emissions.
McMaster University engineering professor Giancarlo Dalle Ave explains how “green” steel is produced in direct iron reduction furnaces and electric arc furnaces, and why it’s such a big change from traditional methods.
How do they work?
The European Union Border Adjustment Mechanism (CBAM) is sometimes described as “the first carbon border tariff in the world.” This is the only example we have so far, but different countries have proposed different ways to implement these types of import duties.
The EU will start collecting carbon fees through the CBAM in 2026, but in 2023 it started a transition phase, which includes collecting information on the emissions generated by the production of different goods.
Initially, the fees will apply to materials that traditionally generate a lot of emissions for production and have a lot of global competition, including iron, steel, cement, fertilizers, aluminum, hydrogen and electricity.
Since European manufacturers have to pay fees for the carbon emissions they create, CBAM will take this into account and adjust the import price accordingly.
Imports from countries with comparable carbon prices should not pay extra.
Other countries plan to implement their own CBAs, including Taiwan in 2025 and the UK in 2027.
Although the US does not have a national price on carbon emissions, they do exist four carbon tariff bills — one Democratic, one Republican and two bipartisan — right now before the US Congress.
Canada held public consulting on CBA 2022, but has not published any results.
Cosbey said they are being investigated by many other countries, including Australia, Japan, Brazil and Turkey.
“So it’s mushrooming,” he said.
Do they actually work?
Dave Sawyer, chief economist at the Canadian Climate Institute, has done modeling showing that CBA helps domestic industry remain competitive while encouraging decarbonisation.
“And then what they’re also doing, which is really cool, is they’re pushing other countries to start implementing their own carbon pricing policies.”
Cosbey said Europe’s CBAM has already done this, pushing both Turkey and Brazil to price carbon domestically.
That’s because domestic carbon taxes equivalent to the CBAM allow countries to avoid paying European import duties — and if carbon taxes are paid anyway, it’s better to collect them at home to reinvest in decarbonization than hand them over to foreign governments as import taxes.
What happens when you exempt some people from a controversial federal tax but not others? On it, producer Lauren Bird explains why some premiers are criticizing the federal government’s carbon tax exemption and how the controversial tax is creating unlikely allies.
The CBA also allows jurisdictions like Europe to enforce stricter emissions regulations. Until now, many countries have dealt with carbon leakage by allowing dirtier industries to emit a certain amount of carbon for free and only charging them for carbon emissions above that level. Cosbey said CBAM allows Europe to get rid of those fees.
“When you do that, you get results,” he said. “You get decarbonisation investments in a hurry.”
However, some modeling studies, such as one published earlier this year Xinlu Sun and colleagues from University College London, suggest that CBAM may not be very effective at stopping carbon leakage and therefore reducing global emissions.
Durel said that if Europe is the only jurisdiction implementing such policies, countries can simply send their cleanest materials to Europe and continue to use dirty production for export to other countries.
What are the disadvantages?
“The downsides are: This is crazy complicated, only partially effective,” and some implementations may be illegal, Cosbey said.
Countries need to calculate the emissions produced in the production of different products, how much their carbon prices add to the cost of production and how this compares with carbon pricing regimes in other countries.
Durel said when CBAs were first proposed nearly two decades ago, there was broad agreement that they would violate international trade laws.
But that has changed. “There’s a growing consensus that it’s legal, but also legitimate,” Durel said.
She credits a better understanding of the urgency of climate change and what needs to be done to bring climate goals into line with the Paris Agreement.
However, because Europe’s CBAM has not yet been fully implemented or challenged, Durel and Cosbey say it is not yet clear whether it complies with WTO rules.
Brazil, South Africa, India and China have protested against carbon-based trade measures such as CBAM, saying they are one-sided, raise costs and could slow global decarbonisation. they are lobbying to be on the agenda of next year’s United Nations climate summit in Brazil.
Durel said policies like CBAM can disadvantage developing countries that cannot yet decarbonize their industries.
Finally, like any import tax and additional administrative procedures, CBAs add costs that are likely to be passed on to the consumer, raising prices.
interestingly, recent polls in the US showed broad public support for carbon tariffs — and linking trade to climate performance — even if it meant increasing energy costs for people, said Barry Rabe, a professor of environmental policy at the University of Michigan and a senior fellow at the Brookings Institution, who conducted the research. .
He added: “This seems to have some kind of stamp across the party spectrum.”
The Parliamentary Budget Officer released an updated analysis of the carbon tax on Thursday, after making an ‘inadvertent error’ in a previous analysis. Conservative leader Pierre Poilievre says his ‘focus is on reducing the carbon tax’ when asked by a reporter about his plans to price industrial carbon.
How is Canada affected by interest in the CBA?
Sawyer says his modeling shows that because Canada has carbon prices (both consumer and industrial), it probably wouldn’t initially pay much under Europe’s CBAM.
But that could change if Canada decides to cut its carbon tax, as proposed by the federal Conservative Party (although it is not clear whether carbon prices for industry and consumers will be reduced). Canadian companies could end up paying carbon taxes on their exported goods anyway — and the country could fall behind technologically, Durel warned.
“Canadian products could be at a disadvantage if there aren’t more decarbonization regulations or incentives for companies to decarbonize,” she said. “Maybe we’re better off keeping the carbon tax on our products, because then we keep the revenue and can reinvest it into decarbonizing Canada.”
