Canada has a chance play catchup on border carbon adjustments

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A new discussion paper from Ottawa on border carbon adjustments represents a bit of crucial catch-up on what has quickly become a hot topic in global trade policy – not least with our giant trading partner south of the border.

This could well be the issue that entices the United States back to the international trade table. Which is ample reason for the Canadian government to get its voice into the conversation – even if it chose the usually sleepy policy days of August to do so.

The paper, published by the Finance Department last week at the same time as it launched public consultations into the topic of border carbon adjustments (BCAs), outlines what forms a Canadian BCA might take, and some of the international considerations involved. Border carbon adjustments are, basically, tariffs applied to imports and/or rebates applied to exports to help address differences in trading partners’ carbon policies.

The idea is to protect the competitiveness of producers in countries that adopt more aggressive carbon-reduction measures – and to remove the incentives for trading partners to drag their feet on carbon policy, and for producers to shift production to lower-carbon-cost jurisdictions. If done in co-ordination with other countries, BCAs have the potential to ease the negative impacts on business of carbon policies, while accelerating greenhouse-gas reduction efforts. If done unilaterally and in competition with trading partners, they could set off a global carbon trade war.

While Ottawa had signalled since last fall that it would explore BCAs as a possible component of Canada’s greenhouse gas reduction strategy, the issue quickly became more pressing in the past month as both the European Union and the United States took substantial, and unilateral, steps in the direction of BCAs.

In mid-July, the European Commission adopted a proposal for a border tax on a variety of carbon-intensive imported materials such as steel, aluminum, cement and fertilizers, beginning in 2026. Some trade pundits view the move as a pre-emptive strike in a potential global trade war over carbon policies, and the uneven playing fields they could create.

Within days of the EU announcement, Democrats in the U.S. Senate introduced legislation for a U.S. border carbon tariff, targeting a similar list of carbon-intensive imports, beginning in 2024.

While President Joe Biden isn’t formally behind the bill, he and his chief climate envoy, John Kerry, have certainly entertained the concept of BCAs in more general terms. Frankly, border carbon adjustments could provide the cover that Mr. Biden will need if he’s going to pursue the relatively ambitious climate agenda that he has laid out – alleviating the argument from his political opponents and some business leaders that aggressive emission reductions would harm U.S. competitiveness.

But the Biden administration appears wary of imposing carbon tariffs unilaterally – an approach that could present problems under existing international trade laws, opening the door for formal complaints at the World Trade Organization and retaliations from individual trading partners. It’s a potential hornet’s nest that Mr. Biden would rather not stir, as the President begins to re-engage in the international trade arena after the openly anti-trade Donald Trump presidency.

It may be telling that as the discussion around BCAs heats up, Mr. Biden this week announced two long-overdue appointments to the U.S. trade team – a new U.S. ambassador to the World Trade Organization, and a new chief negotiator in the office of the United States Trade Representative. Despite talking a more trade-friendly game than his predecessor, Mr. Biden has moved remarkably slowly on rebuilding U.S. presence at the global trade table – until now. The President’s climate ambitions – and, by extension, his interest in taking a lead role in multilateral discussions around BCAs – may have persuaded him to start rebuilding a team up to the task.

“Right now, we’re pursuing multilateral efforts [on BCAs],” Mr. Kerry said in an interview last month. “We’re trying to bring people together; we don’t want to do something that pushes people away.”

That’s just fine from Canada’s perspective.

A key takeaway from the Finance paper is that the government is very aware of the precarious position Canada would be in if the United States and other key trading partners opted for unilateral border carbon measures. If BCAs are coming to the global trade sphere, Ottawa would much rather see them as part of a multinational framework designed to keep the playing field level for everyone, while accelerating the global climate fight.

“There are different ways countries can take action, and we need to think about how we bring those approaches together,” the Finance report says. “This is why the government wants to engage with key trading partners and other like-minded countries who are taking climate action to better understand their perspectives and plans for BCAs or alternative measures, and ensure there as much coherence and coordination as possible among different policies and approaches.”

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