Taxes are a hot topic these days. US President-elect Donald Trump says he is human “a big believer in tariffs,” and has threatened 25 percent tariffs on Canadian and Mexican products. unless they stop the flow of drugs and migrants across the border.
Trump says that tariffs are “a powerful tool not only in the economy, but also to achieve other things outside of the economy.”
Could that include making countries cool the planet?
Canada and the US are among those discussing it carbon values or carbon boundary adjustment as a way to protect local industry and achieve climate goals at the same time.
But do they work? Where are they used? And what will that do to trade and the cost of living?
Here’s a closer look.
What is a carbon tax?
Tariff is a tax or duty on goods and services imported from another country, usually based on the value of the goods being purchased. The goal is usually to raise the price of imported goods relative to domestically produced goods and services to give domestically produced goods a competitive advantage. Taxes also generate revenue.
A carbon tariff or carbon border adjustment (CBA) can also be applied to imports, based on the carbon emissions produced by imported goods or services.
US President-elect Donald Trump said on Monday he would sign an executive order imposing a 25 percent tariff on all products entering the United States from Mexico and Canada.
Why do countries want to use them?
There are both economic and environmental reasons.
Places like Canada and Europe have put a price on carbon to encourage companies to invest in carbon emissions. That raises production costs in industries such as high-emission steel.
Many industries of this type face strong competition from countries that can make products more expensive because they do not have carbon prices.
Carbon boundary adjustment are payments specifically designed to level the playing field and make domestic products more competitive.
Aaron Crosbey, senior fellow at the Winnipeg-based International Institute for Sustainable Development, said that technically, CBAs are not tariffs, which are largely limited under international trade agreements (although “CBA” is sometimes used interchangeably with “carbon tariff,” the term normal).
Instead, CBAs are border charges that correspond to domestic taxes, which are often allowed under international trade laws (similar border charges exist to offset Canada’s goods and services tax, he notes).
Laurie Durel, a Canadian postdoctoral researcher at Oeschger Center for Climate Change Research from the University of Bern, has studied CBAs in international trade law. He says that without fixing the prices of imported goods, the production and sale of goods such as steel may move to countries with dirty production that harms countries with strict regulations.
“Then basically [there] it will still be the same amount of greenhouse gas emissions into the atmosphere, but without the jobs [places like] the EU.”
This change, called carbon leakage, can cause global emissions.
McMaster University Engineering Professor Giancarlo Dalle Ave explains how “green” steel is made with reduced iron furnaces and electric furnaces, and why it’s such a big change from traditional methods.
How do they work?
The European Union’s Carbon Border Adjustment Mechanism (CBAM) is sometimes described as “the world’s first carbon border tax.” That is the only example we have so far, but different countries have proposed different ways of implementing these types of import charges.
The EU will start collecting carbon credits through the CBAM in 2026, but began a transition phase in 2023, which involves collecting information about the carbon produced by the production of different goods.
Initially, the fees will be spent on the most emitting materials to produce and become more globally competitive, including iron, steel, cement, fertilizers, aluminum, hydrogen and electricity.
Since European manufacturers have to pay for the carbon emissions they produce, CBAM will take that into account and adjust the price of the products they buy accordingly.
Imports from countries with comparable carbon prices will not have to pay more.
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, it does exist four carbon tariff bills – one Democratic, one Republican and two bipartisan – before the US Congress right now.
Canada held the public consultation on CBAs in 2022, but he never released the results.
Crosbey said there are many other countries they are looking at including Australia, Japan, Brazil and Turkey.
“So it’s kind of a mushroom,” he said.
Do they really work?
Dave Sawyer, chief economist at the Canadian Climate Institute, has done modeling that shows CBAs help domestic industry remain competitive while decarbonizing.
“And what they’re doing, which is really good, is they’re pushing other countries to start doing their own carbon pricing policies.”
Crosbey said Europe’s CBAM has already done that, pushing Turkey and Brazil to put a price on carbon at home.
That’s because having domestic carbon taxes equivalent to CBAM allows countries to avoid paying import taxes to Europe – and if carbon taxes are paid anyway, it’s better to collect them at home to reinvest in carbon emissions than to give them to foreign governments as import taxes.
What happens when you exempt some people from the controversial corporation tax, but not others? About That producer Lauren Bird explains why some prime ministers are criticizing the federal government’s carbon tax exemption and how the controversial tax is creating potential allies.
CBAs also allow authorities such as Europe to enforce stricter emissions regulations. Until now, many countries have tackled carbon leakage by allowing polluting industries to emit a certain amount of carbon for free, and charging them only for carbon emitted above that level. Crosbey said the CBM allows Europe to remove those subsidies.
“When you do that, you get results,” he said. “You get decarbonizing investments faster.”
However, some modeling studies, such as one published earlier this year by Xinlu Sun and colleagues at University College London, suggest that CBAM may not be effective in stopping carbon leakage and thereby reducing global carbon emissions.
Durel said that if Europe is the only jurisdiction that implements such policies, countries can simply export their cleanest products to Europe, and continue to use dirty production to export to other countries.
What are the worst cases?
“The downside is: it’s incredibly complicated, it’s less efficient” and some implementations may be illegal, Crosbey said.
Countries need to calculate the carbon emissions produced in the production of different products, how much carbon pricing adds to production costs, and how that compares to other countries’ carbon pricing regulations.
Durel said that when CBAs were first proposed nearly two decades ago, there was widespread agreement that they would violate international trade laws.
But that has changed. “There is a growing consensus that this is legal but also illegal,” said Durel.
He recommends a better understanding of the urgency of climate change, and what needs to be done to comply with climate goals and the Paris Agreement.
However, because Europe’s CBAM has not yet been fully implemented or contested, Durel and Crosbey both say it is not yet clear whether it complies with World Trade Organization rules.
Brazil, South Africa, India and China have protested carbon-based trading mechanisms such as CBAM, saying they are unilateral, raise costs and could reduce global carbon dioxide emissions. They are there lobbying for them to be on the agenda at next year’s United Nations climate conference in Brazil.
Durel said policies such as CBM could endanger developing countries that have not been able to remove carbon from 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.
It is interesting that recent polls in the US has shown broad public support for carbon tariffs — and linking trade and climate action — even if it means some increase in human energy costs, said Barry Rabe, a professor of environmental policy at the University of Michigan and a senior fellow at the Brookings Institution. do research.
He added, “This seems to have some kind of cachet across the partisan spectrum.”
Parliament’s budget chief released an updated analysis of the carbon tax on Thursday, after making an ‘inadvertent error’ in an earlier analysis. Conservative leader Pierre Poilievre says he is ‘focused on getting rid of the carbon tax’ when asked by a reporter about his plans for carbon pricing.
How is Canada affected by interest in CBAs?
Sawyer says his modeling shows that because Canada has carbon prices (both consumer and industrial), it may not have paid much less than Europe’s CBM to begin with.
But that could change if Canada decides to introduce a carbon tax, as the Federal Conservative Party has proposed (although it’s unclear whether industrial and consumer carbon prices will be cut). Canadian companies could end up paying a carbon tax on their exports — and the country could fall behind in technology, Durel warns.
“Canadian products may be disadvantaged if there is no decarbonization regulation or incentives for companies to decarbonize,” he said. “We’re probably better off keeping our carbon tax on our products, because we keep the revenue and can reinvest it in decarbonizing Canada.”
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