There's a missing tool in our fight against climate change

A tool you’ve probably never heard of may be the key to enabling Canada's climate ambition. It’s called border carbon adjustment, and it could change the way we pursue decarbonization.

Canada has been on a roll over the past year. The Liberal government introduced a legislated net-zero target, backed by a plan to increase the price of carbon to $170 per tonne by 2030. The Conservative Party responded with its strongest climate plan to date, designed to achieve Canada’s Paris Agreement targets. For the first time, every federal political party seems to be focused on serious emissions reductions.

It’s not just governments that are getting ambitious. Alongside their international peers, Canadian industry players have issued a rapid-fire succession of net-zero commitments. About 90 per cent of western oilsands production is now covered by a mid-century net-zero target, and sectors like steel, cement and mining are also proposing big emissions cuts. A steadily rising national carbon price offers a powerful incentive for Canadian firms to reduce their emissions.

The problem we now must confront — urgently — is that not every country is ambitious about cutting carbon pollution. Canadian firms are up against some international competitors that enjoy lower production costs because the countries where they operate aren’t prioritizing climate action. This means that pricing emissions in Canada could have the effect of shifting production to places where it’s cheaper to pollute — a phenomenon called “carbon leakage.” We need to plug this leak before it becomes a flood, both to protect our economy and ensure we reach our climate goals.

The European Union is a few steps ahead of Canada in tackling this challenge. On July 14, the European Commission announced its 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 price already paid by foreign producers, meaning much less impact for countries — like ours — with strong carbon pricing regimes.

Other countries with big climate commitments are also moving in this direction. The U.K. and the U.S. have both said they want to implement border carbon adjustment (BCA). After their June summit, the G7 leaders announced in a joint communiqué that they would work together to address carbon leakage.

Last week’s move by the EU gives us a clearer picture of the choices Canada will have to make as we get increasingly serious about climate action and start reckoning with the emissions embedded in our imports. Canada’s ambitious timetable for carbon pricing makes this even more urgent.

The sooner we ramp 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 mirror our complex domestic greenhouse gas regulations with a regime that applies at the border? Do we give foreign producers any credit if their home country has some form of carbon pricing? Do we provide any relief for Canadian exporters and, if so, how do we do it without violating World Trade Organization rules?

These are some of the top-line questions we’re going to need to address — there are many more. We can’t be daunted by them. Encouragingly, Canada is going into this process with a big advantage: our ambitious carbon pricing system. Not only is carbon pricing helping us to cost-effectively decarbonize our economy, but as we saw in the leaked draft of the EU’s proposal, it offers the best hope of reducing the impact of foreign BCA on our exporters.

Our new report has shown us that BCA is a complicated tool to get right, it’s challenging to square with the spirit of multilateralism, and even at its 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 decarbonize and to ensure markets for their green products. For all BCA’s challenges, though, it’s hard to see how we could successfully decarbonize without it.

Canadian leaders need to start designing our BCA system now — beginning with close consultation with affected industries — to keep our economy competitive and our climate ambition on track.

Michael Bernstein is the executive director of Clean Prosperity.

Aaron Cosbey is a development economist with 30 years’ experience in the law and economics of sustainable development.