This coming Saturday marks five years since Canada signed on to the Paris Agreement and Prime Minister Trudeau announced that “Canada is back”. Moving the ball downfield on ambitious environmental policy has been a hallmark of Trudeau’s leadership. Since asserting that “the environment and the economy go hand in hand” in 2015, the Liberals moved quickly to introduce a national price on carbon, commitments on protected areas and most recently, committed to achieve Net Zero emissions by 2050. Those moves haven’t been without their hurdles, including attempts from provinces to challenge the constitutionality of a carbon tax – now being studied by the Supreme Court (with a ruling expected late this year or early next). In spite of these hurdles, the government seems poised to continue with its green recovery agenda with a clean growth plan, clean fuel standards and movement on a commitment to plant billions of trees, all anticipated before the end of 2020.
The latest green policy to be floated by the Trudeau Liberals was tabled last Monday in the Fall Economic Update (FES). The Liberals announced they are exploring the potential of a border carbon adjustment and committed to discussing this idea with international partners. This type of adjustment attempts to prevent carbon leakage. This is the practice of companies transferring their production away from a country with stiff environmental laws, like Canada, to a nation that has fewer restrictions. In doing so, the country with higher regulations becomes less desirable and the companies experience an overall rise in emissions. To prevent this, a country is able to leverage a carbon adjustment to establish a carbon fee on imports from countries that do not have carbon pricing. This allows for products to face the same costs as those supplied by domestic producers who pay a price for carbon pollution. In short, the adjustment fee levels the playing field between countries and businesses that operate with varying climate regulations.
The idea of a carbon adjustment was first introduced in 2007 by then French President Jacques Chirac. The idea remained just that until 2019 when Emmanuel Macron pitched it to German Chancellor Angela Merkel. The European Union, like Canada, is now exploring the effects of this adjustment and the potential impacts it could have both domestically and internationally. President-Elect Joe Biden’s trade agenda calls for a provision that includes a carbon adjustment. His platform notes that “this adjustment would stop polluting countries from undermining our workers and manufacturers”. This provision would require countries exporting goods into the United States to meet climate and environmental obligations.
This policy, like the carbon tax, has its critics. Minister of Economic Development of the Russian Federation, Maxim Reshetnikov, said early this year that Moscow “is extremely concerned by attempts to use the climate agenda to create new barriers”.
It is doubtful that concerns from Russia, or other countries with lacklustre environmental regulations, will dissuade Canadian and other governments from implementing these types of measures. The bigger hurdle lies with the World Trade Organization (WTO) that generally rejects measures like the border carbon adjustment. However, as the environment and these types of measures gain more international support, the WTO may have to change its tune.
With the announcement made in the FES, it is clear that the government is ready to work with international partners to ensure that there is a balanced playing field between those who are tough on emitters and those who have some catching up to do. The move towards a carbon border adjustment may well be a rallying cry for progressive-leaning governments, like Canada’s, to move closer to reaching goals set out in the Paris Agreement.
