Tariffs are a hot topic these days. US President-elect Donald Trump says he is a “big advocate of tariffs” and has threatened a 25 percent tariff on products from Canada and Mexico unless they stem the flow of drugs and migrants across the border.
Trump says tariffs are “a powerful tool not only economically, but also to enforce other things outside of the economy.”
Could this include getting countries to cool the planet?
Canada and the USA are among those discussing CO2 tariffs or CO2 limit adjustments as a way to protect local industry while meeting climate goals.
But do they work? Where are they implemented? And how will this affect trade and the cost of living?
Here’s a closer look.
What is a CO2 tariff?
A tariff is a tax or levy on goods and services imported from another country, often based on the value of the imports. The goal is typically to increase the price of imports relative to domestically produced goods and services in order to provide domestically produced goods and services with a competitive advantage. Tariffs also generate revenue.
A carbon tariff or carbon border adjustment (CBA) can also be applied to imports based on the carbon emissions caused by the 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 imported into the United States from Mexico and Canada.
Why should countries want to implement them?
There are both economic and environmental reasons.
Countries like Canada and Europe have put a price on carbon to encourage companies to invest in decarbonization. This increases production costs for industries such as steel, which produce a lot of emissions.
Many of these industries face stiff competition from countries that can produce products more cheaply because they do not have carbon pricing.
CO2 limit adjustments These are fees specifically designed to level the playing field and make domestic products more competitive.
Aaron Crosbey, a senior fellow at the Winnipeg-based International Institute for Sustainable Development, said technically CBAs are not tariffs, which are heavily restricted under international trade agreements (although “CBA” is sometimes used interchangeably with “carbon tariff”). a more general term).
Rather, CBAs are border fees that correspond to domestic taxes generally permitted under international trade rules (similar border fees exist to offset the Canadian goods and services tax, he notes).
Laurie Durel, a Canadian postdoctoral researcher at Oeschger Center for Climate Research from the University of Bern, studied CBAs in the context of international commercial law. She says without some sort of price adjustment on imports, production and sales of goods like 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 in the atmosphere, but without the jobs in (places like) the EU.”
This shift, called CO2 shifting, could lead to an increase in global emissions.
McMaster University engineering professor Giancarlo Dalle Ave explains how “green” steel is made using direct reduced iron and electric arc furnaces and why this represents 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 CO2 border tariff“It is the only example we have so far, but different countries have proposed different ways of imposing these types of import tariffs.
The EU will start collecting carbon fees through CBAM in 2026, but launched a transition period in 2023 to collect information on emissions produced during the production of various goods.
First, the fees will apply to materials whose production traditionally produces high emissions and which face strong global competition, including iron, steel, cement, fertilizers, aluminum, hydrogen and electricity.
Since European producers have to pay fees for the CO2 emissions they produce, the CBAM will take this into account and adjust the import price accordingly.
There would be no additional costs for imports from countries with comparable CO2 prices.
Other countries plan to implement their own CBAs, including Taiwan in 2025 and the United Kingdom in 2027.
Although there is no national price on carbon emissions in the United States, there is one four CO2 tariffs – one Democrat, one Republican and two bipartisan – currently before the US Congress.
Canada held a public event Advice on CBAs in 2022, but has not yet published results.
Crosbey said many other countries are considering them, 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 created modeling showing that CBAs help domestic industries remain competitive while driving decarbonization.
“And then what they do, which is really cool, is they get other countries to adopt their own carbon pricing policies.”
Crosbey said Europe’s CBAM had already done this, pushing both Turkey and Brazil to set a price on carbon domestically.
Because when there are domestic carbon taxes that comply with CBAM, countries can avoid paying Europe’s import fees – and when carbon taxes are paid in both directions, it is better to collect them domestically to invest in decarbonization than handing them over to foreign governments as import taxes.
What happens when you exempt some people from a controversial federal tax but not others? About That producer Lauren Bird explains why some prime ministers are criticizing the federal government’s exemption from the carbon tax and how the controversial tax creates unlikely allies.
CBAs also allow countries like Europe to introduce stricter emissions regulations. To date, many countries have addressed carbon leakage by allowing dirtier industries to emit a certain amount of carbon for free and charging them only for the carbon emitted beyond that. Crosbey said CBAM was allowing Europe to abolish these certificates.
“When you do that, you get results,” he said. “You can get decarbonization investments quickly.”
Some modeling studies, such as one was released earlier this year by Xinlu Sun and colleagues at University College London suggest that CBAM may not be very efficient at stopping carbon leakage and thereby reducing global emissions.
Durel said if Europe was the only jurisdiction to implement such policies, countries could simply send their cleanest materials to Europe and continue using dirty production to export to other countries.
What are the disadvantages?
“The downsides are: It’s insanely complicated, only partially effective” and some implementations could be illegal, Crosbey said.
Countries need to calculate the emissions produced when producing various products, how much their carbon pricing increases production costs, and how this compares to carbon pricing systems in other countries.
Durel said 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 legitimate,” Durel said.
She praises a better understanding of the urgency of climate change and what needs to be done to bring climate goals in line with the Paris Agreement.
However, because Europe’s CBAM has not yet been fully implemented or challenged, Durel and Crosbey say it is not yet clear whether it is compatible with World Trade Organization rules.
Brazil, South Africa, India and China have protested against carbon-based trade measures such as CBAM, saying they are one-sided, increase costs and could slow global decarbonization. That’s them They are lobbying for them to be on the agenda of next year’s United Nations climate summit in Brazil.
Durel said measures like CBAM could disadvantage developing countries that cannot yet decarbonize their industries.
Finally, like any import tax and additional administrative procedures, CBAs impose additional costs that are likely to be passed on to the consumer and increase prices.
Interesting, Current surveys in the USA showed broad public support for carbon tariffs – and linking trade to climate performance – even if it meant some increase in people’s energy costs, said Barry Rabe, a professor of environmental policy at the University of Michigan and a senior fellow at the Brookings Institution who led the study Research through.
He added: “This seems to have some kind of cachet across the party political spectrum.”
The parliamentary budget officer published an updated analysis of the carbon tax on Thursday after making an “inadvertent error” in an earlier analysis. Conservative leader Pierre Poilievre says his “focus is on abolishing the carbon tax” when asked by a reporter about his plans for industrial carbon pricing.
How is interest in CBAs impacting Canada?
Sawyer says his modeling shows that Canada is unlikely to initially pay much less than the European CBAM due to carbon pricing (for both consumers and industry).
But that could change if Canada decides to scrap its carbon tax, as the federal Conservative party has suggested (although they It was not clear whether both industrial and consumer carbon prices would be reduced). Canadian companies could pay carbon taxes on their exported goods anyway – and the country could fall behind technologically, Durel warned.
“Canadian products could be disadvantaged if there are no further regulations on decarbonization or encouraging companies to decarbonize,” she said. “We may be better off if we keep our carbon tax on our products, because then we keep the revenue and can reinvest it into decarbonization in Canada.”
