post-doctoral fellow with the Centre for International Governance Innovation
This week on March 3, 90 days after the 2015 Climate Change talks in Paris, the premiers of Canada’s provinces and territories will meet with Prime Minister Trudeau in Vancouver to discuss a way forward for a pan-Canadian climate change framework. (Update, March 4: The resulting Vancouver Declaration can be read here.)
Since the new federal government has acknowledged that the only sustainable economic paradigm is one that is based on clean energy, the transition to a greener economy is now an immediate priority. The bloom has faded on the global oil industry for investors, too. With the Governor of the Bank of England Mark Carney warning of stranded carbon assets and oil industry pricing adjustments caused by climate related losses and liabilities, smart investors are looking hopefully toward the green economy.
Until very recently, it has been the provinces taking the lead in climate action, creating an interesting test ground for different approaches to pricing carbon. British Columbia and Alberta have used variations on a carbon tax. Quebec has a cap-and-trade system and Ontario has just introduced one as well. More recently, Newfoundland, Labrador, Nova Scotia, New Brunswick and Prince Edward Island are all discussing possible climate policies. Now that Canada is engaged in taking climate change seriously, there is an opportunity for the federal government to become a global leader in linking trade-savvy solutions with low-carbon policies.
In a global marketplace, one of the greatest challenges is that green measures in a given market can increase the cost of production, and consequently, local producers may find that consumers would prefer to purchase cheaper products from jurisdictions that do not impose climate change measures. One solution to level the playing field between foreign and domestic producers is a federally coordinated carbon price on products manufactured in Canada, reinforced by a border carbon adjustment (BCA) for similar imports at the Canadian border. Such border measures can only be adopted at the federal level only after the introduction of a pan-Canadian carbon price baseline and must avoid trade distorting or discriminatory motives.
By taking such measures, carbon prices will be equalized for identical products, regardless of their origin. This would limit the risk of cheaper foreign products undercutting the price of Canadian products and larger manufacturers fleeing to countries with lower environmental standards where they can produce commodities without accounting for their carbon footprint. As an added bonus, this system can act as a complement to the various provincial initiatives already working to reduce carbon emissions.
Promoting a national approach to carbon pricing – and even a national carbon tax – ultimately allows the federal government to not only tackle climate change, but also to introduce policy options that extend the greener economy paradigm to imports with benefits for businesses, consumers and the government.
From a business perspective, BCAs would ensure that local producers aren’t the only ones who would be held accountable for their carbon emissions. All importers of foreign products into Canada would be held to the same standards. Consumers also stand to benefit from the profits this system generates. In the short term, consumer advantages include tax rebates and other assistance for lower income families and the development of public transportation systems, parks and gardens. In the long term, companies will start offering greener goods instead of carbon intensive ones in an effort to avoid the carbon price altogether. Consumers will then be able to increase their purchasing power in more environmentally conscious markets. By raising the price of carbon intensive products, companies and consumers will be incentivized to gravitate away from such commodities.
Finally, and perhaps most importantly, BCAs would send a forward-looking message from Canada to rest of the world: we are taking climate change seriously and expect you to do the same. By enacting a combination of carbon price and BCA legislation and designing it in a way that is compatible with Canada’s World Trade Organization (WTO) obligations, Canada’s example could lead other countries to tackle the problem with similar measures. BCAs have the potential to create a cyclical, snowball-like effect. For the majority of countries in the world that are members of the WTO, putting a price on carbon can protect their exporters from having to pay border carbon adjustments elsewhere, effectively spreading climate action globally. With the money gained, governments can look to raise more funds for clean energy and technology innovation and gain advantages as early adopters in the transition to the green economy of the future.
But someone needs to get the ball rolling and, as Trudeau and provincial leaders may have the foresight to see this week, Canada is in a prime position to take leadership.
This article stems from the author’s report, released in late 2015, entitled, “When CO2 Goes to Geneva: Taxing Carbon across Borders — Without Violating WTO Obligations.”