Can tariffs combat climate change?

Definitions are a hot topic these days. US President-elect Donald Trump says… “A big believer in tariffs,” and threatened to impose a 25 percent tariff on products coming from Canada and Mexico. Unless they curb the flow of drugs and migrants across the border.

Trump says tariffs are “a powerful tool not only economically, but also to take other things out of the economy.”

Could this include getting countries to cool the planet?

Canada and the United States are among those discussing it Carbon tariffs or Carbon border adjustments As a way to protect local industry and achieve climate goals at the same time.

But do they work? Where is it implemented? What will this do to trade and the cost of living?

Here’s a closer look.

What is a carbon tariff?

A tariff is a tax or duty on goods and services imported from another country, often based on the value of the import. The goal is usually to raise the prices of imports compared to locally produced goods and services to give those made at home a competitive advantage. Tariffs also generate revenue.

A carbon tariff or adjustment of carbon limits could also be applied to imports, based on the carbon emissions generated by the imported goods or services.

Why do countries want to implement it?

There are economic and environmental reasons.

Places like Canada and Europe have instituted a carbon price to encourage companies to invest in decarbonization. This raises production costs for industries like steel that generate a lot of emissions.

Many of these industries face intense competition from countries that can manufacture products at a lower cost because they do not have carbon pricing.

Carbon border adjustments These are fees specifically designed to level the playing field and make local products more competitive.

Collective trade agreements are not technically tariffs, and they are highly restrictive under international trade agreements (although “CBA” is sometimes used interchangeably with “carbon tariff,” said Aaron Crosby, a senior associate at the Winnipeg-based International Institute for Sustainable Development). ). A more general term).

Instead, border tariffs are border fees that correspond to local taxes, which are generally allowed under international trade rules (similar border fees exist to adjust GST in Canada, he points out).

Lori Dorrell, a Canadian postdoctoral researcher at Oshgar Center for Climate Change Research From the University of Bern, he studied business agreements in the context of international trade law. She says that without some sort of import price adjustment, the production and sale of commodities such as steel may simply shift to countries with dirtier production at the expense of countries with stronger regulations.

“So there will still be the same amount of greenhouse gas emissions in the atmosphere, but no jobs in (places like) the European Union.”

This transformation, called carbon leakage, It could cause global emissions to rise.

How do they work?

The EU Carbon Border Adjustment Mechanism (CBAM) is sometimes described as “The world’s first carbon border tariff“It’s the only example we have so far, but different countries have proposed different ways to implement this type of import duty.

The EU will start collecting carbon fees through CBAM in 2026, but has begun a transition phase in 2023, which involves collecting information on emissions from the production of different goods.

Initially, the tariffs will apply to materials that traditionally generate a lot of emissions to produce and face a lot of global competition, including iron and steel, cement, fertilisers, aluminium, hydrogen and electricity.

Since European producers have to pay a fee for the carbon emissions they generate, the CBAM will take this into account and adjust the price of imports accordingly.

Imports from countries with similar carbon prices will not need to pay more.

Other countries plan to implement their own collective partnership agreements, including Taiwan in 2025 and the United Kingdom in 2027.

Although the United States does not set a national price on carbon emissions, it exists Four carbon tariff bills – One Democrat, one Republican, and two from both parties – are now before the US Congress.

Canada held a public meeting Consultation on collective cooperation agreements in 2022, but no results have been released.

Crosby said several other countries are looking into the matter, including Australia, Japan, Brazil and Turkey.

“So it’s kind of reproductive,” he said.

Do they actually work?

Dave Sawyer, chief economist at the Canadian Climate Institute, has modeled that collective investment agreements help domestic industry stay competitive while spurring decarbonization.

“Then what they also do, which is really cool, is they push other countries to start implementing their own carbon pricing policies.”

The European CBAM system has already done this, prompting both Turkey and Brazil to set a carbon price domestically, Crosby said.

This is because having domestic carbon taxes equivalent to CBAM allows countries to avoid paying import duties in Europe – and if carbon taxes are paid either way, they are better off collecting them at home to reinvest in decarbonisation rather than handing them over to foreign governments as import taxes.

Collective investment agreements also allow jurisdictions such as Europe to implement stricter regulations on emissions. So far, many countries have dealt with carbon leakage by allowing dirty industries to emit a certain amount of carbon for free, and charging them only for carbon emitted above that level. CBAM allows Europe to get rid of those allowances, Crosby said.

“When you do that, you get results,” he added. “You’re getting investments to decarbonize quickly.”

However, some modeling studies, e.g One published earlier this year Chenlu Sun and his colleagues at University College London point out that CBAM technology may not be very effective in stopping carbon leakage and thus reducing global emissions.

If Europe were the only jurisdiction implementing such policies, countries might simply send their cleanest materials to Europe and continue to use the dirty production for export to other countries, Dorrell said.

What are the negatives?

“The downsides are: ‘It’s crazy complicated, it’s only partially effective’ and some applications may be illegal,” Crosby said.

Countries need to calculate emissions from producing different products, how much carbon pricing adds to the cost of production, and how this compares to carbon pricing systems in other countries.

When collective trade agreements were first proposed nearly two decades ago, there was widespread agreement that they would violate international trade laws, Dorrell said.

But this has changed. “There is a growing consensus that this is legal but also legitimate,” Dorrell said.

She credits a better understanding of how urgent climate change is, and what needs to be done to align climate goals with the Paris Agreement.

However, since the European CBAM regime has not yet been fully implemented or challenged, both Dorrell and Crosby say it is not yet clear whether it is compatible with WTO rules.

Brazil, South Africa, India and China have protested carbon-based trade measures such as CBAM, saying they are unilateral, increase costs and could slow global decarbonisation. They are And push for it to be included on the agenda of next year’s UN climate summit in Brazil.

Dorrell said policies like CBAM could harm developing countries that cannot yet decarbonize their industries.

Finally, like any import tax and additional administrative procedures, collective trade agreements add costs that are likely to be passed on to the consumer, raising prices.

Interestingly, Recent opinion polls in the United States It has shown broad public support for carbon tariffs — and linking trade to climate performance — even if it means some increase in people’s energy costs, said Barry Raab, a professor of environmental policy at the University of Michigan and a senior fellow at the Brookings Institution. He conducted the research.

“This seems to have some kind of impact across the partisan spectrum,” he added.

How is Canada affected by interest in collective cooperation agreements?

Sawyer says his model shows that because Canada has carbon pricing (both consumer and industrial), it likely wouldn’t pay as much under the European CBAM system to begin with.

But this could change if Canada decides to scrap the carbon tax, as the federal Conservatives have (though) suggested. It was not clear whether industrial and consumer carbon pricing would be reduced). Dorrell warned that Canadian companies may end up paying carbon taxes on their exported goods anyway — and the country may fall behind technologically.

“Canadian products could be harmed if there is not more regulation of decarbonization or encouragement of companies to decarbonize,” she said. “We might be better off keeping the carbon tax on our products, because then we keep the revenue and can reinvest it in decarbonization in Canada.”