Other countries are increasingly using carbon tariffs to punish countries that are free-riding on the need to fight climate change.
by Eric Van Rythoven. Originally published on Policy Options
May 23, 2024
If an election were held tomorrow, all signs point to a resounding Conservative victory. The latest projections from 338 Canada show the Conservatives with a commanding lead and a projected 220 seats in the Commons, well past the 170 required to form a majority government.
If their party’s messaging is to be believed, the first order of business in a Poilievre government will be to ”axe the tax” and end the Liberal government’s carbon pricing program.
However, their victory may be short-lived.
The debate over the carbon tax has focused so far on domestic politics. However, this misses the importance of the international context. Increasingly, our trading partners take the threat of climate change seriously and use carbon tariffs to punish other countries they see as free-riders.
Any government that wants to protect Canada from these tariffs will need a credible plan to reduce emissions. The result is that a future Conservative government may have to bring back the carbon tax, whether it likes it or not.
Enter the carbon tariff
Other countries are increasingly using carbon tariffs – a tax on imported carbon-intensive goods in response to “carbon leakage,” which occurs when governments introduce new climate regulations but businesses respond by moving production overseas, thus avoiding the need to reduce their emissions.
Increasingly, carbon tariffs are the reality of global trade. The most prominent example is the European Union’s carbon border adjustment mechanism (CBAM), designed to “discourage the import of cheap carbon-intensive products made in non-EU countries.”
The mechanism’s trial phase started in 2023, but some countries are already feeling the pinch. Chinese steel producers worry it could raise the cost of their exports by four to six per cent with further increases coming. But the impact of the tariff does not stop there.
China is the biggest purchaser of Australian iron ore, but this ore is typically a lower grade and energy-intensive to refine. The EU’s pressure on China to lower steel-production emissions means that Australia will need to green its mining industry or risk losing its most important customer. The impact of CBAM will thus be felt globally.
A greening American leviathan
Critics of the carbon tax argue the EU is a special case and that what really matters is the United States, which accounts for about two-thirds of Canada’s global trade. The U.S. currently has no mechanism for carbon tariffs.
This argument relies on the wishful thinking that the status quo continues. Instead, we have a remarkable “greening” of the American leviathan where the trendline is to more climate action.
Almost two-thirds of Americans want their federal government to do more on climate change. This includes broad, bipartisan support for policies such as curbing power plant emissions and taxing emissions.
In 2022, President Biden signed the most significant climate legislation in American history, the Inflation Reduction Act, which includes billions of dollars for renewable energy, electrification and electric vehicles to fight climate change.
Polls suggest 73 per cent of Americans support a carbon border adjustment mechanism similar to the EU – and this support extends to Republican-leaning states traditionally skeptical of environmental regulation.
Early versions of a carbon tariff, such as Democratic Senator Sheldon Whitehouse’s Clean Competition Act, are working their way through Congress.
In American politics, carbon tariffs have an exceedingly rare quality: bipartisan appeal. For MAGA Republicans, they offer a means to strike back at countries they see, in Donald Trump’s words, “making billions screwing us.” For progressive Democrats, they offer a means to fight climate change by penalizing countries they see as climate laggards.
Unfortunately for Canadians, Americans will see us in both of these categories.
Free-riding and resentment
The problem is this: other countries increasingly take the threat of climate change seriously and are expending significant political and financial capital to fight it.
If the Conservatives do axe the carbon tax without a credible replacement, these countries will see Canada rolling back its climate policies and ask why such a rich and technologically developed country is not doing more and why Canada should get the benefit of climate action without paying the costs.
Critics claim that Canada does not need a carbon tax to reach its emission goals. This is true, but as economists remind us, the carbon tax is “the least-cost way to reduce emissions.” Even some carbon opponents agree, such as Saskatchewan Premier Scott Moe who recently revealed that his government considered alternatives to carbon pricing but found them too costly. 
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If Conservatives have already ruled the least costly option out-of-bounds, what possible alternatives are there? And if the Conservatives really have a credible alternative for Canada to reach its emission goals, then why can’t they tell us what that is?
The result is that Canada – already a dilettante in defence spending and miserly in foreign aid – is likely going to do very little on climate change under a Tory government. This will generate no small amount of resentment among our allies and trading partners who are making sacrifices to fight climate change while we free-ride on their efforts.
Foreign politicians will sell the argument that Canadian goods are ”unfair” because of our weak emission standards and that tariffs will level the playing field.
There is a thread of self-serving protectionism here, but foreign publics will hardly care. “Make the bastards pay” will rule the day.
Back to square one
Canadian governments can tolerate many things, but they cannot tolerate a threat to trade. Any carbon tariff would immediately provoke a response from a Conservative government.
Yet the insults and outrage that Conservatives employ today against domestic opponents could hardly be used against a foreign government without the risk of further estrangement.
A Conservative government could mount a legal challenge to any carbon tariff, but this might take years and it might not win. In the interim, any tariffs would be a millstone around our collective necks, weighing down Canadian jobs and the economy.
Instead, the most likely way Canada will protect itself from carbon tariffs in the future will be a credible commitment to reduce emissions. Here any Conservative government would have to convince its trading partners that it has a realistic and effective plan to reduce carbon emissions and that it is sincere in implementing it.
For a political party that recently rejected adding language that “climate change is real” to their party policy, this would be a bitter pill to swallow. But if the Conservatives were to put forward a plan, they would likely want one with a track record of having the lowest cost on consumers and industry, minimal impact on inflation and a proven history of reducing emissions.
That plan is the carbon tax.
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This article first appeared on Policy Options and is republished here under a Creative Commons license.