- Francis, a number of countries, including Canada, have set targets of net zero emissions by 2050. And carbon pricing is central to reaching those targets. But in your recent report, you talk about this new approach called carbon border adjustments. So first of all, what are carbon border adjustments, or CBAs, as they're called?
- So carbon border adjustments are basically border adjustments, things you do that complement your carbon tax regime. So here in Canada, we pay something like $40 per ton at the federal level per ton of emissions. And basically, that cost, that additional cost, that manufacturers and gas producers, pretty much any industry is facing, is not one that countries elsewhere are necessarily facing. For example, most countries in the world do not have a carbon price. So that naturally puts Canada, or Canadian industry, at a somewhat competitive disadvantage relative to those foreign competitors.
So what a border adjustment does is it basically takes-- it basically adjusts for that carbon tax for anybody that they might compete with-- so whether that's an importing firm coming into Canada or wanting to sell into Canada. Conversely, it could also apply in terms of basically rebating, potentially, the carbon taxes that Canadian industry has to face when they're exporting. So basically it's a way of equilibrating that kind of competitiveness challenge that we face here in Canada.
- OK, that's a great backdrop. Now I want to talk about some of the challenges of CBAs. And one of the first things you talk about is trade coverage. Tell us a little bit about that.
- Yeah, so implementing a carbon border adjustment is actually extremely, extremely difficult in practice. These kinds of things have not been tried anywhere in the world. Border adjustments as a policy tool are actually quite old. We use them in other areas-- for example, corporate tax regimes or even in consumer taxes. So they're used elsewhere, but something like this is brand new.
And so really what everyone is trying to figure out, anyone who's interested is trying to figure out, is how do you actually implement this thing? So the first question you got to answer is, well, what are you going to cover? Are you going to cover exports and imports? Notionally, if your exclusive goal is just to, again, equilibrate that competitiveness challenge, then notionally, you should be rebating the carbon taxes that domestic industry faces when they go try and compete abroad, because again, it's a cost that these producers have to face that foreign competitors do not.
But on the same token, the point of a carbon tax is to help lower emissions. So if all you're going to do is rebate the cost, then there's really no point. So in practice, very likely what this might look like is it'll be more like an import levy. So basically, any advanced economy that implements a CBA will kind of impose an import levy on anybody that's importing into that country.
But there are lots of other questions around how do you implement this thing. For example, how many countries do you want to hit? How many sectors and goods do you want to hit? What kinds of emissions are you actually looking at? So all of these areas are actually really difficult to address. The more countries you want to hit, the more goods, and the more emissions, the more complex it gets.
- And you talked-- you also mentioned some of the legal concerns. Can you expand a little bit about that, as well?
- Absolutely, and this goes back to that complexity issue. So let's say, hypothetically, you wanted to do something really simple. You only wanted to hit your top 10 importers by market share. You wanted to hit only trade-exposed are emissions-intensive sectors. And you only want to hit carbon, for example, as an emission. You're going to forget about all the other kinds of emissions that you might want to consider. You just want to do that.
There are actually specific WTO rules surrounding-- actually preventing-- that kind of thing, because essentially what you're doing is you're actually discriminating against specific countries and specific industries based on these kind of delineations. So you might actually run afoul of WTO rules the simpler you make it. The more complex you make it, you actually might align yourself with the WTO. But on the same token, that just makes your administration more difficult. So there's a balance that all countries are trying to face here in terms of figuring out how complex do I want to make it, and will that run afoul of WTO rules?
- So you sort of talk about the complexities of applying these rules. What countries have you seen applying this CBA framework?
- So right now, zero. There are actually no countries that have actually implemented it in full. There are a number of countries that have expressed interest in it. Primarily that's the EU, the UK, here in Canada, and actually the US, as well. They've also expressed interest, which is actually kind of an interesting group of countries that you might consider cooperating on this. But so far, no one's implemented it.
The furthest that people have gone is actually in the EU, where they've actually launched-- or they're planning on launching-- a pilot program likely at some point during the summer. So we will likely see more details about how a group of countries-- in this case, the EU-- are actually going to answer some of those difficult implementation questions. So what are they going to get covered? What countries are going to be impacted? What industries? All of those things-- how do they actually estimate emissions intensity of imports coming in? All of those questions we could actually have potentially at least some early answers to later this year, which is actually very exciting.
- And that leads me to my last question. So given Canada's heavy reliance on energy exports, do we stand to benefit from this framework if we adopt it ourselves?
- And that's the really interesting question here, because in fact, Canada does kind of-- can position itself to benefit tremendously from a carbon border adjustment regime, because essentially what you're saying is, we're going to take all the advanced economies-- recall that I had mentioned pretty much all the biggest countries in the world are now talking about this. If it were a possibility that we collaborated on one kind of gigantic carbon border adjustment bloc, well, then the position that we're in is essentially we're equilibrating that competitiveness challenge.
And we're saying that everybody has to play on a level playing field, whether you're China, whether you're Canada, whether you're Bolivia, or Venezuela, or whoever. For industries like oil and gas, manufacturing-- all of these things are going to get impacted, because you have the world's largest consumers saying, we are now going to adjust your imports for our carbon tax.
And so if we have a possibility of kind of front-running a little bit and being able to lower our emissions, leverage new technologies, and actually become more efficient in that space, then suddenly, we've introduced a competitive advantage. So there's a really interesting kind of long-term play here for Canada where we can potentially embed ourselves in these new supply chains that might emerge as a consequence of the clean energy transition and the government policies that are going to crop up as a result of that, like carbon border adjustments.
- Francis, fascinating topic-- I'm sure there's to be more on this, I would love to bring you back again to talk a little bit more. Again, thank you very much for your insights.
- Thanks for having me, Anthony.