Fear of climate change rust belt has governments considering carbon border levy

If you thought Canada's domestic carbon tax was controversial, just wait for its new global equivalent now being negotiated behind closed doors, say Canadians who have been following its progress.

It's not a secret. In fact the new charge got its own subheading in the recent federal budget.

The plan is to "make sure that regulations on a price on carbon pollution apply fairly between trading partners," said the budget document. "This levels the playing field, ensures competitiveness, and protects our shared environment."

It's prompted, in part, by fear of a Rust Belt repeat. Then, industries hollowed out in rich countries as manufacturing chased cheaper labour. This time, the draw would be from countries with climate regulations to those without.

So far, the border charge, which is officially not a tax at all but "border adjustments" has garnered little attention outside specialist circles. But according to Aaron Cosbey, one of Canada's foremost experts on the subject, that is about to change.

Cosbey, an economist with the Winnipeg-based International Institute for Sustainable Development, was just last week putting the finishing touches on a comprehensive IISD report on the subject when we spoke.

Don't say carbon taxes

The idea of a border charge is to address concerns that in countries with a price on carbon, like Canada, domestic players making, say, aluminum are at a disadvantage compared to imported goods from countries without those regulations. The fear is, that could entice companies that need aluminum to source it from the U.S. or somewhere else that doesn't have a carbon tax because it's cheaper than Canadian-made aluminum.

The "border adjustment" would be a levy to make sure imports are subject to something similar.

"Maybe don't say cross border carbon taxes," Cosbey said in an email following our conversation, clarifying how to describe the content of the forthcoming report. "From a WTO-legal perspective a tax, a tariff, and a regulation are really different things, and the current Canadian regime is probably not a tax – it's a regulation."

So far, the few news reports there have been in places like Bloomberg Green and the Financial Times, journalists have not always been so careful of their wording. "EU industry calls for urgent carbon border tax as prices soar," declared one recent headline.

While crucial for squeezing the new provision within World Trade Organization rules, exactly what to call it may be one of the lesser worries for those trying to hammer out an international agreement on the scheme that is expected to raise stiff opposition from countries, including China, asked to pay the levy.

But what is almost certain is that without a new set of rules to equalize the economic cost of fighting climate change across national boundaries, countries like Canada and the U.S. or trade blocks like the European Union will be at a huge trade disadvantage to those like Russia or Brazil where climate rules are light or non-existent.

Called "carbon leakage," the term can apply to the carbon-dense goods produced in unregulated parts of the world, allowing the carbon to "leak" back into Canada as imports. It is also used for the industries that relocate production to escape expensive carbon regulation and carbon pricing.

As with Canada's domestic carbon tax, the battle over whether to impose a border charge will inevitably be political, said Osgoode Hall legal scholar Gus Van Harten, an early proponent of carbon equalization payments. But he said opponents will find it harder to convince voters that preventing carbon cheating by foreign producers is bad for Canadians and Canadian jobs when the alternative is to create a new rust belt caused by climate change rules.

"A [domestic] carbon tax is more easily misconstrued as picking from someone's pocket," he said.

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'Really really complicated'

In fact, according to University of Calgary economist Jennifer Winter, who studies carbon pricing, some industries "would be happy about it" because it would protect them from foreign competition, including from poorer countries that don't have stiff carbon rules.

It could also affect consumer prices. While things like cars made in Germany would be no more expensive, the new charge would raise the cost of goods imported from less regulated countries, including many of the world's poorest. Without a carefully agreed structure, such rules could be used for plain old protectionism, leading to tit-for-tat countermeasures, hurting world trade. But Winter thinks the biggest challenge is figuring out a fair way to compare.

"It's complicated," she said. "Really, really complicated."

That was a common view from everyone I spoke to regarding the new border carbon charge, and why, despite objections from Canada's Green Party, the levy was not included in the environmental Bill C-12 that passed second reading in Parliament last week.

Among the complications will be comparing and trying to put an equivalent carbon cost on different countries' climate change rules.

Canada has a national carbon tax but the U.S. does not. Europe uses a system of trading carbon credits that has become increasingly expensive for its domestic producers. The cost of flexible regulations, which some say are a more effective tool, are difficult to quantify.

Trying to determine the carbon content of every imported part or ingredient will be difficult and could lead to mountains of documentation. That is why the first version of the levy will likely only apply to products like steel, aluminum and cement, where the carbon content is relatively easy to determine. But there are further difficulties.

For example, how would you credit China's large investment in electric transport? How would you offer credits for the cost of U.S. President Joe Biden's plan to invest in a green economic transformation?

Biden campaigned in favour of border adjustments and two weeks ago expressed renewed interest, reported Bloomberg Green, something that worries those U.S. trading partners such as Australia with weaker carbon rules.

Such complications and the need for international negotiations may be one of the reasons for Europe's repeated delay of its border levy plan. First scheduled for release in April, then moved to June, last week there were rumours that date has now been stretched to July 14.

While Europe is the clear leader on the issue, everyone I spoke to said the defeat of Donald Trump, who famously called climate change a hoax, and the election of a pro-climate Biden, has transformed the issue.

"If you've got an administration that will engage in a positive climate change debate you don't have to, you know, draw lines in the sand," said Maria Panezi, who teaches trade and environmental law at the University of New Brunswick and keeps in close contact with Europeans working on the proposal.

Even if there are no further delays and Europe unveils its carbon adjustment proposal in July, that is expected to be just the first step, leading to a long period of internal and international negotiation. Canada is already in international talks with what the budget calls "like-minded partners," and plans to start consultation with provinces and territories this summer.

But according to Angelo Katsoras, a geopolitical analyst and author of the recent National Bank of Canada report titled Is a carbon border tax inevitable?, despite the complications, the answer to that question is increasingly, "yes."

"For Europe it's a matter of economic survival," Katsoras said in a phone interview last week. And he said that applies to other countries like Canada and the U.S. now tightening greenhouse gas rules.

"I think it has become politically unsustainable to continue to put in stringent targets without a carbon border tax."

Follow Don Pittis on Twitter @don_pittis