Could tariffs combat climate change?

Tariffs are a hot topic these days. US President-elect Donald Trump says he is a “big believer in tariffs” and has threatened a 25 percent tariff on products from Canada and Mexico. unless they stop the flow of drugs and immigrants across the border.

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

Could that include getting countries to cool the planet?

Canada and the United States are among those arguing carbon fees either carbon border adjustments as a way to protect local industry and achieve climate goals at the same time.

But do they work? Where are they being implemented? And what effect will that have on commerce and the cost of living?

Here’s a closer look.

What is a carbon tariff?

A tariff is a tax or fee on goods and services imported from another country, often based on the value of the imports. The goal is usually to increase the price of imports relative to domestically produced goods and services to give those manufactured in the country a competitive advantage. Tariffs also generate revenue.

A carbon tariff or carbon border adjustment (CBA) may also be applied to imports, based on the carbon emissions produced by the imported goods or services.

Why would countries want to implement them?

There are both economic and environmental reasons.

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

Many of these industries face stiff competition from countries that can make products cheaper because they don’t have carbon pricing.

Carbon border adjustments They are tariffs specifically designed to level the playing field and make domestic products more competitive.

Aaron Crosbey, senior associate at the Winnipeg-based International Institute for Sustainable Development, said CBAs are not technically tariffs, which are heavily restricted under international trade agreements (although “CBA” is sometimes used interchangeably with “tariff.” carbon” (a more general term).

Rather, ACBs are border charges that correspond to internal taxes, which are generally allowed under international trade rules (similar border charges exist to conform to Canada’s goods and services tax, he notes).

Laurie Durel, Canadian postdoctoral researcher at the Oeschger Center for Climate Change Research from the University of Bern, has studied collective agreements in the context of international trade law. She says that without some form of import price adjustment, the production and sale of goods like steel may simply shift to countries with dirtier production at the expense of countries with stricter regulations.

“So basically there will still be the same amount of greenhouse gas emissions in the atmosphere, but without the jobs in (places like) the EU.”

This change, called carbon leak, could cause an increase in global emissions.

How do they work?

The European Union’s Carbon Border Adjustment Mechanism (CBAM) is sometimes described as “the world’s first carbon border tariff“It is the only example we have so far, but different countries have proposed different ways of implementing these types of import tariffs.

The EU will begin charging carbon fees through CBAM in 2026, but began a transition phase in 2023, which involves collecting information on the emissions generated by the production of different goods.

Initially, the tariffs will apply to materials that traditionally generate a lot of emissions and have a lot of global competition, including iron, steel, cement, fertilizers, aluminum, hydrogen and electricity.

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

Imports from countries with comparable carbon prices would not have to pay more.

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

Although the United States does not have a national price on carbon emissions, there are four carbon fee bills —one Democrat, one Republican, and two bipartisan—before the United States Congress right now.

Canada held a public meeting consultation on collective agreements in 2022, but has not published any results.

Crosbey said many other countries are investigating them, including Australia, Japan, Brazil and Türkiye.

“So it’s multiplying,” he said.

Do they really work?

Dave Sawyer, senior economist at the Canadian Climate Institute, has produced models that show CBAs help domestic industry stay competitive while driving decarbonization.

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

Crosbey said Europe’s CBAM has already done this, pressuring both Turkey and Brazil to put a price on carbon at the national level.

This is because having domestic carbon taxes equivalent to the CBAM allows countries to avoid paying import tariffs from Europe, and if carbon taxes are paid anyway, it is better to collect them at home to reinvest in decarbonization than to hand them over. to foreign governments as import taxes.

CBAs also allow jurisdictions like Europe to implement stricter emissions regulations. Until now, many countries have tackled carbon leakage by allowing the dirtiest industries to emit a certain amount of carbon for free and charging them only for carbon emitted above that level. Crosbey said CBAM allows Europe to get rid of those rights.

“When you do that, you get results,” he said. “Decarbonizing investments come quickly.”

However, some modeling studies, such as one published earlier this year by Xinlu Sun and colleagues at University College London, suggest that CBAM may not be very efficient in stopping carbon leakage and therefore reducing global emissions.

Durel said that if Europe is the only jurisdiction implementing such policies, countries could simply send their cleanest materials to Europe and continue using dirty production for export to other countries.

What are the disadvantages?

“The disadvantages are: this is incredibly complicated, only partially effective” and some implementations may be illegal, Crosbey said.

Countries must calculate the emissions generated in the production of different products, how much their carbon price adds to the cost of production, and how it compares to carbon pricing regimes in other countries.

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

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

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

However, because Europe’s CBAM has not yet been fully implemented or challenged, Durel and Crosbey say it is still unclear whether it complies with World Trade Organization rules.

Brazil, South Africa, India and China have protested against carbon-based trading measures like CBAM, saying they are unilateral, increase costs and could slow global decarbonization. they are push to get them on the agenda of next year’s United Nations climate summit in Brazil.

Durel said policies like CBAM can harm developing countries that are not yet able to decarbonize their industries.

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

Curiously, Recent US surveys showed widespread public support for carbon tariffs — and for linking trade to climate performance — even if it meant some increase in people’s energy costs, said Barry Rabe, a professor of environmental policy at the University of Michigan and a fellow principal at the Brookings Institution, who conducted the research.

He added: “This seems to have a kind of cachet across the partisan spectrum.”

How does interest in collective agreements affect Canada?

Sawyer says his modeling shows that because Canada has a carbon price (both consumer and industrial), it probably wouldn’t pay much under Europe’s CBAM initially.

But that could change if Canada decided to eliminate its carbon tax, as the federal Conservative Party has proposed (although It has not been clear whether both industrial and consumer carbon prices would be reduced.). Canadian companies could end up paying carbon taxes on their exported products anyway, and the country could fall behind technologically, Durel warned.

“Canadian products could be at a disadvantage if there are not more regulations to decarbonize or encourage companies to decarbonize,” he said. “Maybe we’ll be better off if we keep our carbon tax on our products, because then we’ll keep the revenue and we can reinvest it in decarbonization in Canada.”