Tariffs are a hot topic right now. US President-elect Donald Trump says he is “a big supporter of tariffs” and threatened to impose 25% tariffs on products from Canada and Mexico unless they restrict the flow of drugs and migrants across the border.
Trump says tariffs are “a powerful tool not only from an economic standpoint, but also to achieve other goals beyond the economy.”
Could this include getting countries to cool the planet?
Among the discussants are Canada and the USA coal tariffs Or adjusting carbon dioxide emission limits as a way to protect local industry and at the same time meet climate goals.
But do they work? Where are they implemented? And what effect will this have on trade and the cost of living?
Here's a closer look.
What is a carbon tariff?
A tariff is a tax or duty imposed on goods and services imported from another country, often based on the value of the imports. The aim is usually to raise the prices of imported goods and services relative to domestically produced goods and services in order to give those produced domestically a competitive advantage. Fares 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.
US President-elect Donald Trump announced on Monday that he would sign an executive order imposing a 25 percent tariff on all products imported into the United States from Mexico and Canada.
Why would countries want to implement them?
There are both economic and environmental considerations.
Places like Canada and Europe put a price on carbon emissions to encourage companies to invest in decarbonization. This raises production costs in industries such as steel, which generate large emissions.
Many such industries face fierce competition from countries that can produce products cheaper because they do not have carbon prices.
Adjustments to the carbon dioxide emission limit are fees designed specifically to level the playing field and increase the competitiveness of domestic products.
Aaron Cosbey, a 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 “carbon tariff” , a more general term).
Rather, CBAs are border fees equivalent to domestic taxes that are generally allowable under international trade rules (similar border fees exist to align with Canada's goods and services tax, he notes).
Laurie Durel, a Canadian postdoctoral researcher at the University of Oeschger Center for Climate Change Research at the University of Bern, he studied CBA in the context of international trade law. Without a correction in import prices, she argues, the production and sale of goods such as steel may simply shift to countries with dirtier production at the expense of countries with stricter regulations.
“Then essentially there will still be the same amount of greenhouse gas emissions in the atmosphere, but no jobs in (places like) the EU.”
This change, the so-called emissions leakage, may result in an increase in global emissions.
McMaster University engineering professor, Professor Giancarlo Dalle Ave, explains how 'green' steel is produced in arc furnaces and direct reduced iron, and why this is such a big change compared to traditional methods.
How do they work?
The EU's Carbon Border Adjustment Mechanism (CBAM) is sometimes described as “the world's first border carbon tariffThis is the only example we have so far, but different countries have proposed different ways to implement these types of import fees.
The EU will start charging carbon emissions through CBAM in 2026, but in 2023 it started a transition phase that includes collecting information on emissions generated by the production of various goods.
Initially, the levies will apply to materials whose production has traditionally been highly emission-intensive and has high global competition, including iron, steel, cement, fertilizers, aluminum, hydrogen and electricity.
As European producers have to pay a fee for the carbon emissions they produce, 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 extra.
Other countries plan to implement their own cost-benefit analyses, including: Taiwan in 2025 and UK in 2027
While there is no national carbon price in the U.S., there are four bills on carbon tariffs – one Democrat, one Republican and two bipartisans – just before the US Congress.
Canada rallied public opinion consultations regarding the CBA in 2022, but has not published any results.
Cosbey said many other countries are looking at them, including Australia, Japan, Brazil and Türkiye.
“So it's kind of mushroom hunting,” he said.
Do they really work?
Dave Sawyer, chief economist at the Canadian Climate Institute, has conducted modeling that shows that cost-benefit analyzes actually help domestic industries remain competitive while driving decarbonization.
“And then what they also do, which is really cool, is get other countries to start their own carbon pricing policies.”
Cosbey said Europe's CBAM has already done this by pressing both Turkey and Brazil to put a price on carbon emissions in the domestic market.
This is because having domestic carbon taxes equivalent to CBAM allows countries to avoid paying European import duties – and if carbon taxes are paid both ways, it is better to collect them domestically to reinvest in decarbonization, rather than giving it to foreign governments in the form of import taxes.
What happens if you exempt some people from a controversial federal tax but not others? About it Producer Lauren Bird explains why some prime ministers are criticizing the federal government's carbon tax exemption and how the controversial tax creates unexpected allies.
Cost-benefit analyzes also enable jurisdictions such as Europe to implement more stringent emissions regulations. Until now, many countries have dealt with carbon leakage by allowing dirtier industries to emit a certain amount of carbon for free and charging them only for carbon emitted above that level. Cosbey said CBAM allows Europe to get rid of these powers.
“When you do that, you get results,” he said. “You are rapidly investing in decarbonization.”
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 effective in stopping carbon leakage and therefore reducing global emissions.
Durel said that if Europe is the only jurisdiction implementing such a policy, countries can simply ship their cleanest materials to Europe and continue to use dirty production to export to other countries.
What are the disadvantages?
“The disadvantages are: It's crazy complicated, only partially effective,” and some implementations may be illegal, Cosbey said.
Countries must calculate the emissions generated in the production of various products, how much their carbon prices add to production costs and how this compares to carbon pricing systems in other countries.
Durel said that when CBAs were first proposed nearly two decades ago, there was widespread agreement that they would violate international trade rules.
But that has changed. “There is a growing consensus that this is legal, but also justified,” Durel said.
She believes there will be 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 Cosbey say it is not yet clear whether it is compliant with World Trade Organization rules.
Brazil, South Africa, India and China have protested against carbon-based trade measures such as CBAM, saying they are one-sided, increase costs and could slow global decarbonization. They are lobbying to be included on the agenda for next year's United Nations climate summit in Brazil.
Durel said policies like CBAM could disadvantage developing countries that cannot yet decarbonize their industries.
Finally, like any import tax and additional administrative procedures, CBAs increase costs that are likely to be passed on to the consumer by increasing prices.
Interestingly, recent US poll showed broad public support for carbon tariffs — and linking trade to climate outcomes — even if it meant some increase in energy costs for people, said Barry Rabe, a professor of environmental policy at the University of Michigan and a senior fellow at the Brookings Institution, who conducted the study.
He added: “It seems to have some recognition across the partisan spectrum.”
The Parliamentary Budget Officer published an updated analysis of a carbon tax on Thursday after she made an “inadvertent error” in a previous analysis. Conservative leader Pierre Poilievre, asked by a reporter about plans to put a price on industrial carbon emissions, is “focused on abolishing the carbon tax.”
What impact does the CBA interest have on Canada?
Sawyer says his model shows that because Canada has carbon prices (both consumer and industrial), it probably wouldn't pay much under a European CBAM initially.
However, this could change if Canada decides to cut its carbon tax, as the federal Conservative Party has proposed (though it has not). it is unclear whether carbon prices for both industry and consumers will be reduced). Canadian companies could end up paying carbon tax on their exports anyway, and the country could fall behind in technology, Durel warned.
“Canadian products could be at a disadvantage if there are no longer regulations governing decarbonization or encouraging companies to decarbonize,” she said. “It may be better if we keep a carbon tax on our products because then we keep the revenue and can reinvest it in decarbonization in Canada.”