Tariffs are a hot topic these days. U.S. president-elect Donald Trump says he’s a “big believer in tariffs,” and has threatened a 25 per cent tariff on products from Canada and Mexico unless they curb the flow of drugs and migrants across the border.
Trump says tariffs are a “a powerful tool not only economically, but also for getting other things outside of economics.”
Could that include getting countries to cool the planet?
Canada and the U.S. are among those discussing carbon tariffs or 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 will that do to trade and the cost of living?
Here’s a closer look.
What is a carbon tariff?
A tariff is a tax or duty on goods and services imported from another country, often based on the value of the imports. The goal is typically to raise the price of imports relative to domestically produced goods and services to give those made at home a competitive advantage. Tariffs also generate revenue.
A carbon tariff or carbon border adjustment (CBA) can also be applied to imports, based on the carbon emissions produced by the imported goods or services.
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Why would countries want to implement them?
There are both economic and environmental reasons.
Places such as Canada and Europe have put a price on carbon to encourage companies to invest in decarbonization. That raises production costs for industries such as steel that generate a lot of emissions.
Many such industries face stiff competition from countries that can make products more cheaply because they don’t have carbon pricing.
Carbon border adjustments are fees specifically designed to level the playing field and make domestic products more competitive.
Aaron Crosbey, a senior associate at the Winnipeg-based International Institute for Sustainable Development, said technically, CBAs aren’t tariffs, which are heavily restricted under international trade agreements (even though “CBA” is sometimes used interchangeably with “carbon tariff,” a more general term).
Rather, CBAs are border charges that correspond to domestic taxes, which are generally allowable under international trade rules (similar border charges are in place to adjust for Canada’s goods and services tax, he notes).
Laurie Durel, a Canadian postdoctoral researcher at the Oeschger Centre for Climate Change Research of the University of Bern, has studied CBAs in the context of international trade law. She says without some kind of pricing adjustment on imports, the production and sale of goods such as steel may simply shift to countries with dirtier production at the expense of countries with stronger regulations.
“Then basically [there] will still be the same amount of greenhouse gas emissions in the atmosphere, but just without the jobs in [places like] the EU.”
This shift, called carbon leakage, could cause global emissions to rise.
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How do they work?
The European Union’s Carbon Border Adjustment Mechanism (CBAM) is sometimes described as “the first carbon border tariff in the world.” It’s the only example we have so far, but different countries have proposed different ways to implement these kinds of import fees.
The EU will begin collecting carbon fees through CBAM in 2026, but began a transitional phase in 2023, which involves collecting info about emissions generated by the production of different goods.
Initially, the fees will be applied to materials that traditionally generate lots of emissions to produce 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 that into account and adjust the price of imports accordingly.
Imports from countries with comparable carbon pricing would not need to pay extra.
Other countries plan to implement their own CBAs, including Taiwan in 2025 and the U.K. in 2027.
Although the U.S. has no national price on carbon emissions, there are four carbon tariff bills — one Democratic, one Republican and two bipartisan — before the U.S. Congress right now.
Canada held a public consultation on CBAs in 2022, but has not released any results.
Crosbey said many other countries are looking into them, including Australia, Japan, Brazil and Turkey.
“So it’s kind of mushrooming,” he said.
Do they actually work?
Dave Sawyer, principal economist at the Canadian Climate Institute, has done modelling that shows CBAs do help domestic industry stay competitive while driving decarbonization.
“And then what they also do, which is really cool, is they drive other countries to start doing their own carbon pricing policies.”
Crosbey said Europe’s CBAM has already done that, pushing both Turkey and Brazil to put a price on carbon domestically.
That’s because having domestic carbon taxes equivalent to CBAM allows countries to avoid paying Europe’s import fees — and if carbon taxes are being paid either way, it’s better to collect them at home to reinvest in decarbonization than hand them over to foreign governments as import taxes.
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CBAs also allow jurisdictions like Europe to implement stricter emissions regulations. Until now, many countries 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. Crosbey said CBAM allows Europe to get rid of those allowances.
“When you do that, you get results,” he said. “You get decarbonizing investments in a hurry.”
However, some modelling studies, such as one published earlier this year by Xinlu Sun and colleagues at University College London, suggest CBAM may not be very efficient at stopping carbon leakage and therefore reducing global emissions.
Durel said if Europe is the only jurisdiction implementing such policies, countries may simply send their cleanest materials to Europe, and continue using dirty production to export to other countries.
What are the downsides?
“The downsides are: this is insanely complicated, only partially effective” and some implementations may be illegal, said Crosbey.
Countries need to calculate the emissions generated in the production of different products, how much their carbon pricing adds to the cost of production, and how that compares to carbon pricing regimes in other countries.
Durel said when CBAs were first proposed nearly two decades ago, there was widespread agreement that they would violate international trade laws.
But that’s changed. “There is a growing consensus that this is legal but also legitimate,” said Durel.
She credits a better understanding of the urgency of climate change, and what needs to be done to align climate targets with the Paris Agreement.
However, because Europe’s CBAM hasn’t been fully implemented or contested yet, Durel and Crosbey both say it’s not clear yet whether it’s compliant with World Trade Organization rules.
Brazil, South Africa, India and China have protested carbon-based trade measures such as CBAM, saying they’re unilateral, increase costs and could slow down global decarbonization. They’re lobbying for them to be on the agenda at next year’s United Nations climate summit in Brazil.
Durel said policies like CBAM can disadvantage developing countries that can’t yet decarbonize their industries.
Finally, like any import tax and additional administrative procedures, CBAs add costs that will likely be passed onto the consumer, raising prices.
Interestingly, recent polling in the U.S. showed widespread public support for carbon tariffs — and 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 senior fellow at the Brookings Institution, who conducted the research.
He added, “This seems to have a kind of cachet across the partisan spectrum.”
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How is Canada affected by interest in CBAs?
Sawyer says his modelling shows that because Canada has carbon pricing (both consumer and industrial), it likely wouldn’t pay much under Europe’s CBAM initially.
But that could change if Canada decided to axe its carbon tax, as the federal Conservative Party has proposed (although it hasn’t been clear whether both industrial and consumer carbon pricing would be cut). Canadian companies could wind up paying carbon taxes on their exported goods anyway — and the country might fall behind technologically, Durel cautioned.
“Canadian products might get disadvantaged if there’s no more regulation to decarbonize or to encourage companies to decarbonize,” she said. “Maybe we’re better off with keeping our carbon tax on our products, because then we keep the revenue and we can reinvest it in the decarbonization in Canada.”