Policy Forum: Trade Policy Pain for Marginal Climate Gain? The Complex Case for Border Carbon Adjustments in Canada

Abstract

Spurred by a 2021 commitment by the European Union to adopt a carbon border adjustment mechanism to address carbon leakage in international trade, developed economies are giving such proposals serious consideration. This article considers the arguments for and against a border carbon adjustment (BCA) for Canada, considering the likely treatment of such measures by the World Trade Organization (WTO) and under Canada's major trade agreements with the European Union, the United States and Mexico, and Indo-Pacific partners. The authors analyze the likely impact of a BCA on carbon-intensive trade between Canada and these trading partners. They conclude that while a carefully designed Canadian BCA could be both WTO-legal and permissible under Canada's major trade agreements, serious political and economic challenges are likely to arise. Since BCAs are by nature protectionist, proponents must advance a stronger case for their effectiveness in addressing global carbon emissions if these mechanisms are to be widely adopted.

Keywords: Carbon pricing, tariffs, trade agreements, EU, US-Canada, WTO