Canada is preparing to introduce a carbon border adjustment measure whose contours are not yet known. Canada and the European Union vowed at a bilateral summit mid-June to “exchange on respective approaches to carbon pricing and WTO-compatible border carbon adjustments”. A think tank is now making concrete proposals on how to go about all this.
The International Institute for Sustainable Development, a think tank specialised in the nexus between trade and environmental policy, released a detailed report this week that makes proposals on the possible Canadian border carbon adjustment mechanism and on related international – not least WTO – ramifications. One of the important relationships the report dwells on is Canada’s relationship with the EU.
The report recommends that eight sectors active in Canada be covered by a carbon border measure with the aim of avoiding so-called ‘carbon leakage’.
Some of these sectors happen to be areas where the EU is a competitive exporter or investor: oil and gas extraction, iron and steel, oil sands extraction, cement, ‘pesticide, fertiliser and other agricultural chemical manufacturing’, basic chemicals, petroleum refining, pulp and paper.
Canada’s exports could also be captured by the EU’s carbon border adjustment mechanism – although the sectors identified as at risk by the IISD do not seem to be captured by the EU’s CBAM regulatory proposal released today.
“Canada and the European Union share climate ambition, share a price-based regulatory approach, and share an interest in ensuring that this approach is not undermined by leakage,” note the IISD authors.
The report recommends that the two agree “on best practices in technical and substantive areas, such as calculating embodied emissions, setting benchmarks, crediting practice, use of revenue”.
It also says Brussels and Ottawa should consider “agreeing on interpretations of trade law under the Comprehensive Economic and Trade Agreement (…) that govern the elaboration and implementation of [border carbon adjustment].”
“Such interpretations would not alter the WTO-based rights and obligations of non-CETA parties, but they would help facilitate the process of bringing the necessary discussions into the WTO,” the authors add.
In the end Canada would need to seek some form of mutual recognition agreement with the EU and other trading partners.
“In the end, crediting for foreign carbon pricing would involve a bilateral process of mutual recognition—a negotiated agreement—for each trading partner that had such a regime,” reckon the authors.
The report also covers comparable issues in the Canada -US relationship.