Implementing border carbon fees fraught with risk: RBC
Canada risks losing ground in global markets as more jurisdictions move to tax carbon-intensive imports, according to a report by RBC economist Farhad Panahov.
Major trading partners like the EU and the U.S. are moving forward with their own carbon border adjustments (BCAs) and other climate-related trade measures, and Canada must decide how to maintain its economic competitiveness while steering its own ambitious climate agenda, Panahov says.
But the central issue is the fragmentation and uncertainty of Canada's current carbon policy. While some provinces have committed to robust carbon pricing, others have stalled or even reversed their plans. According to the report, this creates a patchwork system that makes it difficult for businesses to plan and invest for the long term. Canada's preferred system, the emissions trading system, has been successful in attracting capital to sustainable projects but has not yet significantly reduced overall emissions.
Fragile relationship
Panahov says implementing a domestic BCA — a tax on imports based on their carbon footprint — would be a “natural extension” of Canada's existing industrial carbon policies. However, he warns of significant risks. Such a move could be seen as an act of trade escalation by the U.S., which has a much lower average carbon price. This could harm an already fragile economic relationship. Furthermore, a BCA could raise costs for downstream Canadian industries that rely on imported goods, potentially hurting their competitiveness.
To navigate this complex landscape, the report recommends several strategic actions for Canadian policymakers. First, a more predictable and streamlined domestic carbon policy is essential to attract the necessary private investment for the energy transition. A fragmented system discourages long-term capital commitments. Second, Canada should actively work to diversify its trade relationships, reducing its reliance on jurisdictions without carbon pricing. This would mitigate the risks posed by potential carbon tariffs. Finally, the report underscores the importance of fostering a collaborative approach with international partners, rather than a confrontational one, to address shared climate and trade challenges.
While the goal of reducing emissions is clear, the path forward is fraught with challenges related to global trade and domestic political divisions, Panahov says, adding a coherent, predictable, and internationally-aware policy framework is not just good for the climate, but also essential for Canada's long-term economic prosperity and its place on the global stage.
