Stakeholders will have an opportunity to weigh in on potential border carbon adjustments in Canada, which are intended to help Canada meet its climate targets and ensure a fair business environment. In the first phase of its consultations, which launched August 5, 2021,  Finance is hosting targeted discussions with the provinces and territories, as well as certain industry associations and environmental organizations. Finance is seeking feedback on environmental, economic and international engagement and trade considerations of potential border carbon adjustments, which could take the form of import charges or export rebates.

Finance says that these initial consultations will help identify questions to be further examined in a broader public consultation that will be announced later this year. Finance also says it intends to continue to advance discussions with key international trading partners throughout the process to ensure coordination among different policies and approaches.

Background

In the 2021 federal budget, Finance announced its intention to consult with provinces, territories, importers and exporters (especially those who deal in emission intensive goods) on whether Canada should participate in a border carbon adjustments program. Finance first announced it would explore border carbon adjustments in the 2020 federal fall economic update.

Finance says that border carbon adjustments can level the playing field by ensuring that imported goods are subject to the same carbon pricing as domestically produced goods, and that exported goods are not disadvantaged in markets with lower (or no) carbon pricing. Finance outlines four main objectives of these adjustments:

  • Reduce the risk of carbon leakage
  • Maintain the competitiveness of domestic industries
  • Support greater domestic climate ambition
  • Drive international climate action.

Canada's plan to explore border carbon adjustments is part of a larger global trend. The European Commission released a legislative proposal for a carbon border adjustment mechanism (CBAM) as part of package of reforms, known as the "EU Green Deal" on July 14, 2021.

Consultations on border carbon adjustments

Finance also released a paper with this consultation that outlines foundational information and key considerations of border carbon adjustments to provide context and inform discussions. Specifically, Finance outlines environmental, economic and international trade considerations, as well as several issues around the design and administration of these adjustments.

Environmental

Finance says that border carbon adjustments can address carbon leakage and potentially support robust climate change policies by ensuring imported goods face the same carbon costs as domestic goods (that are at risk of causing leakage). Finance identifies several related questions, including whether border carbon adjustments would:

  • Improve carbon emission reductions in Canada (compared to existing measures)
  • Create new carbon leakage risks for downstream sectors
  • Incentivize other jurisdictions to adopt more ambitious climate policies and contribute to global greenhouse gas reduction efforts.

Economic

Finance notes that implementing border carbon adjustments could increase the cost of goods in Canada covered by the adjustments. Finance notes that this raises several questions, including whether border carbon adjustments would:

  • Improve competitiveness for Canadian producers (compared to existing measures)
  • Create pressure issues for downstream sectors
  • Affect Canadian consumers and what those impacts would be.

International Trade

In its consultation paper, Finance says Canada must consider how border carbon adjustments would affect trading relationships and the multilateral trading system more broadly. With this lens, Finance is asking:

  • Whether Canada has opportunities to align with other countries exploring border carbon adjustments
  • What are the risks to Canada's trade relations in adopting these adjustments
  • How to design these adjustments to align with Canada's international trade law obligations
  • Whether Canada should provide exemptions (or other flexibility) for imports from certain developing countries or other countries taking ambitious measures to reduce greenhouse gas emissions.

Scope, design and administration

Finance outlines several key questions to consider on the scope and design of border carbon adjustments, including:

  • Which emissions and products should be subject to the adjustments
  • Whether adjustments should apply to imports only or combined with an export rebate
  • Whether any foreign countries should be excluded from the application of border carbon adjustments, and on what basis
  • How carbon costs should be established for imported goods
  • Whether there should be flexibility to apply different rates to different countries, regions within countries or individual sectors or facilities
  • How to account for other countries' climate measures, including non-pricing measures.

Further, Finance notes that any eventual implementation of border carbon adjustments would raise additional questions on other design and administration issues, such as what reporting and verification requirements are needed to administer and enforce these adjustments and what adjustments could be needed to federal and provincial/territorial climate change plans.

For more information, contact your KPMG adviser.

Information is current to August 17, 2021. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500