While we know the meanings of the words carbon and tariff, the term carbon tariff has been floating around in the media lately, and it’s a phrase that maybe some of us haven’t heard before and might not yet fully understand. The entire concept, however, may have some upsides.

“Carbon tariffs, or carbon border adjustments, are something that’s been talked about a lot, and there’s sort of a two-pronged rationale behind this,” says Marla Orenstein, director of the natural resources centre at Canada West Foundation. “We’ve seen a lot  of countries, Canada included, imposing more regulations and legislations of different types, to try to reduce the greenhouse gas emissions, carbon dioxide emissions of a lot of different sectors, mainly heavy industry, not just heavy industry.”

Recently, there have been a few ways that the government has tried to achieve reductions in greenhouse gas (GHG) emissions reduction, specifically with carbon dioxide. Implementing a carbon tax was one of them. The proposed Clean Fuel Standard to reduce carbon intensity is another.

Reducing the carbon footprint comes with cost, though.

A carbon border adjustment is intended to counterbalance two things, says Orenstein: that when tariffs are imposed, it suddenly means that domestic products are more expensive than imports, decreasing a country’s competitiveness; and it will address something called carbon leakage, in the situation where across the world you see a preference for goods that are cheaper, and don’t necessarily have a GHG reduction component. A carbon tariff is intended to level the playing field for these two issues. (story continues below)

Listen in on the full conversation between Orenstein and Shaun Haney to hear about WTO compliance, who pays the tariff, reception within Canadian government, and how the Canadian energy sector views a carbon tariff:

A carbon tariff could provide interesting market access as well; Canada is one of the countries bringing on GHG reduction regulation, but so is the E.U., and under their model, there may be some countries where the tariff is not applied, if they have similar legislation in place. Canada could receive preferential access, or un-tariffed access to the E.U. market as a result.

The U.S. is another player, and Trump does not seem to be interested in any legislation to bring GHG emissions down, but Biden is interested in introducing such regulations. Depending on the outcome of the election, a carbon tariff and the necessary regulatory set-up in Canada might benefit Canada’s relationship with the U.S. as well.

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