While the European Union is ahead of the pack when it comes to applying a carbon tariff to imports, Canada and the U.S. are also looking at implementing border carbon adjustments.
Fertilizer will be front and centre, along with steel and cement, when it comes to imports subject to the EU’s border carbon adjustment that is set to take effect in 2026 after being signed into law last month.
A border carbon adjustment is designed to level the playing field for domestic producers in jurisdictions that have a price or tax on carbon emissions, such as the EU and Canada.
As an example, even though Canadian fertilizer producers are subject to carbon pricing, their shipments to the EU will face an adjustment tax to bring them in line with the EU’s weekly central carbon price, says Luter Atagher, doctorate student in McGill University’s law faculty and author of a new research report published by the Canadian Agri-Food Policy Institute (CAPI).
“Currently, the carbon price in the EU is around 100 euros. That is a price difference between Canada, which sits at around 50 to 65 Canadian dollars as of this year. So that means that the difference between the Canadian carbon price and the EU carbon price would have to be paid with respect to Canadian fertilizer exports into the EU.”
If the Canadian government moves ahead with its own border adjustment regime, fertilizer imports from other countries would be subject to the same carbon price that the Canadian fertilizer industry faces, he explains.
The Canadian government has held consultations on implementing the import policy, but Atagher suggests the United States is closer to implementation, with proposed legislation before Congress. The U.S. Department of Commerce is also currently proposing regulatory changes that could allow for an anti-dumping or countervailing type duty on imports from countries with weak environmental regulations, explains Atagher.
“It is possible that kind of regulation could move faster than what has been tabled in Congress,” he notes. (continues below)
One of the main challenges for the U.S. is the import duty must also apply to domestic industry for it to comply with the World Trade Organization’s rules, and the U.S. doesn’t have an upfront carbon price or tax. As Atagher discusses in his paper, there is a legal basis under WTO rules for border carbon adjustments, but problems arise as soon as there’s discriminatory treatment between domestic and foreign products.
“There are developments within the EPA to come up with some sort of social cost of carbon. I think current proposals put it somewhere around 190 US dollars. I’m not sure the extent to which this may become a legislated carbon price that is applicable across the nation, but definitely you need something that is actually applied and then extended to imports in order to comply with the WTO,” he says.
Atagher says he expects the EU policy that was approved by lawmakers in May will also be challenged at the WTO over different requirements for imports versus domestic products, such as the reporting of indirect emissions.
Canada has yet to move forward in terms of tabling legislation, but as the federal carbon tax rises toward $170 by 2030, as is currently planned, it will get to a point where it is necessary to impose border carbon adjustments to level the field for Canadian producers, says Atagher.
Read Atagher’s report, entitled “Application of Border Carbon Adjustments (BCAs) to International Fertilizer Trade: Legal Challenges and Options,” here. He will also be discussing the report as part of webinar organized by CAPI on July 12.
Related:
Carbon tariff could help level the playing field between trading nations
Generalized environmental trade policies could open a Pandora’s box of issues for cattle industry
How carbon accounting will play into trade
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