Carbon Tariffs and Rebates
In their communique from last week’s first ministers meeting, the Prime Minister and Premiers agreed to disagree on carbon pricing. The federal government had tried to mollify opposition by promising climate rebates for residents of Saskatchewan and other provinces where the federal carbon tax will apply, starting in 2019.
Ottawa should fund larger rebates and better address provincial concerns by extending the federal carbon levy to the carbon content of imports from countries that do not price emissions.
Since emissions are free in the U.S. and many other countries, a Canadian carbon price could prompt industry to relocate to jurisdictions with weaker environmental standards — eliminating Canadian jobs and increasing global emissions.
To safeguard Canadian jobs and help reduce global emissions, we should adjust carbon pricing at the border. With a carbon tariff on imports, the federal carbon price would apply to products consumed in Canada, whether they are produced at home or abroad.
For example, making a ton of steel in China and shipping it here emits five times as much carbon as manufacturing it at Evraz in Regina. A federal carbon tax without border adjustments would increase the cost of Regina steel, encouraging Canadians to instead buy dirtier steel from China.
By contrast, a Canadian carbon tax with a corresponding carbon tariff would increase the price of imported Chinese steel more than Regina steel, creating an environmentally appropriate incentive for Canadians to buy local. Evraz would have an incentive to minimize its emissions to maximize this competitive advantage.
Border adjustments would also rebate the federal carbon price on Canadian-made exports, providing a level playing field for industries selling their products abroad. For a quarter-century, Canada has applied the GST to imports and rebated it on exports. Such border adjustments are consistent with international trade agreements and keep Canada competitive with the U.S., which does not charge a value-added tax like the GST.
However, the provincial governments that began pricing carbon do not have the constitutional authority to levy import tariffs or issue export rebates. Provinces have instead tried to maintain competitiveness by exempting their carbon-intensive, trade-exposed industries.
The federal “backstop” carbon tax for provinces without their own carbon pricing was modeled on Alberta’s existing carbon tax and exemptions. This past summer, Ottawa announced it would exempt 90 per cent of emissions from cement, steel, lime and nitrogen fertilizer production, and 80 per cent of emissions for other industries.
Such large exemptions should keep industry from relocating abroad, but substantially reduce the federal carbon revenues available to fund consumer rebates. Ottawa has promised rebates next year of $609 for a Saskatchewan family of four.
Alberta’s output-based exemptions may have seemed like an appropriate model for a federal “backstop” that would apply only to Saskatchewan. It now appears that the federal carbon tax will apply to at least half the country. Ottawa should consider using its constitutional jurisdiction over international trade to implement carbon border adjustments, rather than exemptions.
Because Canadian industry exports much of its output, the fiscal cost of export rebates would be similar to output-based exemptions. But that cost would be offset by the revenues from a carbon import tariff, enabling larger rebates to consumers.
Even assuming production processes abroad are the same as here, Statistics Canada estimates that the carbon content of our annual imports exceeds 200 megatons. A carbon tariff of $20 per ton next year would collect $4 billion, which could fund a rebate of $110 for every single Canadian in addition to what was already announced.
In reality, production is much more carbon-intensive in China and many other countries than in Canada. Developing the capacity to properly assess the carbon content of imports would boost carbon tariff revenues.
The federal government argues that a carbon tax with exemptions and rebates will reduce emissions, safeguard jobs and compensate consumers. A carbon tariff would better serve these purposes by encouraging the use of Canadian-made products instead of more carbon-intensive imports, and by collecting revenue that could fund larger rebates for all Canadians.