Question Period Note: IMPACTS OF CARBON BORDER ADJUSTMENT MECHANISMS (CBAMS) ON THE CANADIAN AGRICULTURE SECTOR

Q1 – What is the Government doing to prevent CBAMs from creating trade barriers for the Canadian agriculture sector? Q2 – What will be the impact of the EU CBAM on Canadia fertilizer exports to Europe? Q3 – How will the Government advocate for Canadian agriculture interests as other countries consider taking new approaches to sustainability? Q-4 – At the moment, is there any international negotiations related to agriculture sustainability rules?

R.1 - Currently, we are not aware of any country that has or is developing a carbon border adjustment mechanism (CBAM) that would apply to agriculture commodities and products.

The EU Carbon Border Adjustment Mechanism (CBAM), for example, does not apply to agricultural products and is limited to products in specific sectors: aluminum, iron and steel, cement, electricity, some fertilizers, and hydrogen. Although Canada is not exempt from the EU CBAM, the carbon price paid in Canada will be taken into account when the EU CBAM is applied.

The Government of Canada continues to regularly engage with the EU and other trading partners on CBAMs. Canada continues to convey to the EU, and other partners considering a CBAM, the importance of ensuring that such measures are consistent with international trade obligations and are fair, transparent, predictable and not administratively burdensome to exporters.

Canada has taken proactive steps by submitting comments during the EU, UK, and Australia consultation processes on CBAM measures, emphasizing the importance that such measures, were they adopted, be consistent with these principles. R.2 - The EU CBAM covers some types of fertilizers, such as ammonia fertilizers. Canadian exports to Europe of fertilizer covered by the EU CBAM is low, accounting for less than one percent of Canada’s annual global fertilizer exports. R.3 - Part of Agriculture and Agri-Food Canada‘s mandate is to ensure the long-term economic competitiveness, sustainability and resilience of the Canadian agriculture and agri-food sector.

The department has a long history of engaging with trading partners to advocate for market access for Canadian products and ensure any non-tariff measures that are put in place by trade partners are consistent with their objectives. R.4 - There is no single international forum leading the conversation on agriculture trade and the environment, and no negotiations are underway to establish an international consensus. However, we continue to engage with trading partners to advocate for trade-enabling solutions to sustainability.

Border Carbon Adjustments (BCAs)

A BCA is a measure that can be applied to traded goods to level the playing field with respect to carbon pricing costs by addressing differences in carbon pricing across jurisdictions. There are various forms of BCAs, including import tariffs and export rebates. While the EU BCA (more details below) applies to fertilizer, there are no BCAs in existence that apply to agriculture and agri-food products.

Exploration of BCAs in Canada

Since Fall 2020, the federal government has been exploring BCAs as a potential tool to address the carbon leakage risks and competitiveness pressures associated with carbon pricing. Following a commitment in Budget 2021, the Department of Finance held targeted stakeholder consultations on BCAs.

In December 2021, the mandate letter to the Deputy Prime Minister and Minister of Finance included a commitment to consider the application of BCAs to emissions-intensive imports, such as steel, cement, and aluminum. Agriculture is not being considered in this assessment and there are no set timelines for a decision.

NOTE: Defer to Finance Canada for any questions on Canada’s work on BCAs.

International Landscape of Border Carbon Adjustments

Currently, there are no countries that are contemplating the application of a carbon border adjustment mechanism (CBAM) for agricultural commodities.

The European Union (EU) and United Kingdom (UK)

In 2023, the EU introduced its CBAM, which comes into full force in 2026. The CBAM is a BCA that puts a price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and aims to encourage cleaner industrial production in non-EU countries. The EU CBAM is linked to its internal Emissions Trading System. The UK has also committed to implementing their own CBAM, which is expected to come into force in 2027. In both cases, the CBAM is targeted, applying to emissions-intensive trade exposed sectors such as iron, steel, aluminum, and fertilizer, but not to agriculture goods.

The United States (U.S.)

The U.S. does not currently have a CBAM in force and the U.S. Federal Government has not taken any actions towards establishing one. While there have been a number of bills that have been tabled in U.S. Congress, including four tabled in 2023, there appears to be no consensus currently on how to approach a CBAM or carbon pricing in the U.S. Additionally, no discussions to date have considered subjecting agriculture goods to a CBAM. Given the current political climate in Congress and with elections approaching, it is not expected that any of the bills currently before Congress will pass.

NOTE: Defer to Global Affairs Canada (GAC) for questions on engagement on CBAMs in other markets on such goods. GAC also engages with Canadian stakeholders on CBAMs, including with the Canadian fertilizer industry.

Canadian Agriculture Sustainability and Trade

Climate change continues to be one of the greatest challenges facing countries across the world. At the same time, with an increasing global population, global food security will require ongoing increases in agricultural production. As part of the fight against climate change, countries are looking to make the production of agriculture goods more environmentally sustainable, including by developing new sustainability measures that can significantly impact global agriculture trade. Measures may take various forms, including subsidies, regulatory requirements, and border measures.

As a major exporter of agriculture and agri-food products, Canada plays an important role in contributing to global food security. As a net exporter and medium-sized economy, open and accessible markets, as well as rules on trade-distorting measures, are critical for our sector’s competitiveness and economic growth. For these reasons, Canada advocates for trade-based solutions that promote the sustainability and economic growth of the agriculture sector while countering sustainability-related measures that unnecessarily impact trade of agriculture products.

Canada’s Engagement Internationally on Issues Related to Agriculture Trade and the Environment

The Government of Canada understands the importance of this topic to the agriculture sector, particularly as it relates to potential impacts on Canadian agriculture exports, including market access and global competitiveness. International trade of agri-food products can, and will need to, be part of the solution to food security challenges, and trade also plays a vital role in the achievement of sustainability goals globally.

Fair, transparent, predictable, and enforceable trade rules are fundamental principles of international trade, and Canada will continue to advocate for countries to take them into consideration when developing measures to support the achievement of sustainability goals. Internationally, dialogues on sustainable agriculture policies and potential implications for agriculture trade are increasing but remain broad in nature. We see this in various forums, including at the World Trade Organization (WTO), the Organisation for Economic Cooperation and Development (OECD), the G7, and G20.

This reflects the fact that sustainability is a broad issue, and countries’ approaches to sustainability vary. There is no one-size-fits-all approach, and international discussions on trade and sustainability are not focused on one particular policy approach, such as a BCA.

Canada continues to advocate at multilateral fora for trade-facilitative approaches that support sustainable agriculture productivity growth while addressing food security. The Canadian Agri-Food Trade Alliance (CAFTA) has issued a set of guiding principles on agricultural trade and sustainability. In general, these principles emphasize the critical role that trade plays in achieving global sustainability and food security, and that sustainability measures should not become a barrier to trade.

As a top exporter of agriculture and agri-food products, Canada has an important role to play in achieving greater sustainability and food security worldwide.

Trade plays a critical role in achieving global food security and sustainability goals by efficiently moving food, technologies and investments where they are needed.

There is a broad range of tools that countries are considering in their approaches to sustainability; there is no one size fits all approach.

None of Canada’s major trading partners are actively designing a carbon border adjustment mechanism that would apply to agricultural products.

We will continue to work with the Canadian agriculture sector and engage with our trading partners to advocate for trade-enabling solutions to sustainability.