Question Period Note: Border Carbon Adjustments (BCAs)

Border Carbon Adjustments (BCAs)

• Avoiding carbon leakage is key to good climate policy. Carbon leakage occurs when companies move to countries with lower climate ambition to avoid carbon costs. The result is that emissions shift from one place to another rather than decline.
• Canada’s carbon pricing systems are designed to address this risk. The federal Output-Based Pricing System and similar provincial systems send a strong price signal while lowering costs compared to a full carbon price.
• Another way to address the risk of carbon leakage is with a border carbon adjustment. This policy applies a price on imports based on their embedded emissions. It helps level the playing field between domestic and foreign producers.
• BCAs can also help encourage other countries to increase their climate ambition and take action to reduce emissions.
• No BCA has yet been implemented.
• Canada has also started exploring whether a BCA makes sense in the Canadian context. We will be working with like-minded economies, including the European Union and our North American partners, to consider whether and how this approach could fit into a broader strategy to meet ambitious climate targets while avoiding carbon leakage, ensuring a fair and predictable environment for businesses, fostering green innovation, and promoting global ambition on climate action.

• The European Commission released its legislative proposal for a Carbon Border Adjustment Mechanism (CBAM) on July 14, 2021. The proposed CBAM would be implemented gradually. The mechanism would start with a reporting requirement being introduced in 2023, with import charges taking effect in 2026 over a limited initial scope of imported products. Full CBAM rates would apply in 2035, when domestic free emission allocations are fully phased out.
• The Commission’s CBAM proposal will now be subject to the legislative process with European Parliament and Council of the European Union (EU). This process will take time and will involve significant debate within each institution, which may lead to amendments to the regulation.
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• As per the United States (U.S.), while there are efforts to develop BCAs in Congress, there are currently no detailed proposals that benefit from the Biden Administration’s support.
• Should the U.S. move ahead with a border carbon adjustment mechanism, Canada would expect to work with the United States to establish a regional Canada-U.S. approach that would recognize Canada’s domestic climate initiatives, such as putting a price on pollution.

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