There is unprecedented momentum toward Canada and the United States working together to fight climate change, coming out of this week’s meeting between Prime Minister Justin Trudeau and President Joe Biden. And it’s likely to bring some significant environmental wins in the coming months.
The two countries have pledged to work together to set new greenhouse gas emissions-reduction commitments for the decade ahead, before an April climate summit to be held by Mr. Biden. This year should bring new continental fuel-efficiency rules for passenger vehicles, which will help meet those targets. Before long, Ottawa and Washington will probably announce greater shared ambition for cutting methane emissions from oil and gas operations, too.
But not everything will be so quick and straightforward. There will be aspects of this combined effort that will require patience and ingenuity from both sides, while testing the limits of their climate-policy compatibility – with one goal that was in discussion this week likely to stand as a prime example.
Included in the statement of mutual priorities released after Mr. Trudeau and Mr. Biden’s conversation was a promise to “work together to protect businesses, workers and communities in both countries from unfair trade by countries failing to take strong climate action.” The Prime Minister added to that messaging when he told Bloomberg News that Canada and the U.S. are “concretely looking at moving forward” on taking into account “the emissions profiles of industrial competitors around the world.”
Those appear to be references to moving forward together on carbon border adjustments – a form of tariff, attached to carbon-intensive products from places with relatively lax environmental policies, which was included in Mr. Biden’s campaign platform and in which Mr. Trudeau’s Liberals have also previously expressed interest.
There are good reasons for that sort of mechanism to be in discussion. It’s supposed to be a way of encouraging greater climate ambition elsewhere, while preventing competitive disadvantage for domestic companies from increased costs of complying with emissions-reduction policies.
It also seems to be emerging as a major component of international trade in a decarbonizing world: The European Union is moving swiftly toward introducing CBAs, and there have been reports that British Prime Minister Boris Johnson wants to use his current Group of Seven presidency to advance their adoption. Canada and the U.S. both have cause to try to get ahead of the game rather than being left behind, and if North American climate policy is being approached continentally, it ostensibly makes sense to work together.
But there is also a big obstacle here. Carbon border adjustments to date involve applying a domestic carbon price to some imports (and rebates on some exports). Unlike Canada, the U.S. doesn’t have a national carbon price, and it’s not expected to adopt one.
So Washington would need to come up with some sort of substitute – presumably by calculating an effective carbon price based on the cost of compliance with U.S. environmental regulations, which is extremely complicated given differences in how those regulations hit various sectors.
That explains why Environment Minister Jonathan Wilkinson sounded a bit less bullish on the subject this week than Mr. Trudeau did, telling reporters after a meeting with Mr. Biden’s climate envoy John Kerry that while border adjustments are on the table, they aren’t “the first order of business.” And in an interview earlier this month after a conversation with another of Mr. Biden’s top climate officials, Gina McCarthy, Mr. Wilkinson was more expansive.
“There are folks out there who talk about border adjustments without fully understanding how they work,” he said. “If the United States goes down more of a regulatory path than a price on pollution, in order to make a border adjustment process work, you would actually have to develop an imputed carbon price based on whatever regulatory tools they are using, and then try to mesh that with the Canadian one and ideally with the European one.”
Beyond just being complex, alignment with the U.S. (where both political parties have strong protectionist streaks) would also require care to not run roughshod over trade laws. “Obviously you’d have to make sure that it is transparent,” Mr. Wilkinson said, “such that it couldn’t simply be utilized as a trade barrier that wasn’t related to the work being done on climate action.”
The governments would have to ensure they were on the same page on other considerations, too, including any concern about how attaching costs to imports could affect supply chains and consumer prices. Not to mention the moral question of how much it’s desirable to penalize developing economies for failing to keep pace with North American policies.
Canada and the U.S. could try to achieve the same objectives – protecting competitiveness, promoting emissions reductions elsewhere – through some mechanism other than CBAs, as Canadian officials have hinted at lately. But nobody seems to know exactly what that means. And any less established form of tariff, or subsidy to domestic industry, could have all the more chance of running into trade-law and other trouble.
It’s also possible that all concerned could decide that this is one area where co-operation doesn’t make sense. Or that the difficulty just causes border adjustments to languish on the priority list during cross-border talks, while lower-hanging fruit is plucked.
But as long as the Americans intend to go down this path themselves, as Mr. Biden has promised, it’s in Canada’s interest to aim for a pact rather than risk winding up on the wrong side of U.S. tariffs.
And if the two countries want to make good on their rhetoric about tackling climate change together, they can’t shy away from the most daunting questions around how global commerce will be shaped by clean-economy transition.
Those questions will keep emerging as the urgency to prevent environmental disaster places new pressure points on international relations. This initial attempt at co-operatively addressing one of them will be a good measure of how real a partnership Mr. Trudeau and Mr. Biden have formed, after the easier stuff is done.
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