Could tariffs fight climate change?

Tariffs are a hot topic these days. U.S. president-elect Donald Trump says he’s a “big believer in tariffs,” and has threatened a 25 per cent tariff on products from Canada and Mexico unless they curb the flow of drugs and migrants across the border. 

Trump says tariffs are a “a powerful tool not only economically, but also for getting other things outside of economics.”

Could that include getting countries to cool the planet?

Canada and the U.S. are among those discussing carbon tariffs or carbon border adjustments as a way to protect local industry and achieve climate goals at the same time.

But do they work? Where are they being implemented? And what will that do to trade and the cost of living?

Here’s a closer look.

What is a carbon tariff?

A tariff is a tax or duty on goods and services imported from another country, often based on the value of the imports. The goal is typically to raise the price of imports relative to domestically produced goods and services to give those made at home a competitive advantage. Tariffs also generate revenue.

A carbon tariff or carbon border adjustment (CBA) can also be applied to imports, based on the carbon emissions produced by the imported goods or services. 

Why would countries want to implement them?

There are both economic and environmental reasons.

Places such as Canada and Europe have put a price on carbon to encourage companies to invest in decarbonization. That raises production costs for industries such as steel that generate a lot of emissions. 

Many such industries face stiff competition from countries that can make products more cheaply because they don’t have carbon pricing.

Carbon border adjustments are fees specifically designed to level the playing field and make domestic products more competitive.

Aaron Cosbey, a senior associate at the Winnipeg-based International Institute for Sustainable Development, said technically, CBAs aren’t tariffs, which are heavily restricted under international trade agreements (even though “CBA” is sometimes used interchangeably with “carbon tariff,” a more general term).

Rather, CBAs are border charges that correspond to domestic taxes, which are generally allowable under international trade rules (similar border charges are in place to adjust for Canada’s goods and services tax, he notes).

Laurie Durel, a Canadian postdoctoral researcher at the Oeschger Centre for Climate Change Research of the University of Bern, has studied CBAs in the context of international trade law. She says without some kind of pricing adjustment on imports, the production and sale of goods such as steel may simply shift to countries with dirtier production at…