POLICY MEMO May 2016
DESIGNING WTO-COMPATIBLE BORDER CARBON ADJUSTMENT LEGISLATION Benefits, Challenges and Recommendations Maria Panezi After the signing of the Paris Agreement in December 2015, many governments and subnational jurisdictions are intensifying their efforts to adopt measures to reduce carbon emissions. The global momentum to phase out carbonintensive technologies, transition toward low-carbon economies and hold energy-intensive industries and carbon emitters accountable for their emissions is now greater than ever before. Private actors and industries have put together contingency plans for a low-carbon future and are increasingly prepared to work together with governments to transition as smoothly as possible to environmentally and economically sustainable production methods. In view of the above, the Government of Canada and Canadian provinces adopted the Vancouver Declaration and are committed to collaborating for a pan-Canadian approach to carbon pricing. Carbon pricing poses significant challenges to Ontario legislators and Ontario businesses alike. Some of the concerns raised in view of carbon pricing legislation are: •
accurately measuring carbon emissions for individual products;
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addressing problems of competitiveness vis-à-vis imports whose producers do not have to comply with equally strict environmental measures or any environmental standards at all, and can thus afford to be sold at lower prices;
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creating and sustaining the administrative infrastructure to monitor carbon emissions in the cap-and-trade system and to limit and penalize industries that do not comply with their obligations;
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tackling the phenomenon of carbon “leakage” (that is, where the lack of environmental legislation is seen as a comparative advantage and businesses respond to taxation measures by either relocating to jurisdictions that do not impose similar environmental standards or by switching to the production of less carbon-intensive products to avoid taxation, while the products previously produced continue to be imported: the net effect is that carbon reductions in one region are offset by “hot spots” in others, and global carbon emissions remain the same — thus not remedying the problem at all);
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addressing concerns about limitations to consumers’ purchasing power as a result of carbon pricing measures, especially low-income families who feel such legislation impacts them the most; and
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preventing market actors from engaging in arbitrage. This is particularly burdensome in cases of multiple jurisdictions with different currencies, and concerns have been raised with respect to the US and Canadian dollars and the Western Climate Initiative.
Many of these concerns could be addressed through the adoption of border carbon adjustments (BCAs). BCAs are tax measures imposed on identical imports at the border, when the same domestic product is impacted by carbon pricing legislation. Such legislation holds foreign products accountable to the same standards as their domestic counterparts.