INTRODUCTION
Policy makers have long claimed that without carbon tariffs, meaningful reductions in carbon emissions will not take place because some countries will continue to prioritize economic objectives over environmental ones. Recently the European Commission declared that carbon tariffs were essential:
“On 14 July 2021, the Commission adopted a proposal for a new Carbon Border Adjustment Mechanism which will put a carbon price on imports of a targeted selection of products so that ambitious climate action in Europe does not lead to ‘carbon leakage’. This will ensure that European emission reductions contribute to a global emissions decline, instead of pushing carbon-intensive production outside Europe. It also aims to encourage industry outside the EU and our international partners to take steps in the same direction.”[1]
Canada and the United States share the longest undefended border in the world and are the two most highly integrated countries in terms of energy investment. Both countries are now closely aligned on carbon policy but will they be able to agree on this latest issue? The Canadian Chapter of the Energy Bar Association recently presented a challenging debate between experts from both counties. A transcript of the proceedings follows, including the bios of the panel members. A video of the debate can be found at lawlectures.com.
Gordon E. Kaiser
The title to this program is Can Canada and the United States Agree on a Carbon Tariff? I use the word carbon tariff. We don’t like calling these things carbon taxes or carbon tariffs. People get too excited, so we call them “carbon border adjustments.” CBAs are the elephant in the room. Many believe that if this remedy is not in place on a multi-national basis, we will not achieve the carbon goals we have set worldwide. There is a concern with such things as carbon leakage. This is an American term, as our guest from California will tell us. The Americans also call it “contract shuffling.”
Today we have a great panel to address these issues. The way we set the program up is a little bit different. We have Team Canada and Team U.S. On each team there is an economist and a lawyer. On Team Canada we have Adonis Yatchew from the University of Toronto. He is also the editor of the Energy Journal. We also have Neil Campbell, the lawyer on the team, who is the head of the Trade Law Group at McMillan LLP in Toronto. Neil may be at bit of a disadvantage. He doesn’t know this, but Adonis’s wife is a lawyer at the U.S. Justice Department in New York City. I’m not sure that Neil will be getting the support that he thought he was getting.
On the Team U.S., we have Meredith Fowlie. She is at the University of California in Berkeley. She is a director of the Energy Institute at Haas at that institution. She is also on a the California Market Advisory Committee, since 2018. She is the economist on the American team. Sanjay Mullick, a partner with the Washington DC law firm of Kirkland and Ellis, is the lawyer on Team U.S.
Adonis Yatchew
It is a pleasure to be here. I have the privilege of introducing the topic today Let me begin with the following observations. The first one is that prices that reflect the value and the costs of goods provide efficient signals for consumers and producers. This is one of the most fundamental messages of economics. Markets work. They allocate resources efficiently as long as prices reflect true costs.
If they do not reflect true costs, then markets do not allocate resources efficiently and one of those circumstances arises here because of the carbon externality. So, the external consequences of generating energy producing carbon dioxide are not embedded in the costs that we pay and therefore we’re not going to arrive at an efficient allocation of that resource and an efficient allocation of the resources that are used to produce the energy, including the air and the concentration of carbon in the atmosphere.
Economists of course call this a market failure, and many have referred to the carbon externality as being the ultimate market failure of the 21st century. Certainly, it looks like it’s starting out that way. In the 20th Century, there was also a very prominent market failure, actually multiple market failures, but one particularly prominent one was the Great Depression.
Returning to the present subject, the objective is to try to incorporate the costs of the externality in the price of the good. If one can do that reasonably accurately, even approximately, then one can restore efficient market signals. This is the basic idea underlying putting a price on carbon.
Now there are two ways, relatively common ways, of putting a price on carbon. One is to impose a tax, carbon tax, the other one is to use the cap-and-trade scheme under which there’s a limit on the level of carbon emissions within a jurisdiction, but permits are issued and can be traded determining the price of these carbon permits.
What’s been going on with the climate change agenda over the last three or four decades? Some have argued that very little progress has been made, at least on a global scale, when we think back to Kyoto in 1997 or Paris in 2015. A key reason for slow progress is the absence of a price on carbon which has been resisted by producers and consumers.
The costs of this, whether it’s the costs that are imposed on producers, and then get passed on to consumers, leads to intra-jurisdictional concerns along with the attendant economic impacts such as unemployment, the potential for shifts in industry, and so forth. Take for example a country like Poland, which is heavily dependent on coal which is extracted in Poland. If you try to shift away from coal, which has the highest carbon footprint of the three of the three hydrocarbon fuels, if you try to shift away from coal to something else that Poland doesn’t have, it’s not only going to have cost impacts, it’s also going to have serious employment consequences.
There are also inter-jurisdictional concerns about the loss of competitiveness. If I put a price on carbon in my jurisdiction and my trading partner doesn’t or other countries that can produce the goods that I produce don’t put a price on carbon, then I’m going to lose competitiveness. There’s going to likely be an industrial shift. These are very real and reasonable concerns.
So, if a price on carbon is an efficient tool (whether through a carbon tax or cap and trade) and if we really do recognize that global warming is a challenging and important problem to be solved, then why have carbon taxes or some form of carbon pricing not been introduced on a large scale? Every year personal taxes in Canada are due on April 30th. I know Americans have to file a little bit earlier, April 15th. In Canada the personal income tax came in during the first world war. It was to be a temporary tax, the purpose of which was to fund the war effort. Each year I file at the last possible minute in the vain hope that this temporary tax will be rescinded, and I won’t owe anything the following day. So, the point I’m trying to make is that once taxes are in place, they stay, people are suspicious of taxes, they’re reluctant to accept taxes. You heard Gordon say that or this is a very sensitive issue, and it is.
As a result, many jurisdictions have opted for alternative approaches and in many cases, these are what economists would call second best solutions. Rather than taxing the externality, they subsidize technologies that some agency of the government thinks is a promising technology that will help in decarbonization, for example, wind and solar generation. This is arguably less efficient because it involves a government agency in the selection of the technology itself.
In fact, the conservative argument is that the government should be involved in correcting the market failure, in this case the externality, and that business and individuals should be the ones that are incentivizing the technologies, choosing winners, and so forth.
So why international progress on decarbonization been so slow? Perhaps the shortest answer to that question is that the agreements that have come into place are voluntary and that there are minimal penalties for failing to meet one’s targets, for deferring the target date and so forth. This is a classic political science collective action problem. For economists it is a Prisoner’s Dilemma where you can free ride for as long as you can get away with it.
So, the deeper question here is: how do you get countries to cooperate, especially once it really looks like we’re not going to come to a global agreement very quickly? Here I’m just going to outline an argument that has been set forth by William Nordhaus, the 2018 Nobel Prize winner in economics. He’s not the originator or not the only one contributing to this line of reasoning but certainly a very articulate individual when it comes to advancing the idea of carbon taxes and carbon border tariffs or carbon border adjustments.
The ideas are very succinctly expressed in a 2020 paper by Nordhaus in Foreign Affairs. The paper is entitled “The Climate Club. How to Fix the Failing Global Effort.” Here are the steps that he outlines. The first one is you need a domestic price on carbon, and it can be a tax, or a cap-and-trade approach, but something that is relatively uniform, so you don’t end up with within country inequities and imbalances or distortions.
Now both Canada and the U.S. have a federal structure, provinces and states have strong self-governing powers, something that keeps returning in U.S. politics and certainly was very important recently when the Canadian Federal Government introduced a carbon price. Nordhaus would then suggest two members of a club for starters. The club could be U.S. and Canada as long as we have similar carbon prices within our countries. We would then impose a tariff on any imports into Canada or the U.S that come from other countries that do not choose to subscribe to a carbon price domestically. Nordhaus suggests a relatively low tariff carbon border adjustment, on the order of about three per cent.
Before I close, let me comment briefly on innovation related to pricing carbon. There are at least two issues. The first one is if we’re not pricing carbon then carbon fuels are priced too low, and you don’t have that incentive to innovate into non-carbon technologies. Imagine for a moment that oil prices went up to $150 a barrel and stayed there. There would be considerable additional incentive to innovate in the transportation sector to replace oil.
The second problem is that the social returns from solving or mitigating carbon are much higher than private returns. You cannot expect companies to spend the resources, to devote the investment resources, that are necessary to produce the kinds of innovations that we’re going to need to move more quickly, unless they can monetize those returns. That’s an argument for some sort of government role for example in the area of subsidizing research to promote these non-carbon technologies.
In summary, countries around the world have tried various approaches to mitigating the carbon problem. Few have introduced a serious price on carbon. There are all kinds of standards and building codes and so on. I’m not taking away from the value of those types of policies. Climate clubs, composed of groups of countries with similar carbon prices, and carbon border tariffs would contribute greatly toward progress. Thank you.
Meredith Fowlie
Thank you for the opportunity to be part of this conversation. I’m not a lawyer, I’m an economist. I study, among other things, the design and implementation of greenhouse gas regulation.
For some additional context, I may be playing for team USA today, but I was born and raised in Canada. I grew up in Toronto and consider myself Canadian. Although you probably cannot hear my Canadian accent any more. I’ve lived in California for almost 15 years now. So, my comments will be drawn from my current home state.
At the crux of the issues we’re talking about today is an inconvenient truth that Adonis has laid out so nicely: climate change policies are incomplete. Only a subset of global greenhouse gas emissions are subject to stringent regulation. And across those emissions that are regulated, regulatory stringency varies a lot across trading partners.
This presents a real predicament for jurisdictions that want to move aggressively on climate policy. If they impose a regulation on their own producers and raise their operating costs, these regulated producers could lose market share to unregulated rivals. This can shift GHG emissions out of the reach of the regulation. Economists use the term “leakage” to describe the phenomenon where in the process of regulating your own emissions, you induce an increase the emissions in jurisdictions that you’re trading with.
What does a climate concerned jurisdiction have to do with this problem? One idea: impose a border carbon adjustment. Economists have written lots of papers exploring this elegant idea that a government imposing a costly regulation on its own emissions can mitigate this shift in emissions by standing at the border and imposing a commensurate tax on the greenhouse gas emissions embodied in the products it imports.
This is a compelling idea in theory. But the reality is inevitably more complicated. To elucidate some of these complications, I wanted to share some insights from the California experience because here in California we actually have a policy that prices the carbon embodied in electricity imports. I think there’s lessons to be learned from this real-world experiment. In particular, I think this example helps focus attention on a key design trade-off that may be underappreciated.
First, a little background. When California was designing its cap-and-trade program it was clear that it needed to find a way to regulate electricity imports. At the time, more than half the emissions from electricity consumption in California came from power plants outside of California that we were importing from.
There were lots of papers being written showing that emissions leakage would be really significant if we just regulated electric producers inside California but didn’t attempt to regulate emissions from our electricity imports. To tackle this problem, California’s cap-and-trade program was designed to regulate first deliverers of electricity. This means we directly regulate emissions from power plants inside California, but for our imports, we tax electricity imports according to the estimated embodied emissions in those imports.
To implement this policy, we need a way to assess the carbon embodied in the kilowatt hours we’re importing. This is a really hard, or impossible, thing to do with great precision. So, the question is, how do you assess the GHG intensity of imports? It’s worth emphasizing that this is going to be a key challenge for any border carbon adjustment.
The simplest approach, which is not the approach California ultimately took, would be to pick a single value, a carbon intensity per unit of imported electricity, and just use this to assess compliance obligations for every kilowatt hour we import from wherever we’re importing it. The problem is that if you pick a low number, we’re going to under-tax the emissions and imports from a carbon-intensive producer such as a coal plant.
We call this carbon “laundering” insofar as some imports will look cleaner than they actually are. But if you pick a high number, then you’re unfairly discriminating against low carbon imports. For example, a wind turbine in California pays nothing but a wind turbine in Nevada is being treated as if it’s a carbon emitter/ The lawyers in the room know better, but my understanding is that this approach can look like unfair protectionism.
To get around these problems, California came up with a different approach. I’m simplifying a bit here, but the basic structure is as follows. California is implementing a source-based carbon adjustment. There’s a default carbon intensity — 0.428 tons of CO2 per megawatt-hour — that exporters to California can accept. But if a deliverer to California can point to a clean source outside the state and demonstrate that this is the resource supplying California, then that deliverer claim that low (or zero) carbon intensity.
It may seem that this source-based approach has solved the leakage problem. But it hasn’t because it creates an incentive to preferentially sell — at least on paper — the cleanest out of state resources to California. Meanwhile, the more carbon intensive producers will be redirected to supply other load in the states that are not subject to greenhouse gas emissions regulation. Economists call this reshuffling or resource shuffling. Whatever you call it, this phenomenon will shrink California’s carbon footprint on paper, but understate the true impact of electricity imports into California on global greenhouse gas emissions.
In the design stages of this policy, California’s policy architects could see that reshuffling had the potential to be a problem. So initially policymakers tried to exterminate the problem by fiat. Electricity importers were required to attest that they were not resource shuffling under penalty of perjury. But as the lawyers in the room well-understand, it’s hard to ban something you can’t precisely define or measure. Ultimately, the state had to walk back efforts to ban reshuffling outright and instead introduced a group of nuanced rules and accounting practices that are designed to mitigate the problem.
As an economist who looks empirically at how climate change policies are working in practice, I have been interested to understand what impact this BCA design has had on electricity imports and associated GHG emissions. To answer this question definitively, I’d ideally have parallel universes to work with. One in which California implements its carbon price without any border carbon adjustment. And another with the border carbon adjustment.
We don’t have parallel worlds. But we have models and data, so what we have done is use a detailed model of the western electricity wholesale market to simulate power plant dispatch in scenarios with and without carbon adjustments, just to try and understand how well the California solution seems to be working in terms of mitigating this leakage or reshuffling problem. I briefly want to highlight some key findings.
The first one was pretty depressing. We find that when we model electricity dispatch in the western interconnect, there’s a lot of zero carbon resources outside of California so there’s tremendous potential for reshuffling.
In principle, California can reshuffle its way to major reductions in greenhouse gases on paper without making a dent in western emissions and that’s indeed what we found when we simulated power system operations in 2019 calibrated to match the market structure we observe in 2019. We see no difference in simulated western emissions, with or without the border carbon adjustment.
When we compare our simulated emissions to observed emissions, things don’t look quite as bad. Observed emissions are lower than our worst-case scenario. What’s the reason? Hard to say definitively. Electricity markets are really complex, we can’t capture all the complexity in our models, so it may be that observed emissions are lower than our projected emissions because our attempts to mitigate reshuffling is working or because there’s other model specification errors that we’re leaving out.
The final insight that I want to launch into this room and hopefully get some discussion going, is in our modeling work we also consider the third policy design. One in which we set a default carbon emission rate at the border use it to assess compliance obligations for all imports. When you do that, you find that if you set a default rate high enough, you can have a moderating impact on emissions leakage because you’re charging every import as if it’s associated with emissions. So, as the default rate rises, California’s demand for imports falls and we really do see an impact on western wide emissions.
So, a question for the lawyers in the room: Is this option on the table? Can we use a default rate to try and capture the impacts of California imports on western emissions even if the actual resource that’s on paper supplying electricity has an emissions intensity lower than that default rate, because I think the results are that it does offer a way to start mitigating emissions leakage more effectively than the current policy design.
To conclude, I leave you with two quick takeaways. First carbon pricing at the border, border carbon adjustments, whatever we want to call it, is going to be challenging in markets where sources are highly substitutable and where you’ve got a lot of variation in the emissions intensity of the sources in the market. Particularly, in markets where you’ve got a lot of low or no carbon suppliers as potential exporters to your market.
Second, California has shown that it’s possible for a jurisdiction that’s regulating its own emissions to price carbon at its borders. California continues to experiment with policy design so I encourage you to pay attention or keep tracking this evolving policy situation because I’m hopeful that future experimentation will hold lessons for other jurisdictions considering similar policy approaches and ways forward. I’ll end there and look forward to the discussion.
Neil Campbell
It is a real pleasure to be on a panel with this diverse group of experts and I’m going to try, as one of the lawyers, to shift focus on what can countries do under the international trade rules that create part of the constraining, or maybe part of the enabling, framework, for using border carbon adjustments. I’m going to talk about what we most immediately think about, which is charges on imports. If I have time, I’ll say a little bit about the opposite, which is adjusting through rebates on exports.
The import charge is really trying to level a playing field in your domestic market by bringing the imports up to a competitive playing field. In other words, if you’ve priced carbon domestically, the import products that are competing in the domestic market will bear at least some comparable measure of carbon cost. An export rebate goes the other way. For a domestic industry that exports to international markets, how do you level the playing fields for domestic producers — who are paying for carbon — to compete internationally against firms that are not. The concept of the rebate is to remove or reduce the charges for carbon that they are paying domestically, so that they can be competitive internationally. This is obviously working in a quite different direction from the environmental policy objective.
The EU is the leader on BCAs with a real proposal. Canada is thinking about border carbon adjustments, and hopefully we’re moving on a path where we get there soon. I think one of the answers to the challenge coming from our two economists is, if you can get a large enough “club” (to use the Nordhouse terminology), that starts to be more impactful than a single small jurisdiction like Canada or a single large jurisdiction like Europe taking action.
There are two fundamental trade law principles deeply rooted in the WTO system (of which almost every country of relevance is a member): “national treatment” and “most-favoured nation treatment.” We can talk about BCAs at that level because agreements like the USMCA or other regional agreements are, with respect to the relevant trade law rules, cross-referencing back to the GATT and WTO framework.
So how do we deal with adjusting carbon on imports? As Gordon said, tariffs are actually not a very viable concept from a trade law point of view. Most tariffs are bound under the GATT, so countries cannot just introduce new tariffs (Article II of GATT).
What countries can do, if you do it appropriately, is introduce internal taxes or introduce internal regulatory regimes with associated charges. The key pathway from a GATT WTO compliance point of view when using both those kinds of mechanisms (or “measures”, to use trade law jargon), is national treatment (Articles II and III of GATT). National treatment basically means non-discrimination, and the relevant comparison is between domestic treatment of a country’s own producers and its treatment of the imports of the foreign exporters.
The second key principle, most-favored nation or “MFN” treatment, is also a strong non-discriminatory norm in trade agreements (Article I of GATT). Here, the discrimination concern is whether you are treating all the other member countries of the trade agreement — all the other members of the GATT in this context — in the same way. That has some interesting challenges for BCAs.
Let me briefly discuss the EU. In a new proposal made in July, the so-called “CBAM” (Carbon Border Adjustment Mechanism) the European Commission is proposing to introduce BCAs in 2024. There is two-year gestation to get EU approvals and then a couple of years of planned phase-in on an administrative basis before the monetary aspects take effect. The long lead time reflects something that Meredith said that bears underlining: the details of BCAs are going to be very complex.
At this stage, we can only talk about the EU at a conceptual level. What they have chosen to do is import charge. This is clearly positioning for WTO compliance. They are going to apply this CBAM charge on imports to the same key sectors that are paying for carbon within the EU — basically emissions-intensive and trade-exposed sectors. In concept, they are getting the imports to pay for carbon at the EU level — in other words, cross referencing the import charge with the price mechanism from the EU’s emission trading system (ETS). There may be details in the implementation that may matter for trade law compliance, but conceptually that is a pretty sensible pathway in respect of pricing from a trade law non-discrimination point of view.
The quantity aspects of the CBAM are going to be complicated. The EU proposal is going to be source-based, to take Meredith’s point, and that could include sources in many countries which have no carbon costs. However, there will be other countries like Canada where producers pay for carbon. For example, under Canada’s federal regime you might be paying forty Canadian dollars per ton currently. By comparison, there could be 60 euro per ton current pricing in Europe. Conceptually the European design is to top the pricing on imports up to current EU levels (in the year that you are importing, starting in 2026) relative to what you are paying in your domestic market (Article 9 of CBAM). We should anticipate lots of complexity in the implementation around the quantities and around the measuring and verifying of the home-country pricing that you are paying as, say, a Canadian exporter to Europe, but in principle you will pay a differential import charge that brings the total carbon cost on a product going into Europe to a level that matches the European domestic level of carbon pricing.
That design is sensible from a national treatment point of view. The challenge that trade law brings to bear is that if you are not taking account of the price that the exporter may be paying its home country, such as Canada, then you would charge the full equivalent of domestic carbon pricing on inbound products that already has embedded carbon pricing from its home jurisdiction. Treating that import in a way that is less advantageous to your domestic environmental policy carbon pricing measure would be problematic.
The CBAM provides for this home jurisdiction carbon to be taken into account and basically levels the playing field with the domestic treatment of producers in the European ETS system. So, the path on national treatment appears to be promising. But the EU will also have to be careful in not disadvantaging the foreigners through implementation mechanics (e.g. tactical and other problematic disadvantages for these imported products coming in).
On the MFN front, the CBAM raises an issue about differential outcomes. If I am a Canadian exporter I might be facing a charge into Europe of 60 euros minus 40 Canadian dollars, to take my example above, using current prices. However, if I am an American exporter I might be paying a higher import charge because the CBAM adjustment going into Europe won’t have a comparable reduction for domestic carbon costs incurred in the U.S. We will then be dealing with two trade partners of the European Union whose exports are being treated differently in the result. However, I would argue — and I think you’ll see this argued if and when a case gets to the GATT — that they are being treated even-handedly by a measure that is neutral in its objective design (i.e. as to the methodology that it applies to all foreign countries), and it is a function of what the foreign countries have chosen to do or not to do that creates the difference in results. In my view, we will see WTO litigation over this, but I think there is a pathway to get to a place where the WTO will find a way to say yes, if you design these systems objectively and fairly, the outcome differentials are okay.
The last thing to say about GATT is that there are a couple of important exemptions which could be invoked to justify contraventions of national treatment or MFN treatment (Article XX(b) and (g) of GATT). One is for measures that are necessary to protect human life and health. Another is for measures related to conservation of exhaustible resources. I think most people feel that those are potentially very plausible exceptions to invoke in respect of carbon pricing, given the nature of the problem the world is confronting.
The challenge is that those exceptions come with a requirement that the domestic measures not be implemented in a way that is arbitrary or unjustifiable discrimination, or is a disguised restriction on trade (see the opening “chapeau” of Article XX). I think these issues can be managed, but this does provide a cautionary note for countries regarding BCA implementation. You can’t go and say we’re doing a policy that is good for human health and the environment, and then play tactical games with your trading partners and disadvantage the foreign producers on the implementation, despite claiming that you’ve got a facially neutral measure.
I will just briefly make a comment about how export rebates would look in a trade law framework. It is notable that, in the BCA consultations underway right now, the Canadian government says that it is considering that option.[2] It is doing so because Canada is export-oriented jurisdiction with a lot of manufacturers selling not only into the U.S. but all over the world. Many of those playing fields have low or no carbon pricing for domestic manufacturers. Interestingly, the EU did not introduce an export rebating mechanism as an integral part of its CBAM regime although it has made statements indicating that it remains interested in looking at ways to do so if rebates could be designed in a way that is appropriate from a trade law point of view.
From a trade law point of view export rebates may be very challenging to design. There is a big risk, depending on how you do the rebating, that what you are effectively creating is an export subsidy. Many export subsidies in the WTO regime are prohibited. It will also be much more challenging for governments from a policy point of view to say that they are exploring export rebates as part of a climate policy. The policy rationale for the rebate is basically the protection of the domestic production that is carbon intensive, and the rebate would be contrary to the domestic environmental policy.
Sanjay J. Mullick
It is good to be with you. Thank you to the Canadian Chapter of the Energy Bar Association. The U.S. is behind many countries. It certainly doesn’t have something like a BCA. In August there was legislation proposed in Congress under the Fair Transition and Competition Act. It’s a parcel of different climate change measures. In it there is a border carbon adjustment measure that I’d like to discuss. It would be scheduled to be implemented in early 2024. There’s still a lot of meat that’s not on the bones. The legislation would assign responsibility to the Treasury Department to define the environmental cost. One feature that maybe sets it apart from others is there would be exemptions if other countries do not have a BCA.
To Neil’s point, there would not be an export rebate construct, at least under this bill as proposed. Estimates are that it would affect about 10 to 12 per cent of imports into the U.S. using a similar framework as others have articulated, which is the carbon intensive and trade exposed. It is similar to Europe, aluminum, cement, iron, and steel, those would be first mover areas that would be subject to the BCA but also potentially coal, gas, and petroleum, and products that are considered to be composed of greater than 50 per cent of the types of principal products, say aluminum, steel, etc.
In terms of calculating the BCA, this is where it gets a little bit tricky. Certainly under U.S. law, perhaps, like others, the proof is in the eating of the regulations that would be ultimately issued by the applicable executive agencies. We are far from that. Essentially, you would be looking to somehow define and identify the domestic environmental costs and multiply that times the greenhouse gas emissions. It could be done at a production level or it could be done at a upstream level, say in the in the instance of fuel cost of extraction.
Meredith and others touched on some points that may be interesting to pick up in discussion. The question is, what is the value and what’s the information? There are some interesting noises as to what would happen in the absence of information and what sort of inferences regulators might be able to make.
There is an interesting commentary to touch on in terms of potential incentive structures. But this has to be put in the context of other legislation. The Biden agenda at the moment is very much subject to negotiation. There is a question whether this will proceed or not.
The president has been a little bit non-committal on carbon tariffs. There have been other proposals. Senator Wyden, for example, made noises about having a price and a carbon tax to go part and parcel with the carbon tariff. That is as yet still undefined.
We talked about how Treasury would really be authorized or empowered or made responsible for implementing the BCA. Secretary Yellen has acknowledged that carbon tariffs could be effective, but she has also cautioned that they wouldn’t be the only way to meet emissions goals.
The U.S lead representative to COP26 is former Secretary of State and Senator John Kerry. He is President Biden’s Climate Envoy. He has been the most distant in saying that carbon tariffs are more of a last resort. The thinking is that he’s really trying to preserve the options heading into Glasgow before coming down on any particular side. At the same time others are suggesting that if the U.S. doesn’t come forth as others have with something like this then we might be a little bit empty-handed going into Glasgow.
As you benchmark this against something like the CBAM that Neil mentioned, the products and industries are fairly similar. As Neil mentioned, the EU’s a bit more open to the possibility of an export rebate. There’s no mention of that yet in the U.S. federal proposal.
The last point is that the CBAM really works under the emissions trading scheme that the EU has and the U.S. doesn’t have. That is considered a bit of a blind spot in terms of not having a fixed carbon price.
Sitting here in Washington, both the IMF and the World Bank have talked about proposing something like a 75 dollar a ton carbon price as being necessary as part and parcel of a BCA.
There have also been views from the private sector. The U.S. Chamber of Commerce representing 4,000 different companies, has talked about how it’s very important to have a federal carbon price. They prefer market-based solutions to go along with that as opposed to a BCA because they have warned that a BCA could actually stifle development of nascent green tech. Finally, having carbon tariffs in the absence of a carbon price, could raise international trade regulatory risk at the WTO. Neil summarized nicely the key issues at the WTO in terms of the offense provisions, non-discrimination requirements and MFN treatment. But I think there is momentum around the exceptions provisions that Neil mentioned in terms of public health and exhaustible resources.
That’s a quick readout of what’s happening in Washington as to at least a potential U.S. federal proposal for a BCA.
Gordon E. Kaiser
I’m going start the questions with Meredith, mainly because she has a class to run to but more importantly, you’re in a bit of a unique position. California has been doing some heavy lifting in this area for a long time and this is a bit of an inside baseball question, but when the Europeans were shuffling around with this stuff, did they talk to any of the California agencies?
Meredith Fowlie
I personally can’t verify whether they did or not. I can say one thing, which is I think when California justifies the heavy lifting it’s doing, which is sometimes asked to do by Californians who are paying higher electricity prices, for example, for this climate leadership, I mean, California is responsible for less than, I think it’s 0.7 per cent of global emissions so we cannot be doing this to reduce our own emissions because we could shut California down and you wouldn’t be a blip on the trajectory of global emissions so, California dealing with other jurisdictions.
I would have to imagine some of that happens because I know folks at the California Resources Board and other implementing agencies, make it a priority to tell the stories of what we’re learning and mistakes that we’re making in California.
I cannot personally point to the conversations that happen. But, I would hope that they happen because a real emphasis of the California climate ambition is to help other jurisdictions learn and grease the wheels of policy adoption when it works and avoid the mistakes that we’re making and learning the hard way.
Gordon E. Kaiser
One more question for you. We’ve listened to Sanjay on this, which is almost as depressing as listening to CNN every night as we watch the American government machine slowly grind to a halt. If the Americans don’t get on board with this concept, is it toast? We’re never going to see a worldwide scheme if the Americans are hesitant is my argument.
Meredith Fowlie
The only thing I will say, because I’m inherently an optimist, is it’s very easy to get depressed when you’re watching Washington but there’s been some tremendous innovation at the state level, and not just in California, if you look at some of the northeastern states as well. Under the Trump administration it was all at the state level and there was a lot of movement and some galvanization of state action given what was happening at the federal level.
My preferred outcome would be to see a coordinated federal ambitious move on the climate front. I think if that doesn’t happen, if the past is any indication, there are plenty of states, a growing coalition of states, that are going to try to move the ball. Sanjay is sitting in Washington and can probably give a more accurate read of where we stand.
Gordon E. Kaiser
Neil, you will appreciate more than anyone else on the panel how the federal government has to fight with the provinces. We have gone through three years of carbon tax litigation where three of the provinces opposed it. It finally got resolved and still they’re not on the same page. Listening to the prospect that the Americans may kick the ball down the field, are you reasonably confident the Canadians will do anything?
Neil Campbell
I am confident that Canada will take some action on BCAs. I think that it makes sense, even for small jurisdiction like Canada, to go ahead and do this unilaterally. The starting point is that, once you have a price on carbon domestically — whether it’s a cap-and-trade system, a tax, or whatever form you’ve chosen — it’s almost a no-brainer to add the border carbon adjustments on an import basis.
All you are doing with the import charge is bringing the imports up to the level playing field that you put your domestic producers on, so it’s an easy political step once you’ve taken the hard first step of domestic carbon regulation or pricing. You may have downstream industries who are affected constituencies and might complain because you are taking away cheap imports that allow them to evade using the domestic high carbon cost inputs in downstream production. But Canada just held an election, and all the political parties were supporting border carbon adjustments notwithstanding other differences in climate views and policies. While we have elected a minority government, the fact that the governing party plus all of opposition parties support BCAs means we will likely see the import charge version of BCAs adopted. The details are complicated though, so it is going to take some time to consult and work through all of that.
The Canadian government also noted the importance of thinking about our trading partners — in Canada’s case the two biggest ones on these emissions-intensive and trade-exposed sectors are the U.S. (about 70 per cent of the trade) and Europe (about 10 per cent).
One of the attractions for the Canadian government in adopting BCAs is to become the second mover after the EU in introducing BCAs as a climate initiative. This is an opportunity to say we are a leader and a model, with relatively modest domestic economic or political downside. The EU envisions that they will do implementation agreements with counterparties, and I think Canada would love to be one of the first countries to do that with them. If you get to a point where the U.S. comes into the fold too, suddenly you would have the North Atlantic as a meaningfully large block and that would start to tip the world as a whole in this direction because it reduces the number of markets that countries without carbon pricing could sell into at low prices.
On the other hand, I predict that Canada will not establish export rebates BCAs. I don’t see how the Canadian government introducing import charge BCAs as a climate initiative could square that with the negative environmental impacts of a rebate mechanism. They would also need to get support from at least one other party to dilute Canada’s existing carbon policy regime in that manner.
Gordon E. Kaiser
Adonis, over to you. You were making a point, which no one else has, which is that we haven’t really adequately considered the impacts of this kind of regulatory regime on a on innovation and product development and I suppose in particular with new technology necessary to reduce carbon. Is that really an issue that is going to weigh significantly in this in this matter?
Adonis Yatchew
Before I go there, let me just comment on something that was of concern a moment ago and that is the half empty, half full glass with respect to the United States. Winston Churchill once famously said that Americans will do the right thing only after they’ve tried everything else. I would suggest that the right thing here is a price on carbon and they will get to it and they are getting to it piecemeal, along with Canadian talent. Today the Nobel Prize in economics was awarded. One of the co-winners was David Card who’s a colleague of my fellow panelist, Meredith Fowlie. He is also a Canadian. So, I think that collectively there’s enough talent here in North America.
With respect to innovation, if hydrocarbons attract a carbon tax and are therefore more expensive, it would promote innovation but let me suggest that there is more of a nuance here with the carbon border tariff. Innovation is not just innovation anywhere, for everybody. The kind of innovation that China needs, or India needs to, and they are dominant carbon growth centers now, certainly China is, the kind of innovation that they need might be very different from what we need in North America.
Where are you going to put the wind farms and the solar panels around New Delhi or around Beijing? Maybe their solution is something quite different from what we need.
These countries that are in a different phase of development and are much more densely populated, need direct incentives to find their solutions, given their particular circumstances. Carbon border adjustments would be a meaningful incentive.
I think at the heart of it is that not all technological innovation is transferable, and I don’t think we are spending enough on innovation proportionately on the kind of innovation that is transferable to countries that need different solutions from the ones that we have and that’s one of the contributions that a carbon border tariff or adjustment would make.
Gordon E. Kaiser
Sanjay, I’m going to give the last word to you. You can wrap it up. The politics of these things are impossible to forecast. You seem to be a little bit negative on this whole thing. Do you have anything more positive you could end with?
Sanjay J. Mullick
In the short term I believe that inflationary pressure around the world will not help green momentum. In the UK you’ve already got gas lines. In China one reason they might have banned bitcoin is because of all the energy it’s sucking up. India is already oil dependent. Prices are going up. These things won’t help if there’s also a perception that there’s now taxes and tariffs on top of that.
China might surprise everyone at COP26 with something innovative. Why? Let’s talk trade. They want to get into the CPTPP. What better way to show everybody that they’re a new China than to do something that contributes to everyone’s interest. Maybe we shouldn’t be so worried about the WTO and might that give runway to things like BCAs. I say so because in a way the WTO has its own COP26 coming up in December which is called MC12, the Ministerial Conference 12.
This is the highest-level decision-making body of the WTO. It meets every couple of years and they’ve been having a trade and environmental sustainability discussion and dialogue and this is one of the agenda items for December. Recently at a meeting one of the Deputy Director Generals flipped the script, talked about how you know legacy, the environment, was used sort of as an obstruction to trade right, as a pretext for protectionism, but he said now it’s the opposite. Unsustainable practices, those are what are being seen as an obstacle to trade. He made, I thought two very interesting, specific statements at this meeting, I think it occurred on October 1st. He talked specifically about a carbon price and that a global carbon price is the quote-unquote first best approach and second of all he generally commented about how WTO stakeholders have to ask themselves, do they want to solve the problem by quote-unquote cooperation or litigation? Now, those words are interesting, but I tell you why I think they’re particularly interesting.
A decade ago, the WTO issued a paper called the Interface between Trade and Climate Change. That’s 10 years ago, a lot of things have changed, I get it, but that paper went through a lot of the same provisions that we’ve talked about, and that Neil talked about. But what I thought was interesting, and this was literally a coincidence in finding this, and feel free to look it up, and I respect that the WTO has issued all kinds of papers, in the conclusions a couple of points were made. One was in discussing Article 20, the exemptions, the exemptions to WTO-compliant trade provisions. It literally said that the first best option is an international agreement. And it literally said that, as stakeholders think about the interface between climate change and trade policy, and that governments need to emphasize negotiation over litigation.
What’s the takeaway? The WTO at the end of the day is not a document, it’s an organization. It has to act. A lot of people have said it’s not effective anymore. The Appellate Body has been described as being in crisis. The Director General recently suggested she might resign, as did the last one. I’m suggesting that the WTO is maybe pulsing that a carbon price, if you have one, that’s how you can make yourself WTO proof, and that going there with disputes is really not the desired path forward.
Gordon E. Kaiser
That’s very true. What you’re really saying is the WTO may be looking for an opportunity to be a leader and a good guy for a change.
Sanjay J. Mullick
I agree.
Gordon E. Kaiser
I’m going to turn the program over to Anna Fung and see if she can wrap this thing for us.
Anna K. Fung, Q.C.
I want to thank you, Gordon, for single-handedly putting together such a stellar panel on the whole issue of Can Canada and the United States agree on a carbon tariff. I think that we can all agree after hearing the presentations this afternoon that we can, and we should. It’s going to however require a lot of work and some degree of cooperation and negotiation.
I also want to thank the debaters from Team Canada, Adonis Yatchu and Neil Campbell, for presenting their views and their worthy opponents, Meredith Fowlie and Sanjay Mullick from Team USA. I want to thank Meredith for providing us with a couple of new words to use in terms of carbon laundering and resource shuffling. I will use these whenever I can as a Commissioner at the BC Utilities Commission when we’re dealing with carbon tax issues.
British Columbia has had a carbon tax since 2008. It started out at ten dollars per metric ton. It’s now gone up to fifty dollars. And that’s higher than the federal carbon tax.
I thank you again, both our panel members and listeners, on behalf of the Energy Bar Association and in particular Canadian Chapter.
GOING FORWARD
In the introduction to this Webinar Review we mentioned that in energy policy terms the question of a Carbon Tariff was the elephant in the room. It turns out that there is also an elephant that’s not in the room. That is China. The CBA concept may prove to be the most burning issues in multilateral climate change analysis.
A short time after this panel discussion, COP26 opened in Glasgow. It quickly became known as COP-out. China produces almost 30 per cent. of the world’s carbon dioxide emissions. Xi Jinping didn’t even turn up at COP26. China is still increasing its capacity for coal-fired power stations. The last minute standoff at COP26 by India regarding coal powered generation was not helpful either.
Carbon Border Adjustments will be a long and difficult issue. Like it or not it is probably the most important one.
THE PANEL MEMBERS
Gordon E. Kaiser
Energy Law Chambers, Toronto
Gordon E. Kaiser is a counsel and arbitrator in energy and competition law matters practising in Toronto and Calgary.
He is a former vice chair of the Ontario Energy Board and a former Market Surveillance Administrator in Alberta. Prior to that he was a partner in a national law firm where he appeared in the courts of five provinces , the Federal Court of Appeal and the Supreme Court of Canada.
Gordon has advised the Alberta Utility Commission and the Ontario Independent Electricity System Operator (IESO) on settlements under the Electricity Act and the Attorney General of Canada on settlements under the Competition Act. He has acted in disputes dealing with transmission and pipeline facilities, power purchase agreements, gas supply contracts, and wind and solar contracts. He is the editor of Energy Law and Policy and The Guide to Energy Arbitration. Gordon was the first Visiting Professor in Law and Economics at the University of Toronto Faculty of law. He is currently Co-Chair of the Canadian Energy Law Forum, Editor of the Energy Regulation Quarterly and President of the Canadian Chapter of The Energy Bar Association.
Neil Campbell
McMillan LLP, Toronto
Neil is the co-chair of McMillan’s Competition and International Trade Groups and a partner in the Energy Group, based in Toronto. Neil’s energy law practice focuses on electricity market issues including in relation to generation, loads, renewables/conservation, procurement contracts, imports/exports and regulatory matters; as well as competition and foreign investment issues in the oil and gas sector. He is the former chair of the Ontario Energy Board’s Market Surveillance Panel (2007–2012). Neil’s trade law practice includes anti-dumping and subsidy proceedings, export controls, sanctions, and international trade agreements. He is a member of the roster of panelists for trade remedy binational panel dispute settlement proceedings under Chapter 10 of the US Mexico Canada Agreement (USMCA).
Neil’s competition law practice includes representation of clients in merger, unilateral conduct, cartel and class action litigation, as well as foreign investment reviews under the Investment Canada Act. He is particularly experienced in energy, financial services, healthcare, pharmaceuticals/chemicals, transportation, and other regulated sectors . Neil is the Global Contributing Editor for the Cartel Regulation desk book, a former co-chair of the IBA Antitrust Section and a member of the Executive of the CBA Competition and Foreign Investment Review Section.
Adonis Yatchew
University of Toronto
Editor-in-Chief, The Energy Journal
Adonis Yatchew’s research focuses on energy and regulatory economics, and econometrics. Since completing his Ph.D. at Harvard University, he has taught at the University of Toronto. He has also held visiting appointments at the University of Chicago, Trinity College, Cambridge, and Australian National University, among others. He has written a graduate level text on semiparametric regression techniques published by Cambridge University Press.
He has served in various editorial capacities at The Energy Journal since 1995 and is currently the Editor-in-Chief. He has advised public and private sector companies on energy, regulatory and other matters for over 30 years and has provided testimony in numerous regulatory and litigation proceedings.
Currently he teaches undergraduate and graduate courses in energy economics, graduate courses in econometrics and ‘Big Ideas’ courses on energy and the environment with colleagues in physics and classics. In June 2018 the International Association for Energy Economics presented him with its Award for Outstanding Contributions to the Profession.
Meredith Fowlie
University of California, Berkeley
Meredith Fowlie is a Professor in the Department of Agricultural and Resource Economics and holds the Class of 1935 Endowed Chair in Energy at UC Berkeley. She is a faculty director at the Energy Institute at Haas and a research associate at the National Bureau of Economic Research.
Fowlie has worked extensively on the economics of energy markets and the environment. Her research investigates market-based environmental regulations, the economics of air pollution, electricity market regulation, and incomplete GHG regulations. She currently serves as a Governor-appointed member of California’s Independent Emissions Market Advisory Committee. She is a member of the Economic Advisory Council for Environmental Defense Fund, the advisory council to the Brookings Institution Center on Regulation and Markets, a Scientific Committee Member for the Chaire Economie du Climat, and the steering committee of the National Bureau of Economic Research (NBER), Environmental and Energy Economics Program. Her work has appeared in the American Economic Review, the Journal of Political Economy, Quarterly Journal of Economics, and the Review of Economic Studies, among other leading journals.
Sanjay J. Mullick
Kirkland & Ellis LLP, Washington D.C.
Sanjay J. Mullick is a Partner at Kirkland & Ellis LLP in Washington, DC. Mr. Mullick advises companies, private equity sponsors, and financial institutions on export controls, national security supply chain controls, and economic sanctions risk assessment in conjunction with investments, offerings and mergers and acquisitions. He also conducts internal investigations, handles voluntary self-disclosures, and designs and implements trade controls compliance programs.
Mr. Mullick has represented U.S. companies and foreign governments in trade remedy proceedings, including antidumping and countervailing duty investigations and suspension agreements before the Department of Commerce, the International Trade Commission and the Court of International Trade. He has advised companies and governments in international arbitration and litigation, including dispute resolution proceedings under the investment provisions of the North American Free Trade Agreement (NAFTA) and bilateral investment treaties (BITs), administered under the rules of the International Center for the Settlement of Investment Disputes (ICSID) and the United Nations Committee on International Trade Law (UNCITRAL).
Anna K. Fung, Q.C.
Deputy Chair, British Columbia Utilities Commission
Ms. Fung received her Bachelor of Laws Degree from the University of British Columbia and was called to the BC Bar in 1985. Prior to joining the British Columbia Utilities Commission as a Commissioner, she spent more than 20 years practising law as corporate counsel, including 15 years as Senior Counsel at Terasen Inc. (now Fortis Inc.). She was an elected Bencher of the BC Law Society for 10 years and served as President in 2007. She is the recipient of several awards including the R.V.A Jones Corporate Counsel Award, the BC Community Achievement Award, the YWCA Woman of Distinction Award and the UBC Law Alumni Achievement Award. She also served as President of the Canadian Corporate Counsel Association, Association of Chinese Canadian Professionals, the People’s Law School and the BC Autism Association. She authored several legal publications on corporate counsel practice and Indigenous law.
She has served as Director of the Vancouver Airport Authority, the Vancouver Foundation, the Law Foundation, the Continuing Legal Education Society and the Arts Club Theatre Society. She is the current Chair of the BC Unclaimed Property Society and a director of the UBC Alumni Association.
- European Commission, Taxation and Customs Union, “Carbon Border Adjustment Mechanism” (14 July 2021), online: <ec.europa.eu/taxation_customs/green-taxation-0/carbon-border-adjustment-mechanism_en>.
- Department of Finance Canada, “Exploring Border Carbon Adjustments for Canada” (last modified 5 August 2021), online: <www.canada.ca/en/department-finance/programs/consultations/2021/border-carbon-adjustments/exploring-border-carbon-adjustments-canada.html>.