Carbon tariffs are policy mischief

It’s hard to imagine a scenario in which such tariffs don’t make life more expensive for ordinary Canadians

At their virtual summit last month, Justin Trudeau and Joe Biden talked about how Canada and the U.S. could be partners on future projects. Trudeau’s jab at Donald Trump — “U.S. leadership has been sorely missed” — made all the headlines but there was another important policy discussion that likely will have more important implications. Trudeau and Biden both hinted that Canadian-American climate co-operation could include “carbon adjustments” on goods imported from high-emitting countries.

Carbon adjustments, often referred to as carbon tariffs, are levies on goods from countries that do not maintain our level of environmental protection. Their main purpose is to avoid “carbon leakage,” in which companies move to countries that don’t impose costs on carbon.

No one knows how high a carbon tariff would be but it seems likely it would be imposed at the rate of our own federal carbon tax. A back-of-the-envelope approximation using the example of imports of Chinese and Indian steel shows that the impact would be significant. In 2019, Canada imported 612,000 metric tons of steel from India and China. The emissions associated with those imports are around 1,132,200 tonnes of carbon dioxide, using McKinsey’s estimate of 1.85 tons of carbon dioxide per metric ton of steel produced.

Chinese and Indian steel presumably wouldn’t have to pay the full weight of the carbon tax on every ton of CO2, because we exempt 80-90 per cent of emissions from our domestic industry, and, to be non-discriminatory, the adjustment rate would have to match how we treat domestic producers. That said, even with an exemption rate of 85 per cent a carbon tariff would be costly. At that rate, 169,830 tons of CO2 related to these imports would be subject to the tax, which is currently $40/ton. That gives a cost of more than $6.7 million. At the 2030 rate of $170/ton, it balloons to more than $28.8 million.

Apply this technique across a long list of other products from these and other high-emitters and the costs become substantial.

Beyond cost, however, there are also a number of logistical hurdles, which have been outlined in a report submitted to the European Round Table on Climate Change and Sustainable Development. The report favours carbon adjustments but advises that they be approached with caution. It highlights that the revenue from the adjustment can either be kept domestically or sent abroad. Neither option is problem-free.

If the money is kept in Canada, one option would be to refund it to Canadian businesses — though giving Canadian firms revenue generated from taxing the sale of their competitors’ products seems unfair. In many cases it would also mean inflating the price of goods from developing countries like India to protect industry in the developed world.

If that’s a problem, the rebate could be returned to Canadians, preferably through a revenue-neutral rebate scheme like the one that in principle is used to recycle our domestic carbon tax — though problems with rollout mean it hasn’t been revenue-neutral yet. Moreover, the Parliamentary Budget Officer estimates that 40 per cent of Canadian families are paying more in carbon taxes than they receive in rebates.

Sending the rebate back to high-emission countries or to global climate funds to help with decarbonization, as suggested in the report to the European Roundtable, isn’t much more attractive. Sending tax revenue abroad won’t likely sit well with Canadians who have spent the last year worrying about the impact of the pandemic on their financial future. It would also run counter to the prime minister’s December pledge not to raise taxes to deal with the deficit.

Rather than taking a swipe at Trump’s leadership, Trudeau should instead have looked at Trump’s record on trade and how disastrous tariffs can be. Trump’s tariffs on imported washing machines, for example, caused a 12 per cent increase in prices, around $88/unit, which created $1.56 billion in extra costs for consumers. (Americans buy a lot of washing-machines!)

Supporters of tariffs would argue, as Trump did, that inflated prices are worth it to expand domestic industry and create jobs. Trump’s tariffs did create manufacturing jobs in the United States — approximately 1800 new positions. The problem is that those jobs came at an enormous cost to U.S. consumers: $811,000 per job created, which comes nowhere near passing a cost-benefit analysis. Carbon adjustments, no matter how well intended, are likely to involve similar numbers.

Carbon tariffs are hard to calculate and open to abuse by rent-seeking protectionists. It’s hard to imagine a scenario in which they don’t make life more expensive for ordinary Canadians. There has to be a better path towards carbon neutrality, one that doesn’t involve drastically raising the costs of importing.

David Clement is North American Affairs Manager with the Consumer Choice Center.

Originally published here.

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