Thank you.
Good afternoon. My name is Michèle Govier. I am the director general of the international trade policy division at Finance Canada. My team leads on federal import policy, including tariff and trade remedy policy, as well as the government's ongoing consideration of border carbon adjustments, or BCAs. I understand the committee had an interest in the BCA consultations we undertook in 2021-22, and I'm glad to be here today to talk about our ongoing work in this area.
BCAs are intended to account for differing carbon costs that companies face across jurisdictions when goods they produce are traded internationally. They typically involve border charges that seek to replicate domestic carbon pricing for imported goods, though rebates of carbon costs for exported goods could also be contemplated. The main objective of BCAs is to reduce the risk of carbon leakage—that is, the movement of investment or production to jurisdictions with a lower carbon cost—thus supporting greater climate ambition and maintaining a level playing field for industries subject to carbon pricing.
Given their administrative complexity and relatively high compliance burden, BCAs are typically contemplated for the most emissions-intensive and trade-exposed sectors, such as steel, aluminum, cement and fertilizer, among others. The EU will be the first jurisdiction to impose a BCA with its carbon border adjustment mechanism, or CBAM, currently in a transitional, reporting-only period. Border charges are currently scheduled to enter into force in 2026 for a narrow set of sectors: cement, electricity, fertilizers, iron and steel, aluminum and hydrogen. The U.K. is also on track to impose a CBAM in 2027.
In terms of our own work on BCAs, in 2020 the Government of Canada announced it would explore BCAs to address carbon leakage risks and competitiveness pressures associated with domestic carbon pricing. In August 2021, the government launched consultations seeking views from a full range of industry associations representing companies in emissions-intensive and trade-exposed sectors, as well as labour unions, academics, non-government organizations, think tanks and the provinces and territories.
To support these consultations, the government released a paper called “Exploring Border Carbon Adjustments for Canada”, which explored the policy considerations related to BCAs from an economic, environmental and international trade relations perspective.
The key messages we heard from Canadian stakeholders through our consultations were not only an interest in a BCA from certain sectors where decarbonization presents greater challenges and where the risks of carbon leakage with a rising carbon price are more prominent, but also a strong preference to retain existing carbon leakage mitigation measures, for example, free allowances provided through the output-based pricing systems alongside a potential BCA.
Concerns were generally about the possibility of retaliatory measures, administrative costs and price impacts, and about the importance of coordination with the United States as our largest trading partner.
Several agricultural stakeholders participated in the consultations and expressed the following key comments. There was mixed and cautious support for the application of BCAs to agricultural goods, including due to concerns that it could lead to greater trade protectionism in the sector. There was recognition that carbon sources and costs in the agriculture sector are more complex and would not lend themselves well to carbon accounting associated with a BCA. There was a recommendation that the best way to ensure the competitiveness of Canadian farming is through the upfront relief of carbon pricing, and there was concern about the impact of BCAs on the cost of farm inputs such as pesticides and fertilizers.
In exploring BCAs, we have identified considerations that are inherent to any jurisdiction that is contemplating that measure, which include the benefits of a BCA in ensuring a fair and predictable environment for businesses as they pursue industrial decarbonization, how to design BCAs that would comply with international trade obligations, and the evaluation of the cost impacts and the compliance burden of BCAs, including costs passed through for downstream industries.
I would note that there are other considerations that are of particular relevance for Canada, one being the different provincial and territorial carbon pricing systems across Canada, which make it difficult to design a BCA that accurately adjusts for carbon costs across the country, and also the significance of the U.S. as a trade partner, given its lack of federal carbon pricing.
The government continues to contemplate this policy tool, in light of these different considerations, taking into account the domestic context, including Canada's broader agenda for transitioning to net zero as well as international developments. Since our consultations, we have not had further representations from the agriculture sector expressing an interest in BCAs.
I'll be pleased to take questions. Thank you.