I'd like to thank the standing committee for this opportunity to intervene on this important subject.
My name is Aaron Cosbey. I'm trained as an economist, and I'm a senior associate with the International Institute for Sustainable Development based in Winnipeg. I'm also a senior fellow at the European Roundtable on Climate Change and Sustainable Transition. In both of those capacities, I've done extensive analysis and policy advice around the EU's carbon border adjustment mechanism, or CBAM, and other proposed border carbon adjustment schemes.
The EU's CBAM, to put it in context, is part of the EU's broader suite of climate-related policies, the so-called “fit for 55” package. It's meant as an accompaniment to the strengthening of the EU's emissions trading system, its ETS. That's a cap-and-trade scheme that limits GHG emissions, or greenhouse gas emissions, within the union. Part of the strengthening involved is removing what's known as free allocation of allowances for the covered sectors. That is, while all sectors have to submit allowances for the GHGs that they emit under the scheme, in some sectors, many of those allowances are provided for free. These are heavily allocated to emissions-intensive, trade-exposed sectors like steel, aluminum, nitrogenous fertilizers and cement, and the point of that is to avoid what's known as carbon leakage.
Just to take a small side trip to talk about carbon leakage, this is what occurs when climate policies in a jurisdiction like the European Union cause greenhouse gas emissions to rise outside of the European Union. This can happen because the regulated installations in the EU lose market share to competitors in jurisdictions that don't have a carbon price. Canada has a similar mechanism built into its federal output-based pricing system. It only charges for emissions above a designated sectoral standard and not for all emissions. There's a similar mechanism built into all the provincial-level industrial pricing schemes. The point is to keep average costs low while maintaining a high marginal cost that still incentivizes decarbonization.
The EU has declared that it will, by 2034, remove all of these free allocations and impose a full carbon price on its producers and, ultimately, its consumers. As free allocation phases out between now and then, the CBAM is going to phase in. The CBAM is an obligation on importers to purchase allowances for each tonne of greenhouse gases embodied in the goods that they import at the same price as they would have had to pay had they been produced under the EU's ETS. These changes are going to start in 2026. We're currently in a transition period, but the charges will start in 2026 at very low levels as free allocation gradually reduces, and they'll ramp up to full value by 2034.
The EU CBAM covers five goods plus electricity, and those are iron and steel, cement, nitrogenous fertilizers, aluminum and hydrogen. These are the usual suspects of industrial decarbonization, and they're covered at the level of basic and slightly processed materials. We're talking not about an automobile but about basic iron and steel, rolled tubes and pipes.
The emissions that are covered are not just direct emissions from the exporters' operations, which are so-called scope 1 emissions, but also emissions embodied in purchased electricity, in the case of cement and fertilizers, and, importantly, emissions that are bound up in any of the CBAM-covered input goods; if you're a steel pipe producer, you're paying for the emissions in the steel that you purchased. This is important: Agricultural goods are not covered, and that means there's also no need to declare emissions, for example, embodied in agricultural goods from upstream inputs like nitrogenous fertilizers.
There is a commission review due in 2025 that's going to make recommendations about expanding the scope of the CBAM coverage, but it is almost inconceivable that it would recommend covering agricultural goods. Frankly, they're having a hard enough time implementing the regime even for the goods they currently have covered. More importantly, the CBAM is only going to be charging for goods that are also covered by the EU ETS; that is, the CBAM is a mirror of the EU ETS at the border, and the current ETS does not cover agricultural goods.
While the EU does have other policies that may significantly affect Canadian exports, and I think the members of the committee know that as well as anyone, such as the farm to fork regulations, and perhaps even the EU deforestation-free products regulations and other more long-standing policies, the CBAM does not appear to be an immediate threat to our export of agricultural goods.
There are many other CBAM-like initiatives in other jurisdictions. The U.K. has declared that it's going to impose a CBAM by 2027. Australia is wrapping up its review that may recommend a version there. The U.S. has had, at any given point in the last decade, four or five bills before Congress that proposed to put a carbon price on imports of some kind, even though the U.S. doesn't have a domestic price.
While it would be prudent for Canadian exporters to carefully monitor these developments, none of them at this point propose to cover agricultural goods. For me, having covered this for a while, I find it inconceivable that they ever would.
In conclusion, in my view, the EU CBAM is not a particularly threatening policy development from the perspective of Canadian agriculture and agri-foods.
I thank you for your attention and look forward to questions.