International Trade Committee on Dec. 2nd, 2024

[Emmanuelle Lamoureux]

As I mentioned, the legislation is still under development, but they have been clear that their intention is to apply a mechanism that respects international trade law. That's reassuring to us. That means a process that is fair and transparent and that does not impose an undue administrative burden on exporters from other countries.

We are, of course, holding them to account on this. We're making sure that this is the case. To the extent that the same measures are applied to all exporters, there is a certain fairness, but we are in constant touch with them to make sure that this is the case.

[Blake Desjarlais, NDP, Edmonton Griesbach, AB]

I think it was Michael who made the point earlier related to the carbon pricing mechanisms here domestically in Canada. My Conservative colleague had a question related to the relative disadvantage or advantage that trading partners would have and the trade imbalance that a carbon price domestically could have with another trading partner.

Michael, can you please clarify your remarks related to my Conservative colleague's question regarding the impact of the climate pricing mechanism here—in relation to subsidy, if it amounts to that—through some kind of mechanism like the carbon border adjustment mechanism?

[Michael Mosier]

Sure. I'm happy to speak a little bit to the relative competitiveness impacts. Please correct me if I'm not answering specifically.

I think the concern.... What a border carbon adjustment does.... To the extent that price is applied to domestic production, the border carbon adjustment would ensure that producers pay the same price for the embedded carbon. I think in Canada to date, ECCC has sought to manage that—they should really speak more to this—through what's called the free allowances through the output-based pricing system. That's how ECCC has sought to manage carbon leakage risk within Canada to date for our emissions-intensive trade-exposed industries.

[Blake Desjarlais, NDP, Edmonton Griesbach, AB]

To put it in a different way, the mechanism that's used domestically and the adjustments that are made for output are different.

[Michael Mosier]

I'm not sure I understand your question with respect to—

[Blake Desjarlais, NDP, Edmonton Griesbach, AB]

The carbon pricing mechanism that exists for goods here in Canada.... When you want to export a good, let's say, you pay the carbon price on those goods and on the production of those goods by seconding materials and paying a price on those materials. When you want to export it, ship it out or sell it, you're saying that there's a process that deals with that pricing mechanism at the point of sale when it's being exported. Is that correct? There's a process to deal with competitiveness at the border.

[Michael Mosier]

Is there an export credit to refund the carbon price? I guess that's your question. Emmanuelle can speak to this.

Anything is possible. I think where we've seen carbon prices enforced to date in the EU, the U.K. and that sort of thing, an export credit has not typically been part of the carbon price. It's really an adjustment applied to imports to make sure that everyone who sells within the domestic market—within Canada—pays the same price. We wouldn't typically see an export credit applied to Canadian exports going into the world market. I think there would be a lot of questions and concerns.

Perhaps my Global Affairs colleagues can speak to the trade concerns that our partners would have, compliance with international agreements and that sort of thing.

[Blake Desjarlais, NDP, Edmonton Griesbach, AB]

Sure.

[Emmanuelle Lamoureux]

I want to add a bit more detail on how the EU CBAM is calculated. It takes into consideration various factors, including total embedded emissions but also the price paid under EU's emissions trading system and carbon pricing paid by the exporter in the country of origin.

It's really to avoid double pricing. There is an adjustment that is made at the border. Not everyone, of course, pays the same amount. It depends on how the goods are produced.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Mr. Baldinelli, go ahead, please, for five minutes.

[Tony Baldinelli, Conservative, Niagara Falls, ON]

Thank you, Madam Chair.

I'd like to thank the witnesses for being with us today. It's an interesting study. Today is the first day, and it's great to get that information.

Mr. Mosier, I'd like to follow up with you. You mentioned that consultations had taken place with industry and individuals. I think you also mentioned the provinces. Has a report been prepared and shared with government? Are there recommendations within that? Is there a public document that could be shared with us?

[Michael Mosier]

To date, there's been no “what we heard” document published by the government from those consultations.

[Tony Baldinelli, Conservative, Niagara Falls, ON]

You mentioned those consultations. You can refer to some of the comments that you've heard. What are some of the comments that you've heard from industry stakeholders like steel associations, the Cement Association of Canada and those high-intensity carbon producers? What have they shared with government in regard to this?

[Michael Mosier]

We've had a number of discussions, including those consultations and others since. I would say that there was some interest, certainly, from those industries in Canada thinking more about a border carbon adjustment where decarbonization presents costs and especially where carbon leakage risk is more prominent and they're more trade-exposed.

However, I would say that they were only really interested in those border carbon adjustments as long as Canada retained its existing measures to address carbon leakage. The output-based pricing system and the allocation of those emission allowances would allow the steel and aluminum industries to remain competitive, particularly as they export to the U.S. market.

[Tony Baldinelli, Conservative, Niagara Falls, ON]

You also mentioned the notion and concerns about potential risks. The U.S., for example, does not have one. They are our largest trading partner. We do more in trade with the United States than we do with the rest of the world combined. From a trade perspective, you would imagine that harmonization with what goes on with our largest trading partner would be a priority.

Were those comments shared directly?

[Michael Mosier]

It's a perfect segue. That was my next point.

I think, almost ubiquitously, all of the industry we spoke with talked about the need for Canada to align with the United States on this. The concerns about retaliation were certainly front of mind.

There was an understanding that Canada and the U.S. do trade a lot of these goods. I spoke about those six categories of emissions-intensive goods. In some categories, 100% of our exports go to the U.S., and in most it's very high. Alignment with the U.S., ensuring continued open lines of trade and ensuring that no new trade barriers are erected were very front-of-mind for the industry.

[Tony Baldinelli, Conservative, Niagara Falls, ON]

You also mentioned potential retaliation concerns and administrative complexities. Are there others that you could share with us?

[Michael Mosier]

Those two would be my next points, and then we also heard about the importance of designing, for example, a border carbon adjustment that would be consistent with Canada's international trade obligations. We also heard from a number of folks—and I spoke about it earlier—about the potential increase in costs, the impacts on downstream producers who use inputs and on the costs for consumers.

Certainly, I would reiterate that administrative burden was something that came up over and over again, as did the importance of not increasing costs but also not hindering trade at the border.

[Tony Baldinelli, Conservative, Niagara Falls, ON]

Now, with the United States, there's a new administration, and we're unaware of what policy they will be moving forward with. If they go forward with no position on CBAM, for example, and they're not going to implement that, what do you believe will be the impact on the EU and their steps going forward? Are they still committed to going forward? Some incoming U.S. administration could then just take the position of tariffs in response.

Have you done any investigations on that or looked into that matter?

[Emmanuelle Lamoureux]

Our sense is that the EU very much intends to move forward with its CBAM. It's under implementation already. We're in the first phase of implementation, although the charges are not in place yet. As far as we know, they are moving forward with this.

[Tony Baldinelli, Conservative, Niagara Falls, ON]

Madam Chair, how much time do I have?

[The Chair, Liberal, Judy Sgro]

I'm sorry. You don't have any time.

Mr. Arya, go ahead.

[Chandra Arya, Liberal, Nepean, ON]

With globalization and international trade agreements, international trade as we knew it is fast receding.

How difficult do you think it is...? Is it possible to achieve a global consensus on this carbon border adjustment mechanism or anything similar to that?

[Emmanuelle Lamoureux]

Certainly, it will be challenging, but what we are seeing now is a movement toward the adoption of such mechanisms among an increasing number of countries. I've mentioned the EU, which is the most advanced, but also the U.K., which will follow shortly after. Australia is also considering it, and Japan as well.

As I mentioned earlier, the challenge there will be interoperability, a consensus on how exactly to make these mechanisms work together to limit the administrative burden on exporters so that those mechanisms, whose intention is to prevent carbon leakage and encourage greener industries, do not become unintentional barriers to trade, especially for SMEs.

[Chandra Arya, Liberal, Nepean, ON]

You mentioned that you see a movement toward that by international partners, but the elephant in the room is the U.S., and the fastest-growing market is the global south, especially the Indo-Pacific area.

If we go ahead while countries like the U.S. or the Indo-Pacific countries do not, do you think we'll ever be able to achieve our objectives?