International Trade Committee on Dec. 9th, 2024

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Thank you to our witnesses. We very much appreciate your valuable information.

We will suspend, as we have to switch to our other witnesses who are coming on board via video conference.

[The Chair, Liberal, Judy Sgro]

I'm calling the meeting back to order.

Thank you very much.

We have with us now Andy Kubrin of Citizens' Climate Lobby, by video conference; and Aaron Cosbey of the International Institute for Sustainable Development, also by video conference. Welcome to you both.

Mr. Kubrin, I invite you to make an opening statement of up to five minutes, please. You have the floor.

[Andy Kubrin, Volunteer, Citizens' Climate Lobby]

Thank you, Madam Chair and honourable members of the committee.

My name is Andy Kubrin. I'm a writer, researcher and climate activist based in Calgary. I volunteer with Citizens' Climate Lobby Canada and the Calgary Climate Hub.

Through my work with Citizens' Climate Lobby, I learned about a policy called a “carbon border adjustment mechanism” or CBAM. As you are no doubt aware, it's a new development pioneered by the European Union.

Last June, along with other Citizens' Climate Lobby volunteers, I briefed my member of Parliament, Mr. Shuvaloy Majumdar, on the topic. Later, I wrote an article about the European Union's CBAM in Canada's National Observer.

A CBAM is basically a tariff levied on the embodied carbon in imported products. It has two purposes, to protect domestic producers from unfair competition from cheap carbon-intensive imports and to encourage other countries to implement their own carbon pricing policies.

No one likes taxes, but with proper design, this one can be a tax worth paying. A CBAM can level the playing field of international trade, promoting clean production everywhere. It can also lower emissions, which puts the brakes on global warming.

I won't try to describe all the complexities of CBAMs here—you have expert witnesses who can help you with that—but I will tell you that CBAMs pose a significant challenge to Canadian exporters and to the nation as a whole. Like many challenges, this one comes with an opportunity.

International trade makes up about two-thirds of our GDP. Our top trading partners are the United States, China, the United Kingdom, Japan and Mexico. If you total the trade with our individual European partners, the EU as a whole is our second- or third-largest trading partner, depending on which source you consult.

The EU introduced its CBAM in 2023 and began requiring importers to submit data on the embodied carbon in specific high-emissions products. In 2026, importers will start paying tariffs on the carbon content of these goods. The program will gradually expand until 2030, when it will cover all goods in the EU's emissions trading system.

Other nations are following suit, including our top partners. The United States is considering various policies. The United Kingdom expects to have a CBAM in place by 2027. Australia, Chinese Taipei, China and India are also weighing their options.

These countries are following Europe's lead for a reason. The European and United Kingdom CBAMs, and perhaps others under development elsewhere, provide a rebate for carbon pricing already paid. In this way, a CBAM becomes a virtuous circle, rewarding countries that reduce their emissions while discouraging freeriders. It turns carbon pricing into a competitive advantage.

There are a few ways Canada can take advantage of these developments.

One is to adapt our own carbon pricing system to capture the rebate available under CBAMs. That could mean modifying the output-based allocation currently available under our output-based pricing system. Our exporters would still pay a carbon price, but the revenue would remain in our economy instead of going to other nations.

The other thing we can do is implement our own CBAM. We would, of course, price the greenhouse gases in goods that we import to discourage carbon-intensive production in other countries. Revenues raised under our CBAM would be used to benefit Canadians. This step would protect Canadian industry and encourage other nations to do their fair share in emissions reduction.

These choices entail risk and trade-offs, and I defer to the experts who will advise you on these matters. A changing trade environment presents you with a challenge and Canada with an opportunity. It's a big challenge, but I'm confident your study will identify the best solutions.

Thank you, Madam Chair.

[The Chair, Liberal, Judy Sgro]

Thank you very much, sir.

Mr. Cosbey, go ahead, please.

[Aaron Cosbey, Senior Associate, International Institute for Sustainable Development]

Thanks, Chair.

Thanks for the opportunity to speak with you today. I'm Aaron Cosbey, a senior associate with the Winnipeg-based International Institute for Sustainable Development. I also chair the Canada-based Commission on Carbon Competitiveness. I've worked for almost 15 years in Canada and internationally on the subject of border carbon adjustment—that sounds sad, actually—including over a dozen reports on the specific elements of the EU CBAM.

I'll speak to you today on two themes. The first is on the context for this session, which I argue is in fact a broader reality than just the EU CBAM and should compel us to focus on these questions. The second is on the ways in which Canada's industrial carbon pricing regime, the OBPS, relates to that broader reality.

First, on the context, the EU CBAM, as you've heard, is now in effect. It will start levying charges on an increasingly stringent scale from 2026 to 2034. It is the first border carbon adjustment regime to come into effect, but it will not be the last. The U.K. has already announced that it will have one in place as of 2027. Australia is in the final stages of consultation on whether it should have a similar mechanism. Chinese Taipei actually has one in law, but it's not yet enacted. Critically important, given that our energy-intensive trade-exposed sectors export overwhelmingly to the U.S., there are four different bills before the 118th Congress in the States that propose some type of border climate-based charge. Several of those bills will be introduced in the next Congress. Some look like they may find bipartisan support.

Moreover, it's not just a matter of border carbon adjustments. BCAs are just one of a suite of measures in the coming green wave that will restrict trade based on the carbon content of goods. Look at the EU's methane regulations, which will affect any gas exports. Look at the buy clean standards in U.S. public procurement. Look at deforestation-free product rules coming in the EU and proposed in the U.K. and the U.S.

These are all relatively recent measures. It's worth asking why the sudden rush of such policies. It is an inexorable trend. It starts with increasingly serious climate change impacts, which translate into increasingly serious climate change policies worldwide. When countries increase their ambition, they need to think about the competitiveness of their domestic firms vis-à-vis firms in other countries that don't face the same climate regulations. That leads us to trade-related climate measures. This is not a static situation. It's a trend. We will see more such measures.

Why does this matter to Canadian exporters? To state the obvious, it means that in our first-, third- and fifth-biggest trading partners, measures are being implemented or contemplated that will, one, punish producers of industrial goods with large carbon footprints, and two, reward national policy efforts to price carbon.

Let me break down those two dynamics a bit. First, the more GHG-intensive our production of steel, aluminum, cement and fertilizers, the more those goods will be charged at the border of any country with a border carbon adjustment or some other such measure. Fortunately, as Catherine Cobden and others have already told you, at the moment our production of goods like steel and aluminum is relatively clean, but the incentives still exist even for our clean producers. The more they can reduce their GHG intensity, the less they're going to pay. Second, measures like the EU and U.K. CBAMs are going to grant credit at the border for a carbon price paid in the country of export.

Let me turn now to how Canada's existing industrial carbon pricing, the OBPS, relates to all that. It helps in both respects. First, it provides incentives to reduce the industrial GHG pollution in those firms, which will lower the border charges payable for Canadian exporters. Second, it lowers the border charges again, because Canadian exporters will have already paid a carbon price. They will be credited for that.

Just to be clear on an important detail, the credit that the CBAM is going to offer will not be the full federal backstop price. To protect our firms against carbon leakage, the OBPS has output-based allocation, which lowers the average cost of carbon paid by the carbon firms. It's likely that this much lower average cost will be what gets credited.

In closing, let me reiterate that we will be seeing many more such measures, similar to the EU CBAM, that restrict trade based on the carbon content of goods. Our existing industrial carbon pricing scheme helps our exporters prosper in a world full of such measures, both by helping them reduce their GHG emissions and, therefore, face lower charges and secure more markets, and also by lowering the charges that are due to them based on the credit for a carbon price already paid.

Thank you. I look forward to our discussion.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Mr. Jeneroux, you have six minutes.

[Matt Jeneroux, Conservative, Edmonton Riverbend, AB]

Thank you, Madam Chair, and thank you to both of the witnesses for joining us here today.

We had some testimony last week that again highlighted that the adjustments were first promised in 2020 and then were in the Liberal Party platform in 2021. Then there were public consultations in 2022.

Mr. Cosbey, were you consulted as part of those consultations in 2022?

[Aaron Cosbey]

I did submit formal comments on those consultations, yes, and informally I have consulted with a number of senior bureaucrats on what the shape of a border carbon adjustment might look like in Canada. I was also lead author on a report we produced that tried to dive more deeply into what a BCA for Canada might look like; there were a couple of reports, actually.

[Matt Jeneroux, Conservative, Edmonton Riverbend, AB]

Okay, so your answer is that you were consulted.

Mr. Kubrin, were you consulted as part of those consultations on the policy in 2022?

[Andy Kubrin]

No, I was not consulted.

[Matt Jeneroux, Conservative, Edmonton Riverbend, AB]

Mr. Cosbey, have you seen the results of those consultations from 2022?

[Aaron Cosbey]

We haven't. The government has yet to issue any response to the consultations it undertook.

[Matt Jeneroux, Conservative, Edmonton Riverbend, AB]

Can you speculate as to why?

[Aaron Cosbey]

My speculation—and, of course, it is speculation—is that through those consultations, the government understood that a border carbon adjustment in Canada would be an incredibly complex tool to implement, and, moreover, that it would have to be—and I believe Ms. Cobden also made this point—done collaboratively with the United States in order to be a workable tool for Canada. That's not an easy prospect.

Moreover, if you'll let me speculate on one more thing, the existing systems of protection under the OBPS, the output-based allocation, are sufficient at the moment to protect the competitiveness of firms against carbon leakage. That may not be the case in the medium term or the longer term, but at the moment I don't think the government sees an urgency to implementing something like a border carbon adjustment, given the complexity that would be involved in that challenge.

[Matt Jeneroux, Conservative, Edmonton Riverbend, AB]

Again, this was promised in 2020 and again in 2021, and there were consultations in 2022, but Mr. Cosbey has not seen any results from those consultations.

Through you, Madam Chair, going back to the witness we had before us, who I believe was from the finance department, we're hoping to get those documents and find out what those consultations looked like. He nodded in agreement at the time.

I will go back to you first, Mr. Cosbey. How important do you think it is that any future border carbon adjustment policy be harmonized with that of the United States?

[Aaron Cosbey]

It's critical. As Mr. Behboodi mentioned in previous testimony, 75% of our exports go to the United States. Moreover, any unilateral trade measure that Canada puts in place that affects U.S. exports to Canada is going to be met with a typical response from a trade partner that is infamous for its retaliatory capacity.

In plain language, if you put something like this in place without the co-operation of the United States, you screw up an intensely integrated flow of trade in goods back and forth across this border that would have negative implications for both countries.

[Matt Jeneroux, Conservative, Edmonton Riverbend, AB]

I'll ask the same question of you, Mr. Kubrin.

[Andy Kubrin]

I don't have the global view of trade that my friend Mr. Cosbey has, so I'll pass on that. I don't think I can add anything of value to this current question. Thank you.

[Matt Jeneroux, Conservative, Edmonton Riverbend, AB]

You don't have any opinion on whether this border carbon adjustment should harmonize with that of the United States. Is that correct?

[Andy Kubrin]

I do believe we need to harmonize with the United States on trade, but that's just a general view. I don't have the global knowledge of trade to say more than that.

[Matt Jeneroux, Conservative, Edmonton Riverbend, AB]

If the incoming president does not have this on his agenda and we are here studying it with the potential recommendation to move forward on it, would you disagree with our moving forward on a border carbon adjustment policy, Mr. Kubrin?

[Andy Kubrin]

I believe we will need to adapt our trade policy to that of the United States, and to policies pursued by many other nations.

I am going to say that I do not know the sole, correct answer. It is a complex question. That's all I can say, but I thank you for your question.

[Matt Jeneroux, Conservative, Edmonton Riverbend, AB]

Thank you, Madam Chair. I'm good.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

It's on to Mr. Sheehan.

[Terry Sheehan, Liberal, Sault Ste. Marie, ON]

I'll be sharing my time with Vance, Chair.

To the witnesses, could you inform the committee what industries might benefit from CBAM? We've heard from the industries that have trepidation.

I'll start with Aaron, perhaps.