International Trade Committee on Dec. 11th, 2024

[The Chair, Liberal, Judy Sgro]

Thank you so much.

We'll go to Mr. Sidhu for a minute and a half, to be fair, or closer to two.

[Maninder Sidhu, Liberal, Brampton East, ON]

Thanks, Madam Chair. I will take the minute and a half.

I know we're talking about what the U.S. is doing, and we want to be in lockstep. We've heard about the U.S. PROVE IT act. Lawmakers down there, Republican and Democrat, are looking at industry and carbon efficiency.

This act was supported by the U.S. Chamber of Commerce, the American Iron and Steel Institute and the American Petroleum Institute. There are many other organizations supporting this act because they know it will give a competitive advantage to countries that have carbon pricing mechanisms or progressive environmental policies in place.

We hear the Leader of the Opposition talk about axing the tax, but in 2021, the Conservatives had carbon pricing in their platform. They've just turned around. This means uncertainty to industry partners that are looking to invest in Canada because we're seen as a progressive partner. Companies are coming here to create jobs.

I think it's very important for committee members and those watching to understand that we have a leg-up when we look at the G7. With our carbon pricing, we're actually competitively ahead of many other countries.

It's important that we look at what the U.S. is doing. The U.S. bill was supported by Republicans from Florida, Indiana and Oregon—from across the U.S. I don't think this is the end of the line, though.

As a quick comment, I want to thank Mr. Sawyer for bringing up that the U.S. PROVE IT act is just one way the U.S. is looking at this. It's being studied, so we'll see where it goes from here, but I know there are a lot of organizations and institutions down in the U.S. that support it.

Thank you, Madam Chair.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Thank you very much to our witnesses for this first hour of testimony.

We will suspend while we switch over to our other witnesses.

[The Chair, Liberal, Judy Sgro]

I call the meeting back to order.

We have with us, as an individual, Neil Campbell, partner at McMillan LLP. From the Canadian Union of Public Employees, we have Angella MacEwen, senior economist in national services. From United Steelworkers, we have Troy Lundblad, department leader of research, public policy and bargaining support, and François Soucy, legislative staff representative for political action and communications.

Welcome to you all.

Yes, Mr. Savard-Tremblay.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

Madam Chair, I apologize for interrupting.

Can we take a short break? I can't hear the interpretation.

[The Chair, Liberal, Judy Sgro]

Okay, wait just a second. We'll see if we can get interpretation.

We're good.

Welcome to you all. We will start with opening remarks.

Mr. Campbell, you have the floor for up to five minutes, please.

[Neil Campbell, Partner, McMillan LLP, As an Individual]

Thank you for the invitation to appear before the committee today.

I'm a lawyer and my practice focuses on international trade, as well as competition and foreign investment review. I have previously written and spoken about border carbon adjustments, or BCAs, including the CBAM, from a trade law perspective. My opening comments will focus on six brief points about when BCAs may be useful and how they may be implemented.

First, in my view, there are two conditions that make BCAs a potentially important trade law instrument that can benefit domestic producers and benefit the Canadian economy. Number one is that you have significant carbon costs being imposed on certain domestic sectors. Number two is that those domestic sectors are facing significant competition in Canada from imported products whose manufacturers basically have an advantage because they incur either low or no carbon costs.

Second, I think the optimal level of a target charge for a border carbon adjustment should match the level of the carbon costs per tonne of emissions being imposed on the domestic industry. This is for two reasons. First, any higher level is going to invite a trade law challenge for violating the national treatment or non-discrimination provisions in WTO and other bilateral and regional trade agreements. Second, any lower amount is just going to leave Canadian producers on a less than level playing field in their home market.

Third, in my view, it's important to allow, in a BCA design, for the charges at the border to be reduced when an exporter can establish that it's subject to carbon regulatory costs in its home jurisdiction. Basically, this eliminates the double-payment problem or double-counting problem. That problem would be difficult to justify under a national treatment standard. What you're doing by recognizing those foreign costs is essentially aligning the total payment that the incoming product makes with your domestic climate regulation level of choice. The EU's CBAM is using that approach. Basically, you have verified local carbon costs being offset against the amounts that the exporter would have to otherwise pay when purchasing the certificates in the EU's emission trading system.

Relative to exporters that are selling into the EU from countries with no carbon regulation, Canadian exporters have a couple of advantages, although the size may vary. First, they're already doing some of the climate measuring, accounting and information type of work that was discussed in the previous panel for domestic purposes. To the extent that the EU wants something more or different, that adds incremental challenges, but relative to a no-carbon country, we're ahead of the game. Second, we'll pay lower charges into the EU than a no-carbon country.

One of the interesting developments since the CBAM has emerged is that, despite China, India, Brazil and some other countries claiming they will challenge it from a trade law point of view, they're also increasing their efforts to build their own domestic carbon pricing systems in various ways. The intuitive logic of that is to keep the revenue, to some degree, within their home jurisdictions rather than paying it to the European Commission.

The fourth point is that the CBAM has attracted a lot of attention. I would encourage you to recognize—and I know it's in your notice of motion—that it's one particular design or one particular approach for implementing a border carbon adjustment. There are quite a number of other options and quite a number of design choices.

One quick example that I think is particularly important for Canadian producers is the question of exemptions or free allowances in a carbon regulatory regime. Those are often perceived to raise trade law issues for a BCA under a national treatment analysis. What the EU is doing is making those go away—it's phasing its allowances out—but that choice may in fact be as much or more driven by the EU's long-term climate policy objectives rather than just trade law compliance. Put more plainly, I think it's defensible to keep the allowances or exemptions in effect as long as you're setting a border carbon adjustment amount at a level that would reflect the average or the net prices being imposed in the domestic jurisdiction.

Here's a quick example with simplified math. If you're imposing a $100-per-tonne cost on carbon emissions but the allowances mean only 75% of emissions are being charged, you could impose a border carbon adjustment at $75 per tonne of emissions and treat foreigners on a level basis, as the average cost they're paying is comparable to the average cost you're imposing on your domestic producers. A BCA would not require Canada to give up its allowances in the OPBS, or features of that sort. Necessarily, it could by choice, but it's not required.

Fifth, I think regulatory burdens can be quite important considerations when you're designing BCAs. For Canadian producers, the incremental cost of doing a Canadian BCA is quite low, partly because they're already doing a lot of client measuring and reporting, and particularly because the obligations in a Canadian BCA are not going to be imposed on Canadians. They're being imposed on foreign exporters or importers.

I will quickly reference what Ms. Lamoureux said about a focus on monitoring interoperability. Things don't need to be identical. There are mechanisms for mutual recognition agreements and such that could be used.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

[Neil Campbell]

Chair, I see you're giving me the nod. I have a very short last point.

[The Chair, Liberal, Judy Sgro]

Committee members always have lots of questions.

[Neil Campbell]

Certainly.

My last point is simply to suggest that the lead time for developing, testing and implementing a BCA is pretty long. The U.K. is starting now and looking at 2027. If Canada starts in 2025, we're probably looking at 2028 or 2029. I think it's a long-view decision, but the time to start thinking about it is now.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Campbell.

We're going to Ms. MacEwen.

[Angella MacEwen, Senior Economist, National Services, Canadian Union of Public Employees]

Thank you very much.

I am here from the Canadian Union of Public Employees. That's Canada's largest union, with over 750,000 members across Canada. CUPE members take great pride in delivering quality services in communities across a broad cross-section of the economy, including in energy, utilities, transportation and airlines.

Globally, we're experiencing the unprecedented impacts of climate change, and many of our members are facing this challenge in both their work and home lives. In response to this challenge, many nations are implementing strategies to speed up the transition to a low-carbon economy.

It is clear the global economy is moving towards a reality where carbon-based adjustment mechanisms are happening at borders. In Canada, we have the additional challenge presented by uncertainties over the U.S. threat of tariffs and the review of CUSMA coming up. It's important to remember that U.S. states and industries may have priorities and approaches that differ from Trump's. As my colleague said before, it's not clear what being in lockstep with the U.S. actually means right now.

Our economy must adapt, though, and be positioned to take advantage of the massive industrial and economic opportunities that are coming with the shift to a low-carbon economy. We can do that through a comprehensive industrial strategy, which means we're all working together to protect Canada's interests and clearly prioritize the interests of workers, their families and their communities. A good example of how we've done this already is the way our transition off of coal energy generation contributed to cleaner manufacturing in most Canadian sectors. That gives us an advantage in the current reality.

The European Union is Canada's second-largest trading partner for goods and services, and they have already implemented a border adjustment tool. This presents the opportunity to develop a robust industrial strategy that diversifies our economy and trade partners and includes a pro-worker agenda.

I am also a member of the Canada-EU Comprehensive Economic and Trade Agreement domestic advisory group. As the CLC representative mentioned on your previous panel, our EU counterparts have expressed their keen interest in purchasing clean products from Canada because of our high labour and environmental standards. One of the immediate government priorities should be to urgently develop a Canadian border adjustment mechanism that aligns with the EU and U.K. CBAMs. This will help us open more doors to trade and to good-paying jobs in Canada and will help us minimize the impact of unfair trade practices from the U.S.

Particularly in the context of our domestic carbon price and other domestic carbon prices, a CBA will help protect Canadian industries and jobs and will reduce global carbon emissions. Such a framework would ensure foreign producers bear equivalent carbon costs and help prevent unfair competition in our domestic market. That helps level the playing field and ensures importers accurately price the environmental costs of their activities.

This embodies the principles that align perfectly with Canada's climate and trade objectives. We know the cost of inaction is enormous and presents serious risks. Without equivalent measures, low-cost, high-emission imports will continue to undercut Canadian producers and jeopardize thousands of good-paying jobs. Given the challenges and opportunities we're presented with, a border adjustment mechanism is a fair and predictable way to keep Canadian companies competitive and keep jobs in our communities.

Thank you.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Mr. Lundblad, you have the floor for up to five minutes, please.

[Troy Lundblad, Department Leader, Research, Public Policy and Bargaining Support, United Steelworkers]

Thank you, Madam Chair.

Thanks to the members of this committee for the opportunity to speak today on this issue.

My name is Troy Lundblad. I'm the department leader for research, public policy and bargaining support at the United Steelworkers union. With me, or rather with you, is my colleague François Soucy, the legislative staff representative in our Ottawa office.

Our union represents over 225,000 workers in Canada and 850,000 members across North America in virtually every economic sector, including steel, aluminum and manufacturing—sectors globally considered emissions-intensive and heavily exposed to trade. Today I'll focus on proposals to consider the implementation of a Canadian carbon border adjustment.

A CBA, or a carbon border adjustment, if implemented, would ensure that the price of imported products reflects the same carbon costs as those incurred by Canadian producers. The steelworkers union has for many years advocated for the implementation of a carbon border adjustment regime. Particularly in the context of the implementation of a domestic carbon price, a carbon border adjustment mechanism will help to protect Canadian industries and jobs and reduce global carbon emissions.

Such a framework would ensure that foreign producers bear equivalent carbon costs to Canadian producers, and it would prevent unfair competition in our domestic market. A CBA can and should be used in conjunction with other policy measures to position our industries for a competitive advantage in low-carbon production while protecting good Canadian jobs—for example, in steel and aluminum. The cost of inaction here is enormous and presents some serious risks. Without equivalent measures, low-cost, high-emissions imports will continue to undercut Canadian producers and jeopardize Canadian jobs.

Indeed, Canada's steel and aluminum sectors already enjoy a distinct carbon advantage over foreign producers. Our aluminum has the lowest carbon intensity in the world, emitting roughly one-tenth of the greenhouse gases as Chinese aluminum. Our steel industry, particularly our electric arc furnace production, has one of the smallest carbon footprints globally thanks to advanced technology and access to low emissions electricity grids in Quebec and Ontario.

However, it's also critical that a made-in-Canada carbon border adjustment mechanism be designed in a manner that reflects the realities of Canadian industry and our trading relationship with the United States. As the global economy rapidly shifts to decarbonize supply chains, Canada must align its policies to maintain access to its vital markets in the U.S. and in the EU. Adopting principles similar but not identical to those in the EU at the national level with the carbon border adjustment mechanism will also help protect Canadian industries and the jobs and communities they depend on.

In addition to the design and implementation of a carbon border adjustment, the USW urges this committee to consider other policies, such as those that promote buy-clean public procurement to prioritize low-carbon materials, such as Canadian steel and aluminum, in infrastructure products. We must also do more to strengthen trade enforcement by giving the Canada Border Services Agency more resources to monitor and prevent the dumping of high emissions imports that destabilize markets and undermine domestic production.

This isn't about greater protectionism but fair competition while promoting emissions reduction. All else being equal, one of the most significant contributions Canada can make to carbon emissions reduction is to meaningfully reduce the importation of dirty steel and aluminum into our domestic market. A carbon border adjustment mechanism can help to level the playing field and ensure that imports accurately price the environmental costs of their activities.

Canada is at a pivotal moment. We need policies that ensure access to key markets without being subject to carbon adjustment, while safeguarding our vital trade relationship with the United States. Our proposals would help grow our industry, secure good-paying jobs and position Canada as a leader in the transition to a low-carbon economy. The United Steelworkers urge you to act decisively to ensure that Canada's industries thrive in a fairer and greener global marketplace.

Thank you, and we look forward to your questions.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Now we'll go to Mr. Baldinelli for six minutes, please.

[Tony Baldinelli, Conservative, Niagara Falls, ON]

Thank you, Madam Chair.

Thank you to the witnesses for being here today.

It's a very interesting topic we're looking at. However, I might suggest that it's a little outdated in the sense that things have changed over the last several weeks given that a new incoming U.S. administration will be taking office in January. There are big unknowns there. We're already hearing about tariffs on certain items and about certain issues. We're talking about CUSMA renegotiations. There are issues with the $390 billion that was committed to the IRA by the Biden administration over 10 years. We have an incoming president, and the previous administration had no carbon tax in place.

From a regulatory standpoint, should Canada be out of lockstep with what's going on in the United States? We just heard from the United Steelworkers about fair competition and keeping a competitive advantage.

If we do a carbon-based mechanism without the United States, how would that impact Canada? They are our largest trading partner. We trade more with the United States than we do with the rest of the world combined. About 50% of our steel is exported to the United States, whereas 0.1% is exported to the EU. How can we maintain a competitive advantage?

First I'll go to you, Mr. Campbell.

[Neil Campbell]

Thank you for the question.

I think there's competitiveness in our market and competitiveness in the U.S. market for us to think about in terms of our producers. A BCA helps you to preserve the competitiveness of your domestic firms in your domestic market. One source of competition in our market, which is not paying for carbon right now, is most of the U.S. If you put a BCA in place, that would charge them and would level the playing field up to the chosen level of Canadian carbon.

For the U.S. market, I think the way we're managing that currently is through the degree of allowances we choose in our system. That's something you can continue to choose as you go forward. Those are essentially climate policy choices in the first instance, so the role the BCA plays is to level the playing field.

I think where your question is going is that there may be consequences if we do that. In the current uncertain environment, that's a very fair question and a fair issue to consider. I'll try to be brief, but I think in the world we're in, which you've described, you can cave to intimidation, you can negotiate or you can retaliate. In the first administration, we saw examples of this. In my view, working on a BCA creates an additional element for Canada to think about using in a negotiation process with the U.S. as you go forward.

[Tony Baldinelli, Conservative, Niagara Falls, ON]

Madam Chair, how much time do I have left?

[The Chair, Liberal, Judy Sgro]

You have 48 seconds.

[Tony Baldinelli, Conservative, Niagara Falls, ON]

This goes back to that regulatory harmony. On the notion of providing certainty, for example, even if we were able to work on certain issues with the United States—for example on a BCA—we still have the implementation of a carbon tax, which the United States doesn't have.

On Monday, we had Catherine Cobden here from the Canadian Steel Producers Association, and she said:

Before we had a carbon price, our steel industry was suffering in our competitive position when we had to compete with unfair traders who were dumping into our market. Now we have the added problem of trying to compete with fair traders, like the Americans, who are very prevalent. They represent 40% of our import share, and we're competing with them, and they do not have a carbon price. Given the $80 per tonne of CO2 emissions that we now face, that makes a significant difference. The issue is that the carbon price will continue to rise year over year....

It went up in 2023 and 2024, and it's going up again in April. How can we maintain jobs and our competitive position, as Mr. Lundblad indicated earlier? We want to continue to have jobs in the Hamilton steel sector.

[Neil Campbell]

I don't want to hog all the answering, but my brief answer is that the BCA would charge for carbon to offset the advantage that U.S. producers have in selling into Canada.

[Tony Baldinelli, Conservative, Niagara Falls, ON]

What is the reaction going to be?

[Neil Campbell]

I agree that that's the broader question, and I think that's a Canada governmental negotiation strategy.

[Tony Baldinelli, Conservative, Niagara Falls, ON]

Would it not be better, then, to work in lockstep, to have something in harmony, with our largest trading partner, rather than doing something that would stand out?