A year after the Paris Agreement on climate change was signed and weeks after it came into force, many countries are engaging in serious conversation on how to reach their emissions targets before it is too late. The Paris Agreement may only be one year old, but it carries great significance. An unprecedented number of countries came together and agreed to take action on climate change. In a time when small coalitions are often preferred to multilateral ones, 193 countries signed the Paris Agreement and agreed that climate change is an urgent problem that requires immediate action. Already 113 countries have ratified the agreement and now need to implement it domestically.
While this is an important accomplishment, finding the right policy solutions and engaging in domestic dialogue on implementation is where the hard work begins. In early October, the Canadian government announced its intention to put a price on carbon, starting from $10 a tonne in 2018. And just this week, Canada announced an ambitious plan to eliminate traditional coal-fired electricity by 2030, in sharp contrast to US president-elect Donald Trump’s plans to revive “clean coal”. Taking climate action is politically difficult because it inevitably involves all sectors and all individuals, and there are fears that carbon pricing will adversely affect business, destroy jobs or significantly reduce consumers’ purchasing power. A price on carbon becomes even more difficult to implement when other countries do not take their climate commitments as seriously or, as Trump has done, threaten to back out of the Paris Agreement and focus his efforts on the coal industry.
A practical solution to remind countries of their commitments may come from an unlikely source: international trade. After adopting a domestic nation-wide carbon pricing system, countries can apply border carbon adjustments (BCA) on carbon-intensive imports at their borders. The BCA is essentially a tax on the carbon that went into the creation of the import and is equal to the country’s national carbon price imposed on identical domestically produced goods. The rationale behind such measures is to create a clean domestic market while addressing leakage, the flight of domestic producers to other jurisdictions and the consumer inclination to buy cheaper carbon-intensive products. If several countries start imposing border carbon adjustments this may also prevent other countries that are threatening to back out of their Paris commitments from doing so. Just as the inhabitants of Lilliput in Gulliver’s Travels used many smaller ropes to tie down Gulliver, small and medium-size countries can stand up to large ones who refuse to honour to their climate commitments.
Border carbon adjustments may be small tax increases on a per-product basis, yet they can affect consumer behaviour. Consumers can choose to buy greener products over the dirtier imports that were more carbon-intensive to make – because BCAs ensure a similar price point. And because the BCA creates a fair playing field, the risk of domestic producers fleeing to other jurisdictions is diminished. Imported products that have paid a carbon price already in their country of origin will not be taxed twice, as their price will already reflect accountability for carbon emissions. But more importantly, countries backing away from climate commitments will be pressured to adopt their own carbon pricing systems – if not to address climate change, to collect the revenues from border carbon adjustments.
The World Trade Organization (WTO), which is often cited as the roadblock to such measures, has never explicitly outlawed them. To date, BCAs have never been adopted anywhere in the world, There is no indication the WTO would block such measures if they were designed with the environment in mind, rather than with a view to protect domestic industries from foreign competition.
Countries adopting a carbon price together with border carbon adjustments will make their national markets greener by holding industries accountable for carbon emissions and will create pressure on countries backing away from their climate commitments. With more countries adopting such measures, capping global temperatures becomes more feasible and the few holdouts will remain prisoners to a multitude of ties until they decide to act in favour of the common good.