Enabling Climate Ambition: Border carbon adjustment in Canada and abroad

This report by the International Institute for Sustainable Development (IISD) and Clean Prosperity examines the design and implementation of a border carbon adjustment (BCA) for Canada. It analyzes how a BCA could prevent carbon leakage—where emissions-intensive and trade-exposed (EITE) industries relocate or are undercut by foreign competitors—while maintaining WTO compliance. The document explores various design scenarios, identifies the most vulnerable Canadian sectors, and evaluates the potential impact of similar regimes being developed in the United States and the European Union.

• Canada's current approach to preventing carbon leakage for emissions-intensive and trade-exposed (EITE) sectors relies on output-based allocation, which allows firms to pay only for emissions exceeding a sectorally-determined free allocation level. However, as Canada moves toward net-zero by 2050, this muted carbon price may be insufficient to drive necessary R&D and capital investment.
• A Canadian BCA could be designed as either a tax-based instrument accompanying a carbon tax or a regulation-based instrument extending an existing internal regulation, such as the output-based pricing system (OBPS), to imports. A tax-based system may offer a more straightforward path to rebating costs for exporters under WTO law, whereas a regulation-based system would likely prohibit such rebates.
• The report identifies 11 product categories at the highest risk of carbon leakage, which together account for 34% of Canada's GHG emissions and 18% of its exports, despite representing only 4.5% of total GDP. Bitumen extraction is identified as having the highest leakage risk.
• Calculating embedded emissions for imports could be handled via a product-based approach (actual data per shipment) or a benchmark-based approach (default values). The report suggests a benchmark approach is less onerous, though using a Canadian average would reduce protection as domestic industries decarbonize, while a global average might be viewed as discriminatory by the WTO.
• To avoid double carbon pricing and ensure WTO compliance, a Canadian BCA should credit foreign producers for carbon prices already paid in their home jurisdictions. However, the report argues against crediting non-price-based regulatory policies, as Canada does not charge its own firms for the costs of such regulations.
• The European Union's proposed Carbon Border Adjustment Mechanism (CBAM), targeted for 2023, is expected to be an extension of its cap-and-trade scheme. For Canada, critical issues include ensuring fair crediting for the OBPS, avoiding 'double protection' where EU firms receive both free allowances and CBAM protection, and preparing EITE sectors for the transition.
• The United States lacks a national carbon tax, making a tax-based BCA unlikely in the near term. Potential U.S. alternatives include low-carbon standards, adjustments based on the social cost of carbon, or the controversial use of Section 232 national security tariffs to levy charges on high-carbon imports.
• The report recommends that Canada coordinate closely with the U.S. and EU to harmonize best practices for measuring embodied carbon and setting benchmarks. It also advises the federal government to consult broadly with industry, provinces, and political parties to ensure the policy is durable and avoids bespoke rules for individual sectors or partners.

APA

Cosbey, A., Bernstein, M., & Stiebert, S. (2021). Enabling Climate Ambition: Border carbon adjustment in Canada and abroad. International Institute for Sustainable Development. https://www.iisd.org/system/files/2021-07/enabling-climate-ambition-border-carbon-adjustment-canada.pdf

Chicago

Cosbey, Aaron, Michael Bernstein, and Seton Stiebert. Enabling Climate Ambition: Border carbon adjustment in Canada and abroad. International Institute for Sustainable Development, 2021. https://www.iisd.org/system/files/2021-07/enabling-climate-ambition-border-carbon-adjustment-canada.pdf.

Wikipedia

{{cite report |last1=Cosbey |first1=Aaron |last2=Bernstein |first2=Michael |last3=Stiebert |first3=Seton |title=Enabling Climate Ambition: Border carbon adjustment in Canada and abroad |publisher=International Institute for Sustainable Development |date=July 2021 |url=https://www.iisd.org/system/files/2021-07/enabling-climate-ambition-border-carbon-adjustment-canada.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{cosbey2021enabling, author = {Cosbey, Aaron and Bernstein, Michael and Stiebert, Seton}, title = {{Enabling Climate Ambition: Border carbon adjustment in Canada and abroad}}, institution = {International Institute for Sustainable Development}, year = {2021}, month = jul, url = {https://www.iisd.org/system/files/2021-07/enabling-climate-ambition-border-carbon-adjustment-canada.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }