Enabling Climate Ambition: Border carbon adjustment in Canada and abroad

The report examines the implementation of a border carbon adjustment (BCA) in Canada to mitigate 'leakage'—where emissions-intensive and trade-exposed (EITE) sectors relocate or are undercut by foreign competitors with lower carbon costs. It proposes two primary design paths: a regulation-based BCA extending the existing output-based pricing system (OBPS) or a tax-based BCA accompanying a full carbon tax. The authors identify 11 high-risk product categories, including bitumen and synthetic crude oil, which represent 34% of Canada's GHG emissions. The report analyzes the EU's Carbon Border Adjustment Mechanism (CBAM) and the U.S. approach, noting that while the U.S. lacks a national carbon price, it may use low-carbon standards or Section 232 tariffs. Key recommendations include coordinating with the EU and U.S. to harmonize benchmarks and ensuring the system is 'future-proofed' to accommodate a transition from the OBPS to full carbon pricing.

• Carbon leakage is most acute for emissions-intensive and trade-exposed (EITE) sectors, such as steel, aluminum, petrochemicals, cement, nitrate fertilizers, and refined fuels, where domestic firms risk being undercut by foreign competitors facing lower carbon costs.
• A Canadian BCA could take two forms: a tax-based system accompanying a carbon tax, or a regulation-based system that extends an internal regulation, such as the output-based pricing system (OBPS), to cover imports.
• The report identifies 11 product categories at the highest risk of leakage, which account for 34% of Canada's GHG emissions and 18% of its exports, but only 4.5% of total GDP. Bitumen extraction is identified as having the highest leakage risk.
• Implementing a BCA that rebates carbon costs for exports is legally complex; while a carbon tax might allow for rebates, the OBPS is considered a regulation by the Supreme Court of Canada, and WTO law generally prohibits rebates for the cost of internal regulations as prohibited export subsidies.
• To avoid undue administrative burdens, Canada should use a benchmark-based approach to calculate embedded emissions in imports, using a default value (such as the Canadian or global average) while allowing low-carbon producers to challenge the default with verified data.
• 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, requiring importers to buy allowances. Canada should seek fair crediting for its own carbon pricing to avoid double-taxing exports.
• The United States currently lacks a national carbon price, making a traditional tax-based BCA unlikely. Instead, the U.S. might employ low-carbon standards, a BCA based on the social cost of carbon, or Section 232 tariffs based on national security grounds.
• A comparative analysis of four products (clinker, ammonia, high-value chemicals, and styrene) suggests that if the EU CBAM credits Canadian carbon pricing, most Canadian exports will not be significantly affected, with the exception of clinker, which could face a charge of over 40% of its market price.

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} }