The Longview Power Plant, a coal-fired plant, on Aug. 21, 2018 in Maidsville, West Virginia.Spencer Platt/Getty Images
Hugo Cordeau is a doctoral candidate in economics at the University of Toronto.
Barely a week after the United States paused tariffs against Canada, President Donald Trump is already talking about new duties on steel and aluminum. There is every likelihood that Canada is in for a bitter, drawn-out trade war. For that reason Canada must focus on honing our retaliatory measures.
Faced with the blanket 25-per-cent tariff threat from the United States last week, Ottawa announced retaliatory taxes on goods imported from the U.S., British Columbia and Ontario threatened to ban U.S. alcohol, and Ontario Premier Doug Ford planned to terminate a $100-million deal with internet provider Starlink, owned by Trump efficiency czar Elon Musk.
Many of these measures, such as the Starlink example, are somewhat targeted to exert maximum pressure on the White House. The federal retaliatory tariffs tried to focus on goods produced in Republican states.
But we can be even more surgical and deliberate in our approach.
What we should do is strike where it hurts the most: Mr. Trump’s electoral base. If they feel the pain, he will listen. But we should also consider measures that hurt us the least and benefit us the most, that would do the most good for the world and that which would strike a raw nerve with Mr. Trump himself.
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An innovative approach is to apply a carbon border adjustment to the U.S. – a trade measure in which countries with carbon taxes impose tariffs on those without.
The traditional rationale for such a measure is that domestic companies, by paying carbon taxes, have higher production costs than foreign ones that don’t. Domestic products are thus more expensive than imports. A carbon border adjustment raises the price of imports to reflect the carbon tax foreign companies won’t otherwise pay. This levels the playing field.
Canada, which has a carbon tax, does not have carbon border adjustments. But it has expressed interest, and the idea was brought up recently by Liberal leadership candidate Mark Carney.
Mr. Carney has mostly talked about a carbon border adjustment as a worthwhile measure on its own. That might be debatable. But when we’re facing a trade war, a carbon border adjustment is a retaliatory tactic that has no equal. Canada should pursue it with renewed focus.
Concretely, we should be applying a state-level carbon border adjustment based on grid carbon intensity – i.e. how clean or dirty a state’s electricity is. The U.S. has a relatively polluting grid at 368 grams of CO2 per kilowatt-hour (gCO2/kwh) – twice that of Canada and six times that of France. Red states such as Wyoming, West Virginia, Kentucky, Indiana, Missouri and Utah have even more carbon-intensive grids, with emissions ranging from 700 to 900 gCO2/kwh, largely owing to their reliance on coal.
In other words, under a carbon border adjustment, the same goods produced in a highly polluting red state grid would be taxed significantly more than those coming from greener grids, which are typically found in blue states.
In levelling the playing field for domestic companies that pay carbon taxes, a carbon border adjustment has a twofold effect: First, while it is inflationary, like all tariffs, the resulting price increase for Canadians can be mitigated by sourcing from greener states. Second, it would be focused on the red states even more than the tariffs that Ottawa has announced, which, despite being targeted, still involve broad product categories.
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On a broader level, a carbon border adjustment is essentially a partial carbon tax on American companies. To avoid the tax, U.S. companies that want to export to Canada are incentivized to invest in low-carbon production methods or to produce goods in jurisdictions with stronger climate policies – or states with cleaner electricity. This is good for the planet.
And such a measure would be the perfect countermove against a “drill, baby, drill” President who wants to encourage more oil production and withdraw the United States from international climate co-operation. Mr. Trump would sit up and pay attention if Canada uses a carbon border adjustment as retaliation to tariffs. The irony of the situation would not be lost on the world that is watching.
This might aggravate Mr. Trump, but that also means a promise for U.S. exemptions can be a good bargaining chip. The measure aligns with what many observers say: Canada can’t win outright in a trade war, but it can cause enough pain that Mr. Trump decides the fight is not worth his while.
The even greater thing is that such a measure can go even further: a G7 collaboration.
The EU has already implemented a carbon border adjustment, and Britain is following suit; Canada has also expressed its desire to collaborate. As well, Canada is hosting the G7 this year and most G7 states either have a carbon border adjustment or are considering one. One for all, all for one, as the Three Musketeers would say.