International Initiatives

Carbon border adjustment mechanisms (CBAMs) have had many names over the years, including Border Carbon Adjustments, Carbon Border Adjustments, or simply border adjustments. It is an interesting fact that to date, though carbon prices are nearly ubiquitous among nations with the most sophisticated bureaucracies, no country has yet demanded accountability for carbon emissions on imports from other countries. However, this looks likely to change. The EU, Canada, Japan, and the UK have all been reported to be looking into a CBAM, but certainly the EU has gone the furthest down this path.

In essence, all a CBAM aspires to do is make sure that goods pay an equal carbon cost regardless of where they come from. So, if the EU imports steel from India, that steel would pay the same carbon price as a ton of steel manufactured in, say, Poland, which is subject to the EU Emissions Trading System (ETS). It’s a simple concept, but the implementation becomes very difficult very quickly. This is why no one has tried it yet, and why it is such big news that the EU is attempting it. Most recently, they released a final plan for how they would accomplish this in December of 2022.

The EU CBAM will begin to take effect in October of 2023 with mandatory reporting of Scope 1 and Scope 2 emissions from iron, steel, cement, fertilizers, aluminum, electricity, hydrogen, and a limited number of downstream products. While reporting of embedded carbon emissions in these products will be required this year, there will be no fee assessed until October of 2025. At present, the EU ETS provides free allowances to affected industries (so-called energy-intensive trade-exposed or EITE industries). As the fee phases in, these free allowances will phase out over the period of 2025-2034. The CBAM is not expected to raise much revenue, with estimates between €1-2 billion each year.

Though most discussions about CBAMs take place with the assumption that there is a pre-existing carbon price in place, this is not universally true. Some discussions have taken place among Republican Senators in the United State about implementing a CBAM without a domestic carbon price. It is unclear that such a proposal is possible without violating existing US trade commitments, though the weight of professional opinions suggests not. However, that does not preclude a serious and very interesting discussion on the topic from taking place in Congress.

Climate clubs are similar in concept to CBAMs in that they try to make sure that people are paying an equal amount for the carbon used to manufacture similar goods. However, they need not limit themselves to carbon prices, and the focus is less on imposing equal costs on incoming goods than on exempting goods from countries that have comparable climate policies from incurring costs. Germany has been leading a recent effort to this end.

The fact that Canada is the US’s largest trade partner surprises more people than it should. After all, the US shares a land border with only 2 countries (Mexico being the third, see below), and all three countries have reduced barriers to trade with the US-Mexico-Canada Agreement, preceded by the North American Free Trade Agreement (NAFTA). Both Canada and Mexico have carbon prices. 

Canada’s system for pricing carbon gives a great deal of autonomy to the provinces. Since 2019, every jurisdiction in Canada has had a carbon price. It is a flexible system: the federal government has set a minimum price, as well as a schedule for increasing that minimum price up to $170 Canadian dollars by 2030. Each province can choose to meet that minimum price however they want; with a cap, with a tax, or with hybrid approaches. 

Under the Greenhouse Gas Pollution Pricing Act (GGPPA), adopted on June 21, 2018, the federal pricing system has two parts: a regulatory charge on fossil fuels like gasoline and natural gas, known as the fuel charge, and a performance-based system for industries, known as the Output-Based Pricing System. The fuel charge applies in Ontario, Manitoba, Yukon, Alberta, Saskatchewan and Nunavut. The Output-Based Pricing System applies in Manitoba, Prince Edward Island, the Yukon, Nunavut, and partially in Saskatchewan. All other provinces and territories are implementing their own pricing systems.

Provinces and territories that have their own carbon pricing systems use the proceeds as they see fit, including by supporting families to take further action to cut pollution in a practical and affordable way. 

In provinces where the federal price on carbon pollution is in effect, ~90% of proceeds go directly to support families through Climate Action Incentive payments. Through these payments, the majority of Canadian families receive more money back than they pay, with low-income Canadians benefitting the most. For Canadians who live in rural and smaller centers, the Government applies an additional 10% top-up to their Climate Action Incentive payment.

The remaining fuel charge proceeds are returned through other federal programming, including: initiatives to help support emission-intensive trade-exposed small and medium-sized businesses; a tax credit to return a portion of proceeds directly to farmers; and co-development and implementation of agreements to return fuel charge proceeds to Indigenous recipients.

Canada’s minimum national price on carbon pollution for explicit price-based systems (i.e., systems that directly set a price on emissions) is $65 per tonne of GHG emissions calculated in carbon dioxide equivalent (CO₂e) in 2023, and increases by $15 per year to $170 per tonne CO₂e in 2030 according to the following schedule:

Explicit Price-Based Systems in Canada

The US shares a land border with only 2 countries, Mexico and Canada, and those two countries are our top two trading partners. All three countries have reduced barriers to trade with the US-Mexico-Canada Agreement, preceded by the North American Free Trade Agreement (NAFTA). Both Canada and Mexico have carbon prices. 

Mexico has had a carbon tax in place since 2013. From 2014 onwards, fossil fuels – with the exception of natural gas – are subject to a carbon tax set at MXN$ 39.80 (US$ 3.50) per tCO₂ released during combustion. Revenues will be used, among other things, on energy efficiency, technologies, and the improvement of public transportation. The carbon tax covers an estimated 44% of Mexico’s GHG emissions. Use of natural gas is exempted, and the tax is capped at 3% of the fuel sales price. Companies liable to pay the carbon tax may choose to pay with credits from CDM projects developed in Mexico or CERs that are also eligible for compliance in the EU ETS, equivalent to the market value of the credits at the time of paying the tax. 

According to the Secretariat of Finance and Public Credit, the tax helps with two key goals: i) emissions reduction and ii) increasing the Federal Government’s budget by tax collection; during 2014 and 2015 it is estimated that tax resulted in approximately USD 950,000 million.

In addition to the carbon tax and with the support of the local governments of California and Quebec, Mexico began its pilot program for the implementation of and Emissions Trading Scheme (ETS) in 2019. The pilot program is set to run for three years, two years corresponding to the pilot phase and one to transition into the fully operational ETS which is scheduled to begin in 2023. The Mexico pilot ETS applies to CO₂ emissions from the power and industry sectors, covering 40% of Mexico’s total GHG emissions. 

Additionally, there are carbon taxes in the states of Baja California, Zacatecas, and Tamaulipas. Jalisco has a carbon tax under consideration, according to the World Bank.