Carbon pricing as an asset for Canadian exports to Europe

Closing address at the Journée de réflexion 2024 of the Chaire en fiscalité et en finances publiques de l'Université de Sherbrooke, on the theme: "Integrating sustainable development: from taxation to public finance".

Stéphane Dion - Special Envoy to the European Union and Europe and Canadian Ambassador to France and Monaco

June 13, 2024 - Longueuil campus of the Université de Sherbrooke

Ladies and Gentlemen,

While I'd like to thank you for inviting me, and for giving me the opportunity to speak on a subject as fundamental as green taxation, I have to admit that it's always a bit awkward to deliver the closing speech at a symposium you haven't attended, especially in front of experts on the subject under discussion.

But I think I can guess what you might have said about the aspect I'm going to focus on: carbon pricing.

As a good student of the Collège des Jésuites de Québec, I'm going to make a three-part presentation. After showing how necessary carbon pricing is, I'll focus on an aspect that has been almost completely overlooked: carbon pricing as an export tool, before situating this debate in today's European political landscape.

Carbon pricing: a necessary policy

It's a safe bet that the consensus in this room is quite similar to that expressed in the letter recently issued by over 400 (!) Canadian economists, including the holder of the Chair that brings us together today, Professor Luc Godbout. It is likely that other economists present here today are also co-signatories of this letter.

You will probably have agreed that:

• carbon pricing, while not the only element in an effective plan to reduce greenhouse gas emissions, is an important cornerstone, since when something costs more (in this case, fossil fuels), people consume less of it;
• A new report from the Canadian Climate Institute shows that federal and provincial carbon pricing for industry and consumers is expected to account for nearly half of Canada's emissions reductions by 2030;
• Carbon pricing reduces emissions at a lower cost than other approaches because it is less intrusive, leaving each individual and company the flexibility to choose the best way to reduce its carbon footprint;
• the effect of carbon pricing on the high inflation experienced from 2021 to 2023 in Canada was minimal (causing less than one-twentieth of the price rise, according to the Bank of Canada), as most advanced countries - with or without carbon pricing - experienced similar inflation due mainly to the aftermath of the COVID‑19 pandemic (disrupted supply chains, rapid growth in money supply and delayed demand) and to the economic impact, particularly on commodity prices, of Putin's war of aggression against Ukraine ;
• the vast majority of Canadian families receive more money in rebates than they pay out in carbon pricing, especially those with low or average incomes.

In short, conclude these 400 or so economists, carbon pricing is the most effective and least expensive way to reduce emissions, stimulate green innovation and support the transition to a clean and prosperous economic future.

As you know, this consensus of experts is international, and has for years involved the OECD, the World Bank, the International Monetary Fund, the International Energy Agency and others. Effective coordination of carbon pricing policies, or better still, a credible global carbon pricing system, combined with a common WTO-compatible approach to border carbon adjustments, would act as a catalyst to accelerate the spread of clean technologies and the transition to a decarbonized economy.

Today, however, the vast majority of global GHG emissions (around 74%) are still emitted free of charge. Meanwhile, global emissions are rising, fossil fuel use continues to increase, and according to some observatories the world could reach +1.6°C warming as early as this year.

A world that reaches a warming of 3°C or more is not something we want to leave to future generations. No population will be immune - least of all the poorest and most vulnerable - to the worst impacts of climate change, including the growing intensity of extreme weather events, a dramatic increase in forest fires, droughts and prolonged heat waves with temperatures around 50°C, rising sea levels and land salinization, ocean acidification, further extinction of plant and animal species, damage to infrastructure and human settlements, increased desertification, food shortages, all leading to waves of climatic migration and widespread political instability.

To avoid such horrors, the task facing humanity is enormous: to change nothing less than the material basis of our industrial civilization, i.e. the energy produced by burning fossil fuels: coal, oil and gas. When the world began to worry about climate change in the early 1990s, fossil fuels accounted for 88% of global energy consumption. Today, it's still over 80%, despite three decades of efforts to promote non-emitting energy sources.

We won't get out of this without putting a price on emissions. Having led this fight in Canada and internationally, and having published several texts over the years urging such reform in Canada and around the world, I am delighted that Prime Minister Trudeau has shown leadership by launching the Global Carbon Pricing Challenge, through which Canada is asking all countries to adopt carbon pricing as a central element of their climate strategies, with a view to achieving a collective goal of covering 60% of global emissions by 2030.

In short, carbon pricing is an ecological necessity and a catalyst for an innovative, low-carbon economy. It can be socially just, as we are achieving in Canada by ensuring that the vast majority of families receive more in rebates than they pay in carbon pricing.

Carbon pricing as an export tool

There's one aspect of carbon pricing that isn't talked about enough in the Canadian political debate: carbon pricing is an export tool. I know that you have addressed this aspect today, in particular during Professor Alice Pirlot's lecture on the European Union's border carbon adjustment mechanism. This is to your credit, since it is regrettable that this aspect has been almost completely ignored in the political debate in Canada at the moment. As Canada's Special Envoy to Europe, this worries me enormously.

Indeed, the world will be less and less indulgent towards climate free-riders. It is to be expected that countries will increasingly resort to carbon tariffs, i.e. on carbon-intensive imported goods. Carbon tariffs are likely to become a reality of world trade. The most prominent example is the European Union's Carbon Border Adjustment Mechanism (CBAM). Similarly, the British government plans to implement its own CBAM by 2027.

The EU is determined to continue implementing its border carbon adjustment mechanism, which came into force in its transitional phase on October 1, 2023. From January 1, 2026, the definitive regime will apply, imposing a carbon price on the products and sectors concerned - steel, cement, fertilizers, aluminum, as well as electricity and hydrogen - with opportunities for expansion into new sectors.

By imposing a tariff adjustment on these products and sectors, the EU aims to ensure that emission reduction efforts within the EU are not undermined by cheaper, more polluting imports from countries that do not impose a carbon price comparable to that of the EU. In other words, this system aims to create a level playing field for European companies, ensuring that they are not disadvantaged in relation to their international competitors who are not subject to the same obligations.

The aim is also to avoid carbon leakage, which occurs when companies move to less climate-ambitious countries to avoid carbon costs, thereby displacing rather than reducing emissions. Finally, this adjustment mechanism is designed to encourage countries exporting to the EU to adopt carbon pricing policies, thereby contributing to global, coordinated climate action.

The Canadian government has put in place a rigorous carbon pricing system and an ambitious trajectory to reach $170 per tonne of CO2 by 2030. Given that Canada already has a serious carbon pricing system, Canadian companies may not incur the EU carbon adjustment when it is implemented. This would give our companies an advantage over competitors who do not have carbon pricing systems comparable to the EU. This is an advantage that is likely to grow in other markets as the number of sectors covered by the EU increases and new countries adopt this carbon adjustment at their borders.

European legislation stipulates that if an explicit carbon price has actually been paid outside the EU, it must be recognized. Consequently, the carbon price paid in Canada by Canadian exporters must be taken into account when determining the European carbon charge.

The price of carbon paid under Canadian systems (federal and provincial) must be recognized, so that our exporters don't have to pay twice for their emissions. This is the argument that Canadian diplomacy in Europe, notably Ambassador Ailish Campbell in Brussels, is continually putting forward to the authorities of the European Union and its member countries. It would be risky for our country to deprive itself of this argument. It would be shooting ourselves in the foot as an exporting country to put an end to our carbon pricing systems, both federal and provincial.

What's more, it's better that the price paid for carbon is taken from us and recycled in our economy rather than being a dead loss for us.

It's important to realize that this debate on carbon pricing is part of a broader issue, namely the European Union's intense trade tug-of-war with the United States and China, which always runs the risk of making Canadian exporters collateral victims. Our diplomatic efforts in Europe are constantly focused on avoiding this. We support Trade Minister Mary Ng and the entire government in their efforts to keep the European market open.

In this sense, carbon pricing is an asset that we must preserve for the sale of our products and services on the European market. Carbon pricing is an export tool, and abolishing it in Canada would not only be an ecological mistake, but also contrary to the economic interests of Canadians. It's in the interest of our companies and our fellow citizens to know this, while they don't know it today.

A communication effort is essential, and I hope that experts will continue to participate actively. It is to be hoped that those who are convinced that carbon pricing is an essential policy for the future of Canada, indeed for humanity, will make it known. The 400 economists' letter is exactly the right thing to do. But it must be repeated persistently. As the teachers among you know, repetition is pedagogical. Lenin said that in politics, you have to repeat yourself. That's the only thing I've learned from him!

Ecological transition in the European political debate

Let me revisit the subject by situating it in the broader European political landscape. I'll leave you to draw parallels with Canada and the United States.

The European political landscape is exceptionally fragmented and polarized, certainly around issues of identity such as immigration, but also around the growing debate on climate and environmental policies. On the one hand, there are those who feel that governments are not doing enough in the face of increasing natural disasters - forest fires, floods, heatwaves, droughts - coupled with the denunciation by environmental groups of the insufficient rate of reduction of greenhouse gas emissions in relation to the targets set for 2030 and 2050. In Scotland, the coalition government between the Nationalists and the Greens has just broken up over the issue of GHG reduction targets.

On the other hand, there are those who feel that governments are doing too much: we are witnessing a backlash against environmental and climate policies, as they move from abstract general principles to concrete regulations that mobilize resistance from agricultural, industrial and other lobbies. At a time when we are just emerging from a period of soaring prices, especially for energy, the effect on the population is being felt.

Radical right-wing parties are stirring up this backlash. They campaign against what they denounce as the intellectual fads of a disconnected urban elite. Agricultural protest in particular has been instrumentalized by these parties, who present themselves as defenders of the people, the land, rurality and the traditional way of life. They accuse the ecological transition, led in particular from Brussels, of being an ideological and technocratic steamroller.

Other parties are becoming more cautious, and want to give assurances that they will not let products that fail to meet European environmental standards enter the European market. To appease the protest movement, several countries and the EU have abolished or delayed the entry into force of environmental measures such as diesel taxes and pesticide bans. The EU's Green Deal is particularly controversial.

This polarization around environmental and climate issues has at least two consequences for Canada. Firstly, Europeans want to cooperate more closely with us to achieve green reindustrialization, to be at the heart of decarbonization and electrification, and to help each other fight forest fires and preserve fresh water. In particular, the Europeans are very interested in Canada as one of the few allied democracies that is also a semi-continent whose soil abounds in critical natural resources essential to the transition to a low-carbon digital economy: all those metals, minerals and rare earths that the European continent so badly needs, and for which China is currently the main supplier.

Secondly, European leaders want to reassure their populations by erecting new trade barriers against foreign products deemed harmful to the environment. This protectionist mindset takes many forms, from the emphasis on "strategic autonomy" and "economic security", to the increasing use of anti-dumping and anti-subsidy measures, to the erection of barriers to foreign products, even affecting intra-EU trade. If we are not careful, green protectionism could set back our commercial interests in Europe. It is against this backdrop that the Carbon Border Adjustment Mechanism (CBAM) is being introduced.

We Canadians need the European market, which is essential to our trade diversification objectives. The European Union is the world's largest importer and exporter of goods and services. It is home to large, fast-growing high-tech companies spanning the entire global value chain. The major transformations - those of the digital transition, artificial intelligence and decarbonization - are to a large extent taking place in Europe. The EU and its academic and research institutions are also among our key scientific partners, especially as Canada will now participate as an associate country in Horizon Europe, the world's largest collaborative science, research and innovation program, with a budget equivalent to $140 billion.

In addition, the EU, which is increasingly asserting itself as a global regulator, will be a key ally in achieving a sustainable decarbonized transition based on high, internationally accepted standards. Canada needs this demanding regulation, because we can't open up all these plants and extract, process and market these essential minerals with the same lax social and environmental standards as some other countries.

Over the past two years, our government has signed a significant number of scientific and commercial cooperation agreements with several European countries and the EU, notably in the fields of critical minerals, clean hydrogen, renewable energies and civil nuclear power. Major investments have been made by European companies in Canada in the battery and electric car sectors. Canadian companies have won significant contracts in various European energy sectors.

In short, Europe needs us, and we need Europe. We need to avoid unnecessary barriers between us. To do this, Canada must stay the course with carbon pricing and continue to be a global promoter. We must do so in the interests of humanity, as a good citizen of the world, but also in our own commercial interest, out of pure economic lucidity.