Impacts of border carbon adjustments on the Canadian economy

Highlights

• Border carbon adjustments reduce Canada's carbon leakage and boost competitiveness.
• Results are affected if Canada targets a different set of sectors than other countries.
• Adding export rebates to import tariffs reduces carbon leakage further.
• Climate policies in the USA play a strong role in determining Canada's carbon leakage and domestic competitiveness.

Abstract

This paper examines how border carbon adjustments (BCAs) may address the consequences of uncoordinated global climate action, focusing on the economic impacts for Canada. We investigate these impacts under different BCA design features and by considering a coalition of countries and regions that adopt BCAs. We find that when Canada is within a coalition of BCA-implementing countries including the United States, BCA measures in the form of import tariffs reduce Canada's carbon leakage and boost domestic and foreign competitiveness. We show that these results may change if Canada imposes BCAs on a different set of sectors than the rest of the coalition or includes export rebates and free emissions allowances to firms. When Canada remains in the coalition while the United States does not, we show that Canada's carbon leakage increases, domestic competitiveness weakens, and foreign competitiveness improves.