Could a Border Carbon Tax Shake Up Canada’s NAFTA Negotiating Position?

Canadian NAFTA negotiators should consider shaking up negotiations with Donald Trump’s trade representatives by proposing a border adjustment tax for carbon, The Energy Mix curator Mitchell Beer and subscriber Diane Beckett suggest in an opinion piece this week in Policy Options.

“One of the early pieces of advice Canada is receiving as it prepares its strategy for renewed NAFTA negotiations with the United States is that when you’re up against a schoolyard bully who is determined to win at all costs, the best defence is a good offence,” they write. “So could Donald Trump’s decision to pull his country out of the Paris climate change agreement be a cornerstone for that strategy? Particularly if Canada can morph the United States’ erstwhile border tax threat into a defence of its own trade and climate interests?”

At least two formulations of a border carbon tax have been proposed since the U.S. election last November—a plan put forward by then-French presidential candidate Nicolas Sarkozy, and a more detailed calculation by Chris Hope of Cambridge University’s Judge Business School. Hope estimated a border carbon tax would be US$150 to $250 per tonne of carbon dioxide, or about 6 to 10% on U.S. exports, Beer and Beckett report.

“If it is to be proportionate, it should cover the harm caused to the Earth from the production of the goods, a harm that will not be reflected in their price if the U.S. presses ahead with the unfettered use of fossil fuels,” Hope wrote.

The highest-profile border tax of all was mooted by Trump and briefly promoted by U.S. House Speaker Paul Ryan (R-WI) and Ways and Means Chair Kevin Brady (R-TX) before being shot down by White House officials and some bedrock Republican supporters. And in his report on Hope’s paper, Quartz London reporter Akshat Rathi said the “diplomatic fallout from [a border carbon tax] would surely test America’s trading partners’ resolve in their commitment to reducing emissions.”

But Beer and Beckett muse that “a more selective measure that favours U.S. states that have effective carbon prices or clean energy industrial strategies could be part of a determined subnational diplomacy on Canada’s part, allowing it to stand firm on climate at the NAFTA table.” And it would be consistent with the broader “doughnut” strategy Canada has introduced in its dealings with an unpredictable negotiating partner, in the hope of advancing national interests on issues ranging from trade to climate change.

The Policy Options post also picks up on a late June op ed in the Vancouver Sun, in which Parkland Institute founder and former director Gordon Laxer spotlighted a NAFTA provision that could slow down Canada’s transition of fossil fuels.

Under Article 605 of the agreement, Canada “signed away to another country first access to its energy resources” under NAFTA, Laxer contended, with a “proportionality rule” that “obligates Canada to make available to the U.S. the same share of its oil, natural gas, and electricity as it has in the previous three years.” While Mexico successfully fought that provision at the negotiating table, Laxer said, the Chrétien government tried and failed.

“At stake is Canada’s ability to guide the pace of oil and gas production as the industry enters a period of managed decline and the country’s deliberately diminished fossil fuel work force shifts to more economically sustainable work,” Beer and Beckett note.

“Whether the proportionality rule can be reopened and resolved is one question for Canadian negotiators. The far more important issue is whether Canada can align its trade position with its attempts at climate leadership and energy innovation, to prevent a failure from a bygone era from limiting progress on the most important economic and geopolitical issue the country faces.”