Tammy Nemeth is a U.K.-based energy analyst. Ron Wallace is an executive fellow of the Canadian Global Affairs Institute and the Canada West FoundationMark Carney has made it clear that as part of continued net zero policies, his government will consider imposing a Carbon Border Adjustment Mechanism (CBAM.) That would be a carbon tariff applied to imports, to support Canadian products burdened by domestic carbon pricing.Proposed in 2021 and included in the 2024 Fall Economic Statement, the Canadian CBAM is a misguided attempt to shield domestic industries. In response to America’s new tariffs, a CBAM has been proposed to pivot trade to the EU and adopt a European-style CBAM. Here we argue that any attempt to harmonize Canada with the EU’s complex regulations risks overregulation that would put Canadian companies at a competitive disadvantage. It also has the potential to strain ties with the U.S., Canada’s primary trading partner. Coming at a time when America is distancing itself from net zero policies, the Trump administration would certainly view any border adjustment mechanisms as thinly-disguised trade barriers that affect sovereign control of trade..The EU’s CBAM, launched in October 2023 with full implementation set for 2026, initially targets high-emission sectors like aluminum, fertilizers, steel, cement, electricity and hydrogen, with plans to expand coverage to all products covered under the EU Emissions Trading System (ETS.) The purpose of the CBAM is to prevent “carbon leakage” by penalizing companies that attempt to dodge EU carbon taxes by manufacturing in countries with lower carbon emission taxes. To diminish circumvention, all imports under the CBAM must provide emissions accounting for a product’s verified “embedded emissions,” to ensure the levied carbon price mirrors that of the ETS so that the carbon price paid on the imported product is equal to what would have been paid if the product was made in the EU. If an exporter is in a jurisdiction with carbon emissions pricing, once verified and converted to Euros, it could be deducted from the EU tariff. That sounds simple enough, but the reality is far more complex..Some may argue that it will be a simple matter for Canadian companies to use the data they are already collecting for Canada’s Output-Based Pricing System (OBPS) in order to comply with the EU requirements. However, the CBAM significantly escalates regulatory demands: it requires exporters to track product-level “embedded emissions” (meaning direct emissions from production, precursors, and indirect emissions like electricity and energy consumption) using intricate EU-specific methodologies; it forbids the use of estimates except in extenuating circumstances; and it also requires companies to accept EU verifications that may require on-site inspections even if the installation is in a country outside the EU. As one law firm explains, “The total embedded emissions declared must be verified by a "verifier" accredited by the national accreditation bodies. The verifier will need to visit the third country producer’s installation and prepare a report.”.Harmonizing Canada’s OBPS with the EU's CBAM either through aligned methodologies or verifier recognition would shackle Canada to a distant protectionist EU system with uncertain outcomes for Canadian exporters. Hence, any pivot to the EU to offset U.S. trade restrictions would require a transformation of Canada’s export economy that would impose an expensive, intricate web of costly compliance monitoring and verifications that risk uncertain EU tariffs and onerous administrative penalties. To be clear, the EU-CBAM, or potential Canadian versions of it, ignores broader environmental regulatory efforts because it is fixated solely on the taxation of embedded emissions.A proposed Canadian CBAM would raise costs for manufacturers, tax U.S. imports and disrupt integrated supply chains. This risks derailing negotiations with a Trump administration sceptical of, if not hostile to, EU climate policies and could trigger further retaliatory U.S. tariffs against such trade measures..Having withdrawn from the Paris Agreement and associated climate disclosures, the Trump administration has signaled a significant rejection of net zero policies, this at a time when Canada and the EU would be embarking together on diametrically opposed measures like CBAMs. In short, any attempt to swap U.S. general tariffs for the EU’s strings-attached tariffs and regulatory morass would be a strategic error.If Canada is serious about being less dependent on the U.S. market, it could preserve U.S. trade relations while attempting to diversify its international trade to markets with less red tape than the EU. With a Canada-India trade deal poised to deliver potential substantial growth by 2030, unburdened by EU-style regulations Southeast Asia may present dynamic alternative trade opportunities for Canadian aluminum, fertilizers and steel.Canada would be better advised to drop considerations of a CBAM and instead work to enhance its U.S. trade relationship while engaging with high-growth markets in Asia and India. Increased compliance costs, lost competitiveness and an erosion of regulatory sovereignty are a certain formula for economic decline. Canada should choose smarter and better.Tammy Nemeth is a U.K.-based energy analyst. Ron Wallace is an executive fellow of the Canadian Global Affairs Institute and the Canada West Foundation.
