Fees are a hot topic these days. US President-elect Donald Trump says he is one "big believer in tariffs" and has threatened a 25 percent tariff on products from Canada and Mexico unless they stop the flow of drugs and migrants across the border.
Trump says tariffs are "a powerful tool not only economically, but to achieve other things outside of the economy."
Could this include getting countries to cool the planet?
Canada and the United States are among those arguing carbon tariffs or carbon border adjustments as a way to protect local industry and achieve climate goals at the same time.
But do they work? Where are they being implemented? And what will this do to trade and the cost of living?
Here's a closer look.
What is a carbon tariff?
A tariff is a tax or fee on goods and services imported from another country, often based on the value of the imports. Typically, the goal is to raise the price of imports relative to domestically produced goods and services to provide a competitive advantage to the homegrown. Fees also generate revenue.
A carbon tariff or carbon border adjustment (CBA) may also be applied to imports, based on the carbon emissions produced by the imported goods or services.
Why do countries want to implement them?
There are both economic and environmental reasons.
Places like Canada and Europe have put a price on carbon to encourage companies to invest in decarbonisation. This increases production costs for industries such as steel that generate a lot of emissions.
Many of these industries face stiff competition from countries that can make products cheaper because they don't have carbon prices.
Carbon rim adjustments they are rates specifically designed to level the playing field and make domestic products more competitive.
Aaron Cosbey, a senior associate at the International Institute for Sustainable Development in Winnipeg, said technically CBAs are not tariffs, which are heavily constrained by international trade agreements (although "CBA" is sometimes used interchangeably with "carbon tariff" a more general term).
Rather, CBAs are border charges that correspond to domestic taxes, which are generally allowed under international trade rules (there are similar border charges to adjust for Canada's goods and services tax, he notes).
Laurie Durel, Canadian postdoctoral researcher at the Oeschger Center for Research on Climate Change from the University of Bern, has studied CBA in the context of international commercial law. She says that without any price adjustment to imports, the production and sale of goods like steel may simply shift to countries with dirtier production at the expense of countries with tighter regulations.
"So basically (there will be) still the same amount of greenhouse gas emissions in the atmosphere, but without the jobs in (places like) the EU."
This change, called carbon leakage, could lead to an increase in global emissions.
How do they work?
The European Union's Carbon Boundary Adjustment Mechanism (CBAM) is sometimes described as "the world's first carbon border tariffIt's the only example we have so far, but different countries have come up with different ways to implement these types of import fees.
The EU will start collecting carbon taxes through the CBAM in 2026, but began a transition phase in 2023, which involves collecting information on emissions generated by the production of different goods.
Initially, the fees will apply to materials that traditionally generate a lot of emissions to produce and have a lot of global competition, such as iron, steel, cement, fertilizers, aluminum, hydrogen and electricity.
As European producers have to pay fees for the carbon emissions they generate, the CBAM will take this into account and adjust the price of imports accordingly.
Imports from countries with comparable carbon prices should not pay more.
Other countries plan to implement their own CBAs, including Taiwan in 2025 and the United Kingdom in 2027.
Although the US does not have a national price on carbon emissions, there is one four carbon tariff bills — one Democrat, one Republican and two bipartisans — before the US Congress right now.
Canada made an audience query about CBA in 2022, but has not published any results.
Cosbey said many other countries are investigating them, including Australia, Japan, Brazil and Turkey.
"So it's kind of a mushroom," he said.
Do they really work?
Dave Sawyer, senior economist at the Canadian Climate Institute, has built a model showing that CBAs help domestic industry remain competitive while driving decarbonisation.
"And then what they also do, which is really cool, is push other countries to start making their own carbon pricing policies."
Cosbey said Europe's CBAM has already done so, pushing both Turkey and Brazil to price carbon domestically.
This is because having national carbon taxes equivalent to the CBAM allows countries to avoid paying import taxes from Europe, and if carbon taxes are paid anyway, it is better to collect them at home for reinvestment in decarbonisation than handing them over to foreign governments as import taxes.
CBAs also allow jurisdictions such as Europe to implement stricter emissions regulations. Until now, many countries dealt with carbon leakage by allowing the dirtiest industries to emit a certain amount of carbon for free and charging them only for carbon emitted above that level. Cosbey said that CBAM allows Europe to get rid of these subsidies.
"When you do that, you get results," he said. "Achieve decarbonizing investments in a hurry."
However, some modeling studies, such as one published earlier this year Xinlu Sun and his colleagues at University College London suggest that CBAM may not be very efficient at stopping carbon leakage and thus reducing global emissions.
Durel said that if Europe is the only jurisdiction implementing such policies, countries can simply ship their cleaner materials to Europe and continue to use the raw output to export to other countries.
What are the drawbacks?
"The downsides are: This is incredibly complicated, only partially effective," and some implementations may be illegal, Cosbey said.
Countries must calculate the emissions generated in the production of different products, how much their carbon price adds to the cost of production, and how it compares to other countries' carbon pricing regimes.
Durel said that when CBAs were first proposed nearly two decades ago, there was widespread agreement that they would violate international trade laws.
But that has changed. "There is a growing consensus that this is legal but also legitimate," Durel said.
She credits a better understanding of the urgency of climate change and what needs to be done to align climate goals with the Paris Agreement.
However, because Europe's CBAM has not yet been fully implemented or contested, Durel and Cosbey say it is still unclear whether it complies with World Trade Organization rules.
Brazil, South Africa, India and China have protested carbon-based trade measures like the CBAM, saying they are one-sided, raise costs and could slow global decarbonisation. they are pushing for them to be on the agenda for next year's UN climate summit in Brazil.
Durel said policies like CBAM can hurt developing countries that cannot yet decarbonize their industries.
Finally, like any import tax and additional administrative procedures, CBAs add costs that are likely to be passed on to the consumer, driving up prices.
curiously, recent surveys in the US showed widespread public support for carbon tariffs, and linking trade to climate performance, even if it meant some increase in people's energy costs, said Barry Rabe, a professor of environmental policy at the University of Michigan and senior fellow at the Brookings Institution, who conducted the research.
He added: "This seems to have a kind of cachet across the partisan spectrum."
How is Canada affected by interest in CBAs?
Sawyer says his model shows that because Canada has carbon prices (for both consumer and industry), it probably wouldn't pay much under Europe's CBAM initially.
But that could change if Canada decides to scrap its carbon tax, as the federal Conservative Party has proposed (although It has not been clear whether both industrial and consumer carbon prices would be reduced). Canadian companies could end up paying carbon taxes on their exported goods anyway, and the country could fall behind technologically, Durel warned.
"Canadian products could be at a disadvantage if there isn't more regulation to decarbonize or to encourage companies to decarbonize," he said. "Maybe it's better to keep our carbon tax on our products, because then we keep the revenue and can reinvest it in decarbonizing Canada."
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