How protective are border carbon taxes for Canadian industry? The critical role of US emissions pricing

Abstract

Border carbon taxes are considered as an important instrument to promote sustainable practices abroad and to level the playing field for domestic emission-intensive and trade-exposed (EITE) industries. We find that US emissions pricing plays a critical role in the effectiveness of border carbon taxes in protecting the international competitiveness of Canadian EITE producers. Border carbon taxes are more effective when the US follows the other OECD countries with stringent CO₂ emissions pricing than when the US abstains from emissions pricing. In the latter case, border carbon taxes reduce the competitiveness of Canadian EITE export supply to the US (Canada's most important export destination), weakening the initial protective effect of border carbon taxes on the Canadian domestic market.