By Ruolz Ariste, Carleton University, The Conversation
As Canada’s federal parties gear up for the upcoming federal election, one of the key issues on the campaign trail will be how Canada will meet its climate policy targets.
Several strategies exist to meet these targets, including: a border charge on imports, a border rebate for exports, a domestic output-based subsidy or a consumer-based carbon rebate like the Canada Carbon Rebate (CCR).
The CCR, introduced by Prime Minister Justin Trudeau’s administration to curb carbon emissions, is designed to offset the costs of carbon pricing by providing rebates to households.
However, both leading candidates for Liberal Party leadership, Mark Carney and Chrystia Freeland, have said they will drop the CCR if elected. Carney has proposed replacing it with a green incentive program, while Conservative leader Pierre Poilievre has been a vocal opponent of the CCR altogether.
The debate surrounding the CCR is crucial, as carbon pricing is the most effective measure to reduce greenhouse gas emissions when paired with accompanying measures. Yet, despite its effectiveness, Canada’s major political parties are willing to scrap it because it’s not politically rewarding.
CCR is widely misunderstood
The CCR is widely misunderstood in Canada, leading to misleading narratives about its economic and environmental impacts.
A recent report from the Parliamentary Budget Office (PBO) argues that industries facing pollution charges could become less competitive because of the CCR, potentially increasing Canada’s federal budget deficit by $4 billion by 2030, and making Canadians worse off.
Similarly, a Fraser Institute report argues Canada’s global emission footprint is too small for the CCR to make a difference, even if environmental benefits are accounted for.
However, these reports fail to fully assess the impacts of carbon pricing and risk distorting the debate and influencing policy in ways that could weaken Canada’s climate strategy.
Yet an overlooked crucial fact in the debate on the CCR is that 80 per cent of Canadian families received more in rebates than they paid in pollution pricing in 2024 because major polluters bear the highest costs under the system.
The missing perspective in assessments
While the PBO’s report may be valid from a business standpoint, the report didn’t run a full cost-benefit analysis, which would have weighed both the economic costs and the social benefits of reducing greenhouse gas emissions.
In climate policy, the social perspective is much more important than the business one. Without this context, reports like the PBO’s risk being misinterpreted, particularly by politicians opposed to climate action. This could have significant negative consequences for environmental policy in Canada.
A major issue in economic assessments is that the benefits of greenhouse gas reduction are typically excluded because they extend beyond national borders. As a result, emissions reduction can appear to be a poor investment, when in reality, its global and long-term benefits far outweigh the initial expenses.
The Treasury Board of Canada Secretariat’s cost-benefit guide acknowledges this issue. Under normal circumstances, global benefits should be excluded in cost-benefit analysis. However, given the nature of climate change, the guide states that the costs and benefits of greenhouse gas reductions — calculated using the social cost of greenhouse gas — are appropriate to include in cost-benefit analysis.
A recent UN report supports this approach, estimating that while global carbon policy measures could cost more than US$1 trillion annually, the economic benefits will be far greater. Shifting to a green economy could yield US$26 trillion by 2030, compared to maintaining business as usual.
Carbon leakage challenge
A major challenge for Canada’s carbon pricing strategy is that many of its key trading partners don’t impose similar emissions pricing on consumers.
For example, the United States and China don’t, even though they are the world’s two biggest polluters. While some jurisdictions, like California’s Cap-and-Trade Program and China’s national emissions trading system, have introduced emissions regulations, these programs are not as widespread as Canada’s.
This imbalance puts Canadian producers at a competitive disadvantage. In response, some businesses may choose to move their production operations to countries with weaker environmental regulations to avoid higher carbon pricing in Canada — a phenomenon known as “carbon leakage.”
Instead of reducing emissions, this carbon leakage simply shifts emissions elsewhere, undermining global efforts to address climate change. To counter this, there has been a growing interest in policies designed to prevent this from happening, such as border carbon adjustments.
This issue is critical to Canada’s ability to meet its climate policy targets. Without effective measures to prevent carbon leakage, the country could face higher costs and less impact on global emissions reduction efforts.
Can Canada still compete?
Given the U.S. President Donald Trump administration’s withdrawal from the Paris Accord, one might wonder whether Canada should continue pursuing the CCR program.
Ideally, Canada would not have to choose between strong climate policy and economic competitiveness. However, without a co-ordinated global approach to carbon policy, Canada faces difficult trade-offs.
International organizations like the World Trade Organization (WTO) could step up by actively promoting carbon tariffs similar to the EU’s Carbon Border Adjustment Mechanism (CBAM).
At the heart of this debate is the “polluter-pays principle,” which holds that those who pollute must bear the costs of their actions. This principle is central to climate justice.
Carbon pricing is the only abatement instrument that can implement the polluter-pays principle, but additional policies — such as border charges on imports, border rebates for exports or domestic output-based subsidies — are required to make it more efficient and politically viable.
Currently, 75 carbon taxes and emissions trading systems are in operation worldwide, covering approximately 24 per cent of global emissions.
Canada is considering its own CBAM, but challenges remain. Implementing such a policy could lead to heightened trade tensions with the U.S. or even provoke retaliatory actions.
Need for international co-operation
To make carbon pricing and border adjustments work, international organizations must help close the knowledge and information gaps. One way to do this is by providing more accurate data on embedded carbon prices to improve the calculation of carbon prices down the road.
Further research is also needed to understand how domestic climate policies impact other nations and how to ensure CBAM’s interoperability with other climate measures. Such work will contribute to the optimization of climate policies for the benefit of all.
In the meantime, Canada’s climate policy must strive to integrate CBAM in a way that aligns with global trade systems like the WTO. Some trade law experts have expressed concerns that CBAM may not be compatible with the WTO General Agreement on Tariffs and Trade, and this must be addressed.
If Canada were to keep the CCR, this integration would be especially important as Canada navigates future trade relations with the U.S. under Trump’s unpredictable administration. Canada doesn’t want to fall behind in its climate action efforts.
Canadians would like the country to lead on climate action while staying competitive. A public consultation on this matter would be a good move from any elected political leader.
Ruolz Ariste, Adjunct Professor, School of Public Policy and Administration, Carleton University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
