Competitiveness Concerns With Incentive-Based Mechanisms

Competitiveness Concerns with Incentive-Based Mechanisms
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Introduction
The negative implications of climate change have become a reality with temperatures rising, drought, rising sea levels, and melting glaciers. The results of climate change are a major threat to humanity and the environment CITATION THT85 \l 1033 (Tietenberg, 1985). It is important to note that human-induced climate change remains the most perversive threat to societies, forcing countries to seek drastic measures to address the issue. Canada has been at the forefront of implementing its climate policy to reduce carbon leakage while at the same time protecting its trade-exposed industries from competition disadvantages. Trade-exposed industries denote those vulnerable to international competition and could be disadvantaged when subjected to carbon pricing and similar climate policies that are not applied uniformly across all nations. Carbon leakage implies that industries relocate to countries with weaker climate policies to reduce the costs associated with complying with measures aimed at reducing emissions, which eventually undermines the fight against climate change. Hence, as Canada implements its climate policy, it must make strategies to protect trade-exposed industries from competitive disadvantages and reduce carbon leakage. The best way to do this will be implementing a hybrid of measures, including a carbon border adjustment mechanism (CBAM), cap and trade, the free allocation of emissions permits, financial assistance to affected companies, and international cooperation.
Strategies to protect trade-exposed industries from competitive disadvantages
1 Implement a carbon border adjustment mechanism (CBAM)
If Canada implements its ambitious policies to reduce carbon emissions, some of its industries, i.e., steel, cement, etc., will be uncompetitive in the local market. The sectors may be transferred to unregulated foreign competitors. One of the most effective and easily implementable strategies to counter carbon leakage is using Carbon Border Adjustment Mechanism (CBAM), also commonly and synonymously referred to as Border Carbon Adjustments (BCAs). A BCA is a charge on embodied carbon in products imported into a jurisdiction with carbon pricing, potentially matched by rebates for embodied carbon in exports CITATION Par21 \l 1033 (Parry, et al., 2021). It is a policy tool designed to deter Emission Intensive Trade Exposed Industries (EITEIs) from relocating to countries with weaker emissions to avoid costs associated with decarbonization. A CBAM can help level the playing field for Canadian industries that face competition from countries with weaker climate policies CITATION Par21 \l 1033 (Parry, et al., 2021). This mechanism can apply a carbon price to imported goods to prevent carbon leakage and encourage other countries to adopt similar climate policies. Canada can impose carbon prices on all imported foods based on their embedded carbon emissions. This would affect the price of carbon-embedded products in the domestic market and make them competitive with locally produced goods. If CBAM is applied right, it can protect local industries from easily produced imported goods.
Border Carbo...