Thank you for the invitation to appear before the committee today.

I'm a lawyer and my practice focuses on international trade, as well as competition and foreign investment review. I have previously written and spoken about border carbon adjustments, or BCAs, including the CBAM, from a trade law perspective. My opening comments will focus on six brief points about when BCAs may be useful and how they may be implemented.

First, in my view, there are two conditions that make BCAs a potentially important trade law instrument that can benefit domestic producers and benefit the Canadian economy. Number one is that you have significant carbon costs being imposed on certain domestic sectors. Number two is that those domestic sectors are facing significant competition in Canada from imported products whose manufacturers basically have an advantage because they incur either low or no carbon costs.

Second, I think the optimal level of a target charge for a border carbon adjustment should match the level of the carbon costs per tonne of emissions being imposed on the domestic industry. This is for two reasons. First, any higher level is going to invite a trade law challenge for violating the national treatment or non-discrimination provisions in WTO and other bilateral and regional trade agreements. Second, any lower amount is just going to leave Canadian producers on a less than level playing field in their home market.

Third, in my view, it's important to allow, in a BCA design, for the charges at the border to be reduced when an exporter can establish that it's subject to carbon regulatory costs in its home jurisdiction. Basically, this eliminates the double-payment problem or double-counting problem. That problem would be difficult to justify under a national treatment standard. What you're doing by recognizing those foreign costs is essentially aligning the total payment that the incoming product makes with your domestic climate regulation level of choice. The EU's CBAM is using that approach. Basically, you have verified local carbon costs being offset against the amounts that the exporter would have to otherwise pay when purchasing the certificates in the EU's emission trading system.

Relative to exporters that are selling into the EU from countries with no carbon regulation, Canadian exporters have a couple of advantages, although the size may vary. First, they're already doing some of the climate measuring, accounting and information type of work that was discussed in the previous panel for domestic purposes. To the extent that the EU wants something more or different, that adds incremental challenges, but relative to a no-carbon country, we're ahead of the game. Second, we'll pay lower charges into the EU than a no-carbon country.

One of the interesting developments since the CBAM has emerged is that, despite China, India, Brazil and some other countries claiming they will challenge it from a trade law point of view, they're also increasing their efforts to build their own domestic carbon pricing systems in various ways. The intuitive logic of that is to keep the revenue, to some degree, within their home jurisdictions rather than paying it to the European Commission.

The fourth point is that the CBAM has attracted a lot of attention. I would encourage you to recognize—and I know it's in your notice of motion—that it's one particular design or one particular approach for implementing a border carbon adjustment. There are quite a number of other options and quite a number of design choices.

One quick example that I think is particularly important for Canadian producers is the question of exemptions or free allowances in a carbon regulatory regime. Those are often perceived to raise trade law issues for a BCA under a national treatment analysis. What the EU is doing is making those go away—it's phasing its allowances out—but that choice may in fact be as much or more driven by the EU's long-term climate policy objectives rather than just trade law compliance. Put more plainly, I think it's defensible to keep the allowances or exemptions in effect as long as you're setting a border carbon adjustment amount at a level that would reflect the average or the net prices being imposed in the domestic jurisdiction.

Here's a quick example with simplified math. If you're imposing a $100-per-tonne cost on carbon emissions but the allowances mean only 75% of emissions are being charged, you could impose a border carbon adjustment at $75 per tonne of emissions and treat foreigners on a level basis, as the average cost they're paying is comparable to the average cost you're imposing on your domestic producers. A BCA would not require Canada to give up its allowances in the OPBS, or features of that sort. Necessarily, it could by choice, but it's not required.

Fifth, I think regulatory burdens can be quite important considerations when you're designing BCAs. For Canadian producers, the incremental cost of doing a Canadian BCA is quite low, partly because they're already doing a lot of client measuring and reporting, and particularly because the obligations in a Canadian BCA are not going to be imposed on Canadians. They're being imposed on foreign exporters or importers.

I will quickly reference what Ms. Lamoureux said about a focus on monitoring interoperability. Things don't need to be identical. There are mechanisms for mutual recognition agreements and such that could be used.

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