A carbon tariff—a policy that would impose fees on imported goods based on their carbon emissions—is built on the idea that Canada should penalize foreign producers for not adhering to stringent climate policies. While this may sound like a strong stance on climate action, the reality is that such a policy carries major risks for Canada’s economy. As a resource-rich nation that exports carbon-intensive products like oil, natural gas, and minerals, Canada stands to lose more than it gains from this approach.

Mark Carney, who is competing for the federal Liberal leadership, has made the introduction of a carbon tariff the number two promise in his 16-point industrial competitiveness strategy.

Key problems with a carbon tariff in Canada

1. Retaliation from other countries

A carbon tariff (also known as a Carbon Border Adjustment Mechanism, or CBAM) would not go unchallenged by Canada’s trading partners. Major exporters to Canada, such as the United States and China, are unlikely to accept this policy without a response. They could retaliate by imposing tariffs on Canadian goods, making it significantly harder for Canadian businesses to compete in international markets. This could be particularly damaging for key industries like oil and gas, mining, and manufacturing, which rely heavily on exports. A trade war over carbon tariffs could weaken the Canadian economy and lead to job losses across multiple sectors.

2. Canada is an exporting nation

Canada exports far more carbon-intensive goods than it imports. By introducing a carbon tariff on foreign products, Canada is effectively inviting other countries to do the same, targeting Canadian exports with similar carbon-based tariffs. This would make Canadian goods more expensive on the global market, reducing demand for them and harming the very industries that drive Canada’s economy. The result? A weaker economy, job losses, and higher costs for businesses that depend on trade.

3. Big business paying for consumers’ emissions

The Carney plan also proposes to make large businesses bear the cost of helping individual households lower their carbon emissions. While this may sound like a fair approach, in practice, these costs will be passed down to consumers. Businesses will need to offset these additional expenses, leading to higher prices on everyday goods and services. In the end, it is Canadian families who will bear the financial burden, facing increased living costs, higher taxes, and fewer job opportunities as businesses struggle to absorb the additional costs.

CBAM in context: implications for Canada

Has this been tried elsewhere?

The European Union’s Carbon Border Adjustment Mechanism (CBAM) is currently in effect. It entered its transitional phase on October 1, 2023, during which importers of certain carbon-intensive goods are required to report the embedded emissions of their imports without incurring financial liabilities. This phase is set to last until the end of 2025. The definitive regime, where importers will need to purchase CBAM certificates corresponding to the carbon emissions of their imported goods, is scheduled to begin in 2026.

However, Europe is not Canada’s largest trading partner—that is the United States. With Donald Trump back in the presidency, there is no chance that the U.S. will implement a CBAM of its own. If Canada were to move forward with a unilateral carbon tariff, if anyone prepared to argue that it would not face significant economic punishment from the Trump White House?

Moreover, with 91 percent of the world having no carbon tariff, other countries would impose countermeasures, leaving Canadian businesses struggling to remain competitive.

This raises the question: is the push for a carbon tariff in Canada more about political positioning than economic pragmatism? Given the unlikelihood of U.S. participation, a Canadian CBAM would amount to a unilateral economic sacrifice. While this may appeal to certain voter bases, the reality is that such a policy would carry immense risks without global coordination. Policymakers should carefully consider whether pursuing this path makes sense in a world where Canada’s largest trading partner is unlikely to follow suit.

Where do others stand?

Chrystia Freeland, the former finance minister and current Liberal leadership candidate, has not explicitly detailed her stance on carbon tariffs. However, she has emphasized the importance of defending Canadian interests against U.S. economic nationalism, particularly in response to potential tariffs from the U.S.

Conservative leader Pierre Poilievre is a vocal critic of carbon pricing mechanisms, including carbon taxes, and has pledged to repeal such measures if elected.

Elizabeth May, leader of the Green Party, has consistently advocated for strong environmental policies, including carbon pricing, but has not specifically addressed carbon tariffs in recent statements.

What it means to consumers

Here are some relatable examples of carbon-intensive exports and imports for the average Canadian:

Carbon-Intensive Exports from Canada

Oil & Gas – Canada is a major exporter of crude oil, natural gas, and refined petroleum products, particularly to the U.S. If a carbon tariff were applied to these products, it could make them more expensive and less competitive in global markets, affecting jobs in Alberta, Saskatchewan, and Newfoundland.

Lumber & Pulp – Canada is a leading exporter of forestry products, including lumber, paper, and pulp, which require significant energy and emissions to produce. If tariffs are imposed on Canadian wood products, the forestry sector could suffer.

Agricultural Products – Fertilizers, beef, and grain production all have significant carbon footprints. If trading partners retaliate with tariffs, Canadian farmers may struggle to compete in global markets.

Carbon-Intensive Imports into Canada

Steel & Aluminum – Canada imports a large amount of steel, primarily from China and the U.S., which is essential for industries like construction, manufacturing, and automotive production. A carbon tariff would drive up costs for these industries.

Consumer Goods from China – Many everyday products (electronics, clothing, appliances) are imported from countries with high-carbon electricity grids. A carbon tariff could increase the price of these goods for Canadian consumers.

Food Products – Imported produce, meats, and packaged foods from countries like the U.S. and Mexico often have high transportation-related emissions. A carbon tariff could increase grocery bills.

MxM News

Quick Hit:

President Donald Trump on Thursday signed a memorandum directing his administration to implement a “fair and reciprocal” trade policy, ensuring that foreign nations imposing high tariffs on American goods will face identical treatment. In a statement on Truth Social, Trump declared that the days of the U.S. being economically exploited are over, vowing to retaliate against trade policies that unfairly disadvantage American businesses.

Key Details:

• Trump wrote on Truth Social, “For purposes of fairness, I will charge a RECIPROCAL Tariff meaning, whatever Countries charge the United States of America, we will charge them—No more, no less!”

• The policy will consider Value-Added Tax (VAT) systems—widely used in Europe—as trade barriers equivalent to tariffs, with Trump arguing they are “far more punitive” and used to harm American exports.

• The administration will crack down on trade loopholes, including countries shipping goods through third-party nations to evade tariffs. “Sending merchandise, product, or anything by any other name through another Country, for purposes of unfairly harming America, will not be accepted,” Trump warned.

Diving Deeper:

Trump’s reciprocal tariff plan is designed to end decades of one-sided trade deals that he says have crippled American industries and workers. By enforcing equal tariffs on foreign nations, Trump is making it clear: If a country charges the U.S. high tariffs, they will face the same in return.

Trump specifically called out countries that manipulate Value-Added Tax (VAT) systems, arguing that these taxes function as hidden trade barriers designed to punish U.S. exports while protecting foreign industries. He declared, “For purposes of this United States Policy, we will consider Countries that use the VAT System, which is far more punitive than a Tariff, to be similar to that of a Tariff.”

Beyond traditional tariffs, Trump’s administration is also cracking down on non-monetary trade barriers, such as regulations designed to block American businesses from competing fairly overseas. He emphasized, “Provisions will be made for Nonmonetary Tariffs and Trade Barriers that some Countries charge in order to keep our product out of their domain or, if they do not even let U.S. businesses operate.”

Additionally, Trump warned against countries attempting to game the system by shipping goods through third-party nations to avoid tariffs. “Sending merchandise, product, or anything by any other name through another Country, for purposes of unfairly harming America, will not be accepted,” he stated.

Critics, including some business groups and investors, argue that tariffs could increase costs for U.S. consumers, but Trump’s supporters say securing fair trade is worth any short-term disruption. JPMorgan CEO Jamie Dimon defended the approach, stating, “If it’s a little inflationary but it’s good for national security, so be it. I mean, get over it.”

Meanwhile, Federal Reserve Chair Jerome Powell sidestepped questions about the policy but acknowledged that trade barriers could influence economic conditions, saying, “It’s not the Fed’s job to make or comment on tariff policy. That’s for elected people.”