From the Industry

Are carbon tariffs a threat to Australian industry or an opportunity?

On 14 July 2021 – Bastille Day, appropriately enough – the European Commission announced an ambitious set of proposals to meet Europe’s agreed goal of a 55% cut in greenhouse gas emissions over the next 10 years, and net zero emissions by 2050. One big plank in that platform is the Carbon Border Adjustment Mechanism or CBAM – often shorthanded as a carbon tariff.

This will not be the last such proposal. Australia needs to engage with the CBAM or risk ending up with a noodle bowl of unilateral decisions and systems in multiple countries that would be a nightmare for many Australian exporters. To not engage in proper negotiation and discussion would leave Australian business unrepresented at a time when many of our markets are moving in this direction. The outcome needs to be that Australian industry can compete in transparent markets and on a level playing field. The EU CBAM has strong political support and is very likely to happen, though the details may evolve from the initial proposal. As it stands now, the scheme will initially apply to imports of aluminium, cement, electricity, fertiliser and steel. Australia’s exports to Europe include some steel and a very small amount of aluminium. The scheme would only require reporting until 2025, after which importers would start to pay the equivalent of the European carbon price. The stated goal of the CBAM is to allow Europe to ramp up its emissions reduction policies without losing its industries as a result. The design tries to create a level playing field by ensuring exporters to the EU are paying the same carbon price that European producers have to under the EU emissions trading scheme. Maintaining trade competitiveness as emissions come down has long been a key objective of responsible climate policy in Australia as much as in Europe. CBAM is best understood as a new alternative to existing approaches, which range from freely allocating emissions rights to vulnerable industries, to not having a carbon constraint at all. The glass-half-full view is that this ‘carbon tariff’ could have been much worse. Prior to the announcement there were fears CBAM would be either a punitive big stick to monster other countries into changing their policies, or else greenwashed protectionism designed to shut trade out of Fortress Europe. Assessing the embodied emissions of complex goods and carbon costs in electricity can also be extremely complex and burdensome. Thankfully these fears are not borne out in the actual detail now available. On its face CBAM applies to a limited range of simple products, doesn’t cover embodied electricity emissions, doesn’t discriminate between trade partners, and doesn’t go further than the carbon-cost equalisation goal. Crucially for non-discrimination, it ramps down Europe’s current free allocation of emissions rights to its own steelmakers and other vulnerable industries, and reduces importer CBAM liabilities to reflect that free allocation while it lasts. Ai Group is preparing research on the impact of Europe’s CBAM and of carbon tariffs in general. Early results suggest Australia’s exports to Europe will be about as profitable after CBAM as they are today. But the devil is in the detail, and it will be vital to ensure actual implementation of CBAM matches the top-level promises of fairness. This will become even more important as CBAM is potentially extended to more goods and to indirect emissions from electricity and perhaps transport. Australia’s policy response should be to enter discussions to ensure that our businesses are treated fairly and our high-quality emissions data is accepted at the European border. The carbon tariff genie is out of the bottle and not engaging isn’t the answer, especially once other countries start to introduce their own carbon costs at their borders. The US is currently debating a proposal for a ‘polluter import fee’ proposed by the Congressional Democrats and endorsed on the campaign trail by President Joe Biden. Canada, Japan and the UK also have discussions about border adjustment underway. We should seek to improve these carbon tariffs, making them fairer and easier to navigate, rather than simply oppose them. And we should also learn from Europe’s experiment. If CBAM performs well, Australia should consider a border adjustment of our own alongside alternative options to ensure continued competitiveness as we develop plans for net-zero emissions. Australian producers have been understandably concerned that their trade competitiveness will be threatened by carbon tariffs, given our relatively high national emissions and lack of carbon constraints. Europe also has form on protectionism. However, at first blush Australia is not at great risk from CBAM. Instead there is an opportunity to shape a new approach that will better reconcile the twin imperatives of economic prosperity and a safe climate with the reality of a messy multi-speed world.