Carbon Border Adjustments

What are they and how will they impact Australia?

All G7 members have sharpened their climate and trade policies to consider the use of carbon border adjustments. Australia should lean in rather than push back on the development of such a proposal while taking advantage of the opportunities in existing and new export industries.

The European Union (EU), the US, Canada, Japan and the UK are ramping up climate commitments ahead of the COP26 Climate Summit, including through domestic carbon prices. To enable their carbon pricing to operate effectively across the global economy, they are contemplating carbon border adjustment mechanisms (CBAMs).

Once implemented, CBAMs will tax the carbon content of imports from countries with unpriced carbon, such as Australia.

The UK, as host of the upcoming G7, has confirmed the Summit will include discussions on coordinating carbon pricing and CBAMs. The G7 members have all agreed on net-zero emissions by 2050 targets and increased climate policy efforts over the next decade. The UK Prime Minister has even tested the idea of a “carbon club” of like-minded countries with high climate ambition, carbon pricing and coordinated border adjustments.

In a few weeks, the EU Commission will present the world’s first detailed CBAM proposal, a central part of their economic recovery plan under the European Green Deal and their efforts to meet their ambitious target of at least a 55% cut in emissions this decade.

While some governments have raised concerns about possible implications of the EU CBAM, including the United States, the Australian Government has gone further. Australian Ministers have repeatedly attacked the European Union’s CBAM proposal as protectionist but have not released any analysis to back up this claim. By contrast, the former head of the World Trade Organisation, Pascal Lamy, has described trade rules as a compass to follow, not an obstacle, in designing a carbon border adjustment. Indeed, from the perspective of countries making greater efforts to reduce emissions, Australia’s lack of ambition and unpriced carbon looks more like protectionism.

Australia stands almost alone among high-income advanced economies in increasing emissions from fossil fuel combustion since 2005 and falls well short of its international peers in the commitments it has made under the Paris Agreement to reduce emissions.  It is also now one of the very few high-income countries without some form of a carbon price.

There are 43 manufacturing processes that are considered Emissions Intensive and Trade Exposed (EITE) in Australia. When aligned with Australia’s exports statistics, it is clear that EITEs account for only a small proportion of the total value of Australia’s exports of goods, worth $20.1 billion or 5% (in 2019-20). Of those, primary metals accounted for the vast bulk of Australia’s EITE exports – 88% in 2018-19 and 87% in 2019-20.

However, the concern is that some of those primary metal goods are mainly produced for the export market. 83% of alumina and 92% of aluminium produced in Australia are exported. In addition, alumina and aluminium make up over 50% (by value) of EITE exports, worth on average about $12 billion annually.

Last year, 64% of aluminium (as well as 40% of Australia’s steel) was exported to countries where carbon prices are in place or under consideration.  And alumina and aluminium made in Australia are highly emissions-intensive compared to competitors (outside of China).

Therefore, a CBAM is a serious risk for some goods in Australia, and potentially a serious opportunity for those that decarbonise production methods.

Australia should engage constructively in discussions on CBAM, to help shape the mechanism. Australia can draw from its expertise with the National Greenhouse and Energy Reporting Scheme, to advise on carbon accounting. Further, decisions about how CBAM revenue will be used and ways to prevent exports from being redirected to jurisdictions without CBAM are key questions for environmental integrity.

Under all circumstances, the safest course of action is for Australia to diversify its production by investing in the production of clean exports. Transitioning industries reliant on fossil fuels – such as hydrogen, ammonia, steel, and aluminium – to be powered by renewables will allow them to operate under any scenario.

Then, a CBAM would only create positive price signals for clean exports. Indeed, Australia’s abundant and low-cost solar and wind resources, minerals endowment, land availability, and scientific and technological capacity would position it to prosper in a low-emissions world.

While CBAMs won’t happen overnight, they are being explored with a level of unprecedented gusto. Investing in clean production methods will allow Australia to hedge its bets and promote new and transformed industries that are cleaner and more resilient.

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