Europe votes in favour of carbon border tax, could hit Australian exports

The European Parliament has given a bold tick of approval to a proposal to start taxing imports from countries without a carbon price, in a move that could hit more than $20 billion worth of Australian exports a year.

The tax is now slated to come into force in 2023, with the precise details expected in June. The United Kingdom and the United States have also voiced support for a similar policy, hoping to protect their own decarbonisation policies while pressuring laggard countries including Australia to develop their own carbon pricing policies.

Exactly how the EU’s border tax would affect Australia remains to be seen in the detail of the policy. However, parliamentarians want the tax to apply first to carbon-intensive items including cement, steel, aluminium, and chemicals, none of which are major Australian exports to Europe. Other imports would gradually be brought under the regime.

Known officially as the Carbon Border Adjustment Mechanism, The EU’s tax is designed to prevent “carbon leakage” –that is, carbon emissions that go offshore in response to carbon pricing, rather than actually being cut. It would do this by imposing a carbon tax on carbon intensive imports that is the equivalent to what EU-based industry must pay.

Australia’s biggest import to the EU is coal, followed by gold, both of which are worth over $4 billion a year. While coal is the most carbon heavy of all fossil fuels, its the user of the coal that must pay the carbon price, not the miner that supplies it. That means Australian coal exports would likely only be taxed for operational emissions, not the carbon embedded in the coal itself – so, perhaps counterintuitively, coal wouldn’t necessarily attract a hefty tax at the border.

That said, the ETS applies to EU power plants and steelmakers, pushing them to find alternatives to coal. That means gas or renewables in the case of power plants, and, eventually, green hydrogen in the case of steelmakers.

Is it protectionism?

The rationale behind the border tax is that countries that don’t have a carbon tax or emissions trading scheme, like Australia, are giving their industry an unfair subsidy. Through this lens, the tax – which could otherwise be viewed as a protectionist tariff – does not need to violate the trade standards embodied by the World Trade Organisations. The European Commission, the EU’s executive branch that is designing the tax, believes it will be consistent with WTO rules.

The EU has had an emissions trading scheme since 2006, but it has spent most of its life well under €20 a tonne, and much of it under €5 a tonne. Only recently has the price really begun to take off, with a tonne of carbon currently trading at around €40. That’s around $US48 and $A62. That is enough to start forcing the EU’s heavy emitters to decarbonise.

As efforts to decarbonise increase, the price will only go up. Carbon markets analyst Reputex has estimated the carbon border tax could eventually cost Australian imports $140 per tonne of carbon emitted.

The UK, which left the EU finally on January 1, will replace the EU ETS with its own scheme in May this year, which it claims will be even stricter than the EU version. A number of US states – most notably California – already have carbon pricing, though at a federal level there is unlikely to be sufficient support in Congress to legislate scheme, even though President Joe Biden and his treasury secretary Janet Yellen have spoken in favour of carbon pricing. China, Japan and South Korea also have schemes – the China’s one focuses only on emissions intensity, not absolute emission caps.