Australia’s ongoing dependence on coal and gas and its lack of any official price on carbon are setting its industries up to be hit hard by international climate levies, as the European Union edges closer to introducing a world first carbon tax on imports.
The European Parliament has this week reached an agreement on the proposed Carbon Border Adjustment Mechanism, or CBAM, a first-of-its-kind legal provision that will levy a carbon tax on non-EU imports crossing the European border.
Essentially, a CBAM allows countries and jurisdictions with carbon pricing to tax foreign imports when they come from places – like Australia – without carbon prices.
The provision is designed to counter the problem of carbon leakage, which occurs when emissions reduction efforts within the EU are offset by increasing emissions outside its borders because of demand for lower-cost, more carbon-intensive products. Under the new law, only countries with the same climate ambitions as the EU will be able to export to the EU without buying CBAM certificates.
According to the European Parliament, the EU CBAM will initially cover a number of specific, carbon-intensive products including iron and steel, cement, fertilisers, aluminium, electricity and hydrogen, as well as some other downstream products like screws and bolts. Indirect emissions will also be included in the regulation.
And while this will have a negligible impact on Australian exports, initially, experts are warning that it could set in motion a domino effect that sees similar mechanisms adopted in other in countries to which Australia is more trade-exposed, like Japan.
Carbon taxes are coming
“It is in Australia’s best interest to engage constructively in the design of CBAMs, invest in clean production methods for products such as aluminium and steel and create a more resilient manufacturing sector,” TAI’s climate and energy program director Richie Merzian told RenewEconomy on Wednesday.
“Carbon taxes are slowly but surely coming and if Australian companies don’t decarbonise they will become less competitive and the revenue will be collected and spent outside of the country.
“Just look at alumina refining and aluminium smelting in Australia which is dominated, in terms of majority ownership and control, by two global companies – Rio Tinto and Alcoa,” Merzian adds.
“Both these companies own multiple aluminium smelters in Canada and Norway, all powered by hydroelectricity. In recent years, both have invested in new smelters in Iceland, using geothermal electricity, and have taken equity interest in very large new smelters using gas-generated electricity in Oman and Saudi Arabia respectively.
“To the extent that either of these companies seeks to reduce their total corporate emissions in the coming years, continued operation of smelters using coal-fired electricity will be a significant obstacle to achieving this objective,” he says.
The opposite of protectionism
Merzian also disputes the claim – spouted last year by then federal trade minister Dan Tehan – that a CBAM is “just a new form of protectionism” that will jeopardise Australian jobs by throttling some of its major exports including iron ore and aluminium.
In fact, Merzian says, describing the CBAM as “protectionism” couldn’t be further from the truth.
“It’s actually the other way around,” he explains here. “The whole point is you can’t get to net zero emissions …by continuing [to carve] out certain parts of your economy and saying, ‘don’t worry, you will never face a carbon price and never have to reduce your carbon pollution.’
“You can’t do that. Right? You have to get to zero across your economy. So you need to include those industries. And then to make it fair, you need to also include the things they’re going to compete with. So it’s actually the opposite of protectionist. It’s about equalising, it’s about fairness.”
Merzian says in this TAI explainer video that despite former prime minister Scott Morrison’s frequent assertions that Australia’s climate policies would not be decided in Brussels or anywhere else in the world, “they are … because Australia is so carbon pollution intensive.
“That is having consequences now for our traded goods,” he says. “And what’s worse is that the revenue made from the CBAMs, well, where is that going?
“So, you could think about it as probably the worst Australian designed carbon tax, where we pay carbon taxes on goods and that revenue goes to other economies to invest in clean industries. That’s basically what could potentially happen,” Merzian says.
A crucial pillar of EU climate policy
Meanwhile, in the EU, the agreement reached on a CBAM still needs to be confirmed by ambassadors of member states and by the European Parliament, and must be adopted by both institutions before it is finalised.
Provisionally, CBAM will kick in from October 2023 and, in its initial stages, will require a simplified process with reporting obligations only. That phase will involve the collection of data, which will inform the full CBAM when it comes into force.
Over the course of the transition the Commission will assess the possibility of extending CBAM’s scope to include other goods at risk of carbon leakage, including organic chemicals and polymers.
“CBAM will be a crucial pillar of European climate policies,” says Dutch European Parliamentarian Mohammed Chahim, rapporteur of the Environment Committee.
“It is one of the only mechanisms we have to incentivise our trading partners to decarbonise their manufacturing industry.
“On top of this, it is an alternative to our current carbon leakage measures, which will allow us to apply the polluter pays principle to our own industry. A win-win situation.”
CBAM is part of the EU’s “fit for 55 in 2030” package, a suite of measures to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels, in line with European climate law.
The EU progress on a CBAM comes a day after the G7 group of industrialised nations announced the creation of an ‘international climate club’ to greenify industry. German Chancellor Olaf Scholz presented the terms for this ‘club’ on Monday, which seeks to unify the climate schemes of major economies over matters like carbon pricing.
These moves are being mirrored across the pond, with US President Joe Biden announcing last week a proposed steel and aluminium emissions-based tariff as part of another so-called ‘club’.
Under the scheme, countries that are members of Biden’s proposed ‘global arrangement’ would pay no carbon-based tariff if the country to which they are exporting their products has higher emission than those on their own shores. On the other hand, if a country hopes to export metals to countries with lower emissions than their own, they would pay higher tariffs.
