Net zero pledges, not border taxes, are biggest threat to Australia’s fossil fuel exports

One of Australia’s largest business groups has played down the potential threats of a carbon border adjustment mechanism being considered by the European Union, but warned that growing international commitments to decarbonisation could slash demand for Australian coal and gas exports.

A new policy paper published by the Australian Industry Group on Tuesday argues that a carbon border adjustment mechanism – which would impose a carbon price on goods exported to most of Europe – were not likely to single out countries like Australia for financial punishment, but that it would work to level the playing ground for European producers that pay a price on their carbon emissions imposed under EU policies.

The introduction of a carbon border adjustment mechanism would see Australian exporters pay the same cost on carbon as European producers when exporting goods into Europe – currently around €58 per tonne (A$93) ensuring that Australian producers do not benefit from Australia’s lack of an equivalent pricing regime.

The report argues that the biggest threat to the value of Australia’s export sector – especially when it comes to exports of coal and gas – were strengthening international emissions reduction commitments, which are likely to drive down demand for Australian fossil fuels.

“The biggest climate-related risk to current Australian trade is not likely to be border adjustments, but the impact of our trade partners’ emissions reduction policies and energy transitions on their demand for our thermal coal, coking coal and gas exports,” the report says.

“Diversification into exports related to clean energy is a sensible hedge.”

The Australian Industry group, which represents some of Australia’s largest businesses, said that based on current proposals the EU’s carbon border adjustment mechanism would apply to just 0.25 per cent of Australia’s exports into the EU because it would only apply to a limited collection of emissions intensive goods that includes aluminium and steel.

Coal and gas exports into the European Union are not currently proposed for inclusion in a carbon border adjustment mechanism, but would instead be subject to the European Union Emissions Trading Scheme that could ultimately erode demand for Australian fossil fuel exports.

“It should be noted that Australia’s coking coal exports to Europe face a much more serious potential indirect impact from [carbon border adjustment mechanisms],” the report says.

“The emissions from producing coking coal are much smaller than the emissions from using coking coal, primarily in primary steelmaking. The existing EU ETS provides a price signal to steelmakers to reduce emissions, and an increasingly prominent option for deep emissions reductions in steel is to use hydrogen instead of coking coal to reduce iron oxide to iron.”

“To the extent that it maintains the expected long term competitiveness of EU steelmakers who reduce emissions, [carbon border adjustment mechanism] will sharpen that incentive and erode demand for coking coal in the EU over time.”

A carbon border adjustment mechanism would send an economic signal to the producers of emissions intensive goods that they should invest in the decarbonisation of their production and to find alternatives to fossil fuels as a source of energy.

“In the longer term Australian producers’ continued competitiveness would depend on keeping up with the pace of decarbonisation in global industry and our nation’s success in building a new advantage in cheap clean energy,” said AI CEO Innes Willox, one of the loudest cheerleaders for Tony Abbott’s scrapping of the carbon price in 2014.

“Our patchwork world is moving towards net zero emissions messily and at different speeds. In the long term, industry won’t be competitive unless it reaches low-, zero- or negative-emissions. But in a messy world nations still fear that tight carbon constraints could cost their industries competitiveness along the way.”

Australia’s emissions reduction targets, which only consist of a 2030 target to reduce emissions by between 26 to 28 per cent from 2005 levels, have widely been panned as inadequate and out of step with the targets being set by international peers.

A growing number of countries, including many of Australia’s key trading partners, have adopted formal 2050 targets for net-zero emissions, but the Morrison government has resisted doing the same.

Former United Nations secretary-general Ban Ki-Moon told the Better Futures Forum on Tuesday that he thought Australia was likely to face an increased likelihood of economic and diplomatic measures being imposed by other countries, while it refused to strengthen its action on climate change.

“Australia’s current goal of a 26-28% reduction on 2005 levels by 2030, and the absence of a national zero emissions target, is out of step with its States, its trading partners, and other comparable nations. It is insufficient to meet Australia’s Paris Agreement commitments,” Ban Ki-Moon told the forum.

“Ethically, the toll of inaction on climate is incalculable. Economically, failing to set ambitious, credible emissions targets in line with the rest of the world poses a huge threat to Australia’s future prosperity and international standing.”

“Australia risks finding itself on the wrong side of carbon-border tariffs as other nations move ahead, seizing the opportunities of the zero-carbon age.”