Australia’s carbon-intensive exporters could eventually lose their competitive edge if the nation does not adapt to measures like the European Union’s impending Carbon Border Adjustment Mechanism (CBAM), a new report states.
The European Union is seeking to even the playing field between domestic producers, which must adhere to the EU emissions trading scheme, and international exporters, which may not face the same environmental and financial constraints.
The EU’s proposed CBAM would impose a carbon ‘certificate’ cost on high-emissions imports which are not subject to comparable emission trading schemes (ETS) or carbon taxes in their country of origin.
That process would ideally protect local producers from cut-price imports while also encouraging international exporters to institute similar carbon-reducing policies, helping to cut global emissions.
The policy position is unlikely to have significant near-term impacts for Australian exporters, but a new report from the Australian Industry Group outlines how international markets are adapting for a carbon-constrained future.
Little short-term impact, Ai Group says
In a fresh paper outlining the policy framework, the Australian Industry Group said such a measure would have little immediate impact on Australian exporters.
The initial target industries of cement, iron and steel, aluminium, fertilisers, and electricity represent about 0.25% of Australia’s total trade with Europe.
Australia’s largest EU export categories are not covered by the CBAM’s initial scope.
“Of our top 5 exports to Europe, only 2 are ever likely to be covered (coking coal and lead),” report author Tennant Reed said Tuesday.
“But even then it’d be modest – most exports are not emissions intensive.”
More broadly, CBAM emissions reporting is slated to start in 2023, with financial “adjustments” only kicking in from 2026.
One scenario floated by the report even suggests some Australian exporters could face an initial boost compared to competing overseas producers, if the nation can win EU recognition for emissions data already tracked by the National Greenhouse and Energy Reporting System.
Long-term costs for inaction
But in the long term, some of Australia’s industries “will lose export competitiveness unless they have a basis to invest in low, zero and negative-emissions production,” Ai Group chief executive Innes Willox said.
This idea speaks to “the perception that Australian trade competitiveness will be threatened unless we adopt more stringent domestic emissions constraints,” he added.
“While many factors impact industry competitiveness, and energy or carbon costs will not be determinative for all businesses, a significant and sustained differential in the carbon constraints faced by Australian and overseas businesses can lead to a loss of investment and activity without improving global emissions,” the report states.
Such concerns speak to the fears of climate-focused Australian investors, who worry that Australia’s reluctance to establish clear goals for net zero emissions by 2050 will deter international capital.
The Ai Group recommends Australia keep a keen eye on EU CBAM developments “to inform consideration of Australia’s future policy options,” while also recognising that even larger export markets may introduce similar measures in the future.
Australia should also consider the thoughtful implementation of its own carbon border system, the report suggests.
Beyond the impacts of the EU CBAM, the Ai Group says larger trends will impact local producers which do not adapt.
“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,” Willox said.