The European Union’s carbon tariffs proposals have been in the works for some time, but this month many of the long-awaited details of the plan have finally been released.
Formally known as the Carbon Border Adjustment Mechanism (CBAM), the plan would see imported products into the EU taxed based on their carbon emissions at the same level as the EU’s equivalent domestically produced products.
The goal would be to ensure domestic producers in the EU aren’t left at a disadvantage when free permits under the EU’s world-leading Emissions Trading Scheme begin to come off in the coming years.
Australia is “dead against” the proposal of the CBAM, with Energy Minister Angus Taylor declaring it a “new form of protectionism designed to shield local industries from free trade”.
Professor John Quiggin, from the University of Queensland School of Economics, says Taylor’s objections, representing the views of the Australian government, ring hollow.
“It’s a last-century concept – no-one cares about protectionism anymore after [former US President Donald] Trump,” Quiggin says. “There is no legitimacy to [his argument] at all. The idea that the EU is going to be diverted by an Australian minister calling this ‘protectionism’ is hopelessly naïve.”
“The US will join the club, Canada will join the club, and I think eventually most of the OECD will join. This will work to reduce emissions globally, and it will put pressure on countries like Australia to adopt similar measures to the EU’s emissions trading scheme.”
The EU’s proposals, even though they are yet to be legislated, are already beginning to gain traction around the world.
In the United States, Democratic lawmakers in both the Senate and House of Representatives earlier this month introduced legislation that would tax products entering the country from nations that don’t have adequate policies for carbon emissions reductions.
“International cooperation will be critical to reaching net-zero emissions,” said Delaware Senator Chris Coons. “We have an historic opportunity to demonstrate that climate policy goes hand-in-hand with providing economic opportunities as US innovators develop and scale clean energy technologies.”
With Australia still lagging behind the world when it comes to reducing carbon emissions, and Prime Minister Scott Morrison yet to commit to a net-zero-emissions-by-2050 target, it’s likely these measures will directly target Australian exporters.
But Victoria University’s Professor Philip Adams says the initial real-term economic impacts of the EU’s CBAM would be minimal on the broader Australian economy.
In the United States, Democratic lawmakers in both the Senate and House of Representatives earlier this month introduced legislation that would tax products entering the country from nations that don’t have adequate policies for carbon emissions reductions.
“There will be some Australian metal producers that sell into Belgium and The Netherlands that might be slugged, but that would be a very small part of their sales,” says Adams. “Across the industry we sell a very small amount into the EU.
“Economy-wide cost to Australia is not zero, but it’s fairly small. At best it might cut Australia’s GDP, relative to where it would have been in 2050, by about $60 million or $70 million.”
But those costs would increase dramatically if the US or other major trading partners with Australia, like China and Japan, followed the EU’s lead and introduced similar measures.
The EU’s proposals are far more progressed than anywhere else, but Associate Professor Felicity Deane, from Queensland University of Technology, says other countries are watching closely. “This [the EU’s proposals] will have a negative economic impact on a number of countries, including Australia. [We] will take a hit,” she says. “We are big on commodities, and while we aren’t a huge importer into the EU, if the US or Japan follow and introduce something like this, it would have a greater impact on Australian producers.”
Deane says the EU’s CBAM proposals take into account whether a product has already had a carbon emissions tax applied to it in its home country, meaning exports from countries with their own equal emissions trading schemes would not be taxed twice.
“[The EU’s proposals] will have a negative economic impact on a number of countries including Australia. [We] will take a hit.”
“This means Australia may want to look at doing things on our own terms – paying a carbon price to our own government, as opposed to others,” she says. “If you pay to your own government, it is taken into account by the EU, so you don’t have to double pay.”
Deane says that despite Australia’s relationship with the EU and our incredibly close relationship with the US, we shouldn’t expect exemptions or exceptions to these carbon-tariff policies.
“Australia is not going to get a carve-out,” she says. “It would be against the whole idea behind the introduction. It’s not going to look particularly fair and it would certainly look like it would breach the ‘most-favoured nation principle’, which is one of the key principles of the World Trade Organisation.”
She predicts that the CBAM will inevitably be challenged by some countries at the WTO regardless, and will likely become a test-case for environmental-related border tariffs around the world.
Quiggin says the pressure on Australia to introduce more of its own carbon-emission-reduction policies would be “difficult to resist”, especially if the US and EU manage to harmonise their schemes.
“The other big player is China, and they are moving in the direction of a carbon price, though they aren’t there yet,” he says. “The pressure on Australia would be very strong.”
Quiggin adds that if more countries sign on to their own CBAM or similar policies, Australian projects in high-emission industries may become “unbackable” from an international investment perspective.
Associate Professor Liam Wagner, from the Adelaide University’s Centre for Global Food and Resources, agrees that the EU’s proposal is just the first movement in what will eventually become a global trend.
“The US will join the club, Canada will join the club, and I think eventually most of the OECD will join,” he says. “This will work to reduce emissions globally, and it will put pressure on countries like Australia to adopt similar measures to the EU’s emissions trading scheme.”