Government taps climate economist to lead carbon leakage review

Policy work to retain steel and cement industries despite stronger climate policies has begun in earnest with the Australia Government’s appointment of Professor Frank Jotzo to lead its “carbon leakage review”.

Carbon leakage refers to the risk of industries relocating from a country with stronger climate policies to countries with weaker ambition.

Jotzo, a professor of climate and environmental economics at the Australian National University, says “no country wants to see its industrial capacity diminish”. 

The review, due to report in September 2024, will consider effective policy options to prevent that happening. Jotzo will lead work to assess the risks of climate leakage; the main sectors affected; and consider policy options drawing lessons from other countries.

The first task will be to assess the risk of carbon leakage under Australia’s current and future climate policies.

That’s not necessarily straightforward, Jotzo says. There are numerous factors which play into trade and production patterns, including the effectiveness of policies designed to prevent or minimise the risk of carbon leakage.

He says most studies investigating carbon leakage have focused on the European Union’s emissions trading scheme which has been in operation for 18 years. 

“The bulk of these studies have come to the conclusion that there is no or only negligible amounts of carbon leakage […] that finding needs to be seen in context of the fact that the policies are of course designed to prevent or minimise such leakage.” 

Where carbon leakage risks are identified, the review will consider the feasibility of policy options, such as: existing policies; an Australian Carbon Border Adjustment Mechanism; emissions product standards; public funding for industry emissions cuts; or multilateral initiatives.

Jotzo says one of the main ways countries have tried to reduce the impact of climate policies on trade exposed emissions-intensive industries is through free allocation of carbon pollution permits. However he says there are other approaches, such as supporting affected industries to shift to greener production.

The carbon leakage review forms part of the Australian Government’s Safeguard Mechanism reforms. 

The Minister for Climate Change and Energy Chris Bowen told ABC Radio National: “Now that we have an industrial emissions reduction policy through the safeguard reforms everybody sensible would agree it makes no sense to see carbon leakage.”

“We need more steel and aluminium and cement for this massive transformation, renewable energy transformation, and we want to see that continuing to be made in Australia.”

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