London | Australian companies have been urged to start preparing now for the European Union’s carbon border tax in 2023, or else risk getting caught up in a potential fracturing of the world trade system.
Consulting firms are gearing up to offer carbon audits to their clients, while think tank experts warn that the border tax could end up splintering the world into high-carbon and low-carbon blocs.
“I had a call from a client in Asia three weeks ago asking about this," says Mark Lewis, London-based chief sustainability strategist at BNP Paribas Asset Management. "That’s the first time I’ve seen an Asian investor starting to think through the implications of what an EU carbon border tax could mean.
 |
| The European Union is looking for a road out of coal dependency. Bloomberg |
And the experts warn it isn’t just companies exporting directly to Europe: it trickles down to anyone in a supply chain that ends up in Europe – which could mean Australian raw materials going due north into Asia-produced exports to the EU.
The EU, a market of about 450 million people, has mooted a “carbon border adjustment mechanism” (CBAM) for some years. But as former prime minister Malcolm Turnbull and former Bank of England governor Mark Carney warned last week, it's now getting serious.
With a net-zero emissions target for 2050 that will soon be legally binding, and an Emissions Trading Scheme (ETS) that will therefore have to ratchet up both the number of sectors it covers and the cost of using carbon, the border tax is almost inevitable.
The tax is levied on imported goods based on the carbon content that goes into producing them, levelling the playing field with European producers who have to buy carbon permits on the ETS. That stops “carbon leakage” – customers switching to cheaper, more carbon-intensive alternatives outside the EU.
Tim Figures, associate director of EU & Global Trade and Investment at Boston Consulting Group in London, says Australian companies should get started now on working out how much carbon is embedded in their products.
“That’s quite a complex calculation, because you’ve got to think not just about how much steel or metal or whatever is in it, but also how much electricity you used to transform it, what emissions came from generating that electricity; and if it’s in Australia, what emissions did the ship that took it halfway around the world to Rotterdam give out?”
The EU is still weighing up four different designs for the CBAM, so an audit alone wouldn’t immediately make a company compliance-ready. But Figures says it's not just about paying the tax, it's about finding ways to remain competitive.
“The more you know about what’s in your product, the more you can start thinking about how you can address it – do I have a more efficient industrial process, do I change the design of my product, do I use different raw materials in it that are less carbon-intensive, do I find another way of transporting it?”
If that all sounds fiendishly complicated, it’s because it is, says Sam Lowe, senior research fellow at the Centre for European Reform in London.
He’s argued that Brussels should probably “take on board much of the financial and administrative burden, particularly for small and medium-sized companies”. That might mean creating and funding a few carbon certification bodies out of the CBAM revenue.
Political momentum
The counter-argument to Figures’ sense of urgency is that the EU is a notoriously slow-moving legislator, and political and business concerns about the CBAM may keep it on the backburner well beyond 2023.
But that ignores the fact that the EU might not be able to reach its binding net-zero without the CBAM.
“The most important reason to impose a carbon border adjustment mechanism is to secure the buy-in of local industry [in Europe] for deeper decarbonisation policies,” Nikos Tsafos of the Centre for Strategic and International Studies wrote recently.
“It is hard for any country to agree on aggressive targets … Regardless of how much carbon leakage exists in practice, powerful people see it as a problem. Offering a solution to that problem might help garner support or, at least, lessen opposition.”
Even Germany, a longstanding sceptic, has come around to in-principle backing of the scheme. The CBAM has now moved into a public consultation, which will run until November.
A firm proposal, which has to overcome political difficulties and try to be compliant with World Trade Organisation (WTO) rules, is due in mid-2021. European Commission President Ursula von der Leyen recommitted to it in her inaugural ‘State of the European Union’ address last month.
Fork in the road
If the EU goes it alone on a CBAM it will become a “low carbon island”, says Tsafos: “Only the most low-carbon producers will be able to export to Europe. High-carbon trade continues, bypassing Europe, and European suppliers have to raise output to meet demand.”
This has been one of Europe's worries, which was why the continent was very quick to latch onto the significance of Chinese President Xi Jinping’s announcement last week that he’s setting a 2060 net-zero target.
The world splinters into two trade blocs: a high-carbon one and a low-carbon one.That suggests Beijing might come to the party on carbon pricing, and EU leaders including German Chancellor Angela Merkel have repeatedly stressed that whatever their geopolitical differences with China, the Europeans want to work hand in glove on climate change.
— Nikos Tsafos, Centre for Strategic and International Studies
If China and Japan came on board with cap-and-trade systems like the EU ETS and a CBAM of their own, the future of world trade starts to look quite different, Tsafos says.
“The world splinters into two trade blocs: a high-carbon one and a low-carbon one. High barriers between the two shut out emerging-country exporters from accessing markets in advanced economies.”
The question then would be: on which side of the divide are Australian producers?
 |
| Coal is set to gradually fade from the picture in the European Union. Bloomberg |
The government's other option is to resist, joining a potential group of countries that brand the CBAM as a trade barrier and fight back through the WTO.
A recent European Parliament study acknowledged that many countries “understand the logic and purpose of the EU CBAM mechanism as a climate instrument, [but] they are concerned that its design and implementation will transform it into a protectionist trade instrument” – and one that hurts lower-income countries.
On the face of it, the WTO could find that a carbon tax was discriminatory – breaching the rule that any country with which the EU doesn’t have a free-trade agreement (FTA) needs to be treated the same. The WTO could also class the CBAM as an illegitimate subsidy to European industry.
Lowe suggests that if the CBAM’s cost is the same as a European producer faces under the ETS, it has a decent chance of surviving a WTO challenge. This also suggests the EU might opt for a model that requires foreign companies to buy EU carbon permits, rather than levying a tax.
The trouble is, as Figures points out, this means Brussels has to start phasing out all its free allocations of permits to European industry – and that’s going to hurt, politically and economically.
Another way to soften the blow offshore might be to phase the tax, starting with just a few heavy-emission sectors.
If the EU instead goes all-out, Lowe worries that “third countries [could] retaliate unilaterally against EU exporters”, dragging decarbonisation into the centre of global trade tensions.
Yet another EU gambit will likely be to embed some kind of commitment to carbon pricing into the EU’s FTAs – including the one under discussion with Australia – so that the CBAM bypasses many countries. It’s understood that Brussels raised the CBAM once again in last month’s round of Australia-EU FTA talks.
Some observers doubt the EU has the stomach for any of this. But others say the EU’s Green Deal, its binding net-zero target and its need for the CBAM revenue to fund its big COVID-19 recovery plan, all point to an inexorability.
“I wouldn’t want to underestimate either the political or the technical difficulties of implementing a carbon border tax; but I would say that I’ve been surprised by the forthrightness with which the commission is pushing ahead with the idea of studying it, publishing it and potentially proposing it,” says BNP Paribas’s Lewis.
“It’s clearly going to be a very, very controversial thing if they do propose it, but I think it’s inevitable.”
Links
- (AU) Australia must prepare for carbon tariffs
- How an EU Carbon Border Tax Could Jolt World Trade
- (AU) Australia is a prime target for green tariffs
- (AU) 'Our own targets': Businesses press ahead as China pushes zero emissions
- (AU) A competitive post-carbon world
- (AU) Australia-EU free-trade deal faces testing final hurdle
No comments:
Post a Comment