Several major economies and Australian trading partners are looking at introducing them. Adam Morton explains why
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| Countries that have pledged to be more ambitious in combating the climate crisis are looking at charging some products from countries not taking similar steps. Photograph: Dean Lewins/AAP |
We know the minister responsible for emissions reduction, Angus Taylor, is “dead against” them. The trade minister, Dan Tehan, is concerned they may be a “new form of protectionism”.
But some experts say it is a matter of when, not if, they are introduced – and the Australian government and business community should be prepared.
What is a carbon tariff? Is it a carbon tax?
In simple terms, it is a charge imposed on overseas businesses that make products that lead to greenhouse gases being pumped into the atmosphere but don’t face a cost for them at home.
Countries that have pledged to be more ambitious in combating the climate crisis are looking at imposing greater carbon costs on their own businesses to drive emissions cuts. But they don’t want locally made goods to be unfairly disadvantaged against overseas competitors.
The answer in some cases is likely to be a carbon tariff – or, if you like, a tax – charged on some products coming in from countries that are not taking similar steps to deal with climate change.
The idea is not to penalise the overseas companies or – as the Morrison government appears to be suggesting – to embrace old-school protectionism.
It is to level the playing field so local businesses in countries applying a tariff can compete while this vast global problem is addressed.
Who is doing it?
No one just yet, but that may soon change.
The idea of carbon tariffs is not particularly new – there have been studies and proposals dating back years – but the global push to cut emissions has accelerated in recent months.
Several of the world’s biggest economies are now planning much deeper cuts in emissions under plans to reach net zero emissions by 2050.
The European Union and Britain both made commitments late last year to make significant cuts by 2030 (55% and 68% compared with 1990 levels, respectively).
Joe Biden has promised a 2030 target for the US before he hosts a leaders’ summit on climate on 22 April.
Australia’s major trading partners in Asia – Japan, South Korea and China – have set net zero goals for either 2050 or 2060 and each is considering what they will do by 2030, with announcements expected this year.
The EU is the most advanced in its carbon tariff thinking, with plans to introduce a system no later than 2023.
The European Commission president, Ursula von der Leyen, proposed a tariff – known as a carbon border adjustment mechanism, or CBAM – as part of a green deal put forward in 2019. The plan was strongly endorsed by the European parliament’s environment committee earlier this month, and is due to be tabled in parliament in June.
As explained above, the goal is to avoid emissions cuts on the continent being undermined when it brings in goods from countries that are not acting on climate in the same way.
The rationale is if it didn’t go down this path there would be a risk of “carbon leakage” – local production shutting down and moving to countries without strong climate policies. Obviously enough, this would do nothing to cut global emissions.
Revenue raised from the charge would be largely used to help pay for the EU’s green transition.
The EU has pledged its system will comply with World Trade Organization rules that aim to ensure fair treatment for all.
It means the tariff will be levelled only on big emitting industries that compete directly with local industries paying a carbon price. Those affected in the short term are likely to be steel, cement, chemicals and fertilisers.
The tariff is not initially expected to apply to industries that do not currently face a carbon cost under the EU emissions trading scheme, such as agriculture. That could change as steps are introduced to make deeper emissions cuts in the years ahead.
A short paper by advisory firm RepuTex noted the current EU carbon price is now about A$60 per tonne of emissions – more than twice what Australia’s carbon price reached before it was repealed in 2014 amid bad faith claims about its catastrophic impact.
It is forecast to hit more than $70 a tonne next year and keep rising.
What about countries outside the EU?
The issue has had a flurry of attention in recent days after reports the British prime minister, Boris Johnson, is considering using the presidency of the G7 this year to forge an alliance on carbon border taxes.
Bloomberg reported the proposal was in its early stages, and Johnson was more likely to push for an agreement in principle at a meeting in Cornwall in June than a binding commitment. The UK is pushing hard for stronger global action on climate in line with what scientists say is necessary on climate ahead of a major climate conference in Glasgow in November.
Johnson has been emboldened by Biden’s election. The new US president has promised to make climate a major priority this year, and already made a raft of executive orders that experts have described as “breathtaking”.
Biden’s election platform included a commitment to introduce a “carbon adjustment fee against countries that are failing to meet their climate and environmental obligations”. It is early days in his presidency and he is facing no end of major domestic issues, but watch this space.
The suggestion the G7 may reach an agreement on a carbon border tax accelerated further on Thursday when the Nikkei newspaper reported that Japan was looking at introducing one, with a decision expected by the middle of the year.
Are the proposed tariffs aimed at Australia?
Not specifically. They appear mainly designed to deal with emissions-intensive goods from emerging economies, notably China and India.
But to stand up under the WTO they will need to be applied equally, so don’t expect Australia-specific exemptions.
What will it mean for Australian government and business? Tennant Reed, a climate policy expert with the Australian Industry Group, expects the EU carbon tariff to have little direct impact here in the short term for the simple reason the country sells few goods to the continent that compete directly with local industries that are caught by the EU emissions trading scheme.
Australia’s biggest single export to the continent is coal for use in steelmaking. It could be affected, but the actual cost would likely be quite small as the EU scheme does not cover “fugitive” methane emissions released during coalmining.
If Japan was to follow the EU’s lead it is possible some industries could be affected – agriculture, for instance – but coal and gas exports are less likely to be charged. Japan overwhelmingly relies on imported energy and there is very little local fossil fuel extraction to level the playing field with.
If China, which buys Australian coal and has its own substantial coal industry, were to head down the carbon tariff path it would be a different story.
The world is moving increasingly rapidly on climate, and what happens in the years ahead will turn largely on how the Morrison government (and its successors) act.
If Australia maintains its current increasingly isolated stance – claiming that climate change will eventually be solved through technology alone, and that businesses and consumers should not face anything that might be described as a tax or regulation that forces emissions cuts – the pressure from the international community is likely to grow.
It stands to reason that if more countries adopt carbon tariffs, more Australian industries will be hit. In the case of the US, aluminium imports could be affected if Biden follows through on his pledge.
But in the short term, the most clear impact if countries make good on their emissions pledges will be shrinking demand for Australia’s fossil fuels and carbon-intensive goods.
Thermal coal, used in power plants, is already in decline and that is expected to accelerate. Metallurgical coal for steelmaking and gas are not as immediately at risk but may follow sooner than the Australian political debate suggests.
Planning for that – and a world in which the global community expects the cost of emissions to be reflected in government policy – may be a good idea.
Links
- Australia ‘dead against’ climate tariffs, declares Taylor
- Big-emitting Australian businesses could soon face costly carbon levy in Europe
- ‘Breathtaking’: what Joe Biden’s sweeping climate plan means for Scott Morrison
- Europe trade talks: Australia urged to be 'more ambitious' on climate
- Big-emitting Australian businesses could soon face costly carbon levy in Europe
- Australia needs to cut emissions by at least 50% by 2030 to meet Paris goals, experts say
- Katharine Murphy Australia's climate wars were always stupid. Now they've got even dumber
- The Biden Plan to Ensure the Future is “Made in All of America” by All of America’s Workers
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