By Jerry Hinkle and Trent Whitehand-Willick
Here at CCL, we’re always taking action to push the Australian Parliament to implement a national carbon price. In recent months, it has become abundantly clear that the rest of the world is taking their own actions on climate that are pushing Australia toward a carbon price, too. The European Union (EU), for example, has proposed a Carbon Border Adjustment Mechanism (CBAM) for implementation in January 2023. Canada, too, is planning to implement a CBAM. The United States of America (US) has also signalled intent to implement its own CBAM.
Each of those policies carries economic implications for Australia. Some of our industries will be directly impacted by the CBAMs and will likely lose export sales when the mechanisms are implemented. Employment will decline accordingly.
But the flip side of that scenario is positive: if Australia enacts its own carbon pricing policy with a corresponding CBAM, sales and employment will likely grow in those same industries.
Let’s explore how each option could play out.
How the EU’s CBAM works
Here’s how the EU’s CBAM works. Initially, it will cover cement, electricity, fertilizer, iron and steel, and aluminium. This group should expand over time to include other “energy-intensive, trade-exposed” (EITE) products. The EU carbon prices are currently just over €55 (AU$88) and are expected to rise between now and CBAM implementation.
Currently, the EU producers of the EITE products are at a disadvantage relative to foreign competitors because they have to pay this $88/ton carbon price (1), thereby increasing their cost of production, while foreign firms do not. This is exactly what the CBAM is designed to counter. Once the EU CBAM is implemented in 2023, Australian exports to the EU will be charged the carbon price at the border (2), and cost of production advantage/EU disadvantage will disappear. The CBAM will allow the EU to increase carbon prices to the level necessary to achieve their ambitious climate goals without concern that their EITE firms will either 1) be at a competitive disadvantage from the carbon price and so lose sales or 2) move operations to countries without a carbon price (i.e., “leakage”).
However, the EU CBAM will eliminate the cost advantage currently enjoyed by Australian exports to Europe (appropriately), and this will reduce our sales of these products and cost jobs in those industries. This should play out similarly when Canada also implements its CBAM. Australia does not export much of the targeted products to the EU but if and when the US, United Kingdom, Japan and the Republic of Korea adopt CBAMs our exports will be very vulnerable.
How Australia can respond
What can Australia do in response? a carbon price with a CBAM might not improve our EITE trade with the EU, but could give us a significant advantage with other major trading partners. Specifically, the EU is designing its CBAM to charge the imports based on the carbon-intensity of the exporting country. Its internal carbon price is based on how much carbon the EU emits in producing the good, but the EITE trade goods coming in are charged the carbon price based on how much carbon the exporting firm emits in producing the same good. Under this approach, a CBAM gives a competitive advantage to the cleaner country.
If Australia’s CBAM were to be designed similarly to the EU’s, our EITE industries would realise a significant advantage because we arguably have much greater capacity for clean production processes than most countries (3). This would ensure our EITE products, particularly primary metals, remain affordable — if not preferrable — to key importers of Australian EITEs, such as Japan and The Republic of Korea. Subsequently, Australia’s EITE firms could expect significant sales and employment gains. For example, a recent analysis by the Australia Research Institute indicates that with a CBAM, Australian EITE industries that decarbonise will be presented remarkable opportunities. And this could be complemented by the creation of our own renewable energy-based export economy (pg. 29-30). The International Monetary Fund has already made clear that a carbon tax policy will grow national economies (CH 3, pg. 100) and increase employment (pg. 92). Should Australia enact a carbon tax with a CBAM design similar to that of Europe, Australian EITE industries will get a clear boost as well.
- The increased cost of production from the CP is partially offset by free pollution permit allowances and subsidies.
- The EU importer pays the CP, but who pays is of no consequence here.
- Frank Muller, Hannah Melville-Rea, Hugh Saddler. 2021. Carbon Border Adjustments: What are they and how will they impact Australia? The Australia Research Institute. Pg. 32
Jerry Hinkle is a research coordinator for CCL.