Pearls and Irritations

Those of us who have at least an elementary grasp of economics would have been astonished at the reasoning of Trade Minister Dan Tehan during his ABC interview last week on The EU’s proposed carbon levy on imports (the Carbon Border Adjustment Mechanism (CBAM).   

The obvious fact is that  a carbon levy on trade is inevitable as we approach carbon neutrality by 2050. That is, a decarbonising crunch points is now arriving given the radical differences globally,  between the carbon intensity of processing and manufacturing in differing countries.  Such differences are becoming intolerable given national (and EU) GHG reduction regimes are  radically different in the extent to which they apply a carbon price on different commodities. Such differences will of course  unfairly penalise those industries where carbon is priced in line with the transition to a carbon neutral 2050.

With the US and Japan now also taking the first steps to a trade based carbon levy, the necessity of  integrating it into our (albeit as yet formulated) 2050 carbon neutrality strategy is obvious.  There is no time to be wasted, as Tehan suggests, by going back to the WTO and trying to negotiate some other complex country specific way of integrating national  GHG emission regimes (what on earth that might be is hard to imagine).

The reluctance to embrace the CBAM makes no sense given that  Australia will, arguably, have most to gain from such a global mechanism.  As Ross Garnaut points out, we have the opportunity to be a global renewable energy manufacturing and processing powerhouse based on being able  to produce the world’s cheapest solar energy. And as Alan Finkle reminds us, this can in turn turn  Australia into a hydrogen driven manufacturing and exporting powerhouse.  That prospect is being enhanced by  AEMO’s plan to make the Australia power grid wholly renewable by 2025 – which happens to fit neatly with the EU’s planned start for its trade based carbon levy in 2026.

Thus, a carbon levy on exports would deliver  the essential competitive underpinning for such energy investment projects as the $100 billion the Western Green Energy renewable energy hub.  It would also put us in the front of the queue for hydrogen exports to Japan.  That is, a levy would ensure that low cost high polluting processing and manufacturing in China, India and elsewhere will be less competitive.

In the shorter term the CBAM poses little threat to Australian exports. Its application to cement, iron and steel, aluminium, fertilises and electricity – as the  Australian Industry group have pointed out – will have little effect on our trade with the EU given it is minimal in these products. Moreover, the CBAM regime is to incorporate a parallel reduction of free carbon credits allocated to EU heavy industries to protect them from carbon leakage  –  trade generated by exporters to the EU which are competitive from not being subject to a carbon tax.

In the medium term a global rollout of an export carbon levy can only help accelerate the decarbonising of our power sector and the re-creation of a low carbon heavy industry sector. However, the indirect effect of a trade based carbon levy on our coal exports  needs to be examined given, presumably, its the unspoken factor in our Government’s response to the CBAM.  If such a tax were to be extended to such exports, Australia’s efficiency as a miner would indicate any carbon generated in the extraction process would be less than our competitors. More to the point is whether a carbon export levy would accelerate the transition away from coal. However, the transition from coal to renewables is and will be driven by the carbon price. In the EU its rise – currently around 50 EU or $AU80 – is a reflection of its accelerating carbon neutrality goals.  That acceleration is and will be evident for other countries (China’s carbon price is estimated to be only around 3 EU) as 2050 approaches and with this will inevitably come an adjustment mechanism for international trade.