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Australia labels possible EU carbon border tax “discriminatory”

04 August 2021 IHS Markit Energy Expert

Australian officials continue to criticize the EU's proposal to implement a Carbon Border Adjustment Mechanism (CBAM), labelling it "discriminatory," building on an earlier attack on the tariff as "protectionist."

From the perspective of EU trading partners, the CBAM runs directly counter to the idea of open markets, Minister for Energy and Emissions Reduction Angus Taylor said in an open letter on 4 August.

"At a time when liberal democracies are working together to rebuild confidence in the benefits of free and open trade, a new wave of protectionism now threatens to sweep across the world," he wrote. "This unilateral step, taken outside of the rules-based international system, discriminates against countries like Australia. Countries that provide the raw materials that global supply chains need to create the goods and infrastructure sought after by consumers in Europe and elsewhere."

The border adjustment is one of nearly a dozen major EU policy measures proposed as part of the Fit for 55 package announced in July and will be written into law over the next two years. Fit for 55 is a comprehensive and interlocking set of proposals that would enable the 27-nation EU to meet a goal of reducing CO2 emissions by 55% by 2030 from a 2005 baseline.

In July, the Australian Minister for Trade, Tourism and Investment Dan Tehan labeled the proposed tariff as "protectionist" and said it could breach trade rules.

From the EU's perspective, the CBAM is designed to ensure imports from overseas face the same carbon price imposed on goods produced in Europe under the EU's own emissions reduction scheme. It would avoid the problem of "offshoring" carbon emissions by allowing imported goods to be made under looser standards.

As announced under Fit for 55, the CBAM would be implemented in 2026 and would initially target products from six carbon-intensive sectors: cement, iron, steel, aluminum, fertilizer, and electricity. Other sectors such as chemicals and polymers are being studied and also could be included as early as 2026.

The CBAM would require importers of specific goods to register with customs authorities and surrender certificates, with prices that are set weekly, purchased from climate authorities in EU member states.

Imposing Europe's standards

But those actions would force EU's internal standards and domestic carbon taxes on the rest of the world, Taylor said in his open letter. "It will punish sectors like aluminum, cement, and steel that will be covered in the first phase of this new European protectionism," Taylor said, and he speculated that agriculture could eventually be included as well.

Emerging economies that rely on exports of energy-intensive products would be punished even more severely than developed countries, given their need to lift their citizens out of poverty, Taylor added.

In the 2019-2020 financial year, Australia exported A$11.7 billion (US$8.7 billion) worth of goods to the EU (excluding the now departed UK), making the bloc the country's seventh-largest trading partner. However, exports to the EU are barely a tenth of the value of Australian annual exports to China, which were more than A$136 billion in 2019-2020.

Australia is only the 35th largest importer to the EU, and the EU runs a trade surplus with Australia of more than A$34 billion per year.

Australia's largest export to the EU in 2019-2020 was coal, with shipments valued at A$2.7 billion, according to data published by the Australian Department of Foreign Affairs and Trade (DFAT).

Coal exports would clearly suffer under a CBAM, and the cost of the tax would likely accelerate the phaseout of coal from the EU that's underway. In 2019-2020, it exported 213 million mt of thermal coal, worth A$20 billion, according to the June 2021 edition of the Resources and Energy Quarterly by the Office of the Chief Economist. Coal exports are already facing a crunch as China, the largest destination for Australian coal in past years, has banned the imports in a trade dispute.

The Australian government says it's the largest coal exporter in the world and that total fossil fuel exports account for about A$80 billion in revenue annually. This has placed pressure on the country to adapt to rising global decarbonization expectations.

While Australia Prime Minister Scott Morrison spoke this spring about the country's progress towards meeting its carbon emissions goals, those targets are, arguably, the least aggressive of any developed nation. Australia's nationally determined contribution under the Paris Agreement, which was updated on 31 December 2020, is to reduce GHG emissions 26-28% below 2005 levels by 2030. The country has focused on reducing emissions intensity, rather than on total emissions reduction.

"Emissions already are reduced by 19% from 2005 levels, and by 36% when you exclude exports," Morrison said in April at the Leaders' Summit on Climate organized by US President Joe Biden. Those references are to emissions intensity, not actual emissions.

"We are applying renewable energy technology 10 times faster than the world average, per person. We have the highest uptake of rooftop solar in the world…. In meeting our target for 2030, we will see emissions per-capita fall by almost half," Morrison continued.

Renewables are expected to supply more than half of the country's electricity by 2030, which could help to decarbonize other key export products, such as iron ore.

--Reporting by Trisha Huang, OPIS, and Kevin Adler, Net-Zero Business Daily

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