Too often climate policy discussion has been dominated by fantasy scenarios: either one where a single country acts alone; or one where the whole world moves in perfect harmony to a globally consistent carbon pricing system. Neither scenario matches the messy multi-speed reality. The Paris Agreement reflects significant action worldwide that will intensify over time. But it also implies a patchwork world with widely varying national and regional policies. Any climate policy is going to have to work effectively within this context, managing risks to national trade competitiveness while lowering net national emissions. That challenge demands solutions that are environmentally effective, economically sound and practically implementable.
A carbon border adjustment is a way of ensuring that a nation’s policies to reduce greenhouse gas emissions do not unfairly disadvantage their industries. If one economy imposes a carbon cost on local producers, a carbon border adjustment would also impose it on imports and potentially rebate it on exports – ensuring that trade competitiveness is not affected by climate policy differences between countries.
Carbon border adjustments are becoming hotly discussed in Australia because of the moves by the European Union to implement one, the potential that other major economies will follow, and the perception that Australian trade competitiveness will be threatened unless we adopt more stringent domestic emissions constraints.
This paper has three purposes:
- Understanding the impacts on Australia of the proposed EU Carbon Border Adjustment Mechanism (EU CBAM) and similar policies being considered elsewhere;
- Understanding the broader economic, legal, diplomatic and practical context to border adjustments, without which we can’t understand the EU proposal; and
- Illustrating that context for an Australian audience by applying it to a hypothetical Australian border adjustment.
The findings may be surprising.
Australia appears to have little to fear in the medium term from actually implementable border adjustments by the EU or anyone else. Little of our trade with Europe is affected – around 0.25% by value – and the direct impact on profitability of covered exports would be broadly neutral. A carbon border adjustment designed to comply with international trade commitments, as Europe has promised, must be non-discriminatory and not operate as a form of trade protection.
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