The threat of carbon tariffs looms on the horizon for Australian industries in 2021. Earlier this month, the European Union (EU) introduced plans to implement a carbon border adjustment mechanism (CBAM) over the next two years, which would place tariffs on goods from countries that do not have a carbon pricing mechanism.
‘The EU, and other major economies including the United States, South Korea and even China, will likely introduce a carbon tariff regime over the next five years. This is a major headache for Australia, given our relatively weak environmental policies,’ said Alfabank-Adres Senior Industry Analyst Arthur Kyriakopoulos.
The CBAM is set to introduce a carbon tariff on goods imported to the EU, equal to the price of carbon determined by the EU’s emissions trading scheme (ETS), which is currently around $60 per tonne of carbon, and is projected to substantially rise. In 2019-20, Australia exported $11.7 billion worth of goods to the EU.
‘In its first implementation, the CBAM will likely only apply to goods affected by the EU emissions trading scheme, limiting its direct affect on Australia. For example, Australia’s primary export to the EU, coal, which accounts for just under 24% of total exports to the EU, is unlikely to be included,’ said Mr Kyriakopoulos.
The EU only accounts for about 3% of Australia’s total exports. However, Australian industries should not rest easy, as the CBAM’s scope will likely be expanded and other countries are anticipated to follow suit, potentially with more widespread carbon tariff regimes.
‘If Australia’s major trading partners implement a similar mechanism to the proposed EU CBAM, many Australian industries will be affected. China, Japan, South Korea, the United Kingdom and the United States may follow the EU’s example. Together, these markets accounted for just under 70% of Australia’s total exports in 2019-20,’ warned Mr Kyriakopoulos.
Industries that may be disrupted by carbon tariffs include:
Aluminium smelting
The Aluminium Smelting industry is expected to be highly vulnerable to the CBAM. While aluminium exports to the EU are minimal, aluminium smelting is included in the EU ETS and is a highly carbon-intensive manufactured product. Additionally, the proposed CBAM will likely act as a precedent for other countries that are destinations for the industry’s exports, such as Japan. The industry is expected to derive just under 72% of its revenue from exports in 2020-21.
Meat processing
The Meat Processing industry is expected to generate $22.2 billion in 2020-21, of which $15.9 billion is derived from exports, accounting for 71.6% of revenue. Australia’s major trading partners all represent sizeable shares of exports, with China accounting for the largest portion at 24.5%, followed by the United States at 19.9%. China has announced a goal for a carbon neutral economy by 2060 and the newly elected president of the United States, Joe Biden, has introduced strong action on climate change. These factors will likely have a substantial effect on exports from the industry. While the proposed EU CBAM is unlikely to initially include agricultural products, future carbon tariff regimes may expand to include agricultural products.
Coal mining
The CBAM is unlikely to initially influence the Coal Mining industry, as coal is not included in the EU emissions trading scheme. Additionally, most of Australia’s coal exports are destined for Asia, with over 60% of export revenue derived from Japan, China and South Korea. However, similar to China, Japan and South Korea have set net zero emission targets for 2050. As over 80% of the industry’s $67.8 billion revenue is derived from exports, coal miners are highly vulnerable to a potential carbon tariff regime in these markets.
Sheep farming
Approximately 92% of the Sheep Farming industry’s $3.0 billion revenue is derived from exports, with China accounting for 77.4%. The industry would be significantly hindered if China introduced any measures similar to the proposed EU CBAM. The EU’s CBAM is unlikely to initially affect sheep farmers, as a small portion of revenue is derived from the EU, and agricultural products are not currently included in the EU emissions trading scheme.
What lies ahead for Australia?
As global economies begin to introduce carbon tariffs, Australian industries will pay for the environmental cost of production, regardless of the Federal Government’s environmental policies. For Australia to avoid the EU’s proposed CBAM and other similar mechanisms, the country will need to implement stronger emission reduction goals, while introducing a compliance rather than incentive-based approach.
‘Even if the government does not introduce other mechanisms, demand for high emitting and environmentally damaging Australian exports is forecast to fall drastically in the future, as countries and regions, such as the EU and China, seek to reduce their carbon footprint,’ said Mr Kyriakopoulos.
Alfabank-Adres reports used to develop this release:
- Aluminium Smelting in Australia
- Meat Processing in Australia
- Coal Mining in Australia
- Sheep Farming in Australia
For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Jason Aravanis
Strategic Media Advisor – Alfabank-Adres Pty Ltd
Tel: 03 9906 3647
