Hidden sweetener for Australia buried in EU carbon border tax

One of the leading figures in European climate policy, Peter Vis, just last month fretted that the European Union might be rushing too fast towards the sort of border carbon tax it voted for this week.

Such a tax might put “the EU in the role of judging the adequacy of other countries’ [climate policies], which is awkward”, Vis, who helped oversee the creation of the EU emissions trading system, told the UK climate journal The ENDS Report.

The EU is moving to force polluters to cut carbon emissions.Credit:AP

Some members of the EU parliament felt far less awkward about sitting in judgment. Belgian socialist MEP Kathleen van Brempt told the ABC after the vote that Australia had not been “loyal” to the Paris agreement and was a “free-rider”.

Van Brempt’s comment was not loose political rhetoric. In relation to the proposed EU tariff, the term free-rider has a specific meaning, and understanding it helps you to understand the purpose of the tariff.

The EU introduced a carbon cap and trade system in 2005 to help cut greenhouse gas emissions. Under the scheme large emitters are issued free carbon credits for the bulk of their emissions, but charged for those judged to be in excess of efficient practice in their industry. They can buy and sell these credits, providing a business incentive to cut emissions.

After the Paris agreement and COVID-19 pandemic the EU Commission determined to use green stimulus measures to help the bloc reach net zero carbon emissions by 2050. This would mean restricting the amount of free credits issued to heavy emitters inside the EU, particularly in sectors such as cement and steel manufacturing, thereby increasing the incentive to further cut emissions.

The problem is that the policy could leave EU-based industry exposed to undercutting from countries without a similar scheme, thereby driving jobs – and greenhouse gas emissions – offshore.

This is known as “carbon leakage”, and given that the EU wants to cut emissions rather than shift them elsewhere, it is unacceptable to most EU parliamentarians.

This is what the formally titled EU Carbon Border Adjustment Mechanism is meant to prevent.

If a German steel manufacturer has to pay, say, $77 a ton for carbon credits on steel it produces in the EU, then a Turkish manufacturer, or an Australian one, will have to pay the same amount to sell the same product there.

This way industry and jobs stay in the EU, and steel is manufactured in a jurisdiction intent on driving down emissions.

Ideally such a measure would help drive down emissions in other jurisdictions too, by eliminating the “last mover advantage” – the benefit that would accrue to the last nation to introduce a carbon price.

“The CBAM is a great opportunity to reconcile climate, industry, employment, resilience, sovereignty and relocation issues. We must stop being naïve and impose the same carbon price on products, whether they are produced in or outside the EU, to ensure the most polluting sectors also take part in fighting climate change and innovate towards zero carbon,” said French Greens MEP Yannick Jadot.

“This is our best chance of remaining below the 1.5°C warming limit, whilst also pushing our trading partners to be equally ambitious in order to enter the EU market.”

The final vote on the shape of such a tariff will not be held until June, but it is already becoming clear that it could become viciously complicated.

Under some proposals developing nations would be given free access to account for the historical emissions of the developed. Certain industries from certain countries would need to be targeted. The EU would need to somehow measure what local emissions trading schemes those nations already had in place, and account for that by raising or lowering its border tariff.

And there are already signs that the EU is baulking at the first hurdle. In this week’s vote MEPs decided to continue issuing their own heavy emitters free credits. If this remains an element of any finalised border tariff, it could become as much a tool of protectionism as decarbonisation.

Vis is also concerned that it could upset countries who signed the Paris agreement because it allowed signatories to determine their own contributions.

“I think it’s going to be hugely problematic if the EU goes ahead with this,” he told ENDS Report.

Australian Industry Group’s principal national adviser Tennant Reed, a close observer of international climate politics, shares the concerns about the complexity and design of the tax.

He believes in its final shape it may simply apply to heavily emitting sectors in all advanced nations, and to that extent fail to push down emissions outside the EU.

But he still sees the benefit of a model that prices carbon within the EU and forces down the bloc’s own emissions.

“It is absolutely imaginable for Europe or other countries to try to use climate as a basis for what are really protectionist or trade barrier measures.

“They’re insisting that that’s not what they’re doing. We should hold them to that, to the extent we can.”

But he says, Australia should have little to fear from such a tariff, because Australian exporters to Europe will be able to charge more for their products there.

And this is the point of the whole exercise.

European consumers will pay incrementally more for the products that most damage the climate.

“That is the price is they will pay to play their part in avoiding terrible impacts from climate change,” he says.

It is the sort of price that consumers across the world may soon be expected to pay.

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