The EU’s Carbon Border Adjustment Mechanism, just released, means that trade and exports will now be on the menu in international climate negotiations. From 2026, emissions created through the production of any goods exported to the EU will be slapped with a tax equivalent to the EU carbon price – about $90 per tonne, or four times the price in our own carbon market.
By itself, the EU’s CBAM will only affect a small amount of Australia’s exports. But it’s just the first of many climate trade dominoes to fall. Once the European Commission irons out the details, it will pave the way for others to implement their own carbon border taxes. Japan and Canada are working on similar mechanisms to the EU, and US Democrats announced plans for a “polluter import fee” this week, too.
For the many countries with a domestic carbon price, including our top five trading partners, CBAMs are the natural next step. Why? Because it makes no sense for governments to make domestic businesses pay for the right to emit while giving overseas competitors a free pass.
As more countries price emissions both domestically and at the border, our exporters will take a double hit if we continue to lag behind our peers on emissions reduction.
First, a growing portion of our exports will be hit with a tax at the border. And second, as competitors’ carbon markets drive decarbonisation, the emissions intensity of our exports will become comparatively higher. This will add a dirty premium to the overseas price of “Australian-made” products in the form of higher carbon border taxes.
For years policymakers have claimed climate action would hurt our carbon-intensive industries –coal, metals, and agriculture. They argued that a domestic price on carbon would cause our trade-exposed, emissions-intensive industries to lose their international edge.
But widespread CBAMs are about to flip that argument on its head. Our climate inaction and carbon-intensive economy will now hamstring exporters who want to compete on the global stage. The emissions embedded in our exports will be higher than those countries with stronger climate action, so at the border our goods will wear a harsher carbon tax.
Look at our electricity sector. Fossil fuels are still being used to meet three-quarters of our electricity demand. And close to half our grid’s capacity is made up of coal and gas-fired assets. Our heavy dependence on fossil fuels has left us with one of the dirtiest grids in the developed world –emitting 75 per cent more carbon for every kilowatt produced than the global average.