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EU carbon border tax is a message to Australia to clean up emissions

news100 by news100
August 16, 2021
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Overseas carbon taxes could see the profitability of Australian emissions-intensive exporters of commodities like aluminium and steel plummet, according to new analysis from a leading business lobby group. 

Key points:

  • Australian Industry Group says there will be opportunities and risks from an EU carbon border tax 
  • EU carbon border tax will be the first domino to fall
  • Analysts say polluters will pay elsewhere, while Australia misses out on the revenue  

New analysis of the European Union’s Carbon Border Adjustment Mechanism (CBAM) from the Australian Industry Group found Australian exporters would pay the price of carbon-intensive production. 

Australia’s biggest energy consumer, Tomago aluminium smelter, has seen the writing on wall and announced plans to switch from coal and gas to renewables by 2029.

The EU’s CBAM is expected to start in 2026 and cover aluminium, cement, electricity, fertiliser and iron and steel. It would initially only focus on the direct emissions of companies.

Countries with an emissions trading scheme (ETS) linked to the European ETS will be exempt from the tariff, or face reduced liabilities if they have an un-linked carbon tax or ETS.

While only 0.25 per cent of Australia’s trade with Europe will be affected (and a fraction of our total exports for aluminium, steel and fertiliser), Ai Group’s report demonstrates how the profitability of exporters could be affected by the introduction of carbon border tariffs in other countries.

Tennant Reed’s report Swings and Roundabouts: The Unexpected Effects of Carbon Border Adjustments on Australia, looks at the risks and opportunities for Australian exporters. (

Sean Warran, ABC News. 

)

The report shows how the tax paid by exporters could be reduced if the federal government convinced the EU to accept existing Australian emissions data as valid.

Ai Group climate and energy analyst and report author Tennant Reed says that’s because Australian emissions data for aluminium and steel producers is comparable with European producers.

“As a result, our research finds that if anything, Australian producers may become slightly more competitive in Europe in the early phases of CBAM – if they are able to get their own emissions data accepted as valid by EU authorities.”

Under this scenario, the profitability of an Australian steelmaker would actually go up 4.2 per cent and aluminium by 1.7 per cent. 

But if the EU refused to accept Australian data, it would assume imports are as emissions-intensive as the worst emitters in Europe and tax them accordingly. Even so, the initial hit to profits would also be low (-0.4 per cent for aluminium and -2.9 per cent for steel)

That’s because increased prices paid by consumers would offset the cost of getting product into that market, Mr Reed says.

“Basically, the imposition of a carbon border adjustment in Europe is going to increase the selling prices for covered products to consumers in Europe.”

A factory with a pond and green grass in the foreground.
Coal-fired electricity-reliant aluminium smelters like Alcoa in Portland could pay the price if overseas markets introduce carbon border taxes. (

Supplied: Alcoa

)

Coal-reliant exporters to be hit

However, as the CBAM expands, including to also consider the electricity emissions of a company (which is likely), the profitability of Australia’s coal-reliant aluminium and steel producers would be hit even harder, especially if they are judged by those default values (-9.1 per cent for aluminium and -5.8 per cent for steel).

If the European carbon price were at the recent average of 50 euros per tonne of carbon, the resulting cost paid by a steelmaker facing default values would start at 62 euros per tonne of steel and more than double to 145 euros a tonne if CBAM expands. But getting their own data accepted would slash the bill to 22–112 euros per tonne under the same scenarios.

For an aluminium maker, under the same assumptions the tariff would start at 60 euros a tonne of aluminium. If CBAM expands, it would soar to 700 euros a tonne for coal-intensive smelters, but much less for renewables-powered producers. The latter could become substantially more profitable.

Opportunities for companies that go green

The Tomago aluminium plant near Newcastle.
The Tomago aluminium plant near Newcastle has announced plans to switch to renewables by 2029.(

Tomago Aluminium

)

Energy-intensive commodities like coking coal and zinc are likely to be next in line to be hit with a tax when EU’s CBAM expands.

Sun Metals’s zinc refinery in Townsville is the largest producer in the world and mainly exports to Asia but has an eye to other markets.

“Our ambitions to be first in the world to produce green zinc, we believe, actually will ensure that we remain globally competitive irrespective of any changes in the regulatory landscape,” says Daniel Kim, the CEO of Sun Metals’ sister company Ark Energy.

Sun Metals was the first major refinery globally to join the RE100 initiative and committed to be 85 per cent powered by renewables by 2030 and 100 per cent by 2040.

Daniel Kim is the CEO of Ark Energy, the sister company to Sun Metals.(

Supplied 

)

“With our existing portfolio of 124MW of solar and 30 per cent interest in the 924MW MacIntryre wind farm, which is targeting full commercial operations by November 2024, we could potentially be producing green zinc as early as 2025,” he says.

“We feel a responsibility to demonstrate corporate leadership in tackling global warming, so it’s the right thing to do. But it’s also the smart thing to do,” he says.

In Tasmania, Bell Bay aluminium smelter and Hobart’s Nyrstar zinc works have the advantage of being connected to the state’s hydroelectricity network.

“For the last few years, Tasmania has been a net exporter of renewable energy to the mainland. So that makes us able to produce some of the greenest zinc in the world,” says Todd Milne, global head of environment for Nyrstar.

Mr Reed says opportunity awaits for exporters that transition to renewables.

“If they’re able to achieve that, Europe would be a much more attractive destination for their output than it is today.”

Aerial view of Nyrstar zinc works on the River Derwent, Hobart.
Nyrstar zinc works in Hobart runs off hydroelectricity.(

ABC News: Tony King

)

Bigger threats loom

Climate and Energy Director at the Australia Institute, Richie Merzian, says the EU is the first domino to fall.

“If the Australian government complains about protectionism, the whole time, in a sense, is dealing itself out of this conversation.”

Japan and Canada are working on similar schemes to the EU, and the US is also proposing to tax imports from nations that lack aggressive climate change policies. 

The US’s Polluter Import Fee is yet to be fleshed out but would put a tariff on imports of fuels like coal, gas petroleum and products like cement, iron, and steel.

About 10 per cent of Australia’s aluminium and 15 per cent of iron and steel is exported to the US.

Mr Reed says there is a much larger risk to demand for Australian exports than the impact of carbon border adjustments.

“That is the effect of emissions commitments, climate policies and energy transition in Australia’s major trade partners on their demand for coal, gas and oil over coming years.”

“Most of Australia’s fossil exports go to economies which have now committed to net zero emissions by 2050 or 2060.”

“90 per cent of our LNG [liquified natural gas] exports go to countries with net zero by 2050 or 2060 commitments, so it is a significant issue,” Mr Reed says

An overhead view of an LNG tanker off the WA coast with a helicopter hovering above its helipad.
More than 90 per cent of Australia’s LNG goes to Japan, China and Korea.(

Supplied: Woodside Energy

)

Australia’s biggest export countries for LNG are China (39 per cent), Japan (37 per cent) and Korea, who are all making moves to decarbonise. 

Non-fossil fuel power supply sources are officially planned to account for around 60 per cent of Japan’s energy mix by 2030, while coal will fall 40 per cent and liquefied natural gas (LNG) will almost halve.

“Now, whether they will succeed in meeting that timeline, we’ll have to see. But if they did, it would certainly have substantial implications for Australia’s current export mix.”

“And it would be timely for us to diversify our exports to seek more irons in the fire and clean energy-intensive exports are one promising opportunity for that.”

As well as encouraging the federal government to fight for fair treatment of Australian exporters, the report also highlights the need for net zero emissions by 2050 for local industries to remain competitive. 

European Union flag against a cloudy blue sky.
If Australia does not tax carbon emissions, Europe could profit at our expense.(

Flickr

)

Mr Merzian says the relatively low and slow cost to Australian exporters also was not an excuse for the federal government not to introduce an ETS policy of its own.

“It’s like the worst-designed Australian carbon border tax because the revenue goes elsewhere. The shape of the tax goes elsewhere.

“And ultimately, we’re left paying without any of the real reinvestment integrating up our economy. So our competitors will only become more competitive,” he says.



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