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"Green tariff" proposed by Bowen to protect Australian steel and cement industry from carbon leakage

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2023-08-15

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Australia is considering the introduction of a "green tariff" targeting imports of steel and cement from nations such as China, India, and Vietnam. The aim is to level the playing field for Australian producers who are grappling with stringent carbon emission reduction regulations introduced last month.

In an announcement scheduled for Tuesday, Climate Change Minister Chris Bowen is expected to reveal Australia's potential adoption of a carbon border adjustment mechanism. This mechanism intends to shield domestic manufacturers, subjected to the new safeguard mechanism, from offshore competitors operating in countries with weaker or non-existent decarbonisation policies.

According to Bowen, "Carbon leakage undermines national and international climate action and has long been a key consideration in the development of climate policy across the world."

The proposed border adjustment mechanism has garnered significant support from manufacturers in "hard-to-abate" sectors, including prominent names like Boral, BlueScope, Adbri, and Sanjeev Gupta's Whyalla steelworks. These sectors are faced with challenging decarbonisation targets that are not easily achievable without substantial technological innovations or costly carbon offset purchases.

Bowen's announcement comes in the wake of a notable shift in global green industry policies, with US President Joe Biden leading the way in introducing substantial subsidies. Additionally, Australia aims to safeguard its "sovereign capacity" and avoid potential disruptions in global supply chains.

The potential border tax plan has drawn inspiration from the European Union's efforts to implement a similar scheme by 2026. This concept has gained backing from influential industry groups such as the Australian Industry Group and the Minerals Council of Australia. However, the intricate details of implementing such a mechanism will require careful consideration to ensure compatibility with World Trade Organization regulations and to avoid exacerbating imported inflationary pressures.

Australia's response is motivated by the belief that initiatives like the US Inflation Reduction Act, along with other industry policies in major trading economies, necessitate proactive measures to remain competitive. Bowen underscores the importance of creating fair policy frameworks that support companies committed to decarbonisation.

The cornerstone of the Labor Party's heavy industrial decarbonisation policy, known as the safeguard mechanism reform, came into effect on July 1. The policy mandates substantial carbon emission reductions, almost 5% annually until 2030, for industrial, manufacturing, and resource firms. This comprehensive approach aims to reduce national carbon emissions by over 200 million tonnes during the decade.

Bowen emphasises that the challenge of decarbonisation is most pronounced among large industrial facilities in "hard-to-abate" sectors that face global competition. The policy changes reflect the principle that significant carbon emitters must play their part in achieving emissions reduction targets.

As Europe prepares to implement its own border tax, Bowen notes that the upcoming tariff will apply to sectors vulnerable to carbon leakage, including cement, iron and steel, aluminum, fertilisers, and electricity. He underscores the interconnectedness of the proposed Australian border adjustment mechanism with broader industry policy ambitions, such as the National Reconstruction Fund and strategies related to critical minerals used in battery production.

Bowen's department is conducting a comprehensive review to assess the suitability of a Carbon Border Adjustment Mechanism (CBAM) or alternative carbon leakage policy options for Australia. The review includes evaluating carbon leakage risks, policy alternatives, and the feasibility of an Australian CBAM.

While Bowen's announcement is applauded by domestic industries and labor unions, diplomatic and trade sensitivities must be navigated. Bowen acknowledges the need for careful consideration of trading relationships, adherence to international trade rules, and alignment with other schemes such as the EU's.

Critics of cross-border adjustment mechanisms, likening them to protectionism, raise concerns. Notably, countries like China, major exporters of steel to Australia, and Vietnam and India, key sources of cement imports, would be directly impacted by such measures.

Bowen stresses that the detailed design of any proposed policy option must be methodical, accounting for Australia's unique context. He reaffirms his commitment to develop sector-specific targets to guide Australia's journey toward achieving net-zero emissions by 2050. The initiative, announced last month, involves two rounds of public consultation, with the final review report anticipated by the third quarter of 2024. Bowen concludes by emphasising that the design of agreed-upon policy options will inform the government's broader Net Zero 2050 plan.

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