The European Carbon Border Adjustment Mechanism and Australian exporters: How European ESG changes may affect market access
The world is changing, and so are the rules of international trade. The EU has introduced a new policy called the Carbon Border Adjustment Mechanism (CBAM), set to take effect in 2026. This policy will require EU importers to pay a carbon tax on certain products based on the carbon emissions generated during their production. The underlying rationale for this new regulation is to address the risk of carbon leakage, whereby companies will relocate their production of goods to countries with less stringent emission policies to reduce carbon pricing costs.
This comes after the EU's decision in January of 2023 to establish the Corporate Sustainability Reporting Directive (CSRD), which demands disclosure of environmental and social risks from large and listed companies in Europe. The CBAM and CSRD are part of the EU's broader sustainability agenda, which aims to create a greener, more resilient economy and drive the transition to a low-carbon future. Companies that do not adapt to these new policies may face a range of risks, including reputational damage, loss of competitiveness, and financial challenges. Conversely, companies that embrace sustainability and actively work towards reducing their carbon footprint may discover new opportunities for growth and innovation.
On 10 May 2023, CBAM was officially signed with the transitional phase starting on 1 October 2023. The timeline can be exemplified as follows:
- 2023 to 2025: transitional period
- No carbon tax to be imposed during this period.
- EU importers of the following goods (cement, iron & steel, aluminium, fertiliser, hydrogen and electricity) from non-EU countries will have to “report greenhouse gas emissions (GHG) embedded in their imports (direct and indirect emissions), without making any financial payments or adjustments”. [1]
- From 2026
- EU importers of goods from non-EU countries will purchase CBAM certificates. The price of those certificates will vary “depending on the weekly average auction price of EU Emission Trading System (ETS) allowances expressed in € / tonne of CO2 emitted.”
- Annually, EU importers will report on the total emissions that are embedded in the goods they imported during the year. CBAM certificates will be surrendered accordingly.
In its current form, from 2026, “the CBAM will apply to direct emissions of greenhouse gases emitted during the production process of the products covered”[2], with only cement, iron & steel, aluminium, fertilizer, hydrogen and electricity being within the scope. However, other industries are not off the hook. At the end of the transitional phase, the EU will consider whether to extend the CBAM scope to other industries and include indirect emissions.
How will the CBAM work?
For instance, let's say that a steel manufacturer based in Australia produces steel using coal-fired power plants, which emit a significant amount of greenhouse gases (GHG). The steel is then exported to the EU, where it is sold to customers. Under the CBAM policy, the EU would impose a carbon tax on the imported steel based on the amount of GHG emitted during its production.
To calculate the carbon tax, the EU would require the Australian steel manufacturer to provide information on the carbon intensity of its production process, such as the amount of coal used, the carbon content of the coal, and the emissions intensity of the power plants. The EU would then use this data to determine the carbon footprint of the imported steel and apply a corresponding carbon tax. If the Australian steel manufacturer fails to provide the required data, the EU may apply a default carbon intensity factor based on the average GHG emissions of the steel industry in the exporting country.
By imposing a carbon tax on imported goods, the CBAM aims to create a level playing field for EU companies that are already obligated to comply with the EU's emissions trading system and other environmental regulations. It also provides an incentive for companies to reduce their carbon footprint and invest in cleaner production technologies, both in the EU and in exporting countries to the EU.
What this means for Australian exporters
The aim of the CBAM policy is to reduce the carbon footprint of imported goods and level the playing field for European producers who face strict emission reduction targets. This could potentially have far-reaching implications for Australian exporters, as they may need to ensure that their products meet the EU's emissions standards or face the risk of higher costs, which could impact their competitiveness in the European market. Initially, the policy will apply to a limited number of sectors, comprising suppliers of cement, iron & steel, aluminium, fertiliser, hydrogen and electricity. However, given the framework’s progressive nature, there is a high possibility that it could expand to cover other goods such as beef, wool, cotton and other Australian exports.
The proposed changes could potentially impact Australian exporters in various ways. Exporters of goods covered by the CBAM may need to ensure their products meet the EU's emissions standards, requiring investment in new technology or processes, ultimately increasing business costs and their competitiveness in the European market. On the contrary, Australian exporters with strong green credentials may benefit from the new policy, as Companies that have already implemented measures to reduce their carbon footprint may demonstrate their sustainability credentials to European buyers, giving them a competitive edge over other exporters. This, in turn, may drive innovation in eco-friendly technologies, such as renewable energy sources like wind and solar power, which could boost the development of green industries in Australia.
Australia’s plan going forward
While Australia may not have as strict ESG requirements as the EU, it is essential for Australian companies to align with European rules to access the market tariff-free and remain competitive. In an effort to prepare for these upcoming market changes, Australian exporters are emphasising the need to boost their green credentials and cut GHG emissions to gain early access to Europe’s $72 billion agricultural export market. Albeit the nation is still in the process of determining specific initiatives to respond to the policy, Australia’s Agriculture Minister Murray Watt, believes that the sector can start by “meeting the climate target of 43% less emissions than 2005 levels by 2030 and net zero emissions by 2050”.
In Queensland the State Government has launched the Low Emissions roadmap for Queensland Agriculture with focus on five pathways including:
- Livestock emissions
- Cropping and horticultural emissions
- On-farm energy opportunities
- Carbon farming and landscape management
- Regions and supply chains.
QLD Minister for Agriculture Industry Development and Fisheries and Minister for Rural Communities Mark Furner was quoted in March earlier this year saying that the low emissions roadmap for QLD Ag “Will help Queensland agribusinesses thrive while they reduce greenhouse gas emissions” and “Those who implement plans to lower greenhouse gas emissions now will have fewer transition costs and disruption to their business than those who delay and find themselves urgently responding to market force.”
Despite this response, there has also been some debate and disagreement among Australian politicians and industry groups about how to respond to the CBAM policy. Some argue that Australia should implement its own carbon pricing mechanism and carbon consumption tax to level the playing field, while others believe that this will only add additional costs to Australian businesses and hinder their competitiveness. There are also concerns about the potential impact on trade relations between Australia and the EU, with some worried that the policy may lead to trade disputes and retaliation measures. As such, it remains to be seen how Australia will navigate this new policy and its implications for its exporters.
How we can help
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Author: Isaac Abraham
Published: 03/07/2023
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References:
[1] Carbon Border Adjustment Mechanism (europa.eu)