Australia is being hit by a carbon tax, whether the Prime Minister likes it or not. But the profits go abroad

Ten years ago, in the run-up to Australia’s short-term carbon price or “carbon tax” (either description is valid), the deepest fear on the part of companies was that they would lose to untaxed companies abroad.

Instead of buying Australian carbon taxed products, Australian customers and export customers would buy untaxed (possibly dirtier) products from another location.

It would give late migrants (countries that had not yet adopted a carbon tax) a “free kick” in industries from coal and steel to aluminum to liquefied natural gas to cement, to wine, to meat and dairy products, even copy paper.

That is why the Gillard government granted free permits to so-called trade-exposed industries so that they would not face unfair competition.

Like a patch, it seemed like. The companies that had the most to lose were bought out.

But that was hardly a solution. What if all countries had done that? Then, where there was a carbon tax (and wherever there was not), trade-exposed industries would be exempt. The tax would not do enough to reduce emissions.

Julia Gillard speaks at the broadcast during the introduction of carbon tax legislation
Subsequently, in 2011, Prime Minister Julia Gillard set up an independent Climate Change Authority to advise on a carbon price and emissions target.(AAP: Alan Porritt)

We are facing carbon tariffs

The European Union has become accustomed to the imperfect solutions introduced by countries such as Australia and is tackling things from the other direction.

Instead of treating foreign and local producers equally by letting them both get off the hook, it will place both on the hook.

This is by ensuring that producers in higher emission countries such as China (and Australia) cannot undercut producers who pay carbon prices.

A red and blue colored world map of explicit carbon prices

Unless foreign producers pay a CO2 price like the one in Europe, the EU will impose a CO2 price on their goods as they enter – a so-called Carbon Border Adjustment Mechanism or “carbon tariff”.

Australian Energy Minister Angus Taylor says he is “dead against” carbon tariffs, an attitude that is unlikely to weigh heavily in France or any of the other 26 EU countries.

Australia is familiar with the arguments for them

From 2026, Europe will apply the tariff to direct emissions from imported iron, steel, cement, fertilizers, aluminum and electricity, with other products (and possibly indirect emissions) added later.

That is, unless they come from a country with a carbon price.

Canada is also exploring the idea as part of “leveling the playing field”. The same is true of US President Joe Biden, who wants to stop polluting countries “undermining our workers and producers”.

Their arguments are consistent with those heard in Australia in the run-up to our carbon price: that unless there is some form of adjustment, a local carbon tax will push local employers towards “pollution paradise” where emissions are untaxed.

In practice, there is not much Australia can do to stop Europe and others from imposing carbon tariffs.

As Australia discovered when China blocked its exports of wine and barley, there is not much a free trade agreement, or even the World Trade Organization, can do. The WTO was castrated when former US President Donald Trump blocked every appointment to its appellate body, leaving it unmanned, an attitude Biden has not reversed.

Nevertheless, the EU believes that such an action would be permitted under the rules of trade, pointing to a precedent set by, among others, Australia.

Prime Minister Scott Morrison wearing a navy blue suit speaks at a news conference
Europe is planning to impose a carbon tariff, whether our politicians like it or not.(AAP: Mick Tsikay)

Legality is not the point

When Australia introduced the tax on goods and services in 2000, it passed laws allowing it to tax imports in the same way as locally produced products, a move which it has recently extended to include small packages and services purchased online.

Trade expert and Nobel Prize-winning economist Paul Krugman says he is prepared to argue with politicians like Australia’s trade minister about what is legal and whether carbon tariffs would be “protectionist”.

But he says it’s next to:

Yes, protectionism has costs, but these costs are often exaggerated and they are trivial compared to the risk of runaway climate change. I mean, Pacific Northwest – Pacific Northwest! – has baked under triple-digit temperatures and we are going to worry about the interpretation of Article III of the General Agreement on Tariffs and Trade?

And a form of international sanctions against countries that do not take steps to limit emissions is crucial if we are to do anything about an existential environmental threat.

Victoria University’s calculations suggest that Europe’s carbon tariffs will push up the price of imported Australian iron, steel and grain by around 9 per cent and drive up the price of every other Australian import by less, except coal, whose import price would rise by 53 per cent. cent.

The tariffs would be charged by Europe instead of Australia. They could escape if Australian producers of iron, steel and other products could find ways to reduce emissions.

A chart showing the EU's share of total exports
Assumes an EU carbon price of 60 euros per. ton, which is roughly the price of the day; assumes that CBAM covers CO2 emissions, including volatile emissions involved in production, with the exception of direct combustion emissions, which are already priced by the EU Emissions Trading Scheme.(The conversation)

Tariffs could also be avoided if Australia were to impose a carbon price or something similar and collect the money itself.

This provides a compelling argument for yet another look at an Australian carbon price. If the Australian emissions are going down anyway, as Prime Minister Scott Morrison claims, it does not have to be set very high. If he makes a mistake, it should be set higher.

One thing that the sad story of Australia’s history of carbon prices has shown is that politicians are not the best at setting rates.

In 2011, Prime Minister Julia Gillard set up an independent, Reserve Bank-like Climate Change Authority to advise on carbon prices and emissions targets, originally headed by a former Reserve Bank governor.

Amazingly, it still exists despite attempts to abolish it. It may still have work to do.

Peter Martin is a visiting fellow at Crawford School of Public Policy, Australian National University. This article originally appeared on The Conversation.


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