Public consultation on the proposed approach to assess and address carbon leakage risk, as part of the Carbon Leakage Review.

Yes, we concur that the definition of carbon leakage provided in the consultation paper is appropriate. We however would like to emphasise that for the purpose of this review and evaluating the importance of preventive/corrective measures, it is crucial that the significant risk of investment leakage associated with uneven international climate policies is considered alongside the direct carbon leakage risks.

The risk of investment leakage is particularly significant for the cement and lime sector where local clinker and cement production capability and local jobs have been already impacted significantly by the increasing costs of production.

Over time, the number of cement kilns operating in Australia has declined as the economics of local production has become less competitive compared to overseas imports. For example, in 2005 Boral operated three Cement kilns in Australia with limited imports of clinker. In 2013 Boral ceased the production of clinker at its Waurn Ponds facility and moved to importing clinker due to higher energy and manufacturing costs of domestic clinker production relative to imported clinker and cement. The change at the time resulted in 25-30 per cent of our total national clinker requirement being imported. The Maldon kiln ceased production of ‘off-white’ clinker in December 2014 due to production costs, with the site now reliant on clinker sourced from our nearby Berrima operations, supplemented by imported clinker. These closures resulted in the loss of over a 100 direct jobs.

Based on Cement Industry Federation data, currently around 40 per cent of clinker use and around 6-10 per cent of cement use is currently from imports. Most imports are clinker and come from Japan, Thailand, Indonesia, and Malaysia. Considering the emissions associated with the shipping, the emissions intensity of clinker imports is higher than the domestic emissions intensity, when considered on a delivered basis. The same applies for direct cement imports to Australia (which have increased considerably in recent years). Comparing Australian net zero pathways to those of some key import sources provides some indication that these differences in emissions intensity are unlikely to decline over time but may increase.

In the absence of an effective mechanism to ensure a level playing field for local and imported products, we anticipate that Safeguard Mechanism reforms will lead to significant investment leakage from domestic manufacturing to imports or manufacturing in countries with less stringent climate regulations. The resulting reduction in Australian cement production, not only will lead to loss of sovereign capability in a strategically important sector but also will see a likely increase in the overall global emissions for the cement sector.

Once the cost of meeting the Safeguard Mechanism commitments exceeds Import Parity Pricing (IPP), there is significant risk of domestic clinker manufacturing being offshored. The loss of domestic capacity will likely result in loss of significant leverage in ensuring competitive pricing for imported clinker/cement. This has the potential to impact construction costs.

The above risk is significant especially due to the significant costs of decarbonisation for the cement industry. The latter is due to hard to abate nature of process emissions which account for approximately 65% of Scope 1 emissions from cement manufacturing.

The complexity and significant cost of decarbonising cement industry, due to a lack of viable technologies as highlighted previously, has been widely acknowledged globally. For example, Science Based Targets initiatives (SBTi) recognises that “due to its process (geogenic) emissions from limestone calcination in clinker production, the rate at which the sector can decarbonise may differ from the overall rate of decarbonisation possible by society as a whole”. In recognition of this, SBTi has developed a unique Sectoral Target Setting approach, aligned with 1.5 ℃ ambition, for the cement industry which allows a significantly lower short term decarbonisation target for the cement industry than its generic, absolute contraction, approach. The short-term baseline reduction required under SBTi sectoral approach, under its highest ambitions level, for the cement industry is approximately 25% over a usually 9–11-year period leading to FY2030. This leads to a significantly lower annual reduction requirement as compared to 4.9% per year baseline decline requirement under safeguard mechanism reforms. Therefore, even when compared to the best in class globally, the decarbonisation requirements for the cement sector under Safeguard mechanism are not reasonable.

This significant differences between requirements in Australia and leading global standards for the cement industry, poses a significant risk to cement manufacturing in Australia. Such stringent requirements will inevitably lead to an increase in the cost of the domestic cement manufacturing as compared to the cost of imports in the long term, which in the absence of CBAM will significantly impact the viability of the local cement manufacturing.

For example, in the absence of CBAM, Boral will face an immediate strategic dilemma. Specifically, to continue to invest in decarbonisation initiatives across its operations, with a focus on its Berrima Cement kiln facility OR invest in import facilities, similar to its recent expansion of import capability at Geelong, Victoria. Opting for the second option, in the absence of CBAM, could lead to a significant potential of carbon leakage. Recognising the above complexities, it is also critical that implementation of a carbon leakage risk mitigation measure is accompanied with an effective measure to control the potentially high financial impact on local cement manufacturing.

We emphasise the importance of prioritising cement and steel as key manufacturing sectors. Cement and steel sectors are strategically important to Australia’s sovereign infrastructure and construction capability. Further, both sectors are exposed to a high carbon leakage risk due to their high carbon intensity, as well as their trade exposed and hard to abate nature. We further support the early implementation of CBAM in the cement sector.

There is significant risk in assessing the impacts of carbon leakage based on national average data for the country of import. National averages may not accurately reflect the carbon intensity at the facility level. For instance, we note that the national average figures for Indonesia are notably lower than the estimates obtained by Boral for specific facilities. In the absence of a robust carbon leakage policy, it is more suitable to base assessments on the maximum emission intensity at the facility level.

Considering that most cement manufacturing facilities in Australia are in regional areas, it is imperative to carefully assess the regional economic impact repercussions, including the impact on both direct and indirect employment.
We also emphasise that the analytical modelling approaches are highly sensitive to quality of input data and caution should be exercised in validating the input assumptions through engagement with local manufacturing stakeholders, including relevant industry associations.

The paper effectively explores the policy options. However, we would like to emphasise that carbon border adjustment mechanism is the preferred policy for the cement sector. This is driven by the sector’s significant vulnerability to the increasing importation of carbon intensive alternatives through well-established import supply chains.

It is also critical that any policy aimed at mitigating carbon leakage risk continues to be reinforced by the existing risk management measures embedded in the Safeguard Mechanism Reforms after extensive consultation. Notably, we believe that TEBA and a potential CBAM should be considered as complementary measures rather than as an either-or scenario. While CBAM is necessary to address the risk of carbon leakage, TEBA serves as a safety net to mitigate the potential financial impacts of the safeguard mechanism reform, irrespective of the carbon leakage concerns.

Furthermore, we stress the significance of ongoing financial support and co-funding of decarbonisation innovation and implementation projects in the cement industry. The latter is particularly important due to lack of mature and commercially available technologies to address process emissions in the cement manufacturing.

The existing measures under the safeguard mechanism are helpful in supporting the decarbonisation of the manufacturing sector and reducing the financial impact of meeting the safeguard mechanism requirements. However, they fail to effectively mitigate the risk of carbon leakage in the cement sector.

For example, we believe that the Trade Exposed Baseline Adjusted (TEBA) system and funding committed to exposed facilities provide value support in industry's transition to net zero and should form part of any future solutions. However, these measures alone are unable to establish a fair competitive landscape for local manufacturing compared to imports. This imbalance is notably concerning in the cement sector which has seen significant growth in importation and an increasing loss of manufacturing capability in the last two decades.

CBAM is desirable as a mechanism to reduce leakage while also providing a level playing field for local production against imports. The European experience in selecting CBAM among various policy options, and its implementation can be leveraged to optimise the CBAM policy for Australia.

In addition to reducing carbon leakage, the CBAM will also enforce Australia’s climate leadership alongside European Union. As opposed to cost reduction policies which could only reduce the financial impact on the Australian businesses, CBAM will also incentivise the decarbonisation of overseas manufacturing and encourage their respective governments to establish carbon policies of their own to support exports.

We would also like to emphasise that early signalling of potential implementation of CBAM is critical to unlocking investment, especially given the long-lead nature of capital investments in the cement manufacturing industry.

There are numerous important design features to be considered and we believe that extensive consultation would be required to optimise CBAM’s design and rollout process. A few key features to be considered include:

• Prioritising the most affected industries in the potential phased rollout planning: We support early implementation of CBAM in the cement sector given sector’s exposure to a significant risk of carbon and investment leakage. This will be facilitated by the existing sector wide support for implementation of CBAM in the cement industry as advocated broadly by Cement Industry Federation.

• The relationship between CBAM and TEBA should be clarified. As we pointed out earlier, we believe that prior to a comprehensive review of effectiveness of Australian CBAM in minimising the negative financial impact on Australian trade exposed sector, it is critical that TEBA, or a similar financial impact control measure, will continue to exist as a risk management mechanism.

• The urgency of CBAM should be considered and learning from European CBAM should be adopted to expedite the implementation process.

• The data declaration and assurance approach for imported materials should be carefully designed. For example, it is important to clarify the default emission values to be used if data is not declared. Given the significantly better average performance of Australian cement compared to the worst cases from import countries, the current methodology adopted by European countries would not be applicable to Australia.

• Treatment of overseas carbon costs and carbon offsets is important. For example, any direct or indirect rebate of carbon costs available to overseas suppliers needs to be considered.

While product standards can support Australia’s transition to net zero, they are highly unlikely to be effective in addressing the risk of leakage in the short term. Further, implementing emissions product standards would be a more rigid approach than CBAM. This is particularly because, to be WTO compatible, the same standards will need to apply to domestic production. The impact of banning domestic production above a certain emission intensity could have significant economic implications which need to be extensively studied.

Targeted public investment is crucial to support short-term and long-term decarbonisation of the cement and other hard to abate sectors. Therefore, targeted public funding should be considered as a critical component of Australia’s decarbonisation policy alongside CBAM.

This is particularly important for the cement sector where there is currently a lack of effective and financially viable technologies to reduce or capture and utilise its hard to abate process emissions.

The need for targeted public investments for decarbonisation is well recognised globally and have been considered in major policies including EU Green Deal, and US Inflation Act to name a few.

Apart from public funding to support individual manufacturers in adopting new technologies, it is also important that a national investment approach is taken to support formation of consortiums within hard to abate sectors including the cement sector.

Multilateral and plurilateral initiatives may contribute to leakage prevention and should be pursued as a potential pathway to reduce the risk of carbon leakage in the long term. However, given the uncertainties in reaching effective agreement and the long lead time of related negotiations, they will not be an effective short-term approach to addressing the imminent risk of carbon leakage associated with implementation of Safeguard Mechanism Reforms.

To the best of our knowledge, there are currently no global agreements/initiatives focusing on addressing carbon leakage within the global cement sector. The global agreement currently being negotiated for Sustainable steel and Aluminium will provide valuable insight for any potential long-term solutions which may include cement and other impacted sectors; and therefore, should be monitored closely.

There is a great an opportunity to pursue initiatives that facilitate discussions and coordination between countries currently implementing carbon leakage measures. For example, Australia can significantly benefit from an agreement with EU involving exchange of information and best practices on CBAM.

The key principles to consider include:

• Clarity of aim and scope: it is critical that the focus on addressing the impact of carbon leakage is considered alongside the corresponding risks of investment leakage.

• Effectiveness in establishing a level playing field for local manufacturing compared to imports.
• Economic impact including the impact on regional economies and jobs

• Level of certainty in achieving the expected outcomes and effectiveness of supplementary mechanisms such as TEBA to mitigate the impact of uncertainties.

• The lead time to achieve desired outcomes given the urgency

• Sustainability of the measure in terms of its ability to support the long-term transition to net zero and clarity on the significant events that warrant a comprehensive review of the policy.

• Compatibility with other relevant regulations, bilateral trade agreements and international trade deals including WTO trade agreements.

• Complexity and administrative requirements: the increase in the administrative burden and reporting requirements should be considered.