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

Executive Summary

BlueScope welcomes the opportunity to make a submission in response to the Federal
Government’s Carbon Leakage Review Consultation Paper (the ’Consultation Paper’) released on 13th November 2023.

The policy framework should not undermine BlueScope’s investment of $1.15 billion to reline its blast furnace, which was committed on the basis of recently implemented government policy.

Australia has made commitments, which BlueScope supports, to reduce its emissions by 43 per cent against a 2005 baseline by 2030 and to reduce net emissions to zero by 2050. 1
BlueScope has already improved the efficiency and reduced the capacity of its Port Kembla
Steelworks so that its absolute scope 1 emissions fell by 40% from 2005 to 2023.

Given current technology, infrastructure enablers, and existing policy frameworks, further step change emissions reductions in primary iron and steelmaking are not commercially viable in
Australia in the near term. Consequently, BlueScope has recently committed to investing
$1.15 billion2 to reline its blast furnace at Port Kembla to provide a critical bridge to future adoption of low emissions iron and steelmaking technology. BlueScope’s investment was made in light of the government’s Safeguard Mechanism (SGM) commitments including the
Trade Exposed Baseline Adjusted (TEBA) baseline decline rates and funding availability under the PRF CICEI Primary Steel fund.

The blast furnace reline preserves Australia’s sovereign iron and steelmaking capability and provides the critical time necessary for the development of enablers required to support lower emissions iron and steelmaking in Australia

Over the medium term, as relevant technologies and enablers develop, Australia is well positioned to establish internationally competitive low emissions iron and steelmaking capacity. Australia has a world-leading share of iron ore production, with substantial natural gas reserves and abundant latent solar resources for low-emissions iron making in the long- term, and a well-developed and efficient domestic iron and steel-making sector and skilled workforce. The development of appropriate policy settings will be necessary for success.

The policy framework needs to enable decarbonisation whilst simultaneously maintaining a vibrant competitive steel industry.

While Australia is committed to contributing to global decarbonisation, if critical domestic industries such as iron and steelmaking are unnecessarily lost in the process, they are unlikely to re-emerge. Once lost, it is highly unlikely that an economy as small as Australia would be able to re-assemble the infrastructure and eco-systems on which Australia’s sovereign primary iron and steelmaking capability depend.

1 Climate Change Bill 2022
2 BlueScope Investor Day presentation, September 2023
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Government policy, including the SGM, a potential Carbon Border Adjustment Mechanism
(CBAM), and funding support, must be designed both to deliver Australia’s decarbonisation commitments, and to support Australian manufacturing to transition.

The Carbon Leakage Review will therefore be most helpful to Australian policy makers if it assesses how a CBAM can serve both of these aims. The Review also needs to consider how a CBAM would serve these objectives in conjunction with other policy instruments, including the SGM and industry support. If the Review only focuses on how a CBAM will affect carbon leakage, then it will inevitably overlook how a CBAM and other measures can best be designed to contribute to a vibrant internationally competitive Australian manufacturing sector.

The policy framework needs to recognise steel as an essential material and critical to enabling the energy transition

Domestic iron and steelmaking is core to a vibrant Australian manufacturing sector. Steel is a key input to the construction, engineering, mining and manufacturing sectors. Sovereign iron and steelmaking capacity also supports Australia’s strategic interests including infrastructure and defence and should play a critical role in building out renewable energy systems including wind towers, solar farms and transmission infrastructure. Over the long term, domestic iron and steelmaking will only survive if it decarbonises.

Maintaining Australia’s sovereign iron and steelmaking through the decarbonisation transition is also important to achieving what should be a national goal of developing a global scale low emissions Hot Briquetted Iron3 (HBI) export industry in Australia.

The policy framework should incentivise a transition that leverages Australia’s natural advantages and recognise the high cost and complexity of steel industry transition

Direct Reduced Iron (DRI) technology is a potentially attractive option to transition Australian iron and steel making to low emissions. In the DRI process, natural gas (and ultimately green hydrogen) replaces coal in the steelmaking process. Natural gas based DRI (NG-DRI) could reduce emissions in iron and steelmaking by around 60 per cent. Green hydrogen based DRI
(H2-DRI) could reduce emissions by approximately 85 per cent.

NG-DRI based on magnetite iron ore is a proven technology, but it is currently economically uncompetitive in Australia because of the high cost of domestic natural gas and direct reduction grade magnetite ores. Magnetite ores are typically higher cost than widely used haematite ores and only comprise around 5 per cent of global iron ore seaborne trade. Both these cost drivers may change over time and are being actively explored by BlueScope.

The magnetite based DRI option will not favour Australia’s existing global leadership in haematite iron ore production. It will also not favour the development in Australia of a global- scale low emissions HBI industry, whose competitive advantage is likely to include co-location with iron ore inputs. Australia would be better positioned if DRI process technology is further developed to use the lower grade and more abundant blast furnace grade iron ores
(haematite) that currently dominate Australia’s iron ore exports.

3
Hot Briquetted Iron is a compacted form of Direct Reduced Iron designed for shipping

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BlueScope believes this variant of the DRI process technology will most likely require the use of an Electric Smelting Furnace (ESF) to refine the higher impurity haematite ores. BlueScope is well placed to develop this alternative DRI process technology given the unique smelting technology that has been deployed at its New Zealand operations since the 1980’s, using the
New Zealand iron sand containing titanomagnetite. However, the development and adaptation of this ESF technology into a DRI process using haematite ores will take significant time and investment to pilot and ultimately commercialise. BlueScope has technical work already underway with major international partners including Rio Tinto, POSCO, ThyssenKrupp and
Tata Steel Europe.

The iron and steelmaking transition will inevitably involve large periodic capital investments in production infrastructure that unlock the potentially large step changes in emissions intensity, particularly the initial shift from Blast Furnace production to NG-DRI, and then the shift from
NG-DRI to H2-DRI.

Developing low emissions iron making technology using haematite ore is a large prize for the
Australian economy but will require substantial investment, time and resources to successfully develop and implement at full commercial scale. If this technology option can be successfully developed, Australia has the opportunity to underpin the longer term competitiveness of its iron ore exports and primary iron and steel production. Success depends on funding very large capital investments, and overcoming externalities that can only be solved through partnership between steelmakers and governments.

The policy framework needs to recognise Australian iron and steelmaking is highly vulnerable to carbon leakage

Australian iron and steelmaking operate in an intensely competitive price sensitive environment, usually competing against imports from the broader Asian region that have negligible or no carbon prices. In this environment, any higher domestic costs from climate transition and carbon pricing, including upfront capital and ongoing operating costs generally cannot be recovered through higher sale prices.

If the decarbonisation transition is not well-managed, it is likely that Australia will lose iron and steelmaking capacity permanently. Without an existing base of manufacturing infrastructure and capabilities, it is unlikely that new entrants will establish new steelmaking operations in
Australia when low emissions technologies become commercially available.

To ensure Australia has a long-term lower emissions iron and steel industry, governments need to finalise and maintain TEBA baseline decline rates, cautiously implement a well-designed CBAM, and increase support for the industry transition.

To reduce overall emissions, and support a vibrant, competitive iron and steel industry that transitions to lower emissions, three key policy levers need to be in place.

First, the design of the SGM should be appropriately finalised, including the production variable review for steelmaking and the EBIT guidelines calculating qualification for the TEBA baseline decline rate. This legislative framework must be maintained for a reasonable period.
This requirement was explicit in BlueScope’s recent $1.15 billion commitment to Australian iron and steelmaking in Port Kembla.

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Announced TEBA baseline decline rates are needed to maintain the viability of this investment and the domestic iron and steel industry until the requisite enablers are sufficiently developed for a step-change reduction in Australian iron and steelmaking emissions to be commercially viable.

Maintaining these recent arrangements is also important to promoting confidence in the durability and stability of future carbon policy, avoiding the perception of sovereign risk for future long-term investments.

Second, a CBAM for steel needs to be carefully designed and introduced cautiously.
Any CBAM involves many complex and untested design choices. The choices for steel are particularly complex because steelmaking uses a large variety of processes that create a wide range of products. The risk of doing irreversible damage is very high – a poorly designed
CBAM would make iron and steelmaking in Australia unviable. Australia has the opportunity to learn from the experience of the implementation of a CBAM in the EU which has been many years in design and will only have financial consequences from the beginning of 2026. With the government already committed to a sectoral approach for a CBAM, it would be prudent to first implement a CBAM for industries with less varied production and product mixes than steel so that insights can be applied to the more complex steel industry.

A cautious approach will also require a better consultation process than the Carbon Leakage
Review has provided to date This Review took around 4 months to produce a Consultation
Paper, but then asked industry participants to produce their responses in 4 weeks. Such rushed consultation on an area that is inherently complex is unlikely to lead to a well-designed
CBAM.

To be well-designed, and to ensure that it does not create an unequal playing field between domestic and foreign producers that could threaten the viability of domestic manufacture, a
CBAM must have appropriate coverage, calculation of importer baselines and actual emissions, export rebates, mechanisms and administration, as detailed further in this submission.

Third, the Australian government needs to support the iron and steel industry transition.

Overseas jurisdictions, including the EU and Canada, are providing much more support than
Australia on a GDP or per capita basis to produce lower emissions iron and steel, primarily
DRI using magnetite inputs. Part of this support is policy to ensure inputs such as natural gas, electricity and ultimately hydrogen are available at a reasonable price. Governments are also providing funding to contribute to the installation of lower emissions steel capacity to overcome market failures in technology development and first-of-a-kind disadvantages. Funding support in Australia needs to be much larger than currently announced, noting that European governments are typically investing about 50 per cent of the initial capital expenditure, with current total capital costs in the realm of €1.5 to 3 billion per DRI-EAF plant depending on scale.

BlueScope’s responses to the detailed questions in the Consultation Paper are outlined in the following pages.

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Recommendations

1. The design of the SGM should be appropriately finalised and maintained:

1.1. This includes the production variable review for steelmaking and the EBIT
guidelines that determine qualification for the TEBA baseline decline rates

1.2. This legislative framework should be maintained until:
• All features of a well-designed and effective CBAM are in place for steel,
• The essential enablers of competitive lower emissions iron and steel are in
place in Australia,
• There is sufficient time to plan and implement an orderly transition to lower
emissions iron and steel production, recognising BlueScope’s recent
investment in the blast furnace reline that was made on the basis of
government’s commitments to TEBA baseline decline rates in the SGM.

2. A CBAM for steel needs to be carefully designed and introduced cautiously,
which includes:

2.1. Comprehensive product coverage of all relevant flat and long steel products and
downstream manufactured products containing steel.

2.2. An appropriate CBAM importer baseline, that:
• Calculates appropriate baselines for imports, which, for reasons of
practicality, will probably have to reflect some kind of average, whereas
Australian baselines are set by reference to each individual facility;
• Reflects the SGM’s treatment of new facilities in setting baselines (i.e.,
CBAM should use the average SGM facility baseline for existing facilities
and international best practice as defined under the SGM for new facilities);
• Sets different baselines for primary and secondary steel production
processes, reflecting the facilities-based approach of the SGM;
• Identifies the applicable baselines for imported products by reference to the
production process of the producing facility, with the facility identified
through a certificate of origin regime with appropriate verification.

2.3. Calculation of actual emissions intensity for imported products through a
certificate of origin regime with appropriate verification.

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Recommendations (continued)

2.4. CBAM importer liabilities that are appropriately calculated relative to this baseline:
• Taking into account carbon liability already paid in overseas jurisdictions;
• Adjusting carbon liability to account for direct carbon support (e.g., free
permits) received in overseas jurisdictions;
• Adjusting carbon liability to account for support received in overseas
jurisdictions to produce lower emissions steel, including for inputs of lower
emissions steel;

2.5. No effective subsidies for imported products with emissions below the relevant
baseline.

2.6. Export rebates for carbon liabilities for Australian domestic steelmakers, similar
to the GST.

2.7. A clear mechanism to impose importer liabilities and rebate export liabilities
separate to the domestic SMC or ACCU market.

2.8. An administratively workable system for importers, which will probably require
linking Customs invoicing and cargo systems with Clean Energy Regulator
emissions liability and unit registries.

2.9. A transitional reporting-only period.

3. The Australian government needs to support the iron and steel industry
transition, including:

3.1. Policy to increase natural gas supply coupled to domestic reservation so that
input costs for Australian iron production are competitive with jurisdictions that
are alternate locations for producing lower emissions HBI.

3.2. Development of reliable cost-competitive firmed renewable electricity for the
transition to H2–DRI.

3.3. Substantial timely investment in electricity infrastructure, including large scale
renewable generation, firming and transmissions upgrades.

3.4. Development of a commercial green hydrogen supply chain.

3.5. Support through grants for lower emissions iron and steel capacity to overcome
market failures in technology development and first mover disadvantages on a
scale at least similar to other jurisdictions, and much larger than currently
announced support in Australia.

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1. BlueScope is Australia’s largest steel producer and operates in a competitive, trade-exposed market

1.1. Two main steel production processes are used to produce two main types of steel products – flat products and long products

Currently there are two main steel production processes.4 The blast furnace (BF) - basic oxygen furnace (BOF) production route is often referred to as ‘primary’ iron and steelmaking, as it creates iron and steel from virgin iron ore. Using this production method, iron ores are smelted with coke produced from metallurgical coal and limestone in the BF to produce virgin iron. The carbon in the coke acts as a chemical reductant to extract iron from the iron ore and cannot be replaced with natural gas or electricity. The coke also provides a gas permeable physical structure within the furnace to allow the ore to be converted. For this reason, there is no ready replacement for coke in this process. Molten iron and a limited proportion of steel scrap (scrap) are then converted into steel in the BOF. There are technical limits to how much scrap can be used due to its cooling effect in the BOF. End product requirements may also limit the proportion of scrap, particularly low-grade scrap, that can be used.

An alternative way of making steel is via melting (and therefore recycling) scrap steel in an electric arc furnace (EAF) – known as ‘secondary’ steelmaking. EAF secondary steelmaking also typically utilises primary iron units5 to reduce impurities in the end product and provide energy for the steelmaking process.

Steel is not a single product. There are two main categories of finished steel products – flat products and long products. Flat products include slab, plate and hot rolled coil. Long products include rebar, bars, wire rods, tubes, structural shapes and rails. Flat products have a range of end uses including roofing and walling for residential, commercial and industrial buildings, fencing, light gauge steel framing, whitegoods and automotive skin panels. Long products have a range of end uses including heavy structural framing for buildings, in infrastructure such as bridges and reinforcing bar and mesh in concrete construction.

Flat products typically require lower impurity levels than long products. The BF-BOF primary steel making production process is well suited to the production of flat products because it mainly uses primary iron units from a blast furnace, which typically have lower impurity levels.
EAF steelmaking can also produce flat products, but this requires a more expensive blend of high-grade prime scrap together with a higher proportion of primary iron units5 to limit impurities. For example, BlueScope’s North Star EAF plant in the US produces high-quality flat products using a raw materials mix of approximately 20 per cent primary iron units (in the form of pig iron), 40 per cent prime scrap (sourced from the offcuts of manufacturing processes) and 40 per cent obsolete scrap (sourced from recycled, end-of-life steel from construction and manufactured goods). EAF steelmaking that utilises low grade scrap

4 International Energy Agency, Iron and Steel Technology Roadmap – Towards More Sustainable Steelmaking,
Oct 2020
5 Primary iron units could be in the form of pig iron, direct reduced iron or hot briquetted iron

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primarily produces long products. In Australia, where scrap and steel markets are smaller,
EAF steelmaking does not produce flat products.

Consequently, comparisons of steel emissions intensity need to distinguish between BF-BOF produced (primary) steel and EAF produced (secondary) steel. Globally, flat products are produced more by BF-BOF processes, whereas long products are produced more through
EAF.6 As a result, long products tend to have lower emissions intensity than flat products, particularly in developed countries where more scrap is available relative to steel demand (see section 4.4

Potential future iron and steel production pathways are discussed further in section 2.4 and
2.5.

1.2. BlueScope is Australia’s largest steel producer

BlueScope is an Australian-headquartered, ASX listed steel manufacturer, with operations in
16 countries. It manufactures a range of flat steel products, including products such as slab, plate, hot rolled coil, metallic coated cold rolled coil (branded by BlueScope as ZINCALUME® steel, and TRUECORE® steel) and painted metallic coated steel (which is branded as
COLORBOND® steel) as well as value-added building material products manufactured from these flat steel products such as roofing and walling which is marketed under the LYSAGHT® and Fielders® brands.

BlueScope manufactures approximately 3.2 million tonnes of steel annually in Australia, using the BF-BOF method of primary iron and steelmaking. BlueScope is the only domestic manufacturer of flat steel products, providing sovereign capability to supply key sectors including building and construction, manufacturing, agriculture, infrastructure, transport and defence. BlueScope’s flat steel products also have a significant role to play in enabling
Australia’s decarbonisation transition infrastructure (see section 2.3 for further detail).

In addition to supplying key domestic sectors, BlueScope exports around a quarter of its
Australian steel production, with volumes varying according to domestic and international market conditions.7 BlueScope employs approximately 6,700 people in Australia, including around 3,500 people at the Port Kembla Steelworks and adjacent facilities in the Illawarra region of New South Wales. BlueScope’s contributions to New South Wales include generating a total of 20,000 direct and indirect jobs, $12 billion in output per year and $2.3 billion in household income per year.8

1.3. The Australian steel industry competes against low-cost producers in countries with less stringent climate policies

BlueScope operates in a highly competitive global market, exporting to the world and competing against imports at home. In 2022, the global steel industry produced just under 1.8

6 CRU Emissions Analysis Tool
7 Totalexports from BlueScope’s Australian operations reached 865,000t in FY2019, or just over one quarter of domestic production. Total exports from Australian operations in FY2022 were 457,000t, reflecting stronger domestic demand
8 IRIS Study “BlueScope’s Economic Contribution to Australia, NSW and the Illawarra” January 2023

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billion tonnes of finished steel, and one in every five tonnes produced was exported.9 The
Australian steel sector is highly trade exposed. Australia’s crude steel production was 5.8 Mt in 2021-22 with steel imports of 2.5 Mt and exports of 1.0 Mt.10 The steel sector is even more trade exposed when considering the steel contained in imported goods. The World Steel
Association estimates Australia’s true steel use is 10.5 Mtpa,11 meaning imports account for approximately half of Australia’s true steel consumption.

Steelmakers are price takers. BlueScope competes domestically against imports from producers in low-cost jurisdictions, often with higher-greenhouse gas emissions intensity and less stringent environmental standards. Greenhouse gas emissions from the Port Kembla
Steelworks are lower than the average of blast furnace emissions from Australia’s major source countries of steel imports (China, Japan, Korea, and India).12 Furthermore, steelmakers in jurisdictions with relatively strong climate policy settings, such as the EU and Korea, are shielded from carbon pricing through the allocation of free permits.13 As a result, almost no sources of imported steel in Australia are currently required to bear material carbon costs.

Iron and steelmaking is a capital-intensive business with cyclical operating margins due to volatility in the prices of its key inputs (iron ore, scrap, metallurgical coal and energy), and cyclical demand for finished steel products. Building and maintaining a strong balance sheet is essential to remain viable through these swings and to fund major capital expenditures, including investments in decarbonisation. BlueScope has worked hard over the last decade to build a strong balance sheet so it can withstand the cycles of the global steel sector.
Inequitable climate change policy puts that hard work and ongoing viability at risk.

9 Worldsteel Association, World Steel in Figures 2023
10 Department of Industry, Science and Resources, Commonwealth of Australia, Resources and Energy
Quarterly December 2022, steel imports
11 World Steel Association, Steel Statistical Yearbook 2022, table 58
12 CRU Emissions Analysis Tool, average blast furnace emissions from China, Japan, Korea, and India
13 Free permits are free allowances distributed in an ETS trading market rather than requiring payment for these allowances

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2. BlueScope supports decarbonisation, and is already acting

2.1. BlueScope supports Australia’s 2030 and 2050 targets

BlueScope supports Australia’s 2030 and 2050 greenhouse gas emissions (GHG) targets, consistent with Australia’s Nationally Determined Contribution under the Paris Agreement.
BlueScope has developed a decarbonisation pathway to support delivery of its climate strategy. It has announced an absolute net zero by 2050 goal for all operations globally, supported by two interim emissions intensity targets for 2030:
• A 30 per cent reduction in GHG emissions intensity for its non-steelmaking activities
(our cold rolled, metal coating and painting lines); 14 and
• A 12 per cent reduction in GHG emissions intensity for its steelmaking operations
globally.

Both targets are measured against a FY2018 baseline and include Scope 1 and 2 emissions.

BlueScope has also set the goal of pursuing net zero Scope 1 and 2 GHG emissions across its entire operations, including midstream and downstream activities.15

Achieving the 2050 net zero goal is highly dependent on several enablers, including the commerciality of emerging technologies, the availability of cost-competitive and reliable renewable energy and hydrogen, the availability of quality raw materials, and appropriate policy settings. These enablers are dependent on timely contributions by other parties along the value chain and are underpinned by government support, as detailed in section 3.4.

2.2. BlueScope has a track record of reducing emissions and is among the most carbon-efficient blast furnace-basic oxygen furnace operators in the world

BlueScope has already delivered Australia’s largest emission reduction from facilities covered by the SGM. Port Kembla Steelworks’ annual Scope 1 emissions have decreased by 40 per cent (4 Mt CO2e) since 2005, in large part by reducing iron and steelmaking capacity through the closure of a blast furnace in 2011. However, this came at a large cost: a loss of 1,500 direct jobs, $400 million in closure-related costs and a reduction in Australian steel exports of
~2 to 3 Mtpa.

14 The Non-Steelmaking Target applies to our midstream activities that include our cold rolled, metal coating and painting lines. It excludes our downstream activities.
15 Achieving the 2050 net zero goal is highly dependent on several enablers, including: the development and diffusion of ironmaking technologies to viable, commercial scale; access to affordable, firmed large-scale renewable energy; availability of appropriate volumes of affordable green hydrogen (with natural gas enabling the transition); access to appropriate quality and sufficient quantities of economic raw materials; and supportive policies across all these enablers to underpin decarbonisation investment and avoid carbon leakage.

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BlueScope has a strong track record of implementing energy efficiency and emissions reduction opportunities. Between FY2012 and FY2022, the Port Kembla Steelworks reduced its Scope 1 emissions per tonne of output from 2.33 t CO2-e/t raw steel to 1.90 t CO2-e/t raw steel – an 18 per cent decline.16 According to data from the World Steel Association, the Port
Kembla Steelworks ranks in the best fifteenth percentile for emissions efficiency of the 56 BF-
BOF facilities surveyed globally.17 From this position further reductions from the Port Kembla
Steelworks will be much harder and more costly to achieve.

The Port Kembla Steelwork’s absolute scope 1 emissions reduction of 40% from 2005 to 2023 is substantial progress towards achieving Australia’s Nationally Determined Contribution to the Paris Agreement of 43% below 2005 levels by 2030.

2.3. BlueScope has a significant role to play in enabling
Australia’s decarbonisation transition, and maintaining sovereign capacity in flat steel production

Steel’s role in the larger task of decarbonising the Australian economy will be crucial because it is an essential enabler in the development of renewable energy. Much of the infrastructure that Australia needs to drive the energy transition will be made from flat steel, including wind turbines, solar panel arrays, hydro infrastructure and transmission lines. It is estimated that approximately 400,000 tonnes per annum of additional steel will be required for renewable energy and related infrastructure, between now and 2050, to meet Australia’s targets based on AEMO NEM forecasting. 18 Further, additional steel will also be required to meet Australia’s green hydrogen ambitions. As Australia’s largest flat steel producer, BlueScope has a critical role to play in enabling Australia’s decarbonisation transition.

Sovereign iron and steelmaking capacity provides ongoing supply and retention of Australian iron and steelmaking capability. Sovereign production helps guard against loss of supply in potential periods of geopolitical instability and dislocation of global supply chains, as seen in recent periods. It also supports the development of a new lower emissions iron and steelmaking industry in Australia. Achieving this transition can unlock strategic, economic, and environmental benefits for Australia, but only if public policy underpins the continued international competitiveness of Australian manufacturing industries.

2.4. BlueScope is planning the next era of lower emissions iron and steelmaking

The Port Kembla Steelworks currently produces iron ore based flat steel products utilising a
BF-BOF process. The BF-BOF process currently accounts for approximately 70 per cent of steel production worldwide with the balance largely comprised of scrap based EAF steelmaking.

16 NGERS
17 World Steel Association, CO2 Data Report 2023 (2022 data year)
18 Australian Energy Market Operator, 2022 Integrated System Plan for the National Electricity Market (June

2022)

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Given the lack of sufficient scrap to meet global steel demand, the International Energy
Agency19 estimates that BF-BOF steelmaking will still account for between approximately 30 to 50 per cent of global production by 2050, with the range depending on the climate change policy scenario modelled. Because global demand for steel is predicted to increase by more than one third through to 2050, primary steelmaking in addition to secondary (recycled scrap) steelmaking will be required to meet global demand.

Similarly, there is insufficient scrap supply of the required quality available domestically to enable Australian steelmakers to transition to scrap based EAF steelmaking and to supply the current domestic demand serviced by these steelmakers, even without considering exports.
Steel demand today is higher than when products currently being recycled for scrap were produced. This means primary iron making will continue to be required to satisfy steel demand in Australia.20

Producing high-quality flat products from scrap based EAF also requires:
• High-quality scrap, of which there is insufficient supply in Australia.
• Primary iron inputs, which requires a BF or DRI process, described below.
• Firm cost-competitive renewable energy, which is currently not available to support
such a transition in Australia.

Thus while a few countries might be able to make sufficient high quality flat products with scrap based EAF processes to fulfil domestic demand, Australia will not.

With both global21 and domestic steel demand22 expected to continue to grow, including to support the decarbonisation transition, the SGM appropriately recognises the continued need for primary steelmaking in Australia (and globally) by applying different emissions baselines to primary and secondary steel making.

An alternative lower emissions replacement for the BF process is a direct reduced iron (DRI) based process. As BF production decreases, DRI-based processes will increasingly be required to produce primary iron inputs that are currently commercially utilised in scrap based
EAF production.

Direct Reduced Iron (DRI) technology is a potentially attractive option to transition Australian iron and steel making to low emissions. In the DRI process, natural gas (and ultimately green hydrogen) replaces coal in the steelmaking process. Natural gas based DRI (NG-DRI) could reduce emissions in iron and steelmaking by around 60 per cent. Green hydrogen based DRI
(H2-DRI) could reduce emissions by approximately 85 per cent. This DRI product has low residual element levels, making it suitable for the production of flat steel products.

19 International Energy Agency, Iron and Steel Technology Roadmap – Towards More Sustainable Steelmaking,
Oct 2020, Global crude steel production by process route
20 Australian Industry Energy Transition Initiative, Pathways to industrial decarbonisation, Phase 3 report, Feb

2023 P. 49
21 International Energy Agency, Iron and Steel Technology Roadmap – Towards More Sustainable Steelmaking,

Oct 2020, Global end-use steel demand and in-use steel stock
22 Additional demand due to decarbonisation transition, as discussed in section 2.3 and inter-material growth in construction applications, as discussed in section 4.2

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Globally, large scale decarbonisation projects have been initiated in the EU, which have focused on replacing BF-BOF with NG-DRI as an early step towards H2-DRI, which might occur once the nascent hydrogen market develops to sufficient scale. These projects have significant capital costs in the realm of €1.5 to 3 billion (A$2.5 to 5 billion) 23 depending on scale, with government funding support provided for approximately half of this cost in most instances (see Appendix 5.2).

2.5. Technologies for achieving step change emissions reductions at Port Kembla are not yet commercially viable, and are continuing to develop

NG-DRI based on magnetite iron ore is a proven technology, but it is currently economically uncompetitive in Australia because of the high cost and limited availability of direct reduction grade magnetite ores and domestic natural gas. Magnetite ores are typically higher cost than widely used haematite ores and only comprise around 5 per cent of global iron ore seaborne trade. In addition, the DRI process requires large quantities of natural gas, or in the long term hydrogen, as a replacement for the coal used as a reductant in the blast furnace process. This significantly increases the requirements for distribution infrastructure for natural gas and electricity (for hydrogen).

As a result, the current DRI-EAF pathway is currently only viable with substantial government subsidies, and is significantly more costly in Australia than in the Middle East and America where domestic gas prices are materially lower, capital costs for building plants may be lower, and there is greater government support to develop gas exploration and fund the capital costs of new plant.24

The magnetite based DRI option will not favour Australia’s existing global leadership in haematite iron ore production. It will also not favour the development in Australia of a global- scale low emissions HBI industry, whose competitive advantage is likely to include co-location with iron ore inputs. Australia would be better positioned if DRI process technology is further developed to use the lower grade and more abundant blast furnace grade iron ores
(haematite) that currently dominate Australia’s iron ore exports.

BlueScope is contributing to worldwide efforts, actively exploring and assessing a wide range of options to develop other iron and flat steelmaking technologies that can achieve significant step change reductions in iron and steelmaking emissions. Projects underway aim to accelerate the feasibility of DRI-enabled pathways with lower-cost haematite ores. BlueScope is working with Rio Tinto to produce low emissions iron feed for the Port Kembla Steelworks via natural gas or hydrogen based DRI using Pilbara haematite ores.

BlueScope is also considering two potential variations to DRI – either combined with an EAF
(DRI-EAF) or combined with an electric smelting furnace and basic oxygen furnace (DRI-ESF-
BOF). BlueScope believes this variant of the DRI process technology will most likely require the use of an Electric Smelting Furnace (ESF) to refine the higher impurity haematite ores.
BlueScope is well placed to develop this alternative DRI process technology given the unique

23 See Appendix for further detail. This does not include the cost of developing upstream enablers such as availability of large amounts of internationally cost-competitive natural gas and low cost firmed renewable energy
24 For example, the Inflation Reduction Act in the US

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smelting technology that has been deployed at its New Zealand operations since the 1980s using the unique New Zealand iron sand containing titanomagnetite. However, the development and adaptation of this ESF technology into the DRI process with haematite ores will take significant time and investment to pilot and ultimately commercialise. BlueScope has technical work already underway with major international partners including Rio Tinto,
POSCO, ThyssenKrupp and Tata Steel Europe.

Although not yet commercially proven, a technical pathway for transitioning from natural gas to hydrogen in the DRI process is technically understood. Further technical development to commercialise H2-DRI can occur when hydrogen becomes commercially available. This transition to hydrogen would require significant quantities of low-cost firmed renewable energy
(indicatively 4-5GW of renewables or 1.5GW firmed renewables, equivalent to around 15 times
Port Kembla Steelworks’ current electricity consumption) along with large-scale commercial hydrogen electrolyser capacity. The capital cost of this infrastructure (in addition to the investment in the natural gas DRI-ESF-BOF process) would be a multi-billion dollar investment, including the required renewable energy generation and transmission, hydrogen electrolyser capacity, and hydrogen pipeline and storage infrastructure. This infrastructure is unlikely to be developed by BlueScope, or any other steelmaker – rather it would require companies with relevant experience and capability to fund and deliver this renewable energy, hydrogen and transport / transmission infrastructure.

With these capital costs, and a likely significant increase in operating costs (depending on the price of key inputs including natural gas, hydrogen and renewable electricity), lower emissions steel will be significantly higher cost than conventionally produced BF-BOF steel, even taking into account the costs of foreseeable medium-term carbon prices in Australia. An Australian producer of lower emissions steel will face even greater competitive challenges unless importers of conventionally produced BF-BOF steel face similar carbon costs in their country of production or when importing to Australia

Consequently, near term deployment of existing DRI-EAF process or the emerging DRI-ESF-
BOF in Australia (or elsewhere in the world) is unlikely to be viable without government policies that incentivise and support investment including for research and development, and pilot projects, as discussed in section 3.4.3. BlueScope believes global industry research and learning by doing will lead to commercially attractive low emissions technologies globally.
BlueScope also recognises the preferred technology for Australia’s future lower emission iron and steel industry, that ideally utilises Australia’s hematite resources (that being DRI-ESF-
BOF), may not align to the first commercially attractive low emissions technology (DRI-EAF) adopted elsewhere in the world. This is discussed further below in section 3.4.1.

Developing low emissions iron making technology using haematite ore is a large prize for the
Australian economy but will require substantial investment, time and resources to successfully develop and implement at full commercial scale. If this technology option can be successfully developed, Australia has the opportunity to underpin the longer term competitiveness of its iron ore exports and primary iron and steel production. Success depends on funding very large capital investments, and overcoming externalities that can only be solved through partnership between steelmakers and governments.

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3. BlueScope supports policy intervention to reduce carbon emissions and to support Australian manufacturers to decarbonise

3.1. The aims of the Carbon Leakage Review need to be broadened

BlueScope believes the Carbon Leakage review has been framed too narrowly.

In assessing future government policy, the Consultation Paper sees its purpose as assessing a range of policy options, including a CBAM, to test how much they “mitigate the risk of
[carbon] leakage” (p.23). The Paper defines “carbon leakage” as the relocation of production from countries with more ambitious emissions reduction policies to countries with weaker policies (p.9). In assessing measures, the Paper focuses on how much policy measures will affect global emissions and support stronger global climate policy, subject to their costs on trade partners, administration complexity and interactions with trade rules (p.19).

BlueScope agrees that in the context of policies such as the SGM, one purpose of policy measures such as a CBAM is to:
• Minimise global carbon emissions, particularly by preventing the movement of
production that would increase global emissions.

BlueScope believes that basic principles of public policy require that policy measures such as a CBAM should also have broader aims, including to:
• Support a vibrant Australian manufacturing industry, and
• Provide a level playing field for competition.

Differential carbon policies could lead to scenarios in which the relocation of production does not increase global emissions but does impair Australian manufacturing. Differential carbon policies might also be unfair to Australian producers. Often (but not always) these two problems go together.25 Policy interventions such as a CBAM should aim to prevent such outcomes, even if they do not reduce global emissions. BlueScope notes that the Consultation
Paper states the importance of considering “the costs on trade partners”. It seems reasonable therefore that the Review should also consider the impact on sovereign Australian manufacturing, and whether there is a level playing field for Australian producers.

BlueScope largely agrees with the Consultation Paper, consistent with general principles of policy design, that policy measures to reduce carbon leakage should also be designed to:

25 I.e., policy settings that are unfair to individual producers do not always impair Australian manufacturing overall, and vice versa. For example, policies might be unfair to producers from a particular country, or who use a particular process. Policy settings may not upset the level playing field, but may impair Australian manufacturing
– for example if there is no export rebate for carbon costs paid in Australia, this would impair Australian manufacturing but treat all domestic players fairly.

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• Provide a clear net benefit.
• Be durable and predictable.
• Be trade compliant.

For further detail on principles which BlueScope proposes should guide Australia’s carbon policy, see response to question 1.1 (section 4.1) and question 4 (section 4.12).

3.2. Carbon leakage is a material risk that in the medium term is not fully addressed by current measures

3.2.1. Carbon leakage is a material risk for the steel industry

Carbon leakage is a material risk for the Australian steel industry. As an Australian steel producer, BlueScope operates in a highly competitive, trade exposed industry, competing against imports and domestic products at home and exporting to the world. In both domestic and export channels, BlueScope is highly exposed to carbon leakage from higher emissions products that are not exposed to carbon costs. This risk is increasingly significant in the medium term as Australia’s climate ambition increases. Over time, it will significantly disadvantage Australian production and could impact ongoing sovereign manufacturing capability of national significance. For further detail on the material carbon leakage risks for
BlueScope see response to question 1.2 (section 4.2).

3.2.2. Further action is needed to address the material risk of carbon leakage in the medium term

BlueScope agrees with the Consultation Paper that the design of the SGM, in particular, the
TEBA baseline decline rates, may partially reduce carbon leakage risk. However, the effectiveness of these measures depends on the finalisation and application of some aspects of the SGM, such as the EBIT guidelines calculating qualification for the TEBA baseline decline rate, the production variable review for steelmaking and the outcomes of the review planned in 2026/2027.

Even if these issues are appropriately resolved, carbon leakage is not fully addressed by current measures in the SGM, and SGM measures are insufficient to address carbon leakage risk indefinitely. For further detail on the capacity of current SGM policy settings to address carbon leakage risks see response to question 3.1 (section 4.7).

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3.3. BlueScope supports the introduction of a well-designed and effective CBAM for steel, but until this can be implemented with confidence the current TEBA regime should be retained

3.3.1. BlueScope has supported a well-designed and effective CBAM for steel

BlueScope supports the introduction of a well-designed and effective CBAM for steel products.
This is consistent with BlueScope’s previous support for consideration of CBAM and recognition that design and implementation of a CBAM will be complex and should be carefully implemented with appropriate safeguards:

“BlueScope supports the consideration of a carbon border adjustment mechanism (CBAM). We note,
however, that CBAMs raise a range of complex technical, geopolitical, and administrative issues,
implying that the design and implementation of a CBAM is likely to be at least some years away. We
consider that a CBAM cannot be relied on, at this stage, to provide meaningful support to the SGM
reforms and impacted facilities in the near to mid-term.”26

3.3.2. A poorly designed CBAM for steel poses major, and potentially irreversible risks to the Australian economy

A poorly designed or ineffective CBAM for steel poses significant risks to Australia and could have long-lasting implications for the Australian economy.

A poorly designed CBAM for steel imperils the economics of established Australian steel manufacturers and could result in them closing permanently. If critical domestic industries such as iron and steelmaking are unnecessarily lost, they are unlikely to re-emerge. Once lost, it would be very difficult in an economy as small as Australia to re-assemble the infrastructure and eco-systems on which Australia’s iron and steelmaking relies.

A poorly designed CBAM for steel also increases uncertainty about future policy shifts, which may delay investment decisions for lower emissions iron and steel. Concern about policy stability has already been created by ongoing changes to the SGM, including through the production variable review and review which is planned for 2026/2027. Perceptions that carbon policy is unstable would be increased if:
• Design flaws in the CBAM create a belief that the policy regime is not sustainable and
that change is needed to correct the flaws, and
• The introduction of a CBAM leads to changes in the TEBA baseline decline rates to
which the steel industry has anchored because they promised some predictability in
the transition.

26 BlueScope submission to the Safeguard Mechanism Reforms, 24 February 2023

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3.3.3. A well-designed and effective CBAM for steel must get many things right

It will not be easy to produce a well-designed and effective CBAM for steel. BlueScope has identified significant complexity in CBAM design for steel.

BlueScope believes that the transition to a CBAM needs to maintain appropriate adjustment for TEBA industries,27 including maintaining current TEBA baseline decline rates (subject to appropriate finalisation of EBIT guidelines calculating qualification for the TEBA baseline decline rate), until:
• All features of a well-designed CBAM are in place,
• The essential enablers of competitive lower emissions iron and steel are in place in
Australia,
• There is sufficient time to plan and implement an orderly transition to lower emissions
iron and steel production, recognising BlueScope’s recent investment in the blast
furnace reline that was made on the basis of government’s commitments to TEBA
baseline decline rates in the SGM.

A well-designed and effective CBAM for steel then requires:

1. Comprehensive product coverage of all relevant flat and long steel products and
downstream manufactured products containing steel.

2. An appropriate CBAM importer baseline, that:
• Calculates appropriate baselines for imports, which, for reasons of practicality, will
probably have to reflect some kind of average, whereas Australian baselines are set
by reference to each individual facility;
• Reflects the SGM’s treatment of new facilities in setting baselines (i.e., CBAM should
use the average SGM facility baseline for existing facilities and international best
practice as defined under the SGM for new facilities);
• Sets different baselines for primary and secondary production processes, reflecting
the facilities-based approach of the SGM;
• Identifies the applicable baseline for imported products by reference to the production
process of the producing facility, with the facility identified through a certificate of
origin regime with appropriate verification.

3. Calculation of actual emissions intensity for imported products through a certificate of
origin regime with appropriate verification.

4. CBAM importer liabilities that are appropriately calculated relative to this baseline:
• Taking into account carbon liability already paid in overseas jurisdictions;

27TEBA industries is shorthand for trade-exposed facilities facing an elevated risk of carbon leakage as per SGM categorisation of EITE facilities

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• Adjusting carbon liability to account for direct carbon support (e.g., free permits)
received in overseas jurisdictions;
• Adjusting carbon liability to account for support received in overseas jurisdictions to
produce lower emissions steel, including for inputs of lower emissions steel;

5. No effective subsidies for imported products with emissions below the relevant baseline.

6. Export rebates for carbon liabilities for Australian domestic steelmakers, similar to the
GST.

7. A clear mechanism to impose importer liabilities and rebate export liabilities separate to
the domestic SMC or ACCU market.

8. An administratively workable system for importers, which will probably require linking
Customs invoicing and cargo systems with Clean Energy Regulator emissions liability and
unit registries.

9. A transitional reporting-only period.

The reasons for these requirements are discussed further in section 4.8.

Thinking through these design choices properly, identifying appropriate policy solutions, and designing the ensuing detail, should not be rushed.

Steel raises complexity for many of these design choices, particularly:
• Defining comprehensive product coverage, as many of the downstream products that
have high steel intensity are classified under a wide variety of tariff codes.28
• Setting appropriate baselines for primary and secondary iron and steel production
processes, recognising they have different carbon intensities.
• Adjusting imports for lower carbon assistance, because this assistance comes in a
variety of forms, both operating and capital expenditure, and is usually specific to the
individual plant.
• Adjusting imports for the subsidisation of lower emissions inputs such as DRI.

Consequently, it will take several years to properly work through the design complexities for a
CBAM for steel in Australia.

EU experience suggests that resolving these design complexities is likely to require a multi- year process. The EU CBAM design process took over 3 years, and it will be over 7 years from proposal to imposing liabilities under a CBAM.29

The Australian context is different to the EU, and raises additional considerations for CBAM design:
28 This is in contrast to other sectors such as cement where there is likely a smaller number of tariff codes
29 A CBAM was first proposed in December 2019 as part of the European Green Deal and initially scheduled for implementation in 2021. Following impact assessment and public consultation in 2020, the European
Commission adopted its proposal for a CBAM regulation in July 2021, and passed legislation in May 2023, although liabilities are only effectively imposed from January 2026

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• Unlike the EU’s carbon pricing mechanism, which is effectively a tax, Australia’s
carbon pricing mechanism, the SGM, is a ‘baseline and credit’ model. Additional
complexities arise when grafting a CBAM onto such a baseline and credit model.
• Relative to EU producers, Australian producers export more of their production.30 This
creates greater concern around the appropriate treatments of exports, both above and
below the relevant baseline.
• Relative to EU producers, a greater proportion of imports to Australia are likely to
embody government subsidies for lower emissions production.31 This increases the
need for Australia’s CBAM to adjust for government subsidies for lower emissions
production.

These complexities need to be considered carefully in defining a well-designed CBAM. For further detail on them see response to question 3.2 (section 4.8).

3.3.4. Australia has the opportunity to learn from others

A CBAM is prone to unforeseen consequences because of its inherent complexity and because it has no historical precedent. The risks of these unforeseen consequences would be reduced if Australia’s scheme were designed in the light of actual experience of a CBAM in operation in another jurisdiction.

Waiting until other jurisdictions are operational would also enable the Australian CBAM to be aligned to finalised international approaches, while adjusting where necessary for local
Australian context. International alignment is highly desirable to promote an internationally coherent and durable policy environment.

The EU is currently scheduled to be the first jurisdiction in the world that imposes liabilities under a CBAM, from January 2026. Given the time required for data collection and analysis, data from the first full year of operations is unlikely to be available before June 2027. This implies waiting until mid-2027 before committing to many features of a CBAM in Australia.

Australia may also be able to learn from the other jurisdictions, including the carbon leakage review and consideration of a CBAM in the UK, where a decision is expected in the short term.

Australia may also be able to learn more about the impact of carbon pricing on carbon leakage, local industry and the fairness of competition between local and imported production as data from the SGM becomes available. Because there is little experience of the revised SGM mechanism, unknown unknowns may influence Australia’s understanding of the risks and how a CBAM should be designed to address them.

30 European steel in figures 2023, EUROFER, In 2022, approximately 12 per cent of EU27 steel production was exported (137 Mt crude steel produced; 16.6 Mt finished steel products exported). In contrast, in Australia around one quarter of BlueScope’s production is exported
31 See section 3.4.1

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3.3.5. Australia should introduce a CBAM progressively, beginning with sectors that have less varied production methods and products

The government has already committed to a sectoral approach for a CBAM, which BlueScope supports. A sectoral approach is consistent with the EU CBAM which initially focusses on a smaller number of sectors before considering expanding its remit to other sectors.32

It would be prudent to first implement a CBAM for sectors with less variety of production methods and products than steel, so that insights can be applied to the more complex steel industry. This is consistent with the New Zealand government’s initial focus on just the cement sector for a CBAM.33

The steel sector has more varied production and products mixes.
• Steel has multiple different production processes with different carbon intensities,
whereas other sectors only have one primary production process.
• Steel downstream products that have a high steel intensity are classified under a wide
variety of tariff codes, whereas other sectors are primarily captured in a small number
of tariff codes.

3.3.6. Introducing a CBAM cautiously would be relatively low cost

It is prudent to take a cautious approach to the introduction of a CBAM, especially as this approach has relatively few downsides.

The TEBA regime may ensure that the costs imposed on Australia’s trade-exposed- emissions-intensive industries are reasonable relative to plausible and cost-effective changes to reduce emissions, provided that the EBIT guidelines calculating qualification for the TEBA baseline decline rate and the production variable review for steelmaking are appropriately finalised and not materially changed through the planned SGM reviews.

Introducing an Australian CBAM cautiously is unlikely to delay global progress to carbon pricing. As a relatively small economy, an Australian CBAM is unlikely to be a major driver of international carbon pricing development. A much bigger driver is likely to be the current EU
– US carbon border negotiation, the Global Arrangement on Sustainable Steel and Aluminium.

3.3.7. Australia should introduce a steel CBAM cautiously

Consequently, BlueScope believes it would be prudent for Australia to not rush the introduction of a CBAM for steel as:
• The consequences of policy missteps would be high.
• The probability of policy missteps is high given the complex questions involved in
designing a CBAM.

32 European Commission Memo, 10 May 2023, Questions and Answers: CBAM
33 The New Zealand government is “exploring the risk of emissions leakage from the cement sector and options to manage this risk through alternatives to industrial allocation policies, such as a CBAM”: Reform of industrial allocation policy in the NZ ETS, paragraph 28, https://environment.govt.nz/assets/publications/reform-of- industrial-allocation-in-the-NZ-ETS-redacted.pdf

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• Australia has the opportunity to learn from others (particularly the EU).
• A progressive approach would provide the opportunity to learn from other sectors with
less varied production methods and products.
• There are relatively few downsides to being cautious with the introduction of a CBAM
for steel.

Overall, the risk to the Australian iron and steel industry of a scheme that is complex and potentially poorly designed exceed the potential benefits of an immediate introduction of a
CBAM for steel.

Until a well-designed CBAM for steel products can be implemented with confidence, the current TEBA regime for steel should be retained, and the EBIT guidelines appropriately finalised.

A cautious introduction of a CBAM for steel is broadly consistent with the approach in the EU.
The EU CBAM design process took over 3 years, and it will be over 7 years from proposal to imposing financial consequences through a CBAM from the beginning of 2026.34

A cautious approach will require a better consultation process than the Carbon Leakage
Review has provided to date. This Review took around 4 months to produce a Consultation
Paper, but then asked industry participants to produce their responses in 4 weeks.35 Such rushed consultation on an area that is inherently complex is unlikely to lead to a well-designed
CBAM.

3.4. Further public investment in decarbonisation is critical for step changes in emissions from iron and steel production in
Australia

BlueScope believes further public investment in decarbonisation is critical for step changes in emissions from iron and steel production in Australia, whether or not a CBAM or other policy options to address carbon leakage are introduced.

3.4.1. Development of step changes in emissions from iron and steel is unlikely without substantial government support

Developing practical transition pathways for iron and steelmaking will require transformational investment from businesses and governments. As the International Energy Agency has recognised, “a sustainable transition for the iron and steel sector will not come about on its own; government will play a central role.”36

34 A CBAM was first proposed in December 2019 as part of the European Green Deal and initially scheduled for implementation in 2021. Following impact assessment and public consultation in 2020, the European
Commission adopted its proposal for a CBAM regulation in July 2021, and passed legislation in May 2023, although liabilities are only effectively imposed from January 2026
35 Consultation Paper was released on 13th November with submissions due on 12th December
36 International Energy Agency, Iron and Steel Technology Roadmap – Towards More Sustainable Steelmaking,

Oct 2020

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Government intervention is required to solve the externalities of developing lower emissions iron and steel. It is hard for a first mover to capture the benefits of the know-how generated in early-stage industry development. This know-how is expensive to generate because some of it relates to the successful implementation of new industrial processes at large scale, and the cost of constructing a single plant is large for either commercial or government investors.

The need for government support is evidenced by the significant funding that governments in overseas jurisdictions are providing to iron and steelmakers. Government typically provide support for 40 to 50 per cent of initial capital expenditure to produce lower emissions iron and steel, as detailed in Appendix 5.1.

3.4.2. Significantly greater government support for a step change lower emissions steel is needed in Australia

While BlueScope recognises and values the existing opportunities for Australian industry to access funding for low emissions transformation, this support is significantly smaller scale than in overseas jurisdictions on a GDP or per capita basis (Figure 1).

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Figure 1 – Lower emissions steel funding support by jurisdiction37

It may be appropriate for Australia to invest in lower emissions iron and steel on a much larger scale than on an equivalent GDP or per capita basis. Australia has a particular national interest in developing haematite DRI processes because they will benefit existing iron ore, iron and steel production in Australia. There is a large benefit to Australian exports and the Australian economy in supporting this new industry that leverages existing assets and existing comparative advantage.

There is also a potential opportunity to capture a significant share of the global DRI industry based on Australia’s co-location of natural gas, renewables resource and iron ore. As a result,
Australia may have a substantial national interest in being at the forefront of the development of lower emissions iron and steelmaking technology, particularly haematite pathways. If
Government wants to promote a new lower emissions HBI export industry, it needs to invest to help establish the substantial infrastructure required.

This investment could also help support the long-term future of lower emissions iron and steelmaking in Australia. This would entail support for existing Australian iron and steelmakers since new lower emissions iron and steelmakers in Australia would have very high costs of entry when competing against imports from established overseas iron and steelmakers.

3.4.3. Government support is required for a variety of measures

Because there is market failure in the development of new technology, and governments in other countries are providing substantial assistance for the transition to lower emissions iron and steelmaking, a competitive lower emissions domestic iron and steel industry is only likely

37CRU Emissions Analysis tool. CRU country average scope 1 and 2 emissions intensity including primary and secondary steel production

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to emerge if Australian governments provide a level of support for Australian iron and steelmakers to transition that is at least equivalent to the support available in other jurisdictions. The essential enablers to support development of lower emissions iron and steel in Australia are:
• Policy to increase natural gas supply coupled to domestic reservation so that input
costs for Australian iron production are competitive with jurisdictions that are alternate
locations for producing lower emissions HBI.
• Development of reliable cost-competitive firmed renewable electricity, including for
BlueScope in an Illawarra Renewable Energy Zone.
• Investment in electricity infrastructure, including for BlueScope an upgraded electricity
connection to Port Kembla Steelworks and transmission to support wind and solar.
• Development of a green hydrogen supply chain, particularly to overcome the ‘chicken
and egg’ problem where no demand results in no supply.
• Support through grants for lower emissions steel capacity to overcome market
failures in technology development and first mover disadvantages on a scale at least
similar to other jurisdictions, and much larger than currently announced support in
Australia, noting that European governments are typically investing about 50 per cent
of the cost with current total capital costs in the realm of €1.5 to 3 billion per DRI-EAF
plant depending on scale.

Importantly, most of these enablers of lower emissions iron and steel are neutral about which lower emissions iron and steel technology may emerge as the most commercially viable, as discussed in section 2.4 and 0.

Without an equivalent level of support to overseas jurisdictions, manufacturers are unlikely to invest in lower emissions iron and steel in Australia. Without similar levels of support,
Australian investments are expected to have uneconomic returns, which endangers the long- term sustainability of the iron and steel industry in Australia. In this scenario, the dominant strategy for existing Australian iron and steelmakers may be to rely on imported DRI or hot rolled coil to Australia, resulting in loss of primary and downstream iron and steel manufacturing in Australia. Investors are also likely to “follow the money” and invest elsewhere if higher levels of support are available.

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4. Response to matters where feedback is being sought

4.1. The Carbon Leakage review has been framed too narrowly

Q 1.1 Is the description of carbon leakage appropriate for the purpose of this Review?

BlueScope believes the Carbon Leakage review has been framed too narrowly, for the reasons outlined above in section 3.1.

Policy measures, such as a CBAM, should aim to:
• Reduce carbon emissions, particularly by preventing the movement of production that
would increase global emissions. This would support realisation of Australia’s 2030
and 2050 targets, through encouraging internally compatible policies to reduce
emissions in trade-exposed industries and promote the earliest feasible roll-out of
lower emissions technology.
• Support a vibrant Australian manufacturing industry to ensure that industries with a
strong future in a net zero world and that enable the energy transition can pursue that
future in Australia. This recognises the value of domestic sovereign industrial capacity
and supports the transition to lower emissions manufacturing. This support also
minimises the risk of unintended damage to manufacturing industries and disruption
for the broader Australian economy and consumers.
• Provide a level playing field for competition between Australian production and
imports and between Australian exports and local production elsewhere, which would
also reduce leakage of emissions to foreign jurisdictions.

Consideration of a CBAM to address multiple aims is consistent with the approach of other international jurisdictions,38 and is consistent with basic principles of public policy that a policy instrument should be assessed in light of all of its costs and benefits.

BlueScope largely agrees with the Consultation Paper that, consistent with general principles of policy design, policy measures to reduce carbon leakage should also be designed to:
• Provide a clear net benefit with incremental costs proportionate to benefits gained.
This will be supported by as simple as practicable design that avoids unwarranted
complexity, recognising the inherent complexity in a CBAM.
• Be durable and predictable with a policy framework that provides clarity and
confidence to support investment and desired action.
• Be trade complaint with WTO rules through non-discriminatory treatment of importers
relative to domestic producers.
• These aims and principles may not always align, so policy needs to balance them
appropriately in making each specific design choice.

38Canada consultation on Border Carbon Adjustments. Canada proposes CBAMs have four main inter-related objectives – reducing the risk of carbon leakage, maintaining the competitiveness of domestic industries, supporting greater domestic climate ambition and driving international climate action

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When these general aims and principles are applied to the iron and steel industry in Australia, they imply that:
• Policy should provide incentives for the Australian iron and steel industry to reduce
emissions. It is vital that policy supports steel’s role in enabling the energy transition.
• Policy should maintain a sovereign Australian iron and steelmaking capability and the
manufacturing sector that relies on it, given that iron and steelmaking has an identified
low emissions pathway. This support should allow the Australian iron and steel
industry and the broader enabling infrastructure time to transition, recognising that if
domestic capacity is lost in the transition, it is unlikely to be re-established.
• Policy should provide a level playing field for competition, including discouraging
perverse incentives to substitute from Australian produced iron and steel into higher
emissions products such as:
− Inter-material substitution from Australian produced steel into products that are
not generally subject to a carbon price (such as tile and brick);
− Substitution from Australian produced steel and their downstream products into
imported downstream products that avoid carbon costs.
• The benefit and costs of any proposed policy should bear in mind the practical
impacts of the timing for changing policy in each sector, including iron and steel and
other sectors with long-life capital investments.
• Policy should be durable and predictable, so should provide a stable framework for
the Australian iron and steel industry to plan future iron and steel production
investments, including future lower emissions production, without destroying
shareholder value. This is particularly important for iron and steel given the long lead
times for iron and steel plant investment.
• Policy should be trade compliant, so will need to use consistent baselines for
Australian and imported steel, which given the design of the SGM implies production-
method specific baselines for importers.

4.2. BlueScope could be significantly affected by carbon leakage as a result of the Safeguard Mechanism

Q 1.2 What is your view on how your business or industry could be affected by carbon leakage?

Carbon leakage is a material risk for BlueScope. This risk is increasingly significant as
Australia’s climate ambition increases.

As discussed above in section 1.3, BlueScope operates in a highly competitive, trade exposed industry. BlueScope’s production for local consumption and for exports competes against foreign producers, many of whom do not pay a carbon price at all or as large as that effectively imposed by the SGM.

Australian steel prices generally reflect international steel prices. Consequently, Australian producers must absorb costs if they are imposed on Australian manufacture but not on

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overseas manufacture. The iron and steel industry is generally subject to challenging forces and economics: it is a relatively capital-intensive industry, with global competition, generally commoditised products and cyclical operating profitability due to input price volatility and variable demand for finished steel. As a result, an external shock such as different carbon prices for local and overseas manufacture can threaten viability.

Iron and steel manufacturing has high fixed costs, and efficiency is usually maximised through production volumes close to a plant’s full capacity. In addition, there is limited scope to reduce production levels from a BF due to the continuous nature of the production process and the detrimental impact of stopping and starting the process. Consequently, many iron and steel producers – including BlueScope – export a material proportion of their production when production capacity exceeds local demand. Commercially, exports are important to ensuring viability given the volatility in local steel consumption. BlueScope typically exports around one quarter of its Australian steel production, with volumes varying according to domestic and international market conditions.39 Approximately three quarters of BlueScope Australia’s exports are to countries that are unlikely to have carbon costs in the near term,40 and so
BlueScope is disadvantaged by carbon policy settings if they effectively impose a net carbon price on exported production.

These challenges do not imply that Australian iron and steel manufacturing is a “sunset industry” without a viable future. A developed economy such as Australia will have an ongoing and expanding demand for iron and steel for building and construction, defence, and not least for a range of infrastructure required to reduce emissions. As Minister Bowen stated, “our energy transition needs steel and a lot more of it.”41 Minister Bowen has also publicly advocated for sovereign Australian steelmaking to meet this demand “I want as much as possible of the steel we need here and elsewhere to be Australian steel.”41 BlueScope also has a well-publicised strategy of growth in construction applications such as COLORBOND® steel for roofing and cladding and TRUECORE® steel for light gauge steel framing, and is currently progressing construction of a $415m seventh metal coating line to underpin the continued growth for its domestic value added products against other materials such as roof tile and timber, which will reduce overall exports. Consequently, Australian production is likely to remain viable for the foreseeable future, provided that carbon policy (including both carbon prices and subsidies for lower emissions production) does not put Australian production at a disadvantage to overseas production. As discussed further in section 3.4.1, Australia potentially has significant comparative advantage in becoming a lower emissions iron producer, but government intervention is required to address the externalities of developing lower emissions iron and steel.

39 Total exports from BlueScope’s Australian operations reached 865,000t in FY2019, or just over one quarter of domestic production. Total exports from Australian operations in FY2022 were 457,000t, reflecting stronger domestic demand.
40 Total prime exports from Australia in FY2023 were 902,000t with greater than three quarters of volume going to destinations without a carbon price including the United States, the United Arab Emirates, Mexico, Vietnam and Oman.
41 Chris Bowen speech to AI Group, November 13, 2023

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4.3. The Review should assess a broad range of steel products

Q 2.1 Are there other goods or commodities beyond those identified as trade exposed under the Safeguard Mechanism that should be included in the assessment?

The CBAM needs to cover multiple levels of the iron and steel supply chain. This would include upstream steel products in coil, sheet or plate form, midstream steel products made from steel and finished downstream goods that contain steel. As an illustrative example, upstream metallic coated painted coils of steel are turned into roll formed roof sheeting that are used in portable buildings or sheds.

The SGM proxy classification of EITE commodities covers most iron and upstream and midstream steel products.42

All relevant downstream manufactured products that have high steel intensity should also be included in the assessment.43 This would include steel containing products such as roof and wall cladding, fencing, sheds, racking, rain water goods, light gauge steel house framing, wind turbines, steel structures and many other products. These downstream products are classified under a wide variety of tariff classifications.

Upstream, midstream and relevant downstream products likely includes all relevant tariff codes under:
• Chapter 72 – Iron and steel.
• Chapter 73 – Articles of iron or steel.

Other downstream products are classified in some tariff codes under a variety of other chapters, including:
• Chapter 82 – Tools, implements, cutlery, spoons and forks, of base metal; parts
thereof of base metal, including tariff code 8201.
• Chapter 85 – Electrical machinery and equipment and parts thereof; sound recorders
and reproducers, television image and sound recorders and reproducers, and parts
and accessories of such articles, including tariff code 8516.
• Chapter 94 – Furniture; bedding, mattresses, mattress supports, cushions and similar
stuffed furnishings; luminaires and lighting fittings, not elsewhere specified or
included; illuminated signs, illuminated name-plates and the like; prefabricated
buildings, including tariff code 9406.

This list is not comprehensive, and the specific downstream products that should be part of this assessment should be informed by industry expertise. BlueScope is currently undertaking detailed analysis to determine the specific end-use products for BlueScope’s Australian produced steel, and how they are classified by tariff codes. This is a complicated analysis

42 For example, as defined in Schedule 2 of the National Greenhouse and Energy Reporting (Safeguard
Mechanism) Rule 2015: item 16: tonnes of continuously cast carbon steel products and ingots of carbon steel, item 18: Tonnes of hot rolled flat products produced at integrated iron and steel manufacturing facilities, item 23;
Tonnes of treated steel flat products
43 Relevant downstream manufactured products should include all downstream products with a high steel intensity that are manufactured in Australia

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because many different products use steel, and downstream steel manufacturing value chains are often complex with a series of intermediate manufacturers.

Downstream products need to be included to avoid the carbon leakage that would occur if steel containing goods are made using iron and steel that has not paid a carbon price, and are then imported to compete against finished goods produced in Australia from Australian crude steel that has paid a carbon price. This is a significant risk given imports currently account for approximately half of Australia’s true total steel consumption.44

4.4. The Review should assess policies against a broad range of policy goals, and with a sophisticated understanding of steel products

Q 2.2 Is this characterisation of the potential impacts of carbon leakage and instruments to address it appropriate for the purpose? Are there other aspects that should be considered?

As discussed earlier (section 4.1), the assessment of carbon leakage and policy instruments needs to analyse the impact of differences in emissions reduction policy stringency between countries to:
• Prevent the movement of production that would increase global emissions.
• Support a vibrant Australian manufacturing industry.
• Provide a level playing field for competition.

Differential carbon policies could lead to the relocation of production which did not increase global emissions, but which did impair Australian manufacturing or was unfair to Australian producers.

The Carbon Leakage Review will therefore be most helpful to Australian policy makers if it assesses how a CBAM can serve all of these aims. The purpose of the Review is ultimately to advise government about the appropriateness of policy instruments such as a CBAM. That advice would fall well short of the issues that should be considered by policy-makers if it only considers the impact of policy instruments on carbon leakage, and does not consider their impact on other policy objectives.

BlueScope notes that the Consultation Paper describes the importance of considering “the costs on trade partners”. It seems reasonable therefore that the Review should also consider the impact on sovereign Australian manufacturing, and whether there is a level playing field for Australian producers.

The Review also needs to consider how a CBAM will serve these objectives in conjunction with other policy instruments, including the SGM and industry support. If the Review only focuses on how a CBAM will affect carbon leakage, then it will inevitably overlook how a CBAM

44World Steel Association, Steel Statistical Yearbook 2022, table 58 estimates Australia’s true steel use is 10.5
Mtpa whereas 5.8 Mt crude steel is produced in 2021-22 with steel imports of 2.5 Mt and exports of 1.0 Mt

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and other measures can best be designed to contribute to a vibrant internationally competitive
Australian manufacturing sector.

In assessing carbon leakage, the Consultation Paper notes that changes in global emissions depend on the relative intensity of production in different countries (p.19). It presents data on steel emissions intensity for a variety of countries (p.20). BlueScope notes that this data is sourced from Global Efficiency Intelligence and Climate Transparency, and appears to differ from a range of data sources that the steel industry generally considers to be more reliable such as CRU and World Steel.45 CRU data results in a significantly different emissions intensity to the Consultation Paper, as shown in country averages in Figure 2.

More fundamentally a more sophisticated analysis of comparative steel emissions intensity is required, which takes into account the complexities of steel production and steel products. For example, average emissions intensity for flat versus long products differs significantly in some countries, as shown in Figure 2. As discussed above in section 1.1, different steel production methods are currently used differentially for a variety of steel products. In particular, flat products have more onerous metallurgical specifications than long products through the EAF process because they are less able to tolerate the residual levels of copper and zinc that are associated with using high levels of scrap. This limits the range of scrap available for flat product production in an EAF (compared to long products). An assessment of the probability of carbon leakage in the steel industry needs to take such complexities into account.
Figure 2 – Steel emissions intensity by country, 202246

45CRU Emissions Analysis Tool
46CRU Emissions Analysis Tool, CRU country average scope 1 and 2 emissions intensity including primary and secondary steel production

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4.5. The Review should consider a broad range of potential economic impacts

Q 2.4 What domestic economic effects from carbon leakage and policy approaches to address it are of particular importance for analysis and modelling? Would the analysis benefit from an assessment of impacts on bilateral trading partners and net global emissions?

As discussed earlier (section 4.1), the analytical approach to policy measures needs to consider multiple objectives, including the aims of:
• Preventing the movement of production that would increase global emissions.
• Supporting a vibrant Australian manufacturing industry sector.
• Providing a level playing field for competition.

The Review’s assessment of the SGM, a potential CBAM and other policy measures should consider a variety of potential economic impacts including:
• The exposure of Australian producers who have paid a carbon price, or who have
invested to reduce their emissions, to competition with relatively high emissions iron
and steel producers that may have not paid a carbon price, in both domestic and
export markets, as described in more detail above in section 4.2.
• The exposure of Australian producers to competition with relatively low emissions
producers that pay a lower carbon price, but which receive substantial subsidies to
support their transition that may not be matched in Australia, and may not be taken
into account by a CBAM.
• The exposure of Australian producers to competition with relatively low emissions
producers that are attracted by relatively high carbon prices to shuffle their lower
emissions volume to Australia, but do not as a result increase their total production of
lower emissions iron and steel. This would fail to reduce global emissions but
disproportionately affect the viability of Australian production.
• The cost to the Australian Government and to the Australian economy if producers
from jurisdictions with more stringent carbon policy can effectively recoup some of
their carbon costs in Australia through the operation of an Australian CBAM (which
would depend on its design features, discussed in more detail in section 4.8.5).

Many of these potential economic impacts would flow from the early adoption of lower emissions iron and steel production outside Australia. While it is hard to predict the future of technology adoption, BlueScope has identified at least two plausible scenarios for early adoption of lower emissions iron and steelmaking elsewhere. These scenarios are outlined below, not as an assessment of the most likely future, but to demonstrate that the scenarios and the ensuing economic effects are plausible and therefore require policy responses in the relatively near term.
• Scenario 1: Taiwanese, South Korean or Japanese iron and steel manufacturers
(which are currently some of the larger sources for flat steel imported to Australia)

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import lower emissions flat steel to Australia initially made with NG-DRI with half the
carbon footprint of primary Australian steel. This could involve:
− Increased carbon prices in Taiwan, South Korea or Japan, which already have
carbon prices or are likely to introduce them in the near term.
− The growth of NG-DRI production in the Middle East, taking advantage of plentiful
natural gas available at prices substantially lower than international parity pricing,
and possibly additional support from Middle Eastern governments.
− DRI in the form of HBI is shipped at relatively low cost from Middle East to Asian
steel mills.
− Taiwanese, South Korean or Japanese steel producers feed this HBI into either
an ESF-BOF or EAF, producing relatively high quality lower emissions flat steel
products. This production might convert existing scrap based EAF facilities, which
currently produce 27 to 40 per cent of crude steel in these countries.47
− These Taiwanese, South Korean and Japanese producers have large integrated
mills with multiple ironmaking units and economies of scale (Australian iron and
steelmakers lack equivalent scale).
− This production receives significant Taiwanese, South Korean or Japanese
government capital expenditure and/or operational expenditure subsidies.
− Export of some of the lower emissions steel product to Australia, using the
established import channels to Australia from these countries, potentially attracted
by differential carbon regimes between Australia and Asia that increase the
effective margin on lower emissions steel when selling into a market with prices
set by higher emissions steel.
• Scenario 2: Chinese steel manufacturers are encouraged by substantial shifts in
Chinese government carbon and industry policy to rapidly develop and implement
lower emissions steel technology. This could include scrap fed EAF or DRI fed lower
emissions steel production processes.
− Export of some of the lower emissions steel product to Australia, potentially
attracted by differentials in carbon regimes.

In these scenarios, depending on its design, a CBAM might provide economic incentives for producers to export to Australia because of differentials in carbon regimes. If so, the bulk of
Australia’s flat steel imports could be lower emissions steel, even though lower emissions steel is only a minority of Asian production, because total Australian steel consumption is small relative to total production in Asia. In such a scenario, importers might have costs (including carbon costs and taking into account overseas government support for lower carbon production) that are materially lower than the costs of Australia iron and steel manufacturers and as a result Australian producers might cease to be viable.

In these scenarios, Australian policy settings would probably not have much impact on shifting global production of iron and steel towards lower emissions pathways and thus reducing global emissions. As the scenarios illustrate, shifts in production would be driven primarily by government support in Asia and the Middle East rather than the commercial opportunity of
472022 values from World Steel in Figures 2023, South Korea 32%, Taiwan 40%, Japan 27%, recognising this is production of crude steel and is not specific to flat product

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exports to Australia. Instead, the main impact of Australian carbon policy would be to encourage sale of that lower emissions product in Australia rather than in other markets – although it might well in the process impair the viability of Australian producers.

4.6. The Review has identified the key policy options

Q 3 Are there additional policy options that should be considered alone or as part of a portfolio of approaches to address carbon leakage?

BlueScope has not identified any additional policy options to those identified in the
Consultation Paper that should be considered to address carbon leakage.

4.7. Existing measures under the Safeguard Mechanism partially reduce carbon risk

Q 3.1 What is the capacity of current policy settings of the Safeguard Mechanism to mitigate carbon leakage risk into the future?

We note that a number of elements of the SGM are yet to be finalised, and the mechanism is subject to planned reviews. The commentary below must be read with this in mind, as there remains a reasonable level of uncertainty regarding the final design of the SGM and any subsequent amendments from the planned reviews.

Carbon leakage is not fully addressed by current measures in the SGM.

BlueScope agrees with the Consultation Paper that the SGM, particularly the TEBA baseline decline rates, may provide some partial support against carbon leakage risk. The capacity for each facility to emit up to its production adjusted baseline should provide support in the initial years of the SGM and provide more certainty in the short term for BlueScope. However, this limited certainty is subject to appropriate finalisation of the EBIT guidelines calculating qualification for the TEBA baseline decline rate, the production variable review and the
2026/2027 SGM review.

These SGM measures alone may not be adequate to address carbon leakage risk. Baseline decline creates a material carbon leakage risk, and the risk increases as Australia’s climate ambition increases, as discussed in section 4.2. As discussed in section 4.10, Australian government support is significantly smaller scale than in overseas jurisdictions, which limits the development of a competitive lower emissions iron and steel industry in Australia.

As previously described in section 3.1, BlueScope believes this Review should also consider the impact of current policy settings on a vibrant Australian manufacturing industry and on providing a level playing field for competition. In the short term these current policy settings may provide some support but are not adequate to address the medium term investment and certainty risk on the Australian manufacturing industry.

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4.8. An Australian carbon border adjustment mechanism should be well-designed and introduced cautiously

Q 3.2 Is an Australian carbon border adjustment mechanism desirable? If so, which design features should be considered?

BlueScope supports the introduction of a well-designed and effective CBAM for steel products.
As discussed above in section 3.3, BlueScope believes it would be prudent for Australia not to rush the introduction of a CBAM for steel as:
• The consequences of policy missteps would be high.
• The probability of policy missteps is high given the complex questions involved in
designing a CBAM.
• Australia has the opportunity to learn from others (particularly the EU).
• There are relatively few downsides to being cautious with the introduction of a CBAM
for steel.

A well-designed and effective CBAM for steel requires:

1. Comprehensive product coverage of all relevant flat and long steel products and
downstream manufactured steel containing products.

2. CBAM importer baselines that are appropriately calculated.

3. Calculation of actual emissions intensity for imported products through a certificate of
origin regime with appropriate verification.

4. CBAM importer liabilities that are appropriately calculated relative to this baseline.

5. No effective subsidies for imported products with emissions below the relevant baseline.

6. Export rebate for domestic carbon liabilities.

7. Clear mechanism to impose importer liabilities and rebate export liabilities.

8. Administratively workable system for importers and exporters.

9. Transitional reporting-only period.

The rationale for each well-designed and effective CBAM design choice is described in further detail below.

In addition, as previously identified in section 3.3.3, BlueScope believes that the transition to a CBAM needs to maintain appropriate support for TEBA industries,48 including current TEBA support (subject to appropriate finalisation of the EBIT guidelines calculating qualification for

48TEBA industries is shorthand for trade-exposed facilities facing an elevated risk of carbon leakage as per SGM categorisation of EITE facilities

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the TEBA baseline decline rate, the production variable review for steelmaking and SGM reviews) for the reasons discussed in section 4.8.10.

Australia has the opportunity to learn from the experience of the implementation of a CBAM in the EU which has been many years in design and will only have financial consequences from the beginning of 2026. With the government already committed to a sectoral approach for a CBAM, it would also be prudent to first implement a CBAM for industries with less varied production and product mixes than steel so that insights can be applied to the more complex steel industry.

4.8.1. Comprehensive product coverage

A well-designed and effective CBAM should comprehensively cover all relevant downstream steel products that have high steel intensity. These goods are classified under a wide variety of tariff codes as detailed above in section 4.3, and this requires further investigation because of the complexity of downstream steel manufacturing value chains.

Comprehensive product coverage is required because carbon leakage would occur if steel containing goods are made using iron and steel that have not paid a carbon price, and are then imported to compete against finished goods produced in Australia from Australian crude steel that have paid a carbon price. Not only would this outcome potentially increase global emissions, thus undermining the key policy purpose of the SGM and a CBAM, it would unfairly impose a competitive disadvantage on Australian producers. It would also undermine the viability of both Australian steel manufacturing, and downstream manufacturing of steel containing products. Consequently, it is also unlikely to be a durable and therefore predictable policy setting.

If comprehensive product coverage increases administrative complexity, the net benefits would be proportionate to the costs. The additional administrative complexity should be manageable with some sensible approximations, such as calculating the weight of steel in steel containing products and inferring a carbon intensity accordingly from the production method typically used to produce the input steel.

Precisely because comprehensive product coverage levels the competitive playing field, it is likely to comply with international trade norms.

If CBAM design fails to provide comprehensive product coverage, undermining the current economics of domestic iron and steel producers and steel goods manufacturers, there is even more urgency to provide substantial additional industry assistance to support the future transition to lower emissions production as discussed in section 3.4.

4.8.2. CBAM importer baselines that are appropriately calculated

A well-designed and effective CBAM should calculate baselines for importers appropriately.

In general, baselines for importers should be set to mirror calculations under the SGM as closely as possible. This approach would promote a level playing field between Australian and overseas producers, promote the viability of efficient Australian producers, and minimise trade compliance risks. It is also more likely to be durable and predictable as it would tie the SGM and CBAM schemes together, supporting a coherent, durable and predictable policy

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environment. It is consistent with the approach in the Consultation Paper that “baselines that apply to Australian facilities under the Safeguard Mechanism may be equally applied to imports.”49

Several design elements are important.
• Reflecting the design of the SGM:
− The baseline for existing overseas facilities (the “importer baseline”) should be the
weighted average of SGM baselines for each existing Australian facility utilising
that production process. This would reflect the impact of any TEBA baseline
decline rate on SGM facilities and the blended Australian industry average and
site-specific baselines if implemented prior to 2030.
−
The importer baseline for new overseas facilities should be international best
practice for that production process. BlueScope understands the Government is
currently undertaking further work to determine the specific definition of
international best practice for calculating baselines for new facilities under the
SGM.50
− Like the SGM, a CBAM should take separate approaches to existing and new
facilities. Otherwise, Australian and importing producers may compete unequally.
For example, if international producers are assigned a baseline for all facilities at
the average of current Australian manufacturing, they would have greater
incentives than some Australian manufacturers to set up a new facility.
• Baselines for imports from existing facilities should be based on averages that apply
to Australian production rather than by reference to each individual international
facility. It is administratively impractical to set a specific baseline for each existing
international iron and steel production facility: historical records may be insufficient,
and the application of TEBA concessions will be difficult because they depend on
EBIT performance of each facility and calculating the actual emissions intensity in
every previous year.
• Separate importer baselines should be calculated for primary and secondary steel
production processes, as they have different carbon intensities. Separate importer
baselines for each process would reflect SGM baselines that are set for each
production method at each facility. Separate importer baselines for each process
would also recognise there will always be a requirement for primary steel production
and there is insufficient scrap for all production to transition to scrap based EAF (see
above section 2.4). Any other approach (such as setting importer baselines for types
of steel products) would effectively treat some international producers differently to
Australian producers, creating an uneven playing field, and potentially raising WTO
compliance issues.
• The facility producing each imported product should be assessed to determine if a
primary or secondary importer baseline should apply. There may also be products
that are produced from both processes, in which case a mixed importer baseline
should apply.

49 DCCEEW Carbon Leakage Review – Consultation Paper, page 26
50 Safeguard Mechanism: International Best Practice Benchmarks, Consultation paper and draft guidelines

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• However, importer baselines are calculated, the importer baseline applied to a
particular shipment of imported product should be determined using a certificate of
origin regime full product traceability approach. This is similar to a Guarantee of Origin
(GO) scheme that Australia is currently developing and the Consultation Paper
describes as “a product-based emissions accounting framework based on robust
internationally aligned emissions accounting methodologies.”51 A certificate of origin
regime is different from an Environmental Product Declaration (EPD) as it has a
narrower emissions and volume scope focussed on the specific information required
to import under a CBAM.
• Where the source of the steel is unclear (particularly if the steel is sourced through a
trader), the applicable importer baseline should be assumed to be the least emissions
intensive production method unless the importer is able to produce a certificate of
origin to prove a more intensive method was used. Otherwise, importers of lower
emissions steel would have incentives to obscure their source of production,
effectively competing unfairly with Australian producers whose source of production is
readily identified.

4.8.3. Calculation of actual emissions intensity for imported products

A well-designed and effective CBAM requires calculation of emissions intensity for imported products based on either reliable verified calculations, or appropriately set defaults. The calculation of emissions intensity for imported products should also be based on a certificate of origin full product traceability principle.

The calculation of actual emissions will need to consider:
• Products where the source may be unclear, particularly if the steel has passed
through a trader.
• Products that utilise input materials produced at a separate facility, such as pig iron.
• Products produced across multiple facility boundaries, such as standalone coated and
painted metallic processes and downstream products produced from a mix of EAF
and BF-BOF processes.
• Products where emissions have been reallocated through accounting basis
calculations, to achieve virtual low emissions steel with no or little actual overall
emissions reduction.

Australia may be able to use some components of the EU CBAM approach to verifying actual emissions intensity for imported products.52 This includes verification by an accredited verifier and imposing penalties if importers do not comply with these obligations. It is vital to ensure emissions intensity reported is verified since as the Consultation Paper recognises “producers may have incentives to artificially reduce reported emissions intensities.”53

Defaults should only be utilised as a last resort. To ensure a level playing field, defaults need to be set to ensure they do not create opportunities for importers to reduce their calculated emissions intensity by obscuring their actual emissions intensity. If robust actual facility
51 DCCEEW Carbon Leakage Review – Consultation Paper, page 28
52 European Commission Memo, 10 May 2023, Questions and Answers: CBAM
53 DCCEEW Carbon Leakage Review – Consultation Paper, page 27

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emissions data is not available the CBAM should utilise default values that create significant incentives for importers to report their verified actual emissions rather than rely on default values.

The EU CBAM sets default values as the average emissions intensity of each exporting country with an additional mark-up for each product. When reliable data for the exporting country cannot be applied for a type of goods, the default values will be based on the average emissions intensity of the X per cent worst performing EU installations for that type of good.54
The specifics of the EU CBAM approach will be determined in future implementing acts.

Alternative approaches to default values could be based on the domestic Australian average emissions intensity, or an Australian average emissions intensity based on worst X per cent of facilities (with the specific per cent to be determined), with an additional penalty. This would be less administratively complex than setting defaults based on the exporting country average.
It also reflects that within-country differences may be larger than between-country differences in emissions intensity.

4.8.4. CBAM importer liabilities that are appropriately calculated relative to the baseline

A well-designed and effective CBAM requires CBAM importer liabilities that are appropriately calculated relative to the baseline. This includes accounting for any foreign carbon liability, adjusted for any foreign direct or indirect carbon support received.

To account for any foreign carbon liability, the importer would subtract its foreign carbon liability already incurred from its liability under an Australian CBAM. This appears consistent with the approach proposed in the Consultation Paper and with the EU CBAM approach.55 It would level the playing field for importers, who otherwise might be double charged for a carbon liability already paid for overseas. Accounting for any foreign carbon liability would also need to consider whether it is appropriate to include liabilities met or avoided using carbon offsets, including verifying the credibility of carbon offsets applied.

The foreign carbon liability should be adjusted for any foreign direct carbon support received, such as allocation of free permits. This would involve calculating the foreign carbon liability to take into account any direct carbon support received so that it reflects the net carbon costs that importers have already paid in their local jurisdiction. Otherwise, there would be an uneven playing field for importers who would effectively pay less than the carbon liability that they would have incurred if producing in Australia.

The foreign carbon liability should also be adjusted for any foreign indirect carbon support received to produce lower emissions iron and steel. Such support can contribute to either or both of capital and operational expenditure. It is usually specific to the individual plant.
Examples of capital support currently committed in the EU and other jurisdictions are detailed in Appendix 5.2. Foreign indirect carbon support also includes support for specific iron or steelmaking inputs, such as subsidised electricity or gas costs. Adjustment should amortise the capital or operational expenditure assistance over total steel production for the facility to

54 To note the EU CBAM has not yet defined the X per cent worst performing EU installations. This will be determined in future implementing acts
55 European Commission Memo, 10 May 2023, Questions and Answers: CBAM

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calculate an impact per tonne of steel. The foreign carbon liability should be reduced accordingly, effectively increasing the liability that the importer would have otherwise under an Australian CBAM.

Australian producers might not be able to rely on existing anti-dumping and countervailing measures to prevent such unfair competition because the subsidies might be exempted given their ostensible environmental purpose. Specific adjustment in the CBAM for indirect carbon support would level the playing field between overseas and Australian producers. It would promote the emergence of a vibrant lower emissions iron and steel industry in Australia that might otherwise be unviable given the competitive disadvantage relative to overseas producers.

Although such an adjustment might increase administrative complexity and costs, these would be outweighed by the benefits of fair and vigorous competition between producers of lower emissions iron and steel.

There might be concern about the durability of this arrangement because the EU CBAM does not adjust for indirect foreign support. However, there are relatively few concerns in the EU that EU producers should be shielded from low emissions iron and steel support provided by countries outside the EU because European countries currently provide the vast bulk of government assistance available globally for lower emissions iron and steel.

There might also be concern that adjusting for indirect foreign carbon support is not trade compliant. However, the proposed adjustment is essentially an “offsetting measure” and is likely to be compliant with WTO rules.

If a CBAM does not adjust for indirect support received in overseas jurisdictions, then it is even more important that there should be commensurate industry assistance for transition to lower emissions production in Australia in order to provide a level playing field, and promote a vibrant lower emissions Australian iron and steel industry. As outlined in section 3.4, the iron and steel industry transition currently receives less government support in Australia than in other jurisdictions. Appropriate forms of support are also discussed in section 3.4, including support for specific iron or steelmaking inputs.

BlueScope accepts it may not be appropriate to adjust foreign carbon liability for research and development support for lower emissions iron and steel because it is not administratively feasible to allocate research and development support to particular facilities. Again, this reinforces the importance of Australian governments providing commensurate research and development support to that provided by governments in other jurisdictions in order to promote the viability of a vibrant lower emissions Australian manufacturing sector.

4.8.5. No effective subsidies for imported products with emissions below the relevant baseline

A well-designed and effective CBAM should not provide effective subsidies to imports with emissions below the relevant CBAM import baseline. If imported product has emissions below the baseline after accounting for foreign carbon liability and adjusting for direct and indirect carbon support received, the importer should not receive a carbon credit. This would be consistent with Australian trade policy, as BlueScope is not aware of other instances where
Australia pays a subsidy to foreign producers or importers.

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This limit is durable and predictable as it is consistent with EU CBAM design and with the consultation phase of the UK CBAM paper where importers are not envisaged to receive effective subsidies. Under the EU scheme, there may be instances where importers have a theoretical negative CBAM liability if the CBAM liability is less than the value of emissions provided by free allocations in the EU. However, the specifics of the EU CBAM approach in this instance will be determined in future implementing acts and the EU approach does not appear to consider providing subsidies to credit this negative liability.

This limit also supports a vibrant Australian manufacturing industry by maintaining the competitiveness of domestic producers relative to lower emission imported products in the short term, providing sufficient time to transition to lower emissions iron and steel in Australia.
However, the limit will provide increasing incentives for lower emissions imports over time as importers will receive increasing credit for lower emission production as Australian baselines decline.

Providing a subsidy for foreign imports would also compromise the links between Australia’s international commitments to reduce emissions and the SGM. Initial SGM baselines and their subsequent decline were designed to align Australia’s emissions reduction goals with the outcomes of the SGM. If importers received SGM credits for emissions under their baseline, then this could distort this ‘zero-sum’ design of Australia’s SMC market and could undermine
Australia’s emissions reduction goals. The SGM credits would be for lower emissions outside of Australia that would not necessarily be taken into account by national accounting for carbon emissions.

It is likely that refusing to provide a subsidy for foreign imports with emissions lower than their baseline would be trade compliant. The EU CBAM does not envisage importers receiving effective subsidies, and the EU believes this is WTO compliant.

Obviously, subsidies for foreign import would be more complex administratively, which is not justified in the absence of compelling benefits.

The absence of a subsidy for imports with emissions lower than their baseline would not discourage lower emissions production in Australia. In the short term, the volume of lower emissions iron and steel production globally is likely to be limited by the availability of scrap, and encouraged primarily by foreign government support rather than carbon prices in a relatively small market such Australia. Consequently, the major impact of a subsidy for a foreign import would be to shuffle foreign production to Australia because it effectively paid a higher carbon price rather than to reduce global steel emissions. In any case, a subsidy is unlikely to attract significant lower emissions imports to Australia in the short term because carbon prices in the EU are currently materially higher than in Australia. In the medium-long term, relatively little production will be affected because with declining baselines, relatively few imports will have emissions below the relevant baseline.

BlueScope recognises the potential alternative approach is to provide subsidies for imported products with emissions below the relevant baseline. This would not achieve the aims of policy measures to reduce carbon leakage and has significant downsides as discussed above.

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4.8.6. Export rebate for carbon liabilities

A well-designed and effective CBAM for steel requires an export rebate for carbon liabilities imposed by the SGM on domestic iron and steel producers. The export rebate baseline should be the same as the SGM baseline for that facility.

Export rebates should be provided for trade exposed manufacturing products as covered in the SGM Schedule 2, Table 1 – Trade-exposed production variables that are also manufacturing production variables.56

Export arrangements should also allow exporters to retain Australian credits if the emissions intensity of the exported production is lower than the baseline applicable to the facility. This would provide a level playing field for domestic production and recognise the significant investment required to change production method and reduce emissions, particularly for the iron and steel sector.

The export rebate might be available regardless of destination, or only if the destination does not have a CBAM. BlueScope is indifferent as to whether a rebate is available on exports to countries with a CBAM if these exports qualify for a credit in the destination country for the full carbon price paid in Australia.

Without an export rebate, Australian steel exports to destinations without a carbon price will be increasingly uncompetitive. As described above in section 4.2, viable exports are important to the economics of iron and steelmakers because local demand is volatile, and exports can fill the gap, maximising the cost advantages of running plant at close to full capacity.

Without an export rebate, Australian steel exports will be unfairly disadvantaged relative to both local production and other exports to a jurisdiction that does not have a carbon price.

An export rebate would be compatible with global trade rules. It is analogous to a GST or VAT rebate on exports. It effectively rebates a tax on local production when that production is exported. It is consistent with the destination principle that goods should be taxed where they are consumed.57

Providing an export rebate would have minimal impact on global emissions. Australian exports to countries without a carbon price are likely to be replaced by alternative production not subject to carbon costs. Assuming current market dynamics continue, Australian producers are unlikely to divert production from local sales to exports because domestic sales typically have higher margins than exports.

Although an export rebate might be inconsistent with the current design of the EU CBAM, it is unlikely to be an unstable policy setting. For all the reasons that apply in Australia, jurisdictions that export a significant proportion of their steel production (unlike the EU) are likely to rebate carbon costs for steel exports.

The Consultation Paper suggests that an export rebate baseline might be calculated in a variety of ways, such as on “carbon efficient domestic production” or “average global

56 National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015, Schedule 2
57 Border Carbon Adjustment in the EU, Treatment of Exports in the CBAM, 2022, p. 10

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emissions intensity.”58 BlueScope believes that it would be administratively simpler, and more obviously compliant with trade obligations, if the rebate was based on the SGM baseline for that facility. In effect the net carbon liability of an exporter with emissions above its applicable baseline would then generally be zero, irrespective of its actual emissions.

4.8.7. Clear mechanism to impose importer liabilities and rebate export liabilities

A well-designed and effective CBAM requires a clear mechanism to impose importer liabilities and rebate export liabilities. The mechanism should aim to minimise costs, and provide a durable approach with predictable outcomes for importers, exporters, and local producers.

Feasible mechanisms include:
• A cash transfer of an amount equivalent to the liability based on the ACCU price. This
has low administrative complexity but may be perceived as a tax by other jurisdictions
so may be less politically feasible.
• Surrender or return of ringfenced CBAM certificates that are separate to the domestic
market for SMCs or ACCUs. The ringfenced CBAM certificate price could be linked to
the current ACCU price and be tradable among liable importers and exporters who
receive a rebate. Ringfenced CBAM certificates would be consistent with the EU
CBAM approach where importers are required to surrender EU CBAM certificates
based on reported emissions.59 The price of EU CBAM certificates is linked to the EU
ETS carbon price.

An alternative would be to require importers to acquire ACCUs commensurate with emissions above the relevant baseline on imports. The impact of this approach on ACCU prices would depend on:
• Whether imports result in a net change to Australian production.
• The emissions intensity of imports relative to the emissions intensity of any Australian
production that is reduced or exported as a result of imports.
• Any link to an export rebate that effectively excludes Australian exports from ACCU
liabilities.

These impacts are hard to assess, and an Australian CBAM would be able to learn from the
EU CBAM approach to implementing ringfenced CBAM certificates.

4.8.8. Administratively workable system for importers and exporters

A well-designed and effective CBAM requires an administratively workable system for importers and exporters that aims to minimise transaction costs. A CBAM would probably require links between Customs invoicing and cargo systems for imports and exports with
Clean Energy Regulator emissions liability and unit registries. The administrative system would also need to receive and share information with other jurisdictions to enable adjustments to CBAM calculations either in Australia or for an overseas CBAM. An

58 DCCEEW Carbon Leakage Review – Consultation Paper, page 27
59 Regulation (EU) 2023/956 establishing a carbon border adjustment mechanism

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interoperable administrative system may also be beneficial to integrate with EU and other
CBAM verification processes and default values (see section 4.8.2 and 4.8.3).

4.8.9. Transitional reporting-only period

A well-designed and effective CBAM requires an initial transitional reporting-only period of at least two years for steel. The transition period is a pilot and learning period for all stakeholders
(importers, producers and government) to collect data on emissions of imports without financial penalties. The transition period would support smooth roll out of a CBAM as it would allow unforeseen issues to be identified and addressed before there are financial consequences, minimising future disruption for stakeholders.

Such a transition period would reflect EU CBAM implementation design that has a transition period from October 2023 to end 2025. The transition period has an “objective of facilitating a smooth roll out and to facilitate dialogue with third countries.”60

4.8.10. Maintaining appropriate adjustments for TEBA industries in the transition to a CBAM

A well-designed and effective CBAM would maintain appropriate adjustment for TEBA industries in the transition to a CBAM, including maintaining appropriate TEBA baseline decline rates (subject to appropriate finalisation of EBIT guidelines calculating qualification for the TEBA baseline decline rates), until:
• All features of a well-designed and effective CBAM are in place;
• The essential enablers of competitive lower emissions iron and steel are in place, as
discussed in section 3.4;
• There is sufficient time to plan and implement a transition to lower emissions iron and
steel production, recognising BlueScope’s recent investment in the blast furnace
reline that was made on the basis of government’s commitments to TEBA baseline
decline rates in the SGM.

Appropriately designed TEBA baseline decline rates in the SGM are required to:
• Maintain domestic competitiveness, providing Australia with a pathway to maintain a
sovereign iron and steel-making industry in the long-term;
• Provide policy durability and predictability in the transition, which is particularly
important when large scale investment decisions only provide an adequate return
over the long-term;
• Provide time for hard to abate sectors to transition.

Maintaining appropriate design of TEBA decline rates in the SGM while Australia transitions to a CBAM would provide policy durability and predictability. It would maintain the current transition approach to which the industry has anchored, and its economics, including the impact on steel costs and therefore pricing relative to inter-material substitutes and imports of

60EU Regulation establishing a CBAM and European Commission Memo, 10 May 2023, Questions and
Answers: CBAM

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steel and steel containing products. Capital investments in iron and steel manufacturing are usually large, and only viable if the plant operates profitably and can continue to operate profitably for a material length of time. In this environment, more durable and predictable steel costs and prices are vital to encouraging continued investment in sovereign steel capacity in
Australia.

Maintaining appropriate design of TEBA adjustments in the SGM while Australia transitions to a CBAM would also provide time for hard to abate sectors to transition. Baselines should align with technologically feasible and commercially viable emissions reduction trajectories – the
‘efficient frontier’ of iron and steel decarbonisation. Otherwise, there is a risk that steel prices are volatile relative to substitutes that do not have carbon costs. This could lead to shifts in downstream industries such as construction, encouraging shifts in construction methods that are costly to reverse even if steel prices revert to historic relativities in the long-term. Increases in steel prices would also increase costs for end users, exacerbating current problems with inflation and cost of living, and increasing input costs critical to investment in other decarbonisation transitions such as electricity generation and transmission.

Appropriately finalised TEBA baseline decline rates in the SGM should be maintained while
Australia transitions to a CBAM, so there may be a period where a CBAM is implemented and
TEBA adjustments remain. This would not create an unequal playing field with importers or raise trade policy concerns. If importer baselines are calculated by reference to Australian baselines including any applied TEBA decline rates (see section 4.8.2) importers would be treated in the same way as domestic producers, conforming with principles of international free trade.

If appropriate TEBA adjustments are not established and maintained, the SGM will undermine the current economics of domestic iron and steel producers. In this scenario there would be even more urgency to provide substantial additional industry assistance to enable the iron and steel industry to transition to lower emissions production as discussed in section 3.4.

4.9. Mandatory product standards would not have an obvious role

Q 3.3 What is the appropriate role for emissions product standards to mitigate carbon leakage?

The Consultation Paper proposes mandatory product standards that set an upper limit on the emissions intensity of a product. The Consultation Paper identified this could apply to both domestic and imported product but potentially exclude products directed to exports.

BlueScope does not support such a regulatory approach based on emissions product standards given the implementation of the SGM.

The UK Carbon Leakage Consultation considered emissions product standards.61 Although extensively discussed in the UK Consultation, the UK has not committed to adopting significant mandatory product standards. As the UK Consultation notes, emissions product standards are

61UK, Addressing carbon leakage risk to support decarbonisation, A consultation on strategic goals, policy options and implementation considerations, March 2023

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primarily relevant in contexts where there is no carbon price,62 such as domestic products not covered by the SGM or for imported product.

As an alternative to a carbon price, emissions product standards are a much blunter instrument because they create a binary threshold for what products can be sold and do not provide incentives to reduce emissions further below the standard, especially for hard to abate sectors such as iron and steel. If product standards impacted Australian manufactured product, these industries might well immediately cease to be viable, and Australia would lose sovereign capacity.

As an addition to a carbon price mechanism such as the SGM, emissions product standards risk creating unnecessary complexity for limited obvious benefit. This is particularly the case for Australia where the SGM baseline and credit system has an inherently complicated interaction with emissions product standards. It would not make sense to set standards near to, or below the baseline, and a standard significantly above the baseline could only operate as a ‘back-stop’ against extremely high-emissions products.

More broadly, BlueScope supports product transparency and stewardship including managing environmental and social impacts throughout the value chain (sourcing, manufacture, use, reuse and recycling). BlueScope was an early adopter of Environmental Product Declarations
(EPDs), publishing its first EPD, in accordance with EN15804, in 2015. This was the first EPD to be published in Australia under the EPD Australasia Program. Our Australian business now has 14 published EPDs, and a number of products are certified to internationally recognised ecolabel, Global GreenTagCertTM GreenRate™, achieving the highest rating, ‘Level A’.63

BlueScope actively supports voluntary product standards. ResponsibleSteelTM is the global steel industry’s multi-stakeholder sustainability standard and certification program designed to ensure that customers, stakeholders and consumers can be confident that the steel they use has been sourced and produced responsibly.64 BlueScope played a foundational role in the establishment and promotion of the ResponsibleSteelTM Standard. BlueScope believes certification can give its customers confidence in the environmental, social and governance performance of its steelmaking facilities. BlueScope achieved ResponsibleSteelTM site certification for the Port Kembla Steelworks in early 2022, the first site in the Asia Pacific region and the fourth steelmaker in the world to obtain certification. BlueScope’s Western Port site in
Victoria achieved site certification in September 2023. BlueScope was also a member of the multi-stakeholder working group that developed the ResponsibleSteelTM greenhouse gas emissions requirements to market or sell products as ResponsibleSteelTM certified.

62 UK, Addressing carbon leakage risk to support decarbonisation, A consultation on strategic goals, policy options and implementation considerations, March 2023
63 Sustainability - Certifications and Credentials | BlueScope Steel Products for Australia
64 ResponsibleSteelTM standard

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4.10. Governments need to invest significantly in supporting the iron and steel industry to decarbonise

Q 3.4 What is the appropriate role for public investment measures to mitigate carbon leakage?

BlueScope believes substantial public investment in decarbonisation is critical for step changes in emissions from iron and steel production in Australia as discussed above in section
3.4.

As shown in section 3.4, development of step changes in emissions for iron and steel is unlikely without government support. Australian governments need to provide substantially greater support than has been announced, in order to promote development of lower emissions iron and steel at least on par with other jurisdictions, and even more may be required for Australia to grasp the opportunity to develop a global scale lower emissions ironmaking industry. Government support is required for a number of enablers including:
• Policy to increase natural gas supply coupled to domestic reservation so that input
costs for Australian iron production are competitive with jurisdictions that are alternate
locations for producing lower emissions HBI.
• Development of low-cost firmed renewable electricity, including for BlueScope in an
Illawarra Renewable Energy Zone.
• Investment in electricity infrastructure, including for BlueScope an upgraded electricity
connection to Port Kembla Steelworks and transmission to support wind and solar.
• Development of a green hydrogen supply chain, particularly to overcome the ‘chicken
and egg’ problem where no demand results in no supply.
• Support through grants for lower emissions iron and steel capacity to overcome
market failures for technology development and first movers. This needs to be on a
scale similar to overseas and much larger than currently announced support in
Australia.

4.11. Multilateral and plurilateral initiatives can assist but are no substitute for domestic policy

Q 3.5 What is the appropriate role for multilateral and plurilateral initiatives to help to mitigate carbon leakage, and the impact of unilateral measures taken to address carbon leakage?

BlueScope agrees successful implementation of multilateral and plurilateral initiatives in the near term may be helpful to mitigate carbon leakage. However, they are no substitute for effective domestic measures including adjustment for TEBA industries and a CBAM.

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4.12. Feasibility of policy options

Q 4 What principles should guide Australian policies to prevent carbon leakage?
Should other factors be considered to assess the feasibility of potential policies?

The principles that should guide Australian policies to prevent carbon leakage are described in response to question 1.1 (section 4.1). This includes the aims and design of policy measures to reduce carbon leakage.

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5. Appendices

5.1. Mapping of matters where feedback is being sought
BlueScope
Topic Question response

1.1 Carbon leakage Is the description of carbon leakage appropriate for the Section 4.1
purpose of this Review?

1.2 The Safeguard What is your view on how your business or industry could Section 4.2
Mechanism be affected by carbon leakage?
2.1 Relevant goods Are there other goods or commodities beyond those Section 4.3 and commodities identified as trade exposed under the Safeguard
Mechanism that should be included in the assessment?

2.2 Assessing Is this characterisation of the potential impacts of carbon Section 4.4 impacts of carbon leakage and instruments to address it appropriate for the leakage and policy purpose? Are there other aspects that should be instruments considered?

2.4 Analytical What domestic economic effects from carbon leakage and Section 4.5 approach policy approaches to address it are of particular importance
for analysis and modelling? Would the analysis benefit from
an assessment of impacts on bilateral trading partners and
net global emissions?

3 Policy options to Are there additional policy options that should be Section 4.6 address carbon considered alone or as part of a portfolio of approaches to leakage risks address carbon leakage?

3.1 Existing What is the capacity of current policy settings of the Section 4.7 measures under the Safeguard Mechanism to mitigate carbon leakage risk into
Safeguard the future?
Mechanism

3.2 Australian carbon Is an Australian carbon border adjustment mechanism Section 4.8 border adjustment desirable? If so, which design features should be mechanism considered?
3.3 Emissions What is the appropriate role for emissions product Section 4.9 product standards standards to mitigate carbon leakage?

3.4 Targeted public What is the appropriate role for public investment measures Section 4.10 investment in firms’ to mitigate carbon leakage?
decarbonisation
3.5 Multilateral and What is the appropriate role for multilateral and plurilateral Section 4.11 plurilateral initiatives initiatives to help to mitigate carbon leakage, and the impact
of unilateral measures taken to address carbon leakage?

4 Feasibility of policy What principles should guide Australian policies to prevent Section 4.12 options carbon leakage? Should other factors be considered to and Section
assess the feasibility of potential policies? 4.1

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5.2. Overseas development of lower emissions iron and steel with government support

The development of lower emissions iron and steel only occurs, in practice, with government support. Developing practical transition pathways for iron and steelmaking will require transformational investment from businesses and governments, as evidenced in the significant level of funding being provided to iron and steelmakers by governments in overseas jurisdictions, summarised in Tables 1 and 2:
• Based on recent public announcements, BlueScope estimates that governments in
Europe have announced the equivalent of at least A$4.8 billion to committed projects
with an additional A$4.7 billion for prospective projects to assist with the capital
expenditure to convert blast furnaces to primarily DRI-EAF or DRI-ESF-BOF (noting
that nearly all of these projects will initially produce DRI using natural gas, with plans
to transition to green hydrogen when commercially viable). This support typically
provides around 40 to 50 per cent of the total capital expenditure for these lower
emissions projects.
• The Canadian and Ontario governments have announced the equivalent of A$1.3
billion to committed projects in Canada of a scale similar to that which would be
required at the Port Kembla Steelworks (noting that this project will also initially use
natural gas not green hydrogen). Government funding in Canada is in the form of
direct grants and low interest loans and typically covers more than half the capital
investment of transition projects.
• The UK government has committed the equivalent of A$1 billion for a prospective
project and A$0.6 billion for a potential project. The committed project support is in the
form of a grant that will cover around 40 per cent of total capital investment.
• France’s 2030 investment plan has allocated €30 billion in subsidies over 5 years
from 2022 to support the transformation of automotive, aerospace, digital, green
industry, biotechnology, culture, and healthcare. The energy sector has been
allocated €8 billion of which €5.6 billion is to decarbonise industry including for steel
and €1.9 billion for green hydrogen. This has resulted so far in €0.85 billion (A$1.4
billion) for lower emissions iron and steelmaking.
• In the US, the Infrastructure, Investment, and Jobs Act will make US$1 trillion in
grants and loans available over the next decade, including for iron and steelmaking.
As part of this the Industrial Demonstrations Program will announce projects
successful in round 1 funding by the end of 2023. This will provide total funding of
$6.3 billion consisting of $35 to $500 million for each project subject to a maximum
government contribution of 50 per cent of project cost. Department of Energy expects
to fund between 22 to 65 projects which BlueScope understands is likely to include
DRI steel based projects.

Separately to funding for the steel industry transition, overseas governments are also investing significantly in providing support for significant enablers of lower emissions steel. This includes significant support for clean energy and hydrogen. For example, in the US US$62 billion has been allocated to clean energy investment, including US$8 billion from 2022-2026 to develop four clean hydrogen hubs. The US Government has also announced $7 billion of funding for
7 hydrogen hubs under its Regional Clean Hydrogen Hubs Program.

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Table 1 – Lower emissions committed and prospective iron and steel projects with government capital expenditure support, not exhaustive

Total Government Proportion gov.
Capacity, CAPEX, A$ CAPEX support, CAPEX support,
Company Country Plant Description Mt p.a. Millions A$ Millions Percentage
Committed Salzgitter Germany Salzgitter Replace BFs with 1.9 3,833 1,667 43%
projects DRI-EAF
Thyssenkrupp Germany TKS Duisberg H2-DRI-melter, NG in 2.5 3,333 917 28%
transition
ArcelorMittal France Fos and Dunkirk EAF (Fos), H2-DRI- 2.5 2,833 1,417 50%
melter-EAF (Dunkirk)
ArcelorMittal Spain Asturias and Sestao Conversion from BF- 3.4 1,667 767 46%
BOF to DRI-EAF
ArcelorMittal Canada Dofasco Hamilton Conversion from BF- 4.4 2,045 1,023 50%
BOF to DRI-EAF
Algoma Steel Canada Sault Sainte Marie Replace BF-BOF with 3.7 795 227 29%
scrap based EAF
BlueScope NZ NZ Steel EAF 3.0 276 129 47%
Prospective ArcelorMittal Germany H2 Hamburg H2 DRI pilot 0.1 183 92 50%
projects ArcelorMittal Germany Bremen & H2-DRI-EAF, grey H2 3.5 4,167 4,167 100%
Eisnehuttenstadt in transition
ArcelorMittal Belgium Gent Conversion from BF- n/a 1,833 467 25%
BOF to DRI-EAF
Tata UK Port Talbot Replace BF-BOFs 5.0 2,388 955 40%
with EAF
Liberty Australia Whyalla Conversion from BF- 1.0 500 50 10%
BOF to EAF
British Steel UK Scunthorpe Conversion to EAF 4.0 2,483 573 23%
(Jingye)
Excludes lower emissions steel projects with likely but not confirmed government support. Excludes operational expenditure support, such as for Thyssenkrupp TKS
Duisberg plant. Assumes foreign exchange conversion factors to AUD: USD 1.5, Euro 1.7, CAD 1.1, UK pound 1.9, NZD 0.9. Whyalla support from SA government.

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Table 2 – Government funding support for lower emissions iron and steel, not exhaustive, estimated steel value

Value for steel Value for steel not committed
Country Funding source Details and eligibility A$ Millions to specific projects, A$ Millions
Funding Australia ARENA iron and steel R&D Low emissions iron and steel R&D 25 25
not funding using Australian iron ore
committed
to specific Australia Powering the Region Fund, Trade exposed industrial SGM ~100 (~1/6 for steel) ~100
projects Safeguard Transformation facilities incl. metals, minerals,
Stream chemicals, cement
France France 2030 plan Industry decarbonisation ~1,850 (~20% of ~9,300) ~450
Germany Hydrogen steel Hydrogen steel production projects 8,300 ~1,500
and research
US Industrial Demonstrations Industrial decarbonisation projects ~1,900 (~20% of ~9,400) ~1,900
Program
US Inflation Reduction Act Estimate for manufacturing sector ~15,900 (~20% for steel ~14,000 (assume inclusive
value65 from 79,500 ~1,900 above)
manufacturing)
Australia excludes PRF Critical Inputs to Clean Energy Industries as not a decarbonisation focussed fund. US 20% for steel based on estimated share of steel of industrial manufacturing emissions of ~8.5% (DOE Industrial Decarbonization Roadmap,) and the assumption US would fund a higher share of steel to gain a larger share of global share and to onshore low emissions steel given US has net steel imports ~30% of its consumption.

65 https://www.mckinsey.com/industries/public-sector/our-insights/the-inflation-reduction-act-heres-whats-in-it

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