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BCA submission to
Carbon Leakage
Review: consultation paper
December 2023
Contents
1. Overview ........................................................................................................................................................................... 2
2. Key recommendations .................................................................................................................................................. 2
3. Description of carbon leakage ................................................................................................................................... 3
4. Effects of carbon leakage ............................................................................................................................................ 3
5. Goods outside the safeguard mechanism .............................................................................................................. 3
6. Characterisation of potential impacts of carbon leakage and policy instruments ........................................ 3
7. Domestic economic effects of carbon leakage ..................................................................................................... 4
8. Policy options to address carbon leakage risks ..................................................................................................... 4
9. Capacity of Safeguard Mechanism to mitigate carbon leakage risks .............................................................. 4
10. Desirability and features of a CBAM ...........................................................................................................................5
11. Role of emissions product standards ........................................................................................................................5
12. Targeted public investment in decarbonisation .................................................................................................... 6
BCA submission to Carbon Leakage Review: consultation paper 1
1. Overview
The Business Council of Australia (BCA) welcomes the opportunity to make this submission to the Carbon
Leakage Review consultation paper. In the context of the Safeguard Mechanism reforms, the BCA supports broad consideration of a Carbon Border Adjustment Mechanism (CBAM) to address the potential for carbon leakage in relation to emissions intensive and trade exposed (EITE) industries.
A CBAM is a potentially useful complement to provisions within the Safeguard Mechanism designed to assist
EITE industries $600m in funding from the Powering the Regions Fund (PRF). Any use of a CBAM should be limited to industries covered by the Safeguard Mechanism, should be carefully targeted to offset carbon cost differentials, and should be implemented in a manner that is consistent with World Trade
Organization obligations and principles.
A CBAM is just one of a suite of measures the government should use to facilitate the domestic energy transition and reduce cost burdens on Australian industry, including EITE sectors. The need for a CBAM should be evaluated against the full range of government policies affecting exposed sectors and form part of a portfolio approach to addressing carbon leakage and its broader economic implications.
The BCA is also supportive of -led Climate Club initiative. Australia should use its participation in this forum to push for harmonisation of the very different national approaches to meeting Paris commitments and to minimise the potential for trade conflicts to arise from these different approaches to addressing climate change.
The BCA note that this is the first consultation paper ahead of a second phase of the review that will assess leakage risks and the feasibility of policy options to address those risks, with a second consultation paper scheduled for mid-2024. It is vital that the government fully engages with industry on the detailed design of any policy options via the second stage consultation paper and affords industry sufficient time to evaluate and provide feedback on those options.
There is also merit in waiting to observe the operation of the EU, UK and Canadian CBAM initiatives, which are only in their early stages of operation and could yield important lessons for the design of an Australian mechanism given that CBAM is still a largely untested concept. The EU approach was the product of a very lengthy and carefully considered design process.
It is also vital that this review is coordinated with other review processes in the climate and energy space, particularly around the future of the gaseous fuels sector.
The BCA offers the following responses to questions.
2. Key recommendations
◼ A CBAM is a potentially useful complement to provisions within the Safeguard Mechanism designed to
assist EITE industries.
◼ A CBAM is just one of a suite of measures the government should use to facilitate the domestic energy
transition and reduce cost burdens on Australian industry, including EITE sectors.
◼ The need for a CBAM should be evaluated against the full range of government policies affecting exposed
sectors and form part a portfolio approach to addressing carbon leakage and its broader economic
implications.
◼ It is vital that the government fully engages with industry on the detailed design of any policy options via the
second stage consultation paper and affords industry sufficient time to evaluate and provide feedback on
those options.
BCA submission to Carbon Leakage Review: consultation paper 2
3. Description of carbon leakage
The consultation paper takes an appropriately broad view of carbon leakage, noting that leakage can occur through both trade and investment channels and is a function of a range of policy settings and other factors not limited to climate policies. For example, a successful energy transition to cheaper renewable energy sources should lower costs for domestic producers, enhancing international competitiveness, but this requires careful sequencing and management of transition risks.
This broad conception of carbon leakage highlights the importance of economy-wide policy settings to the competitiveness of Australian industry and a successful energy transition. A CBAM should be viewed within this over-arching policy perspective. Emissions leakage is amenable to being addressed through a carefully targeted suite of policies, including the design of the Safeguard Mechanism, potentially complemented by a CBAM.
4. Effects of carbon leakage
The Safeguard Mechanism already includes funding under the Safeguard Transformation Stream of the PRF to provide support for the steel, cement, lime and alumina sectors. Trade Exposed Baseline Adjusted Facilities also receive slower baseline decline rates, equivalent to free emissions permits. However, there remains uncertainty around the operation of some of the existing EITE provisions in the Safeguard Mechanism which should be bedded down before the carbon leakage review makes any recommendations to government.
The current review should clarify to what extent the proposed analysis and modelling of carbon leakage risks will take in scope 1, 2 and 3 emissions given that the Safeguard Mechanism only takes in scope 1 emissions. It also needs to carefully consider the challenges of measurement, verification and reporting, particularly where domestic and international supply chains are opaque, to enable comparisons of the emission-intensity of imported products, exported goods and domestic production.
5. Goods outside the safeguard mechanism
The application of a CBAM to address carbon leakage risks necessitates an assessment of carbon pricing differentials that may be difficult to determine in the absence of a direct nexus to the Safeguard Mechanism to establish an implicit carbon price. The Safeguard Mechanism is based on facility level emissions whereas a potential CBAM is based on emissions embedded in goods, which gives rise to complications in mapping any
CBAM on to the Safeguard Mechanism. This suggests any assessment of carbon leakage risks should not be limited to goods classified as trade-exposed by the Safeguard Mechanism. An assessment of broader carbon leakage risks will be helpful in determining the future design and scope of the Safeguard Mechanism, especially when a separate scheduled review of the Mechanism is undertaken in 2026-27.
6. Characterisation of potential impacts of carbon
leakage and policy instruments
It is important to consider carbon leakage in a broader context and dynamic setting, recognising that the domestic and international energy transitions will impact the emissions intensity of industry, the location of production facilities and international trade flows. This broad consideration will in turn facilitate a portfolio approach to policy measures designed to assist EITE industries through the transition.
It is anticipated that Australia could benefit from new opportunities in low-emissions industrial production, but for this to occur, the domestic energy transition will need to be successfully managed in a way that delivers on this
BCA submission to Carbon Leakage Review: consultation paper 3
promise of lower energy costs for domestic producers. If the domestic energy transition is poorly managed or sequenced, this could result in higher energy prices and problems with reliability of energy supply that in turn affect decisions about the location of production and new business investment.
7. Domestic economic effects of carbon leakage
The BCA sector-specific, economy-wide and international dimensions of carbon leakage risks and policies designed to address those risks. This analysis should be viewed as an important input into the subsequent review of the Safeguard Mechanism and any future changes to its design.
The analysis should address the relative economic importance of carbon leakage and whether this is best addressed through a CBAM or through other policies designed to underpin the international competitiveness of
Australian industry through the energy transition.
An assessment of the impacts on bilateral trading partners and net global emissions should be viewed as an important consideration given the need to harmonise differing national approaches to emissions reduction and to avoid trade frictions arising from those different approaches. Consideration of the impact on regional trading
8. Policy options to address carbon leakage risks
The BCA supports the broadest possible consideration of policy options to address carbon leakage risks and their potential interaction to inform a portfolio of policies that minimise reliance on a single policy option. These options should be framed in the context of multilateral and plurilateral initiatives and the obligations arising from those initiatives, as well as the design principles of the Safeguard Mechanism.
The government should give consideration to reducing tariff and non-tariffs barriers that raise input costs and compliance burdens for Australian industry independently of a CBAM. Lowering these tariff barriers may provide a competitive boost for Australian industry that offsets some of the competitive disadvantage from differential carbon pricing.
Multilateral and plurilateral initiatives, including the Climate Club, can play a useful role in identifying and adopting common approaches to measuring and verifying the emissions intensity of traded goods and the adoption of mandatory product standards, as well as cooperation on other policy approaches to reducing carbon leakage risks.
Proposals for a Climate Club to impose common tariffs on low climate ambition countries raise major issues about how to measure relative climate ambition and also raises the threat of a broader trade conflict, which could inhibit the global energy transition as well as retard world economic growth. There is also risk of domestic policy capture of Climate Club policies for protectionist ends rather than climate objectives.
9. Capacity of Safeguard Mechanism to mitigate
carbon leakage risks
Current policy settings in relation to the Safeguard Mechanism are an appropriate baseline for comparison against other policy proposals to address carbon leakage risks. The current Safeguard Mechanism design already recognises and seeks to manage these risks and the carbon leakage review should be viewed as an important input into any future changes in these policy settings.
BCA submission to Carbon Leakage Review: consultation paper 4
The review should give consideration to how the management of carbon leakage risks through the Safeguard
Mechanism might affect the exposure to announced or proposed CBAMs in other jurisdictions.
10. Desirability and features of a CBAM
A CBAM is potentially a useful component of a broad-suite of policies designed to mitigate carbon leakage risks.
A CBAM should be narrowly targeted and designed to offset differentials in carbon pricing in a symmetrical fashion, recognising this may facilitate the import of goods with low emissions intensity. This requires careful analysis and comparison of potentially very different approaches to carbon pricing. Any CBAM will require a close nexus with the Safeguard Mechanism given its role in determining the safeguard compliance price and influencing the domestic price of emissions via the Australian Carbon Credit Unit market.
There may be merit in sequencing the introduction of CBAM across different commodities, starting with simpler products such as cement to test key design elements before progressing to more complex and heterogeneous products such as steel.
The design of a CBAM should aim to minimise the costs of emissions accounting and compliance, recognising the complexity of accounting for emissions across what may be complex supply chains and the risks of reshuffling of high and low emissions outputs between countries. In particular, a CBAM could led to exports with high emissions intensity being sent to countries without a CBAM, while low emissions exports are sent to countries with a CBAM, leading to a smaller overall impact on emissions.
There is support among some BCA members for an export CBAM based on a local emissions cost benchmark assessed against a carbon compliance price for production in export markets to enhance the competitiveness of
Australian exporters. An export CBAM would potentially give rise to rebates to Australian exporters of relatively low emissions goods or could be implemented through free emissions allocations. However, this could potentially come at a cost to government, reduce incentives to lower emissions and necessitate finding emissions reductions in other parts of the economy to meet existing net zero commitments.
stated aim that a CBAM is implemented in a way that is consistent with WTO principles and obligations. An increase in imports attributable to the operation of a domestic carbon price is equivalent to an increase in market access and the use of carbon border adjustments to offset the market access implications of domestic emissions pricing is consistent with WTO principles such as non-discrimination.
Adherence to these principles will help strengthen international cooperation to address climate change. The
WTO has an important role to play in managing trade frictions arising from different national approaches to emissions reduction, particularly given that the Paris agreement does not have its own adjudication or enforcement mechanisms.
11. Role of emissions product standards
There may be a role for mandatory emissions product standards as part of a broader suite of policies aimed at mitigating carbon leakage. International alignment on these standards would serve to reduce carbon leakage, facilitate global emissions reduction and also reduce the compliance costs and administrative burden of adhering to these standards. -led
Climate Club.
BCA submission to Carbon Leakage Review: consultation paper 5
12. Targeted public investment in decarbonisation
Direct public support for lowering the emissions intensity of domestic output should be considered among the suite of options to address carbon leakage, but in the context of broader consideration of least-cost emissions reduction strategies. The PRF already provides for such targeted assistance and it is a feature of emission reduction strategies in other jurisdictions, particularly those like the United States which focus on cost-reducing rather than cost-imposing approaches to emissions reduction. Targeted support for lowering the emissions intensity of domestic output may also provide benefits for Australian exporters with respect to CBAMs imposed by other jurisdictions.
The review should focus on developing rigorous methodologies for evaluating such assistance in the context of broader de-carbonisation strategies, underpinned by appropriate cost-benefit analysis. Whereas the consultation paper frames targeted public investment and a CBAM as potential substitutes, some BCA members see these approaches as potentially highly complementary.
BCA submission to Carbon Leakage Review: consultation paper 6
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BCA submission to Carbon Leakage Review: consultation paper 7
BCA submission to Carbon Leakage Review: consultation paper 8
