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

13 December 2023

Professor Frank Jotzo
Carbon Leakage Review
Department of Climate Change,
Energy, the Environment and Water

By email: carbonleakagereview@dcceew.gov.au

Australian Steel Association – Carbon Leakage Review consultation

A Introduction 1
B Carbon leakage assessment must be true to purpose and have wide vision 2
C Design and scope of measures must be carefully calibrated and costed 4
1 Scope and design of CBAM should not be excessive and counterproductive 4
2 CBAM “tariffs” require a mature and well-established carbon pricing scheme and
balanced methodology 5
3 Government support for transition and easing the cost of compliance will be critical
6
4 Green credential-based public investment and procurement policy over “local
content” requirement 7

A Introduction

Australian Steel Association (“ASA”) welcomes the opportunity to provide its submission as part of the first stage public consultation of the Carbon Leakage Review released on 13 December 2023 (“the
Consultation Paper”).

ASA is the peak independent representative body for a broad spectrum of stakeholders across the entire steel supply chain in Australia. Our members include steel producers, distributors, end-users, traders, manufacturers, fabricators, roll-formers, roof fixers, transport and shipping companies, trade credit insurance providers. We are committed to providing an independent voice for Australian businesses that rely on and deeply engage with and in the market for steel products in Australia, and who want to see the market thrive under conditions of open and fair and competition.

info@steelassociation.com.au | +61 438 051541
1 Belfast Street Newtown 3220
www.steelaus.com.au
Our members are uniquely positioned in the steel products supply chain. They proudly perform critical roles in a broad range of Australian economic sectors that require access to imported steel products, either as an alternative or only source of supply. They supplement and must compete within a market dominated by the two large domestic production groups. 1

ASA is deeply committed to the promotion of a competitive and environmentally sustainable steel market in Australia. What happens in the steel market has profound impacts on Australia’s manufacturing sectors and on the broader economy. Key amongst these are the mining and the building and construction sectors, which are as fundamental to Australian life as a meat pie at the footy.

As such, ASA members have strong interest in this review.

B Carbon leakage assessment must be true to purpose and have wide vision

ASA supports a “carbon leakage” review that is true to Australia’s climate change commitment. That is, the assessment of “carbon leakage” risks should be made in the context of and for the purpose of achieving broad-based carbon emission reduction.

ASA is concerned to ensure that any review of “carbon leakage” risks properly taking into account:

• the true climate impact of Australia’s steel supply chain, – unaffected by any industrial and
economic policy goals of promoting domestic production;

• the full spectrum of the Australian economy in the steel supply chain.

In referring to the “full spectrum”, ASA means Australia’s downstream steel processing, fabrication, machinery and equipment, and other building products sectors, involved in manufacturing, processing, fabrication and supply, of which the two large integrated steel production groups that are the subject of the Safeguard Mechanism (hereinafter the “Safeguard Producers”) are part.

In this context, ASA notes and support the following statements in the Consultation Paper: 2

Carbon leakage refers to production of emissions intensive trade exposed (EITE) goods and
commodities shifting from countries with more ambitious emissions reduction policies to those
with weaker (or no) emissions reduction policies solely because of different policy settings.
Relocation of production and resulting higher or lower emissions can also occur due to other
factors.1 Left unchecked, carbon leakage undermines efforts to reduce emissions in relevant
sectors.
______
Footnote 1: This includes broader competitiveness issues and policies unrelated to climate, or
where trading partners have climate policy with similar levels of stringency but differ in their
existing emissions intensity or their costs to produce cleanly. Production then shifts towards
places where the emissions intensity of production is lower because of factors such as emissions
intensity of energy supply, technology, and plant equipment. The anticipated emergence of
renewable energy-based export industries, as well as critical minerals producers and possible
downstream processing technology, including in Australia is an example of such relocation that is
compatible with climate policy objectives. [underlining supplied]

1
The two groups being the BlueScope group for flat steel products and the Liberty Steel group for long steel products.
2
Consultation Paper, Page 9, Box 1
2
Further, ASA supports the need for a real world, practical and holistic assessment, as recognised by the
Consultation Paper:3

Climate policies are not the only factors affecting carbon leakage, and leakage may not occur
despite differences in policy and scheme prices. For example, for production to shift location via
the investment channel, there also needs to be access to resources, skilled labour, energy,
infrastructure and other inputs. Broader market considerations must also be considered. If other
factors are not favourable, for example, if transport costs compared to domestic production are
high, then leakage may not occur.

ASA notes that the Consultation Paper has correctly identified some of the most relevant and unique circumstances of the Australian steel sector, in particular:

• Australia’s domestic steel production has a higher or comparable average emission intensity in
comparison to its major trading partners in the region.4 This points against the likelihood of any
production relocation, in the sense of carbon leakage, on their part.

• The Australian steel market for Safeguard goods is dominated by domestic production, with
imports accounting for less than 20% of total domestic consumption. 5 This is despite the
relatively higher cost of production of the two Safeguard Producers and their ability to demand a
premium as the dominant (and often sole) local supplier for their respective product lines. This
indicates that Australia’s domestic production of Safeguard steel products will likely be able to
pass on cost increases associated with the Safeguard Mechanism.

• Australian production of Safeguard steel products has very limited exposure to export markets,
with export sales accounting for just over 10% of total production.6 This indicates that climate
policy impacts on export trade will have limited impact on Australian production.

On the other hand, it is also important to recognise that the effect of Australia’s climate policy measures and the risk of carbon leakage is not limited to the facilities subject to the Safeguard Mechanism.

ASA members, and the key downstream and advanced manufacturing sectors which ASA
members supply, must also be considered as part of the carbon leakage assessment,
even if they are not directly subject to the Safeguard Mechanism at this stage.

This is especially the case where the large Safeguard Producers are better positioned to pass on their cost increases in an already concentrated steel market, and are well equipped to resort to regulatory support to shield themselves against the impact of the Safeguard Mechanism – including through the trade remedy tools such as anti-dumping and countervailing actions, which are presently well-utilised or indeed over-utilised by them, and local content requirements for major public infrastructure projects, whether or not ASA agrees with those requirements.

Importantly, the review must take into account the fact that ASA members and downstream steel users that rely on imports as their main or only viable source of supply will also be exposed to carbon leakage risk where their operations in Australia are impacted by increased cost imposed on imports by CBAM-like measures or by over-subsidisation of the Safeguard Producers who are their major and entrenched

3
Consultation Paper, page 10.
4
Ibid, page 19
5
Ibid, page 17
6
Ibid, page 18
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suppliers. That problem is exacerbated by vertical integration, related party distortions, and anti- competitive conduct. This complicated notion may be simply understood by likening the situation to dumping and subsidisation principles but doing so within the domestic market. Any “regulatory favouritism” and “subsidisation” of Safeguard Producers could worsen domestic market concentration and manipulation, in circumstances where ASA members are “materially injured” but have no ability to secure a “trade remedy”.

Imports play an important role in the transition to the production and use of “greener” steel products in
Australia. They should not be demonised in environmental terms without proper evidence. ASA members are strongly invested in the supply chains they have built up with overseas suppliers, the great majority of which have strong environmental credentials and compliance records. Steel mills in Japan, Korea, China,
Taiwan, and the EU have made considerable technological upgrades and advancements in reducing carbon emissions. Accordingly, they already make important contributions to the decarbonisation for the
Australian economy.

For example, international steel suppliers such as China Baowu, Nippon Steel, POSCO and SSAB have made significant investments and achieved major technological breakthroughs in steel decarbonisation and the development of “green iron” projects. They provide an indispensable alternative to higher carbon intensity products supplied by the domestic Safeguard Producers.7

In so far as the steel sector is concerned, ASA submits that safeguarding an open, fair and competitive market remains a critical policy tool for fostering innovation, technology upgrades, and the ultimate transition to a greener steel industry that will support the net zero goals for the broader Australian and global economy.

C Design and scope of measures must be carefully calibrated and costed

1 Scope and design of CBAM should not be excessive and counterproductive

Australia is a net importer of steel products, with the majority of its local production relying on aging production facilities with high carbon intensity. Many of ASA’s members are directly engaged with or rely on imports as a key supplement or as the only source of supply of steel products – supply that is unable to be fulfilled by the domestic Safeguard Producers, or is not available from them at competitive prices, or is not available from them at all.

The domestic Safeguard Producers make extensive usage of trade remedy protection. The imposition and maintenance of anti-dumping and countervailing duties on imports provides regulatory and pricing support for their market dominance. These trade barriers are in addition to the natural and technical protections enjoyed by the Safeguard Producers, which include Australia’s status as a relatively small market for steel products, Australia’s isolation and geographical distance from other major economies

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As an example, as noted in an industry news article contributed by a ASA member, for structural steel sections and steel reinforcing bar products, the average carbon intensity of InfraBuild Whyalla Structural Sections grade 300 is 3.72 tonnes of carbon per metric tonnes of finished steel (C/mt/FS), InfraBuild Reinforcing Bar grade
500N at 1.67 tonnes (C/mt/FS). In comparison, imports of structural sections grade 300 from Tung Ho’s mills in
Taiwan have carbon intensity of 0.619 and 0.934 tonnes (C/mt/FS), reinforcing bar sourced from Celsa Poland is at
0.806 tonnes (C/mt/FS) for Standard Quality 500N grade, and at 0.356 tonnes (C/mt/FS) for Green Quality 500N
(produced with 100 % renewable energy).
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and the associated higher logistical costs, and the high technical and quality levels mandated by
Australian standards.

As such, ASA submits that the Review should carefully consider the necessity, scope and design of any border measures so that further restrictions and compliance costs are not imposed on the supply and usage of imported steel products. Such an outcome would detrimentally impact on the competitiveness of ASA members and of the Australian steel industry in general, and would place further inflationary pressure on the broader Australian economy, particularly the building and construction sectors.

It is important that any consideration of CBAM-like measures ensures that they do not place unnecessary or excessive costs on steel products that are either not supplied by the Safeguard producer’s local facilities on reasonable and commercial terms, or where the imported products are clearly the better alternative for achieving carbon reduction goals for Safeguard products wherever they are sourced.
As indicated in Section B above, it is imperative for the Review to also consider the broader economic impact, including the potential carbon leakage impacts associated with downstream and advanced manufacturing sectors relying on imported steel products resulting from CBAM-like measures.

2 CBAM “tariffs” require a mature and well-established carbon pricing scheme and
balanced methodology

Any genuine climate goals based CBAM design can only be developed on the back of a well-established domestic carbon pricing scheme and a mature emissions trading system with strong integrity. These are the necessary steps and pre-conditions that paved the way to the first and still the only CBAM regime in the world, being the EU CBAM. In comparison, the Australian carbon pricing and emissions trading schemes are still in their early stages, with the Safeguard Mechanism only coming into effect earlier this year.

Accordingly, ASA expects that the Review will fully factor-in the relatively unestablished and developing nature of Australia’s carbon pricing regime; the relatively high carbon intensity of the Safeguard
Producers; the proper costing of carbon emissions for both domestically manufactured and imported steel products; and the broader economic impact of such products in the context of Australia’s transition to net zero. The design of a CBAM-like mechanism must not be rushed. This is especially the case if the
Review comes to the conclusion that there is a low risk of significant carbon leakage with respect to the manufacturing and supply of Safeguard steel products in Australia.

In terms of the broader economic impact, ASA would like to once again highlight that steel products are the backbone of nation building and have a special role to play in the Australian economy.

Steel products – both in terms of its availability and costs – have a strong impact on the cost and
project timeframe of building and construction projects, and therefore a strong link to inflationary
pressure to the broader economy and Australia’s response to housing crisis.

ASA respectfully urges the Review to consider the real climate and carbon leakage prevention benefits of any CBAM-like measure. Will there be any such benefits? What costs and broader economic impacts would be associated with same? What special issues must equally be taken into account, such as the interests of SMEs (like many of ASA’s members) and market competition? The consideration of the suitability and viability of CBAM-like measures for steel products in Australia must not be narrowly focussed on what the environmental impacts should be, “all going well”. The consideration must be real and realistic. Simply feeding data about present carbon emissions and desired carbon goals, into a
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computer and pressing a button to model what it will take to go from A to B in scientific terms, will not work. Any investigation of cause and effect in an economic system must take into account commercial behaviours and market settings. A clear understanding of the workings and responses of market players is required to optimise the pace and degree of any changes and to preserve the vitality of the industries and markets that will deliver the environmental benefits that are the object of the exercise.

Separately, ASA submits that the Review should ensure that the precise accounting or calculation methods to be deployed for CBAM purpose should be carefully examined and broadly consulted with both major domestic and international steel suppliers. The methods themselves should not be open to abuse and should not be creative of unnecessary trade barriers. Australia’s key trading partners in the region should be consulted, with special consideration given to the technical challenges faced by supply chains involving developing economies.

Last but not least, as the Consultation Paper correctly recognises, any CBAM-like measure must be carefully constructed and implemented to ensure it complies with Australia’s obligations under international laws, especially with respect to WTO rules, and must be consistent with Australia’s commitment to fair and open trade.

3 Government support for transition and easing the cost of compliance will be critical

If the Review considers that a carbon border measure for imported steel products is necessary and desirable for the purpose of achieving climate change goals, it will be critical that such measures are implemented with an adequate transition period and with the necessary support in place. This will be necessary to assist with compliance and minimise the disruption on trade and supply chains for that part of the Australian economy relying on steel products.

As an example, ASA notes that the EU ETS commenced in 2005, and that the EU CBAM itself was introduced after two and a half years of legislative and consultation processes. The EU CBAM’s official transitional period began on 1 October 2023, and payment obligations will not come into effect until
2026. The EU CBAM implementation and transition process will provide important experience and examples for the design and implementation of any border measures that Australia might implement.

As already stated, the design of any CBAM-like measure should fully take into account the unique circumstances of the Australian steel industry and steel market. Inappropriate CBAM-like measures pose a significant administrative, technical and financial threat to the viability of Australian businesses involved in the importation, distribution and consumption of steel products. Such impact and complexity will disproportionately impact businesses that have a smaller corporate governance footprint and lower technical and reporting capacities. They are presently disadvantaged in dealing with burdensome regulatory requirements and a CBAM, whether “good” or “bad”, will only make things more difficult. This is especially the case in comparison to the resources available to the large domestic Safeguard
Producers. Given Australia’s geographic location in the Asia Pacific region, compliance costs and regulatory challenges will disproportionately affect suppliers from developing economies in the region.

As such, ASA submits that the Review should recommend that the regulatory and policy designs of any
CBAM-like measures must be accommodated with adequate governmental support and transition processes that effectively ease and assist with the technical and financial compliance requirements of such measures.

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4 Green credential-based public investment and procurement policy over “local
content” requirement

ASA submits, consistent with the purpose of this Review and Australia’s climate change goals, that the
Review should recommend that the Government put in place measures that rank green credentials and low carbon emission based investment and production in substitution for “local content” based preferential treatment in government procurement.

As highlighted in this submission, Australia’s Safeguard Producers for steel products are already heavily protected by trade remedy investigations and measures. They should not need the various forms of local content requirements that ASA has observed in major government infrastructure and building projects.
These regulatory measures do not incentivise innovation, investment, and transition to a low carbon steel sector in Australia. Instead, they entrench the existing dominance of the high carbon intensity products offered by the two Safeguard Producers. In ASA’s experience, even where government procurement projects include green credential requirements, there are significant uncertainties and inconsistencies in tender assessment that make it even more difficult for genuine low carbon import alternatives to compete and participate in such projects.

Therefore, the Carbon Leakage Review should recommend an overhaul to the public investment and government procurement policy so that is consistent and compatible with Australia’s commitment to net zero and its ambition of an industrial transition to a low carbon economy. This can be achieved by introducing consistent and transparent rules on procurement that promote the development and application of suitable standards on green credentials, so that the use of steel products that meet such standards are preferred regardless of country of origin.

*****

ASA appreciates the opportunity to contribute to this important policy review. We stand ready to provide further input and any information as requested by the Review.

Yours sincerely

David Buchanan
CEO
Australian Steel Association

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