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CEMENT INDUSTRY FEDERATION
SUBMISSION
Carbon Leakage Review
December 2023
1. Introduction
Thank you for the opportunity to contribute to the Carbon Leakage Review Consultation Paper (November
2023). We strongly welcome the Carbon Leakage Review (‘the Review’) and the explicit inclusion of the
Cement Industry within its terms of reference.
The Cement Industry Federation (CIF) is the national body representing all Australian integrated cement manufacturers1 – Adbri Ltd, Boral Cement Ltd and Cement Australia Pty Ltd.
Australian cement production is a critical manufacturing industry of national importance, supporting over
1,200 employees in well paid positions as well as hundreds of apprentices, contractors and transport operators. The cement, lime and concrete value chain supports over 15,000 jobs in Australia.
Portland cement (cement) is the critical material required to produce most cement and concrete types used in Australia. Cement is a critical input for Australia’s residential and commercial construction industry, as well as for major infrastructure projects.
After water, concrete (including cement) is the most used material in the world and will continue to be crucial in supporting a modern world.
CIF members also operate lime manufacturing facilities. Lime is essential, life-sustaining and critical to many modern environmental, scientific and industrial applications. Quicklime and hydrated lime are essential products for environmental and industrial applications. Due to its potential to absorb and to neutralise, it serves as a cleaning agent in different sectors, including the cleaning of domestic water, flue gases or soils.
Lime serves as a flux in metallurgy such as high-quality steel making and is applied in aluminium and nickel processing, also being of importance for the mining industry. Lime products serve as a fertiliser, soil stabiliser and soil improver. Hydrated lime is often used as a critical constituent within modern building mortars and can also be carbonated to produce precipitated calcium carbonate, used in the pharmaceutical sector and as a filler e.g., in paper products or paints.
Key Points
• Leakage risks are significant for lime, clinker and cement: Carbon leakage, arising from differences
in climate ambition between countries, could undermine valuable efforts to address climate change and
negatively affect domestic manufacturing facilities, their communities and supply chains.
• Early implementation should be a priority for simply transformed goods such as lime, clinker
and cement: Early implementation of a CBAM will be critical to mitigate imminent production leakage
risks and enable the industry to invest with confidence in decarbonisation technologies across the
production process.
• A multi-pronged policy approach is needed, including a Carbon Border Adjustment Mechanism
(CBAM): A CBAM will need to be complemented by other policies to address leakage due to the likely
initial focussed coverage, and the need to carefully manage transitional arrangements.
• Complementary measures will be needed to address domestic leakage and distortion within
sectors: Policies to address international carbon leakage should be matched by complementary
measures to address the risk of domestic leakage.
• The Australian cement and lime industry will work with authorities and other stakeholders to
achieve positive outcomes: CIF members will continue to work with their supply chains to assist in
increasing capability to measure embodied carbon and record these at the border.
1
Integrated cement manufacturing is when clinker and cement is produced as an ‘integrated’ process at the same facility. Whilst all cement manufacturing facilities in Australia are integrated, this is not the case in the EU where many facilities only produce clinker.
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Cement and Lime Emissions
Cement and lime manufacturing are considered amongst the hardest-to-abate sectors given the limited options currently available to reduce greenhouse gas emissions – specifically process emissions from the heating of the limestone raw material.
The industry is committed to decarbonising production and has developed roadmaps for the decarbonisation of lime2 and cement3. It is committed to working with the Federal Government and other stakeholders to contribute to Australia’s national goal of achieving net zero emissions by 2050.
Cement, the binder in concrete, is made by heating limestone to very high temperatures up to 1450°C.
This breaks down the limestone into clinker (~65% calcium oxide), the key ingredient of cement, and carbon dioxide. This reaction is called calcination and makes up approximately 70% of direct (scope 1 emissions) arising from cement manufacturing – see Figure 1. Lime (~90% calcium oxide) is produced in a similar manner.
Australian integrated cement manufacturers are committed to implementing emissions reduction opportunities that are available now – with a clear focus on clinker substitution and substantially increasing the use of alternative fuels. However, significant emissions reduction opportunities are going to take time to develop and implement. Lime manufacturing has fewer options for decarbonisation.
Figure 1: Typical direct (Scope 1) emissions profiles for cement and lime4
2
VDZ, Decarbonisation Pathways for the Australian Lime Sector, available at: http://cement.org.au/wp- content/uploads/2023/06/Decarbonisastion_Pathways_Australian_Lime_Sector.pdf
3
VDZ, Decarbonisation Pathways for the Australian Cement and Concrete Sector, available at: https://cement.org.au/wp- content/uploads/2021/10/Decarbonisation_Pathways_Australian_Cement_and_Concrete_Sector.pdf
4
Source: CIF Survey Data
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2. Key Cement Industry positions
2.1 Leakage risks are significant
Carbon leakage is a critical issue facing Australian manufacturers, with lime and integrated clinker-cement manufacturing production being amongst the most at risk. Carbon leakage, arising from differences in climate ambition between countries, could undermine valuable efforts to address climate change and negatively affect domestic manufacturing facilities, their communities and supply chains.
The risk of carbon leakage is particularly high for Australian lime and integrated cement manufacturing.
Emissions are high relative to the value of the product, making final product costs particularly sensitive to differential climate policies.
The cement and lime industries are both trade-exposed and operate in a highly competitive market. The market is supplied by domestically produced cement and lime as well as imported products. The volume of imported products has grown significantly in recent times. Imports of clinker, cement and lime are sourced from countries in the Asia-Pacific region. Industry data suggests higher emissions intensity than the domestically produced products in most cases5.
The CIF appreciates the Trade Exposed Baseline Adjusted (TEBA) measures in the current Safeguard
Mechanism design. These aim to mitigate leakage risks by providing for lower declines in emissions baselines for trade exposed manufacturing facilities such as lime and cement.
Nevertheless, given the high degree of trade and commercial exposure across our industry, these measures will need to be supplemented as soon as possible by a more robust approach that directly targets carbon leakage by ensuring neutral treatment of embedded carbon across domestic and imported products. Fair competition requires a level playing field without which producers are incentivised to offshore capacity. Not only does this adversely impact local production, but perversely would result in increased emissions.
Moreover, the longer-term risk of uneven treatment of embedded carbon undermines the viability of industry investment in the decarbonisation technologies needed to reach net zero. All this suggests the industry faces risks of carbon leakage in the absence of explicit and enduring policy to robustly address the issue.
2.2 Early implementation should be a priority for simply transformed goods
Urgent implementation of a CBAM for lime, clinker, and cement will be critical to mitigate the accelerated carbon leakage. The certainty of a level playing field will provide the confidence necessary for the industry participant to deploy the significant capital investment associated with implementing decarbonisation technologies. The counterfactual position being to unnecessarily close domestic integrated cement facilities and import higher embodied carbon materials.
The CIF understands there are CBAM design complexities that arise in other industries to be covered by the Review. However, prioritising the early introduction of a CBAM for specific ‘simply transformed materials’ such as lime, clinker and cement will provide a pathway towards resolving the issues for more complex goods while reducing significant carbon leakage risk.
The CIF considers that such a phased implementation should begin in July 2025, commencing with measurement of embedded emissions on covered products, and proceeding to a progressive introduction of financial obligations from July 2026. Such a timetable would allow for Australia to benefit from lessons from EU implementation, while adapting arrangements for our circumstances, including significantly simpler domestic and international supply chains.
2.3 A multi-pronged policy is needed, including a CBAM
It is important that a multi-pronged approach is implemented to address the risk of carbon leakage. A well- designed CBAM would be a critical part of this for Australian lime integrated cement manufacturers as it ensures that imported goods face an equivalent embedded carbon price and aim to reduce net global emissions.
5
Policy principles for emissions reduction in the cement industry (The CIE), Internal report prepared for the CIF (Aug 2022)
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A CBAM will need to be complemented by other policies to address leakage due to the likely initial focussed coverage, and the need to carefully manage transitional arrangements. Appropriate phasing of a CBAM in concert with changes to Safeguard Mechanism benchmarks will ensure the desired neutral impacts between imported and domestic production and minimise impacts on downstream industries. The EU is using a phased approach that can provide guidance on how to manage domestic transitional arrangements.
2.4 Need for complementary measures to address domestic leakage and distortion within sectors
Policies to address international carbon leakage should be matched by complementary measures to address the risk of domestic leakage.
As with international carbon leakage, domestic leakage could also undermine the efforts and investments of covered facilities and therefore impact the ability of Australia to meet its emissions targets.
The Consultation Paper also suggests that uneven coverage across the domestic industry may introduce additional complications from a World Trade Organisation (WTO) point of view when introducing a CBAM, suggesting this domestic issue is directly relevant to the ambit of the Review.
2.5 Industry commitment to work with authorities and other stakeholders to achieve positive outcomes
The CIF and its members welcome the Review’s strong commitment to industry and stakeholder engagement and are available and willing to work closely with the Federal Government to provide relevant information wherever possible to assist those deliberations.
CIF members will continue to work with their supply chains to assist in increasing capability to measure embodied carbon and record these at the border. This will build on existing efforts in this area to verify emissions for clinker, cement and lime developed from domestic and imported products. The CIF believes that this approach can help facilitate smooth and timely introduction of measures to address carbon leakage, including a CBAM.
2.6 Adoption of International Carbon Intensity Metrics
Clinker, cement and lime are underpinned by robust and long-established international carbon accounting systems. These accounting principles provide an equitable means to calculate the carbon intensity of these products. Not all countries have adopted the same standards and such differences will need to be addressed to allow for ‘like for like’ comparisons amongst imported and internationally sourced product.
The introduction of systems to address carbon leakage will need to consider appropriate standards and carbon accounting principles that ensure ‘like for like’ treatment of all products.
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3. Response to consultation paper
3.1 Carbon leakage
Is the description of carbon leakage appropriate for the purpose of this review?
Cement and lime are key enablers for both economic activity and building a sustainable, low emissions economy.
Demand for cement products is expected to increase by up to 40 percent by 20506. Data on cement, combined with population statistics in the period 1990 to 2020, indicate that on average, there has been a significant correlation between cement consumption and population growth over the past 30 years and this relationship is likely to continue.
The increasingly high cost of capital in Australia, coupled with ongoing investments in capacity in South
East Asia, has led to demand growth in Australia being met by a growing proportion of lime, clinker and cement being sourced from overseas markets as illustrated in Figure 2, Figure 3, and Figure 4 below.
It will be critical that lime, clinker and cement are initially included as part of CBAM in July 2025. If only clinker imported emissions are addressed, importers will quickly move to importing cement to avoid being penalised. Unlike the EU, all domestic facilities in Australia are integrated, whereas the EU has a number of facilities that just produce clinker.
Figure 2: Source of clinker used in domestic production processes, 2010/11 to 2021/227
100%
80%
Proportion (%)
60%
40%
20%
0%
Imports Domestic production
Figure 3: Domestic production and imports of cement, 2010/11 to 2021/228
100%
80%
Proportion (%)
60%
40%
20%
0%
Imports Domestic production
6
Full_Report_Decarbonisation_Pathways_web_single_page.pdf (cement.org.au)
7
Data sourced from ABS, CIF
8
Data sourced from ABS, CIF
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Figure 4: Source of emissions in the Australian Lime Industry, 2017-18 to 2022-239
The Australian cement industry is commonly referred to as a ‘domestically focused’ sector as over 98 per cent of cementitious products manufactured in Australia are consumed domestically.
The Australian cement manufacturing industry is therefore an ‘import competing sector’ since the cost of producing the Australian manufactured products must be similar to the landed price of imported product to remain internationally competitive over time.
As over 45 per cent of clinker used to produce cement in Australia is imported, coupled with the increasing amounts of imported cement – the Australian cement manufacturing sector is defined as one of the most highly trade exposed industries. As illustrated in Figure 5, Australia has the highest trade exposure to imported clinker, for a clinker producing country, in the world. Australia is one of few countries in the world that imports cement directly.
Figure 5: Ratio of clinker imports to clinker production for clinker producing countries (excluding countries with no or very low levels of domestic clinker production)10
0.8
0.7
Australia
Ratio of imports to production
0.6
0.5
0.4
0.3
0.2
0.1
0.0
0 20 40 60 80 100 120 140
Clinker production (Mt)
0.8
Australia
0.7
Ratio of import to production
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Clinker Producing Country
Note: Data excludes countries with no or very low levels of domestic clinker production
Data sources: Estimates based on data from World Bank, Global Cement and Concrete Association and CIF survey data.
9
Data sourced from VDZ (2023) Decarbonisation Pathways for the Australian Lime Sector
10
Policy principles for emissions reduction in the cement industry (The CIE), Internal report prepared for the CIF (Aug 2022)
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Production across the cement supply chain is highly emissions intensive, with a total of 4.7mt CO2e emitted from integrated production of clinker and cement in 2021-22. As illustrated in Figure 1, the majority of emissions from the sector are scope 1 process emissions from the production of clinker, which remains a hard-to-abate process. However, the Australian cement industry has and continues to make significant efforts to reduce domestic emissions, which, for example, declined by over 5 per cent between 2019-20 and 2020-21, mainly due to improvements in process efficiency and use of lower emissions fuels.
Imports of lime, clinker and cement originate predominantly from Southeast Asia and Japan as illustrated in Figure 6 below. While there are general commitments to decarbonise these economies in line with the
Paris accords, there are limited explicit policies to price, tax or introduce sectoral regulation to drive emissions reductions in the local cement industries, as illustrated in Table 1 below.
Figure 6: Sources of lime, clinker and cement imports to Australia
100% 3%
9% 7%
80% 14% 28%
31%
60% 27%
30% 23%
40%
16%
50%
20% 39%
23%
0%
Lime Clinker Cement
Japan Indonesia Thailand Malaysia Vietnam Other
Table 1: Decarbonisation policies for the cement industry in key importing countries
Country Relevant climate policy as applies to the cement industry
Japan Voluntary carbon price introduced this year, however auctions for
emissions allowances will only commence for power producers in 2033-
34. No explicit mandatory pricing planned for cement. 11
Indonesia No active policy driving decarbonisation of the cement industry. Some
policies focused on renewable energy.12
Thailand No explicit carbon pricing policies, however, an intention to decarbonise
through clinker substitution, and the introduction of CCUS in cement
production post-2040.13
Malaysia Preliminary work being undertaken to investigate the potential for a carbon
tax and plans to develop a policy and framework for a domestic ETS.
Voluntary Carbon Market platform (Bursa Carbon Exchange) commenced
in 2022 with first carbon credit auction in 2023. No explicit mandatory
carbon pricing planned for cement.14
Vietnam Roadmap for implementation of an ETS developed with a National
Crediting Program and pilot ETS expected to start in 2024 and 2026
respectively, becoming fully operational by 2026 and 2028. 15 Initial focus
for ETS includes cement.16
11
https://grjapan.com/sites/default/files/content/articles/files/gr_japan_overview_of_gx_plans_january_2023.pdf
12
https://climateactiontracker.org/countries/indonesia/
13
Thailand’s Long Term Low Greenhouse Gas Emissions development strategy (Revised Version), available at: https://unfccc.int/sites/default/files/resource/Thailand%20LT-LEDS%20%28Revised%20Version%29_08Nov2022.pdf
14
Carbon Pricing Dashboard | Up-to-date overview of carbon pricing initiatives (worldbank.org)
15
Carbon Pricing Dashboard | Up-to-date overview of carbon pricing initiatives (worldbank.org)
16
Vietnam | International Carbon Action Partnership (icapcarbonaction.com)
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Additionally, the latest data from the Global Cement and Concrete Association (GCCA) revealed that 21 per cent of cement and concrete producing countries have published decarbonisation roadmaps, with some key Australian import source countries such as Malaysia and Vietnam yet to commence any considerations of one, as illustrated in Figure 7 below. This is changing quickly as the GCCA continues to facilitate the development of individual country roadmaps.
Figure 7: Whole life cement and concrete decarbonisation roadmaps17
Furthermore, there is evidence to suggest that cement produced from imported clinker has higher overall emissions than cement produced with local clinker, as illustrated in Figure 8 below. Some of this variance may be based on definitional and scope differences, but this underlines the importance of basing policy aimed at addressing carbon leakage on verified domestic and foreign facility-level data.
Figure 8: Global Warming Potential of domestic cement produced from imported and local clinker 18
1200
Global Wamring Potential (kgCO2e)
1000
800
600
400
200
0
Energy source used in production
Imported clinker Local clinker
The factors outlined above suggest a significant risk of carbon leakage within the Australian integrated cement industry. The CIF supports the definition of carbon leakage as proposed by the consultation paper as pertaining to both trade and investment and consider the risks of carbon leakage across both these channels to be high for the Australian integrated cement industry.
17
GCCA Concrete Future, Cement Industry Net Zero Progress Report
18
Data sourced from HILT CRC presentation, Research Pathways to Decarbonise – Cement and Lime. Figures based on cradle- to-gate lifecycle assessment. [Data for cement using imported clinker includes emissions from international transport.]
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3.2 The Safeguard Mechanism
What is your view on how your business or industry could be affected by carbon leakage?
The CIF recognises the importance the Safeguard Mechanism will play in ensuring Australia meets its broader decarbonisation goals. We welcome the TEBA measures in the current Safeguard Mechanism design. These aim to mitigate leakage risks by providing for lower declines in emissions baselines for trade exposed manufacturing facilities such as lime, clinker and cement.
Nevertheless, given the high degree of trade and commercial exposure across our industry, these measures will need to be supplemented as soon as possible by a more robust approach that directly targets carbon leakage by ensuring neutral treatment of embedded carbon across domestic and imported products.
The CIF considers this more robust approach is needed to prevent carbon related trade diversion, given the high trade and emissions exposure outlined above.
Moreover, the CIF considers that investment leakage risks remain significant with the Safeguard
Mechanism TEBA arrangements. These will need to be urgently supplemented and reformed to provide robust incentives for new investment, which by definition rely on confidence in the adequacy and long-term stability of relevant policy frameworks in providing a neutral playing field for low carbon investments.
Australian cement and lime producers are committed to reducing emissions as part of the collective challenge to achieve net zero emissions by 2050 or earlier. This is reflected in individual CIF member commitments, such as Adbri’s Net Zero Emissions Roadmap, Boral’s Commitment to net zero and Cement
Australia Ltd through its shareholders Holcim and Hanson/Heidelberg Materials.
It is important to note that decarbonisation investments rely on expectations and risks around returns over decades-long time horizons. The prospect of artificial competition from imports with lower standards of regulation around embedded carbon is a significant risk as our member firms consider progressing these technologies and investments. Some technologies such as alternative fuels and clinker substitution are commercially available now but involve significant new investment reconfiguring kilns and fuel supply infrastructure. The domestic waste market also needs to be supported to ensure waste (that normally goes to landfill) is available to be used as an alternative fuel (i.e., substituting fossil fuels such as coal and gas).
Many of the technologies that will achieve low- to zero-carbon cement and concrete are still being developed, as illustrated in Figure 9 below and will therefore need a multi-decade investment effort to unlock. Establishing robust and enduring carbon leakage policy frameworks will be essential to ensure this investment and innovation can occur, with a solid prospect of monetisation in the Australian market.
Figure 9: Identified decarbonisation pathways for cement and concrete 19
There are a number of points to note with this pathway, including:
19
VDZ, Decarbonisation Pathways for the Australian Lime Sector, available at: http://cement.org.au/wp- content/uploads/2023/06/Decarbonisastion_Pathways_Australian_Lime_Sector.pdf
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• A significant proportion of the abatement potential is outside of the facility or company level (beyond
scope 1 emissions, for example) in that the abatement involves the external electricity and transport
sector or involves innovation in design and construction.
• Each of the technologies underlying the reductions within the industry have different technological
readiness levels, implying a real time constraint to the pathway.
• The uptake of low emissions cements, and to an extent the use of SCMs, will involve coordination with
building codes and similar construction requirements.
• Around one third of the abatement potential requires carbon capture usage and storage. While there
are considerable technological developments currently underway, this is a long-term technology that
requires considerable further development.
3.3 Relevant Goods and Commodities
Are there other goods or commodities beyond those identified as trade exposed under the Safeguard Mechanism that should be included in the assessment?
The predominant focus of analysis and policy evaluation in the Review should fall on those commodities and sectors with the highest propensity for carbon leakage. Carbon leakage occurs in products where:
• there is coverage under carbon policy (e.g. the safeguard mechanism)
• domestic production can be substituted for overseas production (it is trade exposed) and
• the product relatively high emissions intensity.
Figure 3 of the Consultation Paper highlights goods covered by the Safeguard Mechanism that have a high proportion of imports contributing to domestic consumption. The figure highlights products such as urea, clinker and steel identified as having high import substitutability. As mentioned above, cement also needs to be included.
While there are significant differences between the Australian and European situation, it is notable that the
EU prioritised new measures to address carbon leakage for a relatively narrow range of industries covering iron and steel, cement, fertiliser, aluminium, hydrogen and electricity generation.
Figure 10 below, highlights the impact of a carbon price on manufacturing sectors in Europe, and supports the focus in this Review on high emissions intensive manufacturing, including cement, lime and iron and steel. The different coverage of electricity emissions in Australia would further accentuate the relative impact on cement and lime in the Australian context.
Figure 10: Impact of a €30/tCO2 carbon cost on Manufacturing sectors in Europe and their share of total manufacturing GVA20
20
Grubb, M., Jordan, N.D., Hertwich, E., et al. (2022), Carbon Leakage, Consumption and Trade, Annual review of Environment and resources, available at: Carbon Leakage, Consumption, and Trade (annualreviews.org).
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Based on this, the CIF endorses the general focus in this Review on Safeguard Mechanism covered products with high trade exposure and believe the products at highest risk of carbon leakage, such as clinker, cement and lime, should be prioritised for analysis, assessment and implementation.
3.4 Assessing impacts of carbon leakage and policy instruments
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?
The CIF supports the characterisation of impacts of carbon leakage in the consultation paper, however we emphasise the need for granular analysis of imported emissions at the facility level rather than relying on broad country average data.
3.5 Analytical approach
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?
The CIF broadly agrees with the analytical approach outlined in the Consultation Paper and would emphasise the need to highlight regional economic impacts, along with whole-of-economy and sectoral analysis. As shown in
Figure 11, cement, clinker, and lime facilities are primarily located in regional parts of Australia and are a significant contributor to Australia’s regional economy.
Jobs and industry in regional areas have a notable multiplier effect when it comes to the socio-economic value for communities compared to equivalent jobs in metro areas. Therefore, it is important that the regional impacts of carbon leakage are explicitly accounted for in this review. This complements the
Government’s focus in setting up the Net Zero Economy Agency, with a mandate to focus on ensuring regions and workforces thrive from the net zero transformation.
Figure 11: Locations of cement, clinker, and lime facilities in Australia
In relation to quantitative analysis of policy responses to carbon leakage, it is important to note that past economic relationships may not produce a reliable guide to responses to uneven ambition in climate policies across jurisdictions.
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Rapid developments in decarbonisation technology, heightened focus in capital markets on decarbonisation, and growing awareness of scope 3 emissions in final consumption may produce different reactions at industry and company level.
This points to the need to supplement broad industry and economy wide data with insight as to the factors impacting particular industries’ production and investment decisions.
3.6 Policy options to address carbon leakage risks
Are there additional policy options that should be considered alone or as part of a portfolio of approaches to address carbon leakage?
It is critical that a multi-pronged approach will be required to address the risk of carbon leakage. A well- designed CBAM would be a critical part of this for the Australian integrated cement industry as it ensures that imported goods face an equivalent embedded carbon price. However, elements of the other policies listed will be required to complement the investment signal arising from the CBAM and the evolution of the
Safeguard Mechanism, address the needs of all sectors, and ensure smooth transitional arrangements.
The coverage of policy options in the Consultation Paper to address carbon leakage is broadly appropriate.
One element of ‘targeted public investment’ that the CIF considers warrants specific attention is support for innovation in new decarbonisation technologies. This support, combined with measures such as a
CBAM, can put Australian industry in the position to lead global decarbonisation. As mentioned in Section
3.2, and elaborated in Figure 8, many of the technologies that will unlock zero carbon cement and concrete are still being developed and therefore will require significant investment to ensure viability.
With the right investment support, and a secure policy ensuring domestic carbon gains can be monetised, the above options can be implemented to support the decarbonisation of the Australian and global cement and concrete sector.
3.7 Existing measures under the Safeguard Mechanism
What is the capacity of current policy settings of the Safeguard Mechanism to mitigate carbon leakage risk into the future?
The current provisions under the Safeguard Mechanism do not adequately mitigate carbon leakage.
As noted, the TEBA arrangements are critical for industries most exposed to carbon leakage by directly reducing the scheme cost if certain criteria are met, whilst also being calibrated to target those industries most affected. As indicated above, TEBA arrangements will need to be supplemented to provide long-term certainty for covered facilities to maintain viability and underpin the confidence to invest in new low carbon production.
The CIF also notes the point made in the Review consultation paper that, as ambition increases, TEBA arrangements will become increasingly challenging as the equivalent emissions reductions need to be found elsewhere from other industries to meet scheme and national emissions budgets. From an industry point of view this adds to the sense that TEBA does not provide a solid basis for decarbonisation investment as it creates additional risk of carbon (and investment) leakage, and puts ever increasing pressure on domestic manufacturers comparative to international imports that do not face the same regulation.
On this point, the CIF reiterates its call in February 2023 for Safeguard Mechanism facilities be able to opt- in to the industry average, namely that baselines should not disadvantage early movers and should reflect the technical possibilities. It is not equitable to either disadvantage early movers that have invested in emission reduction programs nor facilities that do not have similar access to current technologies due to regional location of their production.
The CIF considers that a CBAM provides a more secure policy framework as it directly addresses carbon leakage. However, until a CBAM is fully operational, TEBA arrangements will remain the primary mechanism for addressing leakage for the Australian manufacturing facilities. As the CBAM is phased in,
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we would expect there to be adjustments in TEBA arrangements, such that the net impact is neutral with respect to carbon regulation on imported and domestic production.
The Safeguard Transformation Stream of the Powering the Region Fund (PRF) also provides a critical mitigant to carbon leakage. It provides an opportunity for successful applicants to mitigate some of the cost of new low carbon investments. Additionally, the cement, lime, aluminium and alumina grant funding opportunity was a positive step towards recognising the importance of these sectors as well as the associated decarbonisation challenges.
This improves the ability of these investments to be viable in the context of competition from other facilities not facing carbon regulation. Other public investment will also be important to facilitate research, development, deployment and commercialisation of low carbon investments - see Section 3.10 below.
Targeted support for all trade exposed sectors covered by the Safeguard Mechanism will remain a critical part of a comprehensive policy response. However, as policy tracks towards achieving net zero, fiscal measures such as this will face increasing competition for limited funds and will be limited in the extent to which they can address leakage in a scaled way.
Again, this suggests a measure such as a CBAM which can address leakage more directly, allowing the
PRF and similar to focus on complementing this more direct signal.
3.8 Australian Carbon Border Adjustment Mechanism
Is an Australian carbon border adjustment mechanism desirable? If so, which design features should be considered?
The CIF supports the introduction of an Australian CBAM. The CBAM offers a means to directly address carbon leakage through mirroring domestic obligations for imported goods.
An Australian CBAM would directly address carbon leakage arising from both trade and investment channels. It provides a direct means to limit artificial carbon-related import substitution and support investment in decarbonisation technologies, by providing certainty around the impact of carbon reduction settings.
Early implementation of a CBAM is critical to reduce risks emerging in the industry from imports from low carbon regulation jurisdictions, and to unlock investment in the sector.
The CIF considers it would be possible to stage the introduction of specific commodities under a CBAM, with simply transformed goods such as lime, clinker, and cement being prioritised for early introduction.
Such an approach could allow for a staged introduction of a CBAM for more complex goods.
The industry considers that such a phased implementation should begin in July 2025. This would commence, as in the EU, with fine tuning measurement of embedded emissions on covered products. This could proceed to a progressive introduction of financial obligations from July 2026. Lessons from early EU experience will be available to inform Australian implementation.
Consistent with Australia’s international trade obligations, any introduction of a CBAM on products should mirror the cost impact of the Safeguard Mechanism benchmarks on related domestic facilities. Phasing of any changes to TEBA arrangements, tied to CBAM introduction, can minimise any impacts on downstream industries. Existing work suggests that even assuming significant changes in scheme ambition and costs, impacts on the end users of concrete are manageable21.
While a CBAM does directly address carbon leakage, it should be considered as part of a broader suite of complementary policies. Complementary policies will assist in interim whilst coverage is explored and implemented and may also support to manage transitional arrangements. Support for public investment into the centralised provision of enabling technologies and fuels, such as hydrogen, will also be vital to prevent investment leakage.
21
Energy Transitions Commission, Mission possible, Sectoral focus Cement, available at: https://www.energy- transitions.org/publications/mission-possible-sectoral-focus-cement/
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3.9 Emissions product standards
What is the appropriate role for emissions product standards to mitigate carbon leakage?
An emissions product standard for cement would involve a maximum embodied carbon emissions level for lime, clinker and cement products, including imports, that can be sold in the Australian market. As such it would operate in addition to the existing suite of product standards for imported and domestic goods involved in the cement manufacturing process, which regulate a range of quality and other factors.
On a related note, the cement industry advocates for reform of existing product standards so that they are less prescriptive and more performance based. This would allow for greater opportunity to develop lower embodied carbon cement, complementing any carbon policy signals arising from the CBAM and Safeguard
Mechanism.
The CIF does not consider emissions product standards to be the first-best mechanism to mitigate carbon leakage. By nature these are blunt mechanisms that are not sensitive to varying amounts of embedded carbon. This means that there is little incentive to exceed the minimum requirements of the standard, which could stifle innovation.
If combined with domestic regulated emissions requirements under the Safeguard Mechanism, minimum standards may not mitigate the risk of leakage to a large extent as emissions within the maximum allowable emissions would still face differential carbon costs.
Hence, the CIF does not consider these will provide the right mitigation against leakage for bulk products like clinker and cement, where Scope 1 emissions can be measured and tracked directly. They may be part of the policy toolkit for other products and sectors, for example those with elaborate transformation, and more complex supply chains.
3.10 Targeted public investment in firms’ decarbonisation
What is the appropriate role for public investment measures to mitigate carbon leakage?
As indicated above targeted public investment in firm’s decarbonisation will remain an important part of the policy mix. In addition to the grant programs targeted at trade exposed Safeguard Facilities such as the PRF, there will be a need for public investment to ensure Australian technology leadership.
The CIF welcomes the Government’s $200 million of funding under the Powering the Regions Fund for the cement, lime and aluminium and alumina sector grant opportunity. This is a positive step towards recognising the importance of these sectors as well as the associated decarbonisation challenges.
Public Investment to develop and encourage early deployment of new decarbonised technology should be available for all sectors, including those covered by a CBAM. These funds should be aimed at overcoming well recognised barriers to early-stage technology development.
Important existing sources of funding and finance include those from the Australian Renewable Energy
Agency, other streams within the PRF and the Clean Energy Finance Corporation, and over time there may be a need for more targeted support for technologies such as Carbon Capture, Utilisation and Storage, which will be needed to achieve net zero emissions in the cement industry.
As articulated in Section 3.6, investment and innovation support for new decarbonisation technologies will prove vital to addressing carbon leakage and decarbonising the cement and lime sectors. The CIF notes that the EU CBAM and broader Fit-for-55 climate package has been accompanied by very significant decade-long public funding commitments.
3.11 Multilateral and plurilateral initiatives
What is the appropriate role for multilateral and plurilateral initiatives to help mitigate carbon leakage, and the impact of unilateral measures taken to address carbon leakage?
The CIF supports continued efforts to build support for climate in global and regional forums. These have potential to provide long term protections against carbon leakage by harmonising elements of carbon policies between different jurisdictions.
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Such efforts can also progress cooperation in specific areas, even if consistent climate mitigation policies will be difficult in the medium and even long-term. For example, it may be possible to secure a degree of alignment on measurement and reporting standards, which can facilitate trade in emissions intensive goods by providing more standardised supply chain information. It can also reduce compliance costs of unilateral measures such as a CBAM or minimum product standards, particularly as a range of countries introduce such approaches.
Given the difficulty in securing international harmonisation, particularly around the extent of climate ambition, Australia will need to proceed with well-calibrated unilateral measures in parallel with multilateral and plurilateral initiatives. The diversity of Australian trading partners means varying carbon policy responses are likely to be in place for some time.
Indeed, the snapshot outlined above in Table 1 above suggests different approaches between Australia’s trading partners with respect to emissions pricing and regulation. In this context a policy like a CBAM, which is sensitive to carbon policies in specific source countries, will complement these international efforts.
3.12 Feasibility of policy options
What principles should guide Australian policies to prevent carbon leakage? Should other factors be considered to assess the feasibility of potential policies?
Importantly, early investigation of practical implementation detail will be needed to facilitate the introduction of an Australian CBAM and other carbon leakage policy options. Australia has an opportunity to learn from the experiences of the EU CBAM and use the lessons to develop a comprehensive approach that best suits our market, industries, and sectors. At the same time Australia has significantly simpler domestic and international supply chains, opening possibilities for streamlined introduction here.
The CIF will continue to work with our supply chains to increase capability in measuring embodied carbon and tracking this across the border. This will involve engaging with foreign upstream providers and industry associations on measurement, verification and reporting capabilities. This builds on existing efforts to verify emissions for cement developed from domestic and imported clinker. The CIF and its members are willing to cooperate with the Review and relevant Australian authorities in this process.
4. Conclusion
The industry welcomes the Review, and the strong commitment to industry and stakeholder engagement.
The CIF and its members are committed to assisting the Review, including the provision of information and data to assist those deliberations.
We believe an integrated response is required to address the risk of carbon leakage and capture the opportunities involved in the net zero economic transformation for Australia.
We consider a CBAM should be at the heart of that response, alongside policies to address the full range of sectoral and technological challenges. A CBAM should rapidly supplement, and eventually replace for covered products, the existing measures to address leakage risks within the Safeguard Mechanism. This will provide investment certainty for the significant decarbonisation investments needed to secure the pathway to net zero, and secure economy-wide and regional prosperity.
The CIF strongly advocates that July 2025 is a critical target date to commence phased introduction of a
CBAM, starting with more straightforward sectors such as our own. The CIF is committed to cooperating with the Review and the Government, and our supply chain stakeholders, on approaches to implementation.
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