Australian exporters could be impacted by carbon tariffs in Europe

Australian exporters could be impacted by carbon tariffs in Europe

Stricter climate ambitions in the European Union (EU) mean increased domestic production costs, and therefore higher prices, for carbon-intensive goods such as cement, iron, steel, aluminium, fertilisers, electricity and hydrogen. This increases the risk of ‘carbon leakage’, which occurs when EU companies move carbon-intensive production to countries with less stringent climate policies. While ‘carbon leakage’ reduces costs, it also means that EU products end up containing raw materials which are more carbon-intensive, or EU products are replaced with more carbon-intensive imports.

To ‘level the playing field’, the EU’s Carbon Border Adjustment Mechanism (CBAM) brings in tariffs for carbon intensive goods imported into the EU, with the aim of encouraging cleaner industrial production in non-EU countries.

There is a transitional period starting 1 October 2023 from when EU companies will need to report emissions embedded in their imports, but surrendering of purchased CBAM certificates only starts from 1 January 2026. The purpose of having a transition period is to give importers time to refine their methodology for determining embedded emissions.

There are two implications for Australian entities:

  • Tariffs could result in reduced demand for carbon-intensive goods into the EU such as cement, iron, steel, aluminium, fertilisers, etc. because there will no longer be a price advantage
  • European customers will need GHG emission data regarding imported products in order to measure the number of CABM’s to be surrendered, so Australian entities will have to start measuring their GHG emissions now.

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