By Craig Emerson
So far, the conversation about the economic consequences of reducing Australia’s carbon emissions has been dominated by the cost to Australia of acting on climate change. “Where’s the modelling of the impact on jobs and the economy?” “Electricity prices will go through the roof!” No mention has been made of the economic costs of inaction. Among those many costs is the prospect of major Australian trading partners imposing tariffs and other charges on Australian goods and services.
In a month when we lost a star of The Life of Brian, Monty Python’s Terry Jones, we could just continue to: “Always look on the bright side of life!” But, the risk of carbon tariffs is real.
Many countries are already identifying Australia as a laggard in reducing emissions. The government’s official projections released in December 2019 (page 6) http://www.environment.gov.au/system/files/resources/4aa038fc-b9ee-4694-99d0-c5346afb5bfb/files/australias-emissions-projections-2019-report.pdf are for Australia to achieve only a 16 per cent reduction in emissions on 2005 levels by 2030 – well below our Paris target of 26-28 per cent. In order to meet our target, we will need to count the Kyoto carryover credits from overachieving our generous target of an increase in emissions of up to 8 per cent between 1990 and 2012.
Australia was one of a handful of countries at an international climate change meeting in Madrid in December persisting with the option of using the Kyoto credits. The architect of the Paris agreement, Laurence Tubiana, told the Financial Times: “If you want this carryover it is just cheating. Australia was willing in a way to destroy the whole system, because that is the way to destroy the whole Paris agreement.”
Through this sort of behaviour, Australia is in the sights of countries looking to deny climate laggards any advantage over those that take effective action in reducing emissions. French Prime Minister Emmanuel Macron has flagged the EU will do a trade deal only if Australia demonstrates its commitment to the Paris agreement – a demand the EU has also placed on Britain, the US, Canada and Japan.
The Democrats in the US are gung-ho about placing similar conditions on trading partners. Could Australia be confident a Democrat won’t win the presidency any time in the next decade or two, or that the Democrats won’t hold a majority in both houses of Congress? In any event, these days the Republicans – including their President – are looking for any pretext to slap tariffs on their trading partners.
Carbon tariffs are becoming part of an economic orthodoxy, designed to prevent countries from freeriding by refusing to deal with the negative spillover of carbon emissions. A former director of the OECD https://www.afr.com/policy/energy-and-climate/the-carbon-tax-that-will-work-20200115-p53rmk has backed a carbon border tax (CBT) adjustment whereby a country that properly prices carbon while another does not would tax the laggard-country’s products at the border to remove the advantage of the carbon subsidy.
This carbon tariff is being proposed by the new President of the European Commission, Ursula von der Leyen, who warned
https://www.ft.com/content/c93694c8-3d15-11ea-a01a-bae547046735 at Davos last week: “There is no point in only reducing greenhouse gas emissions at home, if we increase the import of CO2 from abroad. It is not only a climate issue; it is also an issue of fairness towards our businesses and our workers. We will protect them from unfair competition.”
It’s not as if this threat is a new one. Shortly after being appointed Trade Minister in October 2010, I warned that the EU was likely to impose carbon tariffs. If Australia had retained its carbon price and was not contemplating using its Kyoto carryover credits towards its Paris target, we would not be facing this risk.
Carbon tariffs would apply not only to Australia’s energy-intensive metal exports but also to exports of other goods such as wine and food and of services such as long-haul tourism.
Australian businesses might be outraged about this, but the risk is a real, commercial one. And it’s not as if the EU and the US have a track record of spurning protectionism; in fact, for them, one pretext for tariffs is as good as the next.
In Australia we need a mature analysis of the cost of not taking effective action on climate change. Company CEOs and boards can be sure fund managers, banks, insurers and regulators will be counting carbon tariffs on Australian exports as a material risk.
Craig Emerson is CEO of Craig Emerson Economics, Director of the APEC Study Centre at RMIT, Distinguished Fellow at the ANU and Adjunct Professor at Victoria University’s College of Business.