Industry, safeguards and CBAMs 02 September 2021

By Rob Murray-Leach

Australia’s large energy users (including mining and manufacturing) are emissions-intensive by global standards for developed economies. As the world moves towards net zero emissions, our large energy users are going to need to rapidly decarbonise. In August two new major papers looked at key issues for large energy users, written by the Grattan Institute and one by the Australian Industry Group. This article summarises these papers, with considerable overlap in their messages.

Grattan Institute – Towards net zero for industrial emissions

On 22 August the Grattan Institute, an independent think-tank, released a report ‘Towards net zero: Practical policies to reduce industrial emissions’. The report notes that Australia is not on track to meet a target of net zero greenhouse gas emissions by 2050, and must take action to reduce emissions from the industrial sector, which they define quite broadly to include:

  • Extracting and processing coal, oil and gas;
  • Extracting and processing other minerals and metals; and
  • Manufacturing of other products.

The report notes that emissions from these sectors will be strongly impacted by overseas demand for their products – in other words, other countries climate policies will have a strong impact on Australia’s industrial emissions. International demand for coal could fall quite rapidly over the coming decade, reducing emissions from Australian coal mining. Global demand for Liquid Natural Gas (LNG) could also decline from the mid-2020s onwards, with 85 per cent of Australia’s LNG exported to countries that now have net zero emissions targets.

However, the economic impact of the reduction in overseas demand for Australian fossil fuels could be offset by increased demand for minerals that are critical for low-emission technologies, such as copper, lithium and rare earth metals. It is clear that Australia should encourage the rapid development of these resources to diversify its exports and mitigate the risks of declining international demand for coal and LNG.

The Grattan Institute notes that the most effective policy to drive emissions reductions across the economy would be a carbon price, but in the near-term this is politically impossible in Australia. Therefore, the Grattan Institute recommends three main policies to reduce emissions from the industrial sector:

  1. Amend the Federal Government’s Safeguard Mechanism so that it creates a strong incentive for industrial facilities to reduce their emissions. The Safeguard Mechanism encourages all facilities emitting more than 100,000 tonnes of greenhouse gas emissions per annum to keep their emissions below an emissions intensity baseline for that sector. There are currently 194 facilities that are required to participate in this program. However, the program currently has baselines that are very high and does not strongly encourage industrial facilities to reduce their emissions. The Grattan Institute recommends setting industry lower baselines and rewarding facilities that reduce emissions below their baselines by allowing them to sell their ‘below-baseline’ credits to other parties.
  2. Adjust state energy efficiency schemes (NSW Energy Saving Scheme, Victorian Energy Upgrades Program, South Australian Retailer Energy Productivity Scheme and ACT Energy Efficiency Improvement Scheme) so that they support smaller industrial facilities to reduce their emissions. Grattan argues that these schemes should focus on encouraging abatement in facilities that are not subject to the Safeguard Mechanism; and
  3. Establishing a $10 billion Industrial Transformation Future Fund to finance investments in low-and zero-emissions industry, particularly the demonstration of novel technologies.

It has been clear for some time that Australia needs stronger policies to drive emission reduction in industry, not least because this will be critical to keep Australian businesses competitive in a global low-carbon economy. The Chief Executive of the Australian Industry Group, Innes Willox, recently stated:

"In the long term, industry won’t be competitive unless it reaches low-, zero- or negative-emissions."

In 2018 the International Energy Agency’s (IEA) review of Australia’s energy policies also strongly recommended that Australian governments “Introduce measures for energy efficiency in business and industry, building upon the experiences from the Energy Efficiency Opportunities programme and through Clean Energy Finance Corporation funding of projects that also reduce GHG emissions in industrial facilities.”

Therefore, in addition to the recommendations made by the Grattan Institute, the EEC strongly recommends that governments place a high priority on helping industrial facilities adopt the technologies and systems that the need to manage their energy use, specifically:

  • Grants for electricity and gas sub-metering for industrial sites;
  • Ensuring that companies have sound energy management systems, such as ISO 50001;
  • Funding the training and accreditation of energy managers; and
  • Mechanisms to ensure senior managers focus on energy management.

The full Grattan Review report can be accessed here, and you can listen to Luke Menzel’s interview with Alison Reeve, one of the authors of the report, in episode 52 of First Fuel.

Australian Industry Group Report – Carbon Border Adjustment

On 17 August, the Australian Industry Group released a report on the potential impacts of the European Union’s Carbon Border Adjustment Mechanism (CBAM) on Australian industry.

The European Union has been considering a CBAM for some time, in order to ensure that European industries that are subject to a carbon price aren’t disadvantaged compared to products manufactured elsewhere. For example, if steel manufacturers in Europe have to pay a carbon price, but Chinese manufacturers don’t, it could give an unfair advantage to Chinese steel producers selling their products in Europe. A CBAM would effectively put a tariff on imports that come from countries without carbon prices to prevent this trade distortion, and could also rebate carbon prices on European exports.

The Ai Group makes a number of conclusions:

  • Australia doesn’t have a huge amount to fear in the medium-term from a European CBAM. A properly designed European CBAM would likely have limited impact on Australian exports because:
    • The CBAM would potentially impact just 0.25 per cent of our exports to Europe. The CBAM is initially proposed to just cover aluminium, cement, electricity, fertilizer, iron and steel.  Very little of what Australia produces in any of these categories is exported to Europe; and
    • Even those products that are impacted by the CBAM would not have their profitability significantly impacted, as the impact of the tariff would be largely offset by increases in prices. It addition, the EU’s CBAM is only proposed to apply to Scope 1 emissions in these sectors, and will not cover electricity used by these industries.
  • If a number of Australia’s other trading partners (e.g. US and China) introduced border adjustment mechanisms it would potentially impact a much larger share of Australia’s exports, but the impact would likely be modest in the early years. This impact would rise if Australian industry does not start to invest in making its products of a comparable or lower carbon-intensity than global competitors, many of whom are aiming to be net zero; and
  • The biggest risk to Australian exports is not CBAMs, but other countries’ domestic climate change programs, as these could dramatically reduce global demand for Australia’s exports of thermal coal, metallurgical coal and gas. As the Grattan Institute noted, diversification of Australia’s exports will be critical to address this risk.

The Ai Group recommends that Australian policy makers should:

  • Closely follow the development carbon border adjustments overseas;
  • Seek to ensure that overseas adjustments (especially the European CBAM) are properly designed and implemented, fair to Australian businesses and aren’t used improperly as a trade barrier in contravention of World Trade Organisation rules;
  • Negotiate carbon border adjustment data agreements, to ensure that Australian businesses emissions data is validated by the EU; and
  • Consider whether Australia should develop its own border adjustment mechanism.

In addition to these formal recommendations, the Ai Group also makes it clear that Australian businesses will need to rapidly decarbonise to ensure that they are not disadvantaged as other countries introduce carbon border adjustments.

The Australian Industry Group report is a very dense report that is not for the faint-hearted, but essential reading for people that are interested in border adjustment mechanisms. For the rest of us, Luke Menzel interviewed the report author, Tennant Reed, to get a summary of the issues, which you can listen to in episode 51 of First Fuel.

Rob Murray-Leach is Head of Policy with the Energy Efficiency Council. Connect with Rob on LinkedIn.

This article was originally published in the September edition of Efficiency Insight.