The European Union has committed to very significant emission cuts — 55% on 1990 levels by 2030, and zero net emissions by 2050.
To help it get there without too much disruption, the president of the European Commission proposed a carbon tariff – known as the carbon border adjustment mechanism, or CBAM.
The details will be tabled in the European Parliament later this year.
A carbon tariff is a tax on imports based on the carbon dioxide emissions involved in making them. Its purpose is to level the playing field with the domestic producers who will be made to pay a carbon price based on their emissions.
At the Victoria University Centre of Policy Studies we have modelled the effect on Australia’s economy.
Initially, we find it will reduce demand for Australian exports of coal, and steel and other emissions-intensive commodities, lowering both export prices and volumes.
But then a range of second round effects will kick in.
Less coal, lower dollar
Lower export income will lower the Australian dollar, pushing up prices for Australian households, particularly the price of imports.
The lower dollar will also make exporters not directly affected by CBAM more attractive to customers overseas.
How big will these effects be?
We have used simulations from the Victoria University Regional Model to run the numbers taking into account emissions intensities, the importance of the EU as a destination for individual Australian exports and the extent to which Australian producers are able to divert each export from the EU to other markets.
Increase in price of exports to EU under carbon border adjustment mechanism
We find that some of the price effects are big (especially for coal) but, with a few exceptions, the EU isn’t an important market for Australian exports.
The exceptions are steel, alumina and aluminium where the EU accounts for between 10% and 20% of Australia’s exports.
Our simulations suggest that for the most part that the projected impacts on the Australian economy are small.
A week’s worth of economic growth
The long-run projected loss in gross domestic product is 0.05%, which is equivalent to a fall in weekly income of less than $1 per person or about one weeks’ worth of normal growth.
At an industry level, most industries slightly increase production, the fall in EU demand being more than compensated for by the weaker exchange rate.
Following a temporary increase in unemployment, job losses in declining industries are offset by expansion in other industries.
Change in industry output under carbon border adjustment mechanism