The Climate Club has teeth

Introduction

It doesn’t matter whether we believe in climate change or not. It is not just a political issue but it is now a global economic issue. Unfortunately for us, it is now an issue in other countries over which we have no sway. The members of the EU continue to press on with their plans for a carbon border adjustment mechanism (CBAM). In effect, is the tax on producers who do not use energy which comes from like countries. In effect you’re in the climate club or not.

There is nothing strange in such a mechanism as many countries who do not have identical laws particularly in the area of tax talk of comparable jurisdictions. In effect countries with similar rules and principles which may have different rates of tax.

The EU Challenge

The members of the EU have already radically change their energy mix and have invested to achieve this goal and also pay more for their energy than in other countries.

From the outside looking in, Australia seems to be dragging the change on entering into energy transition as our government does not have a national energy policy and no clearly defined targets for 2050 or any other specific date.

Australia’s Response

Australian business has long seen this issue emerging particularly as Japan and South Korea have also made announcements for 2050. They have been urging the Australian and state governments to address the issue. The issue of dealing with reduction of carbon has proved to be a poisoned chalice for leaders of the Liberal Party. Interestingly Boris Johnson of the UK Conservative party has embraced the need for a reduction in emissions. Canada and the United States have clearly moved down a similar path.

Australia has long had an argument from major companies including Rio Tinto, BHP and Alcoa that we need to address this issue. The three name companies are major users of energy and clearly understand their costs would be impacted.

What about our Friends?

If our major trading partners including China, Japan, India, Canada and the United States each move down a similar path Australia may find itself in an awkward position.

The current debate suggests that unless you have a carbon tax in the United States the CBAM will be without teeth. This is not the case. The US may well argue that whilst they don’t have a national carbon tax they do have strong policies particularly at a state level which are pushing them towards a lower level of emissions and that in effect the price of energy in the US has risen because of this.

Globally resources groups such as BP and mining groups such as Indonesia’s Adaro brightly talk about how their operations are already heading towards zero net emissions of CO2. Many in Australia continue to live in a sheltered world and do not understand the global changes in how we live and how much it will cost which will continue to occur.

In Canberra

Whilst Prime Minister Morrison may have said to the National Press Club "Australia would reach net zero emissions as soon as possible and preferably by 2050” these words are not policy and do not come with any firm commitments. It is almost as if they were said to see what the community’s reaction would be.  Unfortunately for the economy the political agenda was seized by private conduct allegations and whilst ethically important they distracted from economic reform.

If Australia looks and its top 20 trading partners and says what is their attitude to climate change and are, they likely to support a CBAM mechanism the countries to which 80% of our exports go have already pledged to be net zero emissions by 2050 and in the case of China by 2060. Australia’s exports are energy intensive; we export fossil fuels, minerals and metals. Australia’s economy therefore is very much impacted by its trading partners attitudes to our own energy policy and to their own approach to decarbonisation.

Conclusion

It behoves Australia to look at alternative technologies and be ready for reductions in demand of the commodities we export.

Whilst the EU is not a major purchaser of goods made in Australia, any levies imposed on Australian exports are likely to be copied in like-minded countries such as Canada, Japan, China, South Korea and New Zealand. Collectively, these countries could impose quite a cost on Australia, our balance of trade and our standard of living.

As a country we must be ready for change and understand our options.

None of this is to suggest that Australia will not continue to export coal, other fossil fuels or minerals but as a price taker we may be forced to accept lower returns and lower taxes (e.g. royalties) as a result.

Mr Morrison needs to develop a national energy policy and understand will take time to implement. It needs to be bipartisan any substantial change in power generation will take at least eight years to implement and the investment is one of at least 30 years.

What is the message to our politicians?

It’s time for them to act by giving us a bipartisan clear long-term policy direction.