Adopt carbon tariffs to reduce income of oil-rich states, Europe says

Europe has urged countries such as Australia to support its plan to impose carbon tariffs, arguing the move to phase out fossil fuels will reduce the income of oil-rich authoritarian states and ease geopolitical tensions.

Millions of dollars in new tariffs could be slapped on Australian exports after the European Parliament voted in March to forge ahead with carbon levies on products from countries with weak environmental laws.

European Union foreign policy chief Josep Borrell says the levies are needed to avoid carbon leakage.Credit: AP

Federal Trade Minister Dan Tehan has repeatedly labelled the EU proposal a new form of protectionism and instead argues tariffs should be slashed on green products including wind turbines and solar panels.

Australia’s climate ambitions have come under renewed scrutiny since the election of United States President Joe Biden in November, with both the US and Britain lobbying the government to lift its Paris agreement targets and commit to hitting net-zero emissions by 2050.

In a joint opinion piece for The Age and The Sydney Morning Herald, two senior European officials said the plan to impose carbon levies would “trigger a race to the top”.

Frans Timmermans, vice-president of the European Commission and Josep Borrell, the EU’s foreign policy chief, said as long as other countries’ climate commitments were not on par with their own, there would be a risk of carbon leakage, which can occur, for example, when companies shift manufacturing to countries with weaker emissions policies. This was why a carbon border adjustment mechanism (CBAM) was needed, they said.

“We know that some countries, even among our allies, are concerned about this. But we want to be clear: setting a price on imported carbon-intensive goods is not meant to be punitive or protectionist,” they said. “In addition to ensuring that our plans are compliant with World Trade Organisation rules, we will engage with our international partners early on to explain what we have in mind.”

Messrs Timmermans and Borrell said the transition to green technologies would drive power shifts away from those controlling and exporting fossil fuels such as oil-rich countries like Russia.

They said the loss of the key source of Russian revenue could lead to instability in the near term but in the long run, traditional fossil-fuel exporters would need to diversify their economies and free themselves from the “oil curse” and the “corruption it so often fosters”.

The EU plan will need approval from the World Trade Organisation, which requires that tariffs do not discriminate against particular countries such as Australia. Australia will argue through the WTO for its plan to cut tariffs on more than 50 environmental goods and services.

Mr Tehan said he had made it very clear his government believed there was a better way to achieve emissions reductions than the EU’s carbon levies, which are also being considered by the US and United Kingdom.

“The worry with this type of mechanism is that it can be very protectionist in nature,” he said.

“Whereby, if we were able to liberalise all environmental goods, all environmental services, you would then make sure that all countries could get access to the technology and the know-how to be able to reduce their emissions and we think that’s a much more positive way to go about it.”

Other nations to have expressed concern about carbon levies include Brazil, China, Thailand, the Philippines, Pakistan and Saudi Arabia, which said the measure could distort global value chains and was primarily designed to stop investment leaving Europe.

Professor Warwick McKibbin, a former Reserve Bank board member who has undertaken international climate change modelling for decades, said Australia needed to take a realistic position that the world was going to implement such measures.

“The economic cost of a carbon border adjustment mechanism is nothing compared to the issue Australia will have to deal with economically when its fossil fuel export industry dramatically declines over the coming decades,” he said. “There needs to be a reopening of the debate on how to create a world-leading framework for climate and energy policy in Australia.”

Victoria University’s Philip Adams, who has worked for the federal Treasury modelling carbon prices, said he believed the EU’s carbon levies would be extremely difficult to implement. Professor Adams said it would difficult to determine the effective carbon price on Australian and EU products.

“It is thought that the CBAM will be applied only to a limited range of products, but even for that range the implementation issues appear huge,” he said. “All this leads me to think that the CBAM is largely a political ploy designed to force Australia to undertake correct and comparable CO2 pricing.”

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