Carbon border tariff a bad step

The Albanese government must face up to the reality that what looked like good policy on climate change at the last election may not look so great anymore. This must include a carbon border adjustment mechanism, an EU initiative designed to punish countries with less vigorous climate abatement policies.

Given our objections to Donald Trump’s new tariffs on steel and aluminium, the government risks finding itself at cross purposes as it argues for free and open trade. Opposition climate change and energy spokesman Ted O’Brien is correct to say the timing could not be worse for the Albanese government to be considering a new carbon tariff of its own.

The government already knows this. A review was launched into “carbon leakage” in 2023. The preliminary findings by environmental economist Frank Jotzo found a carbon border tax could be used to equalise the effective carbon reduction efforts between Australia and foreign jurisdictions. But a final report and recommendation, due late last year, are yet to surface and are unlikely to be made public before the election.

A lot has changed since 2023 when the world was riding high on the need to transform the global economy. The EU quickly realised that without punitive measures it would simply be importing carbon-intensive products from elsewhere and putting its own industry out of business. Australia was exposed to EU carbon-based trade sanctions but rather than argue the undesirability of new trade restrictions it considered joining the push.

Australia’s energy-hungry, trade-exposed industries are particularly vulnerable because of the huge rise in energy costs as a result of the decarbonisation agenda. The situation was further complicated by the introduction of Labor’s revised safeguard mechanism that forces major emitters to cut emissions by a set amount each year. The plight of trade-exposed industries was recognised by vague promises and ad hoc interventions but these are no substitute for good policy. A CBAM would only layer on further inefficiencies.

Mr Trump’s new global trade war complicates things further. Rather than follow the restrictive mindset of the EU, Australia must refocus on unleashing the animal spirits of productivity. This includes following the US in prioritising the development of cheap and abundant energy. Doing so will allow us to maintain a coherent argument against the imposition of trade sanctions. The trade lesson for Australia is that to thrive our industries must be competitive on price and reliability. Erecting trade barriers was never going to be a profitable solution.