The United Kingdom and the European Union (EU) may soon hit Australian exports with carbon tax policies designed to compel European trading partners to reduce emissions.
On March 10, Members of the European Parliament adopted a resolution to support a carbon tax, otherwise called the “carbon border adjustment mechanism” (CBAM).
Details are to be presented to parliament in June at the earliest and is expected to cover the power sector and energy-intensive industrial sectors, like cement, steel, aluminium, and more.
The EU Parliament said the tax’s objective is to help the region achieve net zero emissions by 2050 while preventing “carbon leakage,” where EU production would simply move overseas where carbon emission policies are less harsh.
“We have to lead by example but we also have to make sure that if our companies work under these very tough standards, that these industries aren’t relocated to countries that are more polluting,” Michael Pulch, EU’s ambassador to Australia, told The Australian.
Jürgen Zattler, director general at Germany’s federal Ministry for Economic Cooperation and Development, told The Guardian that the policy would be used as a tool to fight global warming and not to protect domestic industry.
However, Tehan maintained his stance, saying he did not want the region to approach the subject in “unique ways which are protectionist” and he advocated for greater trade liberalisation.
“We know they’ve already got heavily subsidised industries,” he told reporters. “What we don’t want to see is additional protectionist measures put in place.”
Queensland University of Technology Associate Professor Felicity Deane said that if the EU were to implement CBAM while it continued to give free emissions to some industries, the argument that the tax would be protecting domestic producers could be made.
The introduction of the tax will heavily impact current talks for the Australia-EU free trade agreement. The EU ambassador said Europe will force Australia to adopt a greater emissions target in negotiations.
This may cause tensions in the relationship between the two parliaments, a sentiment raised by U.S. presidential envoy on climate, John Kerry. He told The Financial Times that he was concerned about the tax plans, warning it should be only used as a last resort.
“It does have serious implications for economies, and for relationships, and trade,” Kerry said. “I think it’s something that’s more of a last resort, when you’ve exhausted the possibilities of getting emission reductions and joining in some kind of compact by which everyone is bearing the burden.”
However, the EU Parliament will face some difficulty with drafting and implementing a carbon tax that would comply with the rules of the World Trade Organisation (WTO).
Under WTO rules, taxes or “charges of any kind” imposed on imported products must be the same as taxes imposed on domestic products. This means while importers can be charged additional taxes, the taxes cannot be imposed on producers.
If the EU continues with its CBAM plans as they currently stand, a country like Australia could lead a WTO dispute on the issue.
“At this stage, the EU hasn’t ruled out relying on exception provisions [to comply with WTO rules], which include the allowance to protect of human, animal and plant life or health or the conservation of an exhaustible natural resource,” Felicity Deane said. “However, the catch is that these exceptions only apply in narrow circumstances that may not fully excuse the CBAM.”