The EU has recently introduced a new policy on climate change, called the Carbon Border Adjustment Mechanism (CBAM). Set to be implemented as early as next year, the CBAM intends to address the issue of ‘carbon leakage’ – whereby emissions are transferred abroad to countries with weaker restrictions. Once in effect, the scheme will seek to apply tariffs to imports which are equivalent to the fees applied to polluting industries in the EU’s own emissions trading scheme (ETS). The scheme is integral to ensuring that the EU’s broader push to realise meaningful decarbonisation does not simply push carbon-intensive industries abroad. Thus, the main aim of the scheme is to keep European industry competitive, while pushing forward with some of the most ambitious emissions reductions targets in the world – a commitment to reducing emissions by 55% of 1990 levels by 2030, and reaching net zero by 2050.

By contrast, Australia is “a free rider” on climate issues according to an influential Member of European Parliament, Kathleen van Brempt. Indeed, another aim of the scheme is to punish slow-movers on climate like Australia. It is clear that we are seen in the bloc as recalcitrant on the issue of global heating. But with Australian exports to the trading bloc worth around $10-20 billion, a relatively small proportion of our overall exports, will the CBAM really force Australia’s hand on higher targets? Analysis by the Victoria University Centre of Policy Studies has shown that the major impact of the scheme would be to partially reduce demand and prices for emissions-intensive Australian exports like coal and steel, and as a result push down the Australian dollar.

Levies imposed by the CBAM would increase the price of exporting coal to the EU by more than 50%, effectively ending the small portion of present Australian coal exports bound for the EU. The biggest impact on exports would likely be on steel, alumina, and aluminium, for which the EU market accounts for around 10-20% of Australian exports. Though there may be pain ahead for some high-polluting Australian industries, it seems that the hit from the CBAM alone is unlikely to be large enough to force our government into more ambitious action, mostly due to the small proportion of our exports which end up in the EU.

The greater risk of the scheme for Australia is if more countries choose to adopt the EU’s approach in tackling emissions leakage. Indeed, it seems that the Biden administration may be poised to follow EU on the matter. If more of our trading partners choose to follow the EU, our biggest exports, iron ore and coal, will be under severe threat. We risk being isolated as a high emitter, and excluded from the trade benefits of a ‘low-carbon club’. It seems now more a question of when than if Australia will be dragged, kicking and screaming, into a new low-carbon world order through progressively more punishing tariffs against our emissions-intensive exports. However, this new development in the international trade regime could present a great opportunity, if only the government can be coaxed from its relative inaction to proactivity.

A report released by the Grattan Institute argues in favour of investing in the production of green steel in Australia. It finds that while Australia currently produces a significant proportion of the raw materials used to make steel, including 38% of global iron ore and 18% of metallurgical coal, it only produces 0.3% of the world’s steel. This is a result of the high cost of producing steel in Australia, and the low cost of exporting coking coal to Asia. The report argues that Australia should push ahead with manufacturing zero-emissions steel with hydrogen. Hydrogen can be produced using renewable electricity, by splitting water molecules through electrolysis, and in turn this green hydrogen can replace the use of coking coal as a reducing agent in the steel making process.

This green steel could be competitively produced in Australia, as the higher wages required for domestic production would be dwarfed by the prohibitively high cost of shipping hydrogen – which must be compressed, or super cooled to a liquid form, to be shipped. As hydrogen is the lightest element on the periodic table, this process much more difficult and costly than when shipping other gasses, like liquid natural gas – because hydrogen takes up much more space for the same amount of stored energy.

Measures like the CBAM only make the proposition that Australia could create a multi-billion dollar green steel industry more feasible, as import levies on coal-coked steel might make the green Australian product all the more competitive. The CBAM raises the stakes for Australia. We can stick to the isolation of being the only major economy with no significant climate plan and face increasing levies on, and an inevitable decline in demand for, Australian coal. Or, with a bit of vision and drive, we can become a green steel superpower by harnessing our natural resources in an environmentally responsible way by shifting to producing steel locally – creating a job rich industry which can replace our reliance on coal exports. The choice is ours.

Pailey Wang is a dual-degree student, studying at Sciences Po where he undertook an Asia-Pacific regional specialisation and majored in Politics and Government, he is currently in his final semester of the program and is completing a major in Political Economy at the University of Sydney. A keen writer, he has edited and contributed to student publications. His particular interests lie in international economics with a focus on environmental and socio-economic transitions.

Pailey is an intern with the Australian Institute of International Affairs NSW.