As the European Union (EU)’s Carbon Border Adjustment Mechanism (CBAM) comes into effect amid the global tariff wars, a new report is calling for Asia to enact its own carbon border levy to ease the public cost of decarbonising the region’s heavy industries.
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Dubbed the “one tariff the world desperately needs”, think tank Climate Energy Finance (CEF) is urging Australia to spearhead talks for an Asian CBAM involving Japan, China, Singapore and South Korea, as it bids to host COP31 climate talks next year.
Last week, the re-elected enegy minister of Australia Chris Bowen said that the country was considering imposing a carbon border tariff on imports of cement and steel. “Australia is a mining sector world leader, but we export with next to zero value add,” said CEF director Tim Buckley. With a carbon price in international trade, “hundreds of billions of dollars of new investment” could be mobilised to leverage the country’s renewables capacity to process its commodities with lower-emissions before being exported elsewhere.
This transnational tariff will build on the strong momentum across the region to put a price on carbon domestically, said CEF, noting that 17 national and sub-national compliance carbon pricing schemes have been put in place thus far, including China’s Emissions Trading Scheme (ETS), which is currently the largest in the world be transaction value.
In March, China – which produces over half of the world’s steel, aluminium and cement – announced that its ETS coverage would be expanded to include those industries. At the World Leaders’ Summit last month, China President Xi Jinping reaffirmed the country’s commitment to the Paris Agreement, which the United States (US) stepped away from earlier this year, and a new climate plan that covers all greenhouse gases across the entire economy.
“This expansion would bring an additional 1,500 companies into the ETS, increasing the total carbon dioxide equivalent covered by 3 billion tonnes, equivalent to about 5 per cent of global emissions,” said CEF’s China analyst Caroline Wang.
“As the US trends towards isolationism, China has a timely opportunity to step up in partnership with other countries and regions on international carbon pricing aligning with climate science, including potentially on an Asian CBAM building on the EU’s CBAM,” said Wang.
Increased trade barriers adopted by large economies also make it “critical to design and harmonise intraregional carbon pricing mechanisms such that they do not restrict trade, but rather enable the trade of clean commodities,” said CEF.
Barring a globally harmonised price on carbon, CEF sees an Asian CBAM as “the clearest pathway” to reduce carbon leakage – where pollutive industries avoid carbon liabilities by moving to other jurisdictions with less ambitious pricing on emissions – and to minimise the public subsidies needed to ensure the competitiveness of lower-carbon products, like green steel.
China has been one of the most vocal opponents of the EU’s CBAM and had previously expressed concern that it may cause discrimination on imported products from developing countries. But Buckley believes that its interest in advancing decarbonisation and cooperation, alongside an expanded ETS scheme – set to kick in later this year – are “all positive steps that make the implementation of… an Asian CBAM far less contentious to China than it might have been a few years ago.”
“China could build strong momentum by endorsing and elevating EU measures to enhance action in alignment with climate science,” said Buckley. He added that given that the carbon border tax CEF is proposing will not blunt the competitiveness of exports from developing countries, “to the extent [they have] an effective domestic carbon price on steel, cement and aluminium.”
An Asian Development Bank (ADB) study last year found that the EU’s CBAM at the carbon price of €100 (US$114) per tonne would lead to a modest reduction in global emissions of less than 0.2 per cent, relative to the ETS on its own.
While the CEF report did not provide estimates for the amount of emissions an Asian CBAM could reduce, Buckley said the tax revenue generated can help governments across Asia raise the capital needed for industrial decarbonisation and compensate consumers where necessary.
Apart from China, Australia, India, Indonesia, Singapore, South Korea and New Zealand have all started mandating emissions trading mechanisms to varying degrees, with most covering the power sector. While the Philippines, Thailand, Japan, Malaysia and Vietnam have announced intentions to launch their own carbon pricing schemes, their coverages have yet to be determined.
Earlier this year, Malaysia’s Sarawak also pushed for a unified Asean emissions trading system to boost carbon prices.
According to CEF, compliance carbon pricing instruments in the Asia Pacific region so far have generated a cumulative revenue of US$4.35 billion. By applying the polluter-pays principle, revenues from a carbon tariff could also be used to fund administrative costs and support climate adaptation measures in vulnerable countries, it said.
