US carbon tariff offers opportunity for Australia
This year is seeing a rapid realignment of economies around efforts to avoid catastrophic climate change. On March 10, the European Union approved in principle the adoption of “carbon border adjustment mechanisms” for goods imported into the EU, and in June will vote on their implementation. If passed, imported goods will have to pay an impost equivalent to the cost of reducing emissions for the same goods in the EU. The cost can either be paid where the goods originate (through a carbon tax or equivalent), or at the EU border. The Biden administration is looking on with interest, calling the proposed levies a “carbon adjustment fee against countries that are failing to meet their climate and environmental obligations”. Japan has recently begun to investigate a similar scheme, and Britain is moving swiftly to adopt a similar fee.
Australia, some of whose goods could face penalties, should have seen this coming. After all, greater ambition to reduce greenhouse gas emissions and carbon tariffs on imports are really two sides of the same coin. Without border tariffs, cheating countries with more lax carbon standards get a free ride on those shouldering the burden.
Australia is a laggard in terms of emission reductions. We are not only the world’s largest exporter of coal (by calorific value) and liquefied natural gas but among the world’s greatest per capita emitters of greenhouse gases. Alongside petro-states such as Russia and Saudi Arabia, this miserable record leaves our industries highly vulnerable to the seismic shift on climate action the world is experiencing. Until 2013 we had a carbon price that would have rendered the current threat of carbon border tariffs irrelevant to Australian industries. Over the scheme’s 18-month life, the economy prospered and industries adjusted to the new regime. But the Abbott government’s abolition of Australia’s carbon price has left us vulnerable, as many predicted it would.
Few industries are as vulnerable to border carbon tariffs as Australia’s aluminium smelters. Heavily dependent on fossil fuel generated electricity, many, including Alcoa’s Portland Aluminium smelter, are already teetering on the financial brink. In December 2020, the federal government provided $150 million to keep Portland Aluminium afloat. The money was used to pay for electricity from AGL – the dirtiest energy company in the nation – and other suppliers, and will keep Alcoa locked into a polluting production model until 2026. Most of Australia’s aluminium is exported, and the US is our sixth-largest buyer. The Australian government’s determination to prop up fossil fuels and the looming carbon-based border charges are on a collision course.
Clean-energy generators argued at the time that the taxpayer money was bad news because it will keep coal-fired power plants running longer than they would otherwise. Moreover, competition from clean producers is intensifying, with Emirates Global Aluminium announcing in January this year that it had started using solar electricity for its aluminium production. Faced with both a rapid greening of aluminium production and border adjustment tariffs in some importing countries, the move by the Morrison government to “save” Portland Aluminium looks more like a death blow than any salvation because it locks a key Australian export industry into a polluting operating model at a critical time. If only the funds had been used to reduce the smelter’s emissions and thus give the business a long-term future.
Aluminium is not the only Australian industry facing a reckoning. Iron and steel, coking coal, gas-based industries and beef and dairy exports all face new uncertainty. Steel production in Australia remains highly carbon intensive. Globally, the largest steel producers, such as Germany’s ThyssenKrupp, are moving quickly to a less carbon-intensive means of production. Last year ThyssenKrupp demonstrated that hydrogen can be used in its existing blast furnaces instead of coal. They are currently constructing a 500-megawatt hydrogen production plant using clean energy near their main steel plant, in order to replace the use of coking coal. By 2025 the company will be manufacturing 50,000 tonnes of clean steel a year, by which time clean steel production in China and South Korea is likely to be well advanced. BlueScope at Port Kembla, south of Wollongong, has promised that it will be a “fast follower” in the race for clean steel. With the costly relining of its blast furnace imminent, it has a real opportunity to trial hydrogen in steel making in Australia. Moves are also afoot in the Pilbara and South Australia to clean up steel production and dispense with coal in the process. Business is clearly far ahead of the federal government in this regard.
It takes a lot of energy to compress gas for export – about 10 per cent of the gas extracted must be burned and wasted to compress the rest. More certainly, products produced from natural gas, such as nitrogenous fertilisers, which can also be made using clean processes, will face tariffs.
Things are looking more hopeful in the beef and dairy sector. That’s because there’s no carbon impost on agricultural products in the EU, making it unlikely that Australian beef and dairy will face border tariffs there. But more importantly, Australian entrepreneurs are developing a potential technological fix to the problem of greenhouse gas emissions in the cattle industry. Australian laboratory research has demonstrated that the red seaweed Asparagopsis, when used as a feed additive, reduces methane emissions – the second most important greenhouse gas – from cattle by up to 98 per cent. It only takes 25 grams of seaweed a day to achieve this and the seaweed can be added to molasses licks or other food sources. Producing the seaweed and distributing it to cattle clearly has a cost, but this is likely to be more than offset because Asparagopsis makes the energy in the methane available to the cattle. The feed value of the methane cattle produce is the equivalent of 20 per cent of the value of all the food the cow ingests. So, with 20 per cent more nutrition available to it, the cattle grow faster, are healthier, and overall production costs are reduced.
Lots of seaweed will be required to treat Australia’s cattle herd. Asparagopsis is native to Australian coastal waters, and the world’s first commercial farm has recently been established near Triabunna on Tasmania’s east coast, by Sea Forest. The company has cracked the complex life cycle of the plant, so can now propagate it. Sea Forest is currently growing its first crops, to be used in large-scale feed-trials with dairy producer Fonterra, a co-operative owned by more than 10,000 New Zealand farmers, which produces about 30 per cent of the world’s dairy exports.
In the next 12 months, Sea Forest estimates it will have captured more than 1600 tonnes of carbon through the cultivation of seaweed. And through feeding seaweed to livestock, it will have avoided the emission of 400,000 tonnes of CO2e (carbon-dioxide equivalent, which is the standard unit for measuring carbon footprints). This is the equivalent of 100,000 cars being taken off the road.
If Sea Forest’s Asparagopsis trials are successful, not only will Australian beef and dairy produce avoid future border tariffs, but the nation will have developed an extremely valuable intellectual property and export product.
The federal government’s current pathway aims to give away taxpayers’ money in the hope that fossil fuel technology can somehow fix the problem of its own making. The use of Asparagopsis shows that there are technological solutions we should be investing in. But reducing emissions across the economy is a complex challenge, and it’s far more efficient to levy a carbon tax across all sectors and let the industries themselves pick the winners. Apart from being hopelessly inefficient, the Morrison government’s approach puts Australia at odds with most of our allies and key trading partners, as well as offering lifelines to fossil fuels.
Finally, in a rapidly changing world, the setting of targets and milestones, backed by legislation, are indispensable to success. The Morrison government’s failure to do this stands in stark contrast to the emissions reduction scheme established by the Gillard government, and subsequently abolished by Abbott. Only with the establishment of emissions reduction targets, consistent with those of our major trading partners and backed by adequate legislation, can Australia hope to prosper in this rapidly shifting environment.
This article was first published in the print edition of The Saturday Paper on May 1, 2021 as "US carbon tariff offers opportunity for Australia".
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