Australia’s Department of Climate Change, Energy, Environment and Water has advised in its carbon leakage review report that the government should assess future carbon leakage risks, policy options to address them, and the feasibility of border carbon adjustments.
The report concluded that the existing safeguard mechanism is effective at mitigating carbon leakage in the short to medium term. However, it warned that settings for certain sectors may require additional measures over time. In particular, reduced baseline decline rates for Trade Exposed Baseline Adjusted facilities were found to limit the contribution of safeguard sectors to the country’s overall emissions-reduction effort.
Public funding seen as insufficient on its own
According to the review, public investment can help lower emissions intensity and address leakage risks in specific cases, especially for export-oriented industries. However, such funding is not considered a fiscally sustainable standalone solution for commodities facing high leakage risk. Instead, it should form part of a broader policy mix, particularly for emerging green export sectors.
The commodity assessment identified cement, clinker, lime, hydrogen and ammonia derivatives, steel and iron, and glass as sectors likely to face material carbon leakage risks over time, suggesting the need for additional policy support.
Border carbon adjustment proposed for selected sectors
The report stated that an import-based border carbon adjustment (BCA) could be appropriate for certain safeguard-covered commodities facing high leakage risks. Implementation could be phased and may involve removing Trade Exposed Baseline Adjustment provisions once a BCA is fully applied to a given commodity.
However, the review advised against a BCA model with export rebates, arguing that such a system would conflict with emissions-reduction targets and could create issues under international trade law.
Cement identified as early candidate
In terms of sectoral rollout, the report suggested that implementation should begin with commodities that have both high leakage risk and relatively simple administrative structures. Cement and clinker were identified as the most suitable early candidates.
Other sectors, including lime, hydrogen, ammonia and derivatives, steel and iron, and glass, were also flagged for possible inclusion. However, factors such as partial safeguard coverage and more complex supply chains mean these sectors would likely require additional preparation before implementation.
Design to mirror safeguard mechanism
On the design side, the report recommended that any BCA should mirror the core features of the domestic safeguard mechanism. Liability would apply to Scope 1 emissions above safeguard-aligned benchmarks and would be adjusted to reflect differences between carbon prices paid overseas and the Australian benchmark, based only on explicit carbon pricing.
The report also advised that Trade Exposed Baseline Adjustment provisions should be removed once a BCA is fully implemented for a given commodity. Measurement, reporting, and verification rules should be aligned with international standards to minimize administrative burdens.
Limited macroeconomic impact expected
According to the analysis, the introduction of a BCA under illustrative scenarios would not have material macroeconomic impacts. Downstream price effects on final goods are expected to be small relative to overall product prices.
The report also concluded that mandatory emissions product standards would not be an effective tool for addressing leakage risks, while multilateral and plurilateral initiatives could support implementation but would not replace the need for domestic policy action in the near to medium term.