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3rd December 2024
Professor Frank Jotzo
Lead, Australia’s Carbon Leakage Review
Department of Climate Change, Energy, the Environment and Water
Australian Government
Ngunnawal Country, 51 Allara St
Canberra ACT 2601
Dear Professor Jotzo,
Re: Carbon Leakage Review – consultation paper 2
The Australian Hydrogen Council (AHC) welcomes this second consultation on the Carbon Leakage Review (the Review) and the opportunity to engage with the design of the potential policy.
The AHC is the peak body for the hydrogen industry and our membership includes companies from across the hydrogen value chain. Our members are at the forefront of Australia’s hydrogen industry, developing the technology, skills and partnerships necessary to ensure that hydrogen and its derivatives such as ammonia and methanol play a meaningful role in decarbonising Australian industry.
The AHC supports the Review’s objectives. We have previously argued that Australia must act to shore up domestic decarbonisation efforts undertaken by government and industry, and ensure that this is not undermined by cheaper, more emissions-intensive, parallel imports. We welcome the comprehensive analysis that has informed this assessment of Australia’s trade and carbon leakage risks and are pleased that this second consultation has taken on the feedback that any carbon mitigation policies must consider industries beyond steel and cement.
However, there is a dissonance in the Review’s consideration of hydrogen and its derivatives. This is an emerging industry in Australia, one which will produce the liquid fuel feedstocks required by many other sectors and industries. There is an urgency for policy to be set in place that safeguards not only investment in the future potential of these industries, but also the continued operation and re-investment of existing production facilities in Australia.
It should also be noted that in its initial submission to the Review in 2023, the AHC called for the inclusion of hydrogen and derivatives, rather than specifying ammonia or other primary derivatives. This was to ensure alignment with the terminology and proposed operation of the Guarantee of Origin scheme (GO scheme) as well as to ensure that all derivatives under consideration for production in Australia could be covered. This position is consistent with, for example, the UK and EU carbon border adjustment mechanism (CBAM) commodity lists.
The AHC understands that hydrogen has been excluded from the carbon leakage commodity list at this time due to the nascent status of the industry and the lack of available commercial scale data. However, hydrogen production has already been identified under the Safeguard Mechanism as trade exposed. The consultation process for hydrogen’s inclusion identified that, as this industry develops in Australia, it is at risk of incurring a green premium and that domestic decarbonisation and sovereign manufacturing capability could be undermined by parallel imports – either of emissions-intensive alternatives, or even low-carbon alternatives – produced by our trade partners. In our view, the Australian Government and DCCEEW must ensure alignment between policies that list and protect hydrogen and its derivatives as trade exposed products.
Given that the Review has only assessed ammonia and derivatives in its analysis of commodities, this submission will discuss the structure and operation of the proposed border carbon adjustment (BCA), implications of the proposal on ammonia production, and highlight the potential investment flight risks if the right policy settings are not set in place.
The design of a border carbon adjustment
The Review has investigated the option of an Australian BCA on the imports of commodities with high risk of carbon leakage. For the covered commodities, this mechanism would impose a price on high carbon imports so as not to undermine Australia’s decarbonisation efforts in the production of that commodity. It is a cost-effective policy mechanism that can assist in defraying the cost of the green premium that is borne by low carbon production, and in the Australian context, given that we do not have an economy wide carbon price, the BCA would be required to act in tandem with the scope and coverage of the Safeguard Mechanism.
The Safeguard Mechanism has generally approached the challenge of carbon leakage through the Trade Exposed Baseline Adjusted (TEBA) provisions. TEBA facilities benefit from lower baseline reduction requirements (that is, instead of a requirement for 4.9% reduction in emissions per year, the obligation is as low as 2% for non-manufacturing or 1% for manufacturing sectors) and can also gain access to additional grant funding via the Powering the Nation Fund, to decarbonise existing operations.
As proposed under the Review, a BCA would likely be a staged mechanism which would potentially include the removal or phase out of TEBA provisions under the Safeguard Mechanism for the covered commodities. This process would require additional analysis on the potential impact on existing industries, including any additional funding support to increase the rate of decarbonisation and improve trade competitiveness.
One of the challenges identified by the Review is the alignment of any new policy measures with the existing Safeguard Mechanism. In particular, the Review notes that where an industry does not have all production facilities covered by the Safeguard Mechanism a BCA cannot be applied, because this could potentially place Australia in breach of our international trade obligations (that is, the restriction on not placing requirements on imports that do not apply to domestic production of those same products).
While we understand this requirement, the proposed design has the potential to create perverse outcomes. The Safeguard Mechanism does not apply to all emitters in the economy, yet other nations that Australia trades with have, or are in the process of implementing, broader carbon pricing with carbon border schemes that reflect this broader coverage. Should weak carbon policy and a related BCA be implemented in Australia, we could see arising a situation where, rather than Australia and Australian products increasing in competitiveness in a carbon constrained world, they are in fact less competitive than those from other nations that face stronger incentives to reduce emissions intensity.
Given that the Safeguard Mechanism only considers scope 1 emissions, the Review proposes that an Australian BCA cover only scope 1 emissions. This is in contrast with the EU and UK CBAMs which cover both scope 1 and 2 emissions. Furthermore, this misaligns with emerging Australian policies such as the GO scheme and sustainable finance taxonomies for manufacturing and industry, which will report on scope 1 and scope 2 emissions.
The Review recommends that the Australian Government continue to engage in multilateral and plurilateral negotiations to address carbon leakage risk globally. As one of a small number of countries currently investigating some form of border carbon adjustment (such as the EU, UK, USA, Japan, Canada, India, China and Taiwan), Australia should obviously take the opportunity to contribute to international best practice and policy development by enabling interoperability and global certification standards.
However, participation in these negotiations and fora should not be the sole signal of Australia’s intention to lead decarbonisation efforts across the Asia Pacific. We call for the development and implementation of a wide-ranging, robust Australian BCA to support decarbonisation domestically and across our region. Countries with clear, future proofed decarbonisation policies provide greater investment certainty and may in fact see increased investment attraction.
Overall, we are supportive of an Australian BCA. However, the design as proposed does not aligned with Australia’s whole of economy decarbonisation targets, is too limited in its recommendations to be effective in protecting existing industries (much less attracting new investment) and risks Australia becoming a climate laggard.
Recommendations
- The BCA should align with international mechanisms and domestic policies.
- Additional analysis is needed on the detailed design of the BCA before it is implemented, including a potential pilot phase.
- The proposed phasing out of TEBA provisions under Safeguard Mechanism for those industries covered under the BCA should be undertaken cautiously to ensure that there are no unintended consequences.
The flight risk of Australia’s hydrogen and derivatives industries
The Review has identified several commodities at risk of material carbon leakage over time:
- cement, clinker and lime;
- ammonia and derivatives;
- steel; and
- glass.
The Review has recommended that the proposed first tranche of support mechanisms under a BCA would target clinker and cement, which are deemed to have more pronounced trade risks. Ammonia and derivatives are stated to be among the group of industries with the second highest level of leakage risk. Yet these commodities (ammonia, urea, ammonium phosphate, ammonium nitrate and sodium cyanide) have been excluded from the initial priorities list.
The AHC agrees with the Review that additional policy measures are warranted for ammonia and its derivatives to address the risk of carbon leakage. AHC would accelerate this to recommend that ammonia and its derivatives be included in the first tranche of products to support.
In terms of potential coverage of the proposed BCA, the Review has identified that domestic ammonia and its derivative facilities are entirely covered by the Safeguard Mechanism and deemed suitable for a BCA. The Review has also found that the flow down costs to the ammonia industry of a BCA to be negligible. Despite these findings, the Review has proposed that these commodities not be included in the first tranche of products covered by a BCA. We see no reason to delay the inclusion of an emerging green ammonia and derivatives industry from the first tranche of an Australian BCA.
Investment risk for the hydrogen and derivates industry is tied to, and emerges from, lack of certainty around Australian carbon policy. Even since the last consultation for the Review (December 2023) there have been a number of examples of divestment or delay of some projects in the market. This includes the decision by Incitec Pivot to sell off its fertiliser division and its continued divestment from Australia towards the United States,[1] as well as the flow on impact on Fortescue’s planned investment in Gibson Island. There has also been recent news of Australia’s sole polyethylene manufacturer, Qenos, abandoning Australian operations. These divestments have reduced Australian sovereign capability and have led to 100% of Australia’s urea and polyethylene being imported, impacting fertiliser, chemicals, packaging and freight industry supply chains.
Whilst the Review notes that the purpose of a BCA is not to protect domestic industry and output, the AHC position is that Australia’s suite of policies for addressing whole of economy decarbonisation should, where possible, be aligned with and work to enhance public investment strategies. For example, the Future Made in Australia Act (FMIA) and National Hydrogen Strategy signal Australia’s ambition to be a market creator for the commercial scale hydrogen industry, with the intention of encouraging private capital to invest in sectors identified as critical to Australia’s future economic prosperity. The proposed hydrogen production tax incentive is currently intended to commence in 2027, and inclusion of hydrogen in the BCA would provide additional investment certainty for projects currently under development and seeking offtake as they approach FID in line with these dates.
The emerging green iron and green bauxite sectors, as well as ammonia, methanol, and other chemical derivatives, are key markets for the offtake of hydrogen. Without demand from these sectors and others, the risk profile for investment in Australia, as well as Australia’s comparative advantages vis-a-vis other locations, is diminished.
The FMIA policies and the Treasurer have spoken about the need for government to be a market creator – that, in the absence of a market, there is a role for public capital to crowd in private capital in key policy areas in the national interest (e.g. green hydrogen, metals processing, minerals). It is integral that the Review and its recommendations enhance the policy intention of FMIA and other similar policies.
In the current Australian context, the policy mix:
- Proposes a hydrogen production tax incentive that is time limited.
- Includes no demand stimulus measures or mandates for the utilisation of clean fuels (of any type).
- Includes the Safeguard Mechanism but no economy-wide plans for the introduction of a carbon tax or carbon pricing mechanism to incentivise investment.
If this paper, and the Review as a whole, says that there is also no need for a BCA to incentivise domestic production and utilisation of hydrogen and derivatives, the question becomes, what exactly is expected or proposed to be the signal and impetus for investment?
The issue of carbon leakage goes beyond the movement of carbon, it also captures the movement of industries. In the absence of a carbon tax and without inclusion of hydrogen and its derivatives in carbon leakage mitigation policies, we risk parallel imports of not just grey commodities, but blue and green commodities that will force out domestic investment and innovation. In our view, hydrogen must be included on the first tranche of the BCA carbon leakage commodity list, which will provide the necessary investment and legislative certainty to companies investing across the hydrogen value chain.
Recommendations
- Consider broadening the commodity listing to hydrogen, in order to cover all derivatives and to align with CBAM lists in other comparable jurisdictions.
- Include ammonia and its derivatives in the first tranche of commodities in the border carbon adjustment.
We welcome the opportunity to engage with the development of the Review and look forward to further consultations on the design and implementation of the carbon leakage mitigation mechanisms.
If you wish to discuss any element of this submission in further detail, please contact me on [email protected] or +61 436 661 767.
Kind Regards,
Katerina Aleksoska
General Manager, International
Australian Hydrogen Council
[1] Evans, S. (2024) ‘Incitec Pivot unwinds fertiliser business as write-offs spike to $1b’, Australian Financial Review, 11 November, https://www.afr.com/companies/manufacturing/incitec-pivot-unwinds-fertiliser-business-as-write-offs-spike-to-1b-20241111-p5kphl.
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