Insight – The limited impact of the European Union’s Carbon Border Adjustment Mechanism on Australian agriculture

The European Commission has presented its ‘Fit for 55’ package. The package aims to meet the European Union (EU) target to reduce net greenhouse gas emissions by at least 55% on 1990 levels by 2030. The package includes the proposal for the Carbon Border Adjustment Mechanism (CBAM). 

The CBAM aims to mitigate the risk of carbon leakage.  It also aims to ensure compatibility with World Trade Organisation rules and other international obligations. The Commission says the CBAM is an environmental measure and not a tax.

The CBAM will begin on 1 January 2023. Importers will start paying financial adjustments on 1 January 2026. 

Summary of CBAM

Under the CBAM, EU importers will buy carbon certificates corresponding to the carbon price that would have been paid had the goods been produced under the EU’s carbon pricing rules. The EU importer can deduct the cost if exporters can show they have paid a price for the carbon used in production.

Countries that are part of the EU Emissions Trading Scheme (EU ETS) will be exempt from the CBAM. Countries with an agreement linking their domestic emissions trading system with the EU ETS may be exempt in future.

Limited trade implications for agriculture 

The CBAM will initially apply to the following products exported to the EU:

  • iron
  • steel
  • cement
  • fertilisers
  • aluminium
  • electricity. 

The CBAM will not apply to agriculture products. In 2026, the Commission will evaluate whether to extend the scope to include other products.

It is unclear whether the CBAM will include agricultural products in the future. The current EU ETS does not include agriculture. Paper products are included in the EU ETS. The CBAM could affect paper products in the future. 

Next steps

The EU Parliament and Council will negotiate the Commission’s proposal with a view to agreeing on the proposal’s points. The draft is likely to undergo multiple changes before it is finally adopted.

The Australian Government will examine trading partners’ proposals to see whether they are WTO compliant. It is committed to participating in multilateral discussions that:
promote trade
build sustainable supply chains 
share knowledge.

Resources

More information on the CBAM is available on the European Commission’s website.

More information about the individual countries within the EU market is available on Austrade’s website.

The Australian Government’s network of Agriculture Counsellors has provided information for this article. Additional information about the Agriculture Counsellor network, including contact details, is available on the Department of Agriculture, Water and the Environment website.

Market overview

  • The EU is Australia 7th most valuable agriculture, fisheries and forestry export market. It is worth an average of A$2.2 billion from 2017 to 2020 (Source: ABS 2021).
  • The EU is a high-value market where the following are important considerations for consumers:
    • social licence
    • sustainability
    • genetically modified organisms
    • animal welfare
    • environmental protection. 
  • Australia is negotiating a free trade agreement (FTA) with the EU. Once in force, the Australia-EU FTA will provide Australian exporters with a competitive edge. It will also provide more choice about where they do business.