Australia should consider introducing a carbon border adjustment mechanism (CBAM), starting with imports of cement and clinker and potentially expanding to products such as hydrogen, steel, and ammonia and derivatives like urea and ammonium phosphate, according to a key report released by the government today.
The identified commodities face risk of future carbon leakage from imports, which could lead to greenhouse gas (GHG) emissions being relocated from Australia to overseas. The carbon leakage review, led by Australian National University professor Frank Jotzo between July 2023 and March 2025, assessed leakage risks in 2030 for all 75 trade-exposed commodities under Australia's safeguard mechanism across 42 commodity groups. The review was announced as part of the 2023 reform of the safeguard mechanism
While current safeguard mechanism settings are effective at mitigating carbon leakage risk in the short- to medium-term, the declining emissions baselines under the scheme could put some of the identified sectors at a "more significant" risk over time, according to the report.
Cement and clinker first, others to follow
Risks are higher for cement and clinker, and the implementation of a border carbon adjustment for these products "is likely to be simplest," according to the report.
Australian production of lime and glass, on the other hand, is only partially covered under the safeguard mechanism, and a CBAM application would face more complexity.
Hydrogen, steel, and ammonia and derivatives carry material carbon leakage risks, but feature more complexity with respect to production methods, supply chains, and product diversity. Some of these products are also only partially covered by the safeguard mechanism.
The government should also consider potential risks for a second group of commodities, consisting of aluminium and alumina, refined petroleum, and pulp and paper. These products face mixed evidence related to leakage risk indicators and analysis of trade and investment leakage, but the government could assess them in the forthcoming review of the safeguard mechanism scheduled for the July 2026-June 2027 financial year and consider particularly the suitability of arrangements for emissions-intensive trade-exposed activities for all commodities under the scheme.
Preference for fees instead of ACCU surrenders
The safeguard mechanism covers over 200 individual facilities emitting more than 100,000t of CO2 equivalent (CO2e) in a compliance year across the oil and gas, mining, manufacturing, transport and waste sectors. Facilities earn Safeguard Mechanism Credits (SMCs) if their reported scope 1 emissions fall below their baselines, and must surrender SMCs or Australian Carbon Credit Units (ACCUs) if emissions exceed the threshold.
If the Australian government decides to pursue a CBAM, it should consider applying liabilities only to scope 1 emissions that exceed the relevant safeguard mechanism baseline at the time of import. The assessment should be based on explicit carbon prices only, and the liability should account for the differences between the effective carbon price paid in the originating country and an Australian benchmark price.
While importers could, in principle, clear the liability by paying a fee or surrendering ACCUs, there was "broad support" for the fee option during the consultation, according to the report.
Surrendering ACCUs would more closely reflect domestic requirements, but trading in ACCUs has legislative requirements that would have to be met by importers which would require careful consideration, the report warned.
The ACCU purchase option would create additional demand for the product, raising prices. But stakeholder feedback "reflected concerns about the potential impact on ACCU supply" if these carbon credit units were used to meet carbon border adjustment liabilities.
The government should not consider a carbon border adjustment that provides rebates for exports, as that would be inconsistent with Australia's emissions reduction targets and could raise considerable international trade law concerns.
"Rebating emissions obligations to exports would effectively exempt production for export from emissions reductions obligations, running counter to overall policy objectives towards net zero and increasing the required emissions reductions elsewhere in the economy," the report read.
Teba provisions could be removed
Trade-exposed, baseline-adjusted (Teba) facilities operating in emission-intensive sectors that might face unfair competition from imports from countries with weaker or no emission reduction policies currently benefit from discounted baseline decline rates under the safeguard mechanism.
Decline rates can be as low as 2pc for non-manufacturing sectors or 1pc for manufacturing sectors, compared with the standard 4.9pc/yr declining rate until 2030.
The Teba provisions for a commodity should be removed once a border carbon adjustment is fully implemented for that commodity, according to the review.
Limited impact on downstream activity
The report also noted that analysis indicates the impact of a carbon border adjustment on downstream activity, such as construction, would be "very limited".
"The review's analysis suggests that the maximum price impacts on final goods that incorporate commodities that may be subject to a border carbon adjustment, such as wind farms, house construction and crops like wheat, would be vanishingly small as a share of product prices," the report said.
The government said today it will continue to consult on carbon leakage with affected industries, and will consider the report's recommendations in the safeguard mechanism review.
