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Australian exports – especially agriculture and mining - stand to lose if action on climate change is weak or not forthcoming.
Our modelling indicates that without significant and coordinated action on climate change, long run global exports will decline by nearly 10%, with Australian exports set to dive by 12%.
The Australian impact for our farmers and miners is particularly bad – accounting for around 65% of the decline in Australian exports.
No action on climate change is now a deliberate choice; one which is costly for the Australian economy.
And the drumbeats for action on climate change just got louder – a few weeks ago it was the G7 exhorting action on climate change and now we see the European Commission and the Biden Administration both flagging their intention to impose a Carbon Border Adjustment Tax (CBAT) – a green tariff – on those countries which don’t act quickly enough or well enough on climate change.
This could be a reality within a couple of years.
Our modelling suggests that the impact of a CBAT on Australia would be to increase the transition costs for our economy by around 45% just over the next decade.
Sectors such as mining, and agriculture don’t benefit from delay on action by Australia; on the contrary, delay in the face of a green tariff will impose transition costs 10 to 15 per cent higher over a decade.
But these costs pale in comparison to the added burden seen in service sectors and construction which would suffer particularly from the drop in the share of global investment Australia can attract. Our modelling suggests transition costs could be between 40 and 90 per cent higher in these sectors.
Across the economy, we are talking additional costs in the order of $15 billion by the end of this decade with over 70,000 fewer jobs created.
Australia, as a small open economy, exposed to the rest of the world through our reliance on exports and imports of goods and services, and the flow of capital, could be severely penalised by a CBAT if we don’t act in broad concert with the rest of the world.
In effect, a CBAT would reduce Australia’s competitiveness, negatively impact our terms of trade (the prices we receive and pay for our exports and imports) and thus impact not just our export facing industries, but the whole economy.
There would also be knock-on effects to the level of investment in Australia from overseas, hampering the ability of Australian businesses to grow and employ more people.
A CBAT, imposed by countries that are transitioning their economies to better take into account the costs of climate change (negative externalities), levels the playing field for their country so that imports from countries which don’t have comparable measures to reduce emissions aren’t given an unfair advantage. For example, no point a country like the UK pushing hard to get to net zero by regulating and imposing a carbon price or equivalent on their domestic production if other countries could simply export their goods to the UK without having to do the same.
We already know that to deal with climate change, our economy will have to undergo a transition –our production and energy system need to change to produce the outputs we need but with much lower emissions intensity.
We can drive this transition ourselves, or have it determined for us by other countries imposing CBATs.
The cost of this to the economy is greater than if we act on our accord, in a timely and effective manner.
The crazy thing is that as part of a concerted global effort to achieve Net Zero emissions by 2050, we would do better. We’d have a bigger economy, more jobs, and higher exports.
A failure to act early means we will be forced to act later; but then we will need to act drastically – further exposing the economy – our businesses and our workers – to higher and unnecessary transition risks.
Businesses in emission intensive industries such as mining, manufacturing, transport, agriculture, construction, and energy which could have benefited from an early transition by making structural adjustments to their supply chains, would now face increased production costs and lose competitiveness.
The choice to delay is actually a decision to force higher costs and risks of transition down the track.
This really is the choice Australia faces.
Act now and drive an orderly transition, or wait till it is forced on us, the case where we all lose.
Pradeep is the Lead Partner for Deloitte Access Economics. He has had a long and successful career in public policy, with deep expertise in economics and proven leadership experience. Pradeep has been a senior bureaucrat, working at the highest levels of public policy, across three jurisdictions in Australia. Pradeep’s experience includes: Director of Policy in the Prime Minister’s office, Secretary of the Department of Health and Human Services in Victoria, CEO of LaunchVic – a company established by the Victorian Government to promote start-ups and entrepreneurship – and Associate Director General of the Department of Premier and Cabinet in Queensland. He holds a PhD in Economics and Bachelor of Economics (Hons) from the University of Queensland.
Cedric Hodges has led the national Deloitte Access Economics' Computable General Equilibrium (CGE) modelling team for over two years. Under his leadership the team has completed over 100 different modelling engagements across Australia and overseas while also presenting at multiple conferences and contributed to furthering the fields capabilities to model endogenous employment responses and skill/qualification attainment. Cedric is based in Canberra and worked in the modelling area of Commonwealth Treasury for more than five years. As part of the Commonwealth Treasury team he helped develop their in-house CGE model, and delivered the modelling of government climate change policy and the modelling behind the Asian Century White Paper. He has a first class honours degree in economics, having written his thesis on CGE modelling, and a Master's degree from ANU where he is now completing his PhD.