Final report from the Australian Carbon Leakage Review

In brief

The Department of Climate Change, Energy, the Environment and Water (DCCEEW) has completed its review into whether additional policies are needed to address carbon leakage in Australia. The review concludes that while current Safeguard Mechanism settings are effective in the short to medium term, additional targeted measures are likely to be required for specific commodities as leakage risks from imports evolve. In particular, the report identifies a border carbon adjustment (BCA) as the preferred instrument for a select set of high‑risk commodities to ensure a level playing field for Australian producers subject to domestic carbon constraints.

The report concludes that any proposed BCA mechanism should mirror the Safeguard Mechanism’s scope (i.e. scope 1 emissions), avoid export rebates, remove Trade Exposed Baseline Adjustment (TEBA) provisions for covered commodities, and be staged, starting with cement and clinker, and later expanding to cover lime, steel, glass, and ammonia and derivatives.

Importers, exporters, producers and end-users of commodities potentially in-scope for any future BCA mechanism should review the report in detail and consider recommended actions.

In detail

The Carbon Leakage Review

The Carbon Leakage Review was an initiative undertaken by the Australian DCCEEW. to assess the risk of carbon leakage in Australia (mainly resulting from the application of the Australian Safeguard Mechanism) and explore the potential policy options to address these risks, including the feasibility of implementing a BCA mechanism for industries covered by the Australian Safeguard Mechanism, such as steel, ammonia and cement.

The review was commissioned in November 2023 to assess the nature and scale of carbon leakage where emissions‑intensive production shifts to jurisdictions with weaker or no carbon constraints—and to evaluate policy options that preserve Australia’s decarbonisation ambition without simply offshoring emissions. It examined 75 trade‑exposed commodities under the Safeguard Mechanism, grouped into 42 categories, with a particular focus on steel and cement given their emissions intensity and trade exposure. The final report finds that existing Safeguard settings, including targeted assistance for trade‑exposed facilities, are currently effective, but that the risk profile is changing for certain commodities where import competition from lower‑cost, higher‑emissions producers is significant. Relevantly, these conclusions are broadly consistent with policy design features of other carbon pricing mechanisms, such as the EU Carbon Border Adjustment Mechanism (EU CBAM) and its interaction with the domestic orientated EU Emissions Trading System. We summarised the initial consultation paper for this review, which was released in late 2024 in our previous Tax Alert.

After analysing a wide suite of potential policy options—including adjustments to Safeguard settings, product standards, public investment, and international initiatives (including the EU and UK CBAMs (noting these were recently reformed)—the review recommends a BCA be applied to a limited number of high‑risk commodities as the most proportionate and effective next step for Australia’s carbon management.

Critically, the proposed BCA would address import‑related leakage by applying a carbon liability to imported goods that mirrors domestic obligations, while not providing export rebates, to maintain the integrity of Australia’s emissions framework and avoid complex refund mechanisms.

The review proposes beginning with cement and clinker due to data availability and the structure of those markets, with further assessment of other candidate sectors such as lime, hydrogen, ammonia and derivatives, steel and iron, and glass.

Proposed characteristics of the BCA

The proposed characteristics of the BCA are as follows:

Government direction: Introduce a BCA for a select group of commodities at high risk of carbon leakage from imports, with cement and clinker identified as suitable for initial implementation.
Scope: Assess liabilities on scope 1 emissions (all relevant GHGs) using benchmarks aligned to Safeguard Mechanism baselines and explicit carbon price differentials between the origin country and an Australian benchmark.
No export rebates: The report does not support export rebates under a BCA due to inconsistency with Australia’s emissions goals and trade law risks.
Interaction with Safeguard Mechanism: BCA design should mirror domestic policy; the need for TEBA concessions for a commodity would cease to exist once the BCA is fully implemented for that commodity.
Monitoring, Reporting and Verification (MRV) and defaults: Implement streamlined reporting, independent verification, and suitable default emissions intensity values, aligning to emerging international standards while minimizing administrative burden.
Trade compatibility: Ensure non-discrimination and any trade requirements placed on imports match those on domestic production, with active engagement in multilateral/plurilateral initiatives to support interoperable approaches.

How a BCA would work in practice

Design choices are anchored to the Safeguard Mechanism to maximise coherence and minimise administrative burdens. The report proposes that emissions coverage be limited to scope 1 emissions and all relevant greenhouse gases, consistent with the Safeguard, and that product‑level benchmarks reflect the same approach used to set Safeguard baselines for the relevant commodity.

For imports, the liability would be calculated by reference to emissions above the benchmark and the difference between the effective carbon price in the product’s country of origin and an Australian benchmark price, thereby aligning the import obligation with the burden faced by domestic producers. The report further recommends that importers should be able to acquit the liability either by payment or by surrendering Australian Carbon Credit Units (ACCUs), mirroring domestic compliance pathways. Importantly for importers, as the Safeguard Mechanism baselines decline (which will materially occur between now and 2040), a significantly greater portion of embedded emissions will be captured by the Safeguard Mechanism, and as a result, any related BCA.

Treatment of imports and exports, and alignment with existing policies

The core objective of carbon border adjustments is a level playing field: imported goods in covered sectors would face a liability equivalent to what Australian based emitters pay, neutralising competitive distortions arising from differing carbon policies across jurisdictions. The report explicitly does not recommend export rebates under the BCA and instead focuses on maintaining domestic decarbonisation incentives while addressing import‑driven leakage. To avoid overlap and double‑assistance, the review advises that TEBA assistance be withdrawn for any commodity once a BCA is fully implemented for that same commodity. Overall, the BCA’s architecture is intended to closely mirror the Safeguard Mechanism to streamline administration and ensure consistency across domestic and border measures.

For emissions‑intensive, trade‑exposed (EITE) sectors, the review finds that a well‑designed BCA would reduce leakage risk by recognising the domestic carbon cost in the price of covered imports, thereby supporting the competitiveness of Australian production. By rewarding lower‑emissions producers, the measure is expected to make investment in emissions‑reducing technologies more commercially viable within covered sectors. At a macro level, the modelling cited in the report indicates no material impact on aggregate economic activity and negligible changes to imports and exports relative to current policy settings, suggesting the approach can preserve Australia’s competitiveness while advancing emissions goals.

Identification of target commodities

The report found that up to 1.5 Mt CO2‑e in carbon emissions per year would shift offshore under the Review’s 2030 trade-leakage scenario (about 0.3% of Australia’s 2023 emissions).

Carbon leakage risk and estimates (trade leakage)

Domestic market
Export markets

Commodities	Indicative 2030 carbon cost as % of price	Imports relative to Safeguard production¹	Sensitivity of imports to price changes	% of emissions covered by Safeguard²	Illustrative estimate of reduction in Safeguard production³
Steel: Crude steel	1-3%	0-0.2	-3.9	100%	0%
Steel: Long steel products	1-3%	0.4-0.6	-0.6	94%	1%
Steel: Flat steel products	3-5%	0-0.2	-0.5	100%	0%
Steel: Treated steel flat products	3-5%	0.2-0.4	N/A	59%	N/A
Cement production: Cement	5-10%	0-0.2	-2.5	100%	3%
Cement production: Clinker	10-20%	0.8-1.0	-0.8	100%	14%
Cement production: Lime	5-10%	0.2-0.4	-3.0	74%	7%
Chemicals: Ammonia	3-5%	0-0.2	-3.5	100%	0%
Chemicals: Ammonium nitrate	1-3%	0-0.2	-1.0	100%	0%
Chemicals: Ammonium phosphate	1-3%	1.4-1.6	-0.3	100%	1%
Chemicals: Urea	N/A⁴	1.2-1.4	-1.7	100%	N/A
Chemicals: Sodium cyanide	0-1%	0-0.2	-5.2	92%	0%
Aluminium production: Alumina	1-3%	0-0.2	-0.6	100%	0%
Aluminium production: Aluminium	1-3%	0-0.2	-4.5	100%	0%
Aluminium production: Bauxite	0-1%	0-0.2	-2.8	75%	0%
Glass: Flat glass	1-3%	0.6-0.8	-1.3	100%	3%
Glass: Glass containers	0-1%	0.4-0.6	-8.5	44%	4%
Pulp and paper	0-1%	0.4-0.6	-0.8	52%	0%
Polyethylene	0-1%	0.4-0.6	-0.5	100%	0%
Energy: LNG	0-1%	0-0.2	-0.3	96%	0%
Energy: Refined petroleum	0-1%	3.2-3.4	-0.3	97%	0%
Energy: Coal	0-1%	0-0.2	-1.1	95%	0%
Energy: Crude oil	0-1%	0-0.2	-0.6	96%	0%
Energy: Ethane and LPG	0-1%	0-0.2	-4.4	98%	0%
Iron ore	0-1%	0-0.2	N/A	93%	N/A
Basic non-ferrous metal	0-1%	0-0.2	N/A	90%	N/A
Nickel products	0-1%	0-0.2	N/A	100%	N/A
Magnesia	3-5%	0-0.2	-2.2	100%	1%
Manganese ore	0-1%	0-0.2	-1.5	73%	0%
Ferro-manganese	1-3%	0-0.2	-0.2	100%	0%
Silicomanganese	1-3%	0-0.2	N/A	100%	N/A
Lithium ore	0-1%	0-0.2	-0.5	53%	0%
Synthetic rutile	0-1%	0-0.2	-0.2	100%	0%
Titanium dioxide	0-1%	0-0.2	-1.2	100%	0%
Other metal ore	0-1%	0-0.2	-0.4	70%	0%
Silicon	1-3%	0-0.2	-0.7	100%	0%
Ethanol and dried distillers grain	0-1%	0-0.2	-1.4	100%	0%
Emerging industry: Lithium hydroxide	0-1%	N/A	N/A	N/A	N/A
Emerging industry: Phosphoric acid	0-1%	N/A	N/A	N/A	N/A
Emerging industry: Rare earth oxides	0-1%	N/A	N/A	N/A	N/A
Emerging industry: Renewable diesel	1-3%	N/A	N/A	N/A	N/A
Emerging industry: Renewable aviation kerosene	0-1%	N/A	N/A	N/A	N/A

^{1 Import and production data are in volumetric units and presented as ranges to ensure confidentiality of underlying data.

2 Import elasticity. N/A indicates when a useable trade sensitivity estimate could not be obtained.

3 Reduction in production of goods covered by the Safeguard Mechanism due to 2030 carbon cost substitution effects with imports, expressed as a percentage of Safeguard-covered production. Rounded to the nearest per cent given the range of plausible values for key input parameters.

4 See Section 2.6 for detailed assessment of the carbon leakage risk for urea production.}

Commodities	Indicative 2030 carbon cost as % of price	Exports relative to Safeguard production⁵	Sensitivity of exports to price changes⁶	% of emissions covered by Safeguard	Illustrative estimate of reduction in Safeguard production⁷
Steel: Crude steel	1-3%	0-0.2	-3.6	100%	0%
Steel: Long steel products	1-3%	0-0.2	-0.4	94%	0%
Steel: Flat steel products	3-5%	0-0.2	-0.4	100%	0%
Steel: Treated steel flat products	3-5%	0.4-0.6	-3.4	59%	6%
Cement production: Cement	5-10%	0-0.2	-0.6	100%	0%
Cement production: Clinker	10-20%	0-0.2	N/A	100%	N/A
Cement production: Lime	5-10%	0-0.2	-2.6	74%	0%
Chemicals: Ammonia	3-5%	0-0.2	-3.4	100%	1%
Chemicals: Ammonium nitrate	1-3%	0-0.2	-11.0	100%	0%
Chemicals: Ammonium phosphate	1-3%	0.4-0.6	N/A	100%	N/A
Chemicals: Urea	N/A⁸	0-0.2	-1.1	100%	N/A
Chemicals: Sodium cyanide	0-1%	0-0.2	N/A	92%	N/A
Aluminium production: Alumina	1-3%	0.8-1.0	-0.3	100%	1%
Aluminium production: Aluminium	1-3%	0.8-1.0	N/A	100%	N/A
Aluminium production: Bauxite	0-1%	0.4-0.6	-0.8	75%	0%
Glass: Flat glass	1-3%	0-0.2	N/A	100%	N/A
Glass: Glass containers	0-1%	0-0.2	-1.6	44%	0%
Pulp and paper	0-1%	1.0-1.2	-1.5	52%	1%
Polyethylene	0-1%	0-0.2	-1.4	100%	0%
Energy: LNG	0-1%	0.4-0.6	-0.6	96%	0%
Energy: Refined petroleum	0-1%	0.2-0.4	-1.0	97%	0%
Energy: Coal	0-1%	0.6-0.8	N/A	95%	N/A
Energy: Crude oil	0-1%	0-0.2	N/A	96%	N/A
Energy: Ethane and LPG	0-1%	0.4-0.6	-0.8	98%	0%
Iron ore	0-1%	0.8-1.0	N/A	93%	N/A
Basic non-ferrous metal	0-1%	0.4-0.6	N/A	90%	N/A
Nickel products	0-1%	0-0.2	N/A	100%	N/A
Magnesia	3-5%	NA	N/A	100%	N/A
Manganese ore	0-1%	0-0.2	N/A	73%	N/A
Ferro-manganese	1-3%	0-0.2	0.0	100%	0%
Silicomanganese	1-3%	NA	N/A	100%	N/A
Lithium ore	0-1%	0.2-0.4	-1.2	53%	0%
Synthetic rutile	0-1%	0.2-0.4	-1.2	100%	0%
Titanium dioxide	0-1%	0-0.2	N/A	100%	N/A
Other metal ore	0-1%	0-0.2	N/A	70%	N/A
Silicon	1-3%	0.8-1.0	-0.2	100%	0%
Ethanol and dried distillers grain	0-1%	0.2-0.4	-0.6	100%	0%
Emerging industry: Lithium hydroxide	0-1%	N/A	N/A	N/A	N/A
Emerging industry: Phosphoric acid	0-1%	N/A	N/A	N/A	N/A
Emerging industry: Rare earth oxides	0-1%	N/A	N/A	N/A	N/A
Emerging industry: Renewable diesel	1-3%	N/A	N/A	N/A	N/A
Emerging industry: Renewable aviation kerosene	0-1%	N/A	N/A	N/A	N/A

^{5 Export and production data are in volumetric units. Results are presented as ranges because some underlying Safeguard data is confidential and given the range of plausible values for key parameters. For some commodities marked with an asterisk, the ratio may exceed 1.0 for various reasons, including because Safeguard production is less than total domestic production for some commodities.

6 Export elasticity. N/A indicates when a useable trade sensitivity estimate could not be obtained.

7 Reduction in exports of goods covered by the Safeguard Mechanism due to 2030 carbon cost substitution effects for exports, expressed as a percentage of Safeguard-covered production. Rounded to the nearest per cent. N/A indicates when a meaningful estimate could not be produced.

8 See Section 2.6 for detailed assessment of the carbon leakage risk for urea production.}

Potential economic impact of a BCA

Australia’s carbon leakage review suggests that introducing a BCA would have a negligible macroeconomic impact by 2030. Modelled outcomes show real GDP essentially unchanged — ranging from roughly zero to a decline of just 0.002% — with aggregate trade effects similarly small, as imports and exports shift within a narrow ±0.003–0.007% band. These results indicate that any economy-wide adjustments are likely to be modest, even as the policy targets emissions-intensive trade flows.

At the sector level, the most pronounced import-volume effects occur in cement and lime, where the combined-sectors scenario (without TEBA removal) shows a decline of about 0.458%. Other sectors exhibit negligible import changes under the modelled settings. This concentration of impacts aligns with the scope of the policy: cement, steel and ammonia together accounted for 2.7% of total goods imports in 2021–22 and were associated, directly and indirectly, with around 0.18% of GDP (approximately A$4.2bn in value added). The report also indicates that construction’s value-added exposure is about 1.26% (around A$1.1bn). In the modelled BCA scenarios, the sectors covered by the mechanism amount to slightly more than 3% of total import value, underscoring the relatively contained share of trade directly affected.

Illustrative downstream price effects, assuming full pass-through of carbon costs, also appear limited. Carbon cost shares are estimated at about 1–3% for concrete, 3–5% for flat steel, and 1–3% for ammonium nitrate fertiliser. Translated into indicative project-level impacts, this equates to an estimated uplift of roughly 0.05–0.1% on a 230 m² house with a notional build cost of $473,000; around 0.1–0.3% on the capital cost of a 100–110 MW wind farm with indicative capex of $215m; and approximately 0.3–0.5% on wheat at an indicative price of $435 per tonne. Overall, the modelling points to small, targeted effects concentrated in a narrow band of emissions-intensive imports, with only marginal implications for the broader economy and downstream prices whilst also achieving a reduction in the risk of carbon leakage and allowing Australia to continue towards its legislated Net Zero target.

Implementation pathway, timelines and transition

The report suggests a phased rollout, with cement and clinker candidates for earlier inclusion given relatively mature data and clear market definitions. It acknowledges that implementing a BCA will require time to finalise detailed design, build administrative systems, and undertake further consultation with industry and trading partners prior to commencement. As coverage is introduced for a commodity and the BCA becomes fully operational, TEBA assistance for that commodity would be removed to maintain coherent incentives and avoid duplication. The review notes that additional technical work is needed to refine coverage, benchmarks and price‑differential methodologies for commodities beyond the initial tranche.

Relevantly, the Safeguard Mechanism will be reviewed over the 2026/27 period. This review will assess the mechanism’s first years of operation since the significant reforms in 2023 and may consider matters such as:

the key design features of the mechanism (such as Safeguard Mechanism credit units and multi-year monitoring)
the emissions baseline decline rate
whether international units should be considered as suitable for surrendering against Safeguard Mechanism obligations
the suitability of arrangements for emissions-intensive, trade-exposed activities
the role and importance of manufacturing facilities in providing sovereign manufacturing capability (capabilities that support national decarbonisation investment and investments made by such facilities after the commencement of the reforms), and
the industries in scope.

Further, although stakeholder feedback in the review process generally supported a targeted BCA approach to address import‑driven leakage in specific commodities rather than a broad‑based measure, the report highlights the need for further analysis to confirm sectoral coverage beyond cement and clinker and to refine the data, benchmarking and compliance mechanics that will underpin accurate emissions assessment and liability calculation at the border. Ongoing consultation will therefore be essential to ensure practicality, data integrity and alignment with international best practice as other jurisdictions advance similar mechanisms.

What this means for business

Importers of covered commodities should:

Prepare for an Australian BCA liability tied to scope 1 embedded emissions and origin-country explicit carbon pricing.

Assess possible use of default values if supplier data are lacking.

Domestic producers of covered commodities should:

Plan for TEBA removal once your commodity is fully covered by the BCA, with baselines and benchmarks continuing to apply under the Safeguard Mechanism.

Consider your current export locations, as similar mechanisms are coming into force globally over coming years (e.g. UK CBAM as an example).

Cross-border supply chain operators should:

Map exposures and assess procurement strategies where cement/clinker, lime, steel/iron, glass, and ammonia/derivatives are in scope.

Understand where potentially in-scope commodities are being sourced, potential impact of any BCA based on origin, and potential price impact to domestically availably alternatives.

Practical actions to take now

Conduct a carbon leakage exposure scan:

For cement/clinker and other commodities which may be subject to a BCA in subsequent phases, identify (by product/HS code) import volumes, suppliers and customers; quantify embedded scope 1 emissions where possible.

Strengthen product-level MRV (measurement, reporting and verification):

Establish data-sharing clauses with suppliers and begin collecting emissions data and verification from suppliers; conduct a gap assessment of your systems against product level MRV daya requirements, prepare for independent verification; plan use of default values for high-risk supply lines.

Align with Safeguard baselines:

Review facility baselines and TEBA status; scenario-plan for TEBA removal in covered commodities.
If in scope of the Safeguard Mechanism, prepare financial impact scenario planning using reasonable assumptions where data is not readily available.

Contracting and pricing:

Update commercial terms to address BCA pass-through mechanisms and data obligations; review Incoterms and customs documentation workflows.

Strengthen associated governance and disclosures:

Update relevant risk registers, board reporting and capital allocation criteria for carbon-leakage policy risk
Determine whether your organisation is in scope of Australia’s mandatory sustainability reporting regime (refer to this PwC Alert) and if so, begin to identify requisite data.
Avoid greenwashing and ensure any purported ‘low carbon’ claims are supported by verified data.

Stakeholder engagement:

Stand up a cross-functional working group and create an advocacy plan for upcoming consultations.
Engage industry bodies and trading partners to facilitate consistent MRV, avoid duplication, and contribute to consultations.