Carbon at the Border: Preparing Trade Rules for Australia’s Trade Future

Zachary Hall | Australian Foreign Policy Fellow

Image sourced from Calistemon via Wikimedia Commons

From 2026, the European Union will charge for the carbon contained in imports to the 27-member bloc. If Australia does not price carbon at home, Brussels will do it at the border. The Carbon Border Adjustment Mechanism (CBAM) signals a broader shift towards viewing emissions as a tradable liability.

Australia’s direct exposure is small for now. In 2019–20, CBAM-covered exports to the EU were worth $AUD234 million, less than 1 per cent of our goods exports to Europe. But the amount matters less than the signal: carbon is becoming a trade factor. If exporters cannot manage it, they risk being priced out.

CBAM risks Australian export profitability

CBAM targets carbon leakage, or the offshoring of emissions. It requires importers to buy certificates matching a product’s carbon footprint. Any credible domestic carbon price is deducted – if there is no verified data, the EU applies the higher default. At today’s prices, the difference could erase margins for Australian steel, aluminium, or fertiliser exports. The fees are not standard; they depend on whether our data is trusted. In this new reality, transparency will lead to tariff relief for Australian exports.

A shift in global norms, led by the EU

While the EU is the first to implement such a scheme, the template is portable – major economies like the UK, Japan and Canada are also exploring models to protect their domestic carbon pricing systems. In effect, Europe is once again acting as a norm entrepreneur, turning EU regulation into a global benchmark through the pull of its single market. Slowly, carbon transparency is becoming a condition of market access, whether by design or diffusion.

That is why the signal matters. Without credible, product-level emissions data, an Australian exporter will face the EU’s higher default charge. More importantly, as other economies align their carbon pricing system with EU standards, that lack of verified data will become a reputational and regulatory penalty across multiple global markets, not just the EU.

Australian credibility built at home

Digging and building cleaner will augment Australia’s future comparative advantage. Countries that can verify their emissions data will set the pace of global trade – and this starts with changes to domestic rules.

The Australian Governrnment could anchor an Export Carbon Verification Scheme that issues product-level certificates for exposed sectors, including steel and aluminium, aligned with EU templates to bolster trust abroad. This would ensure that Australian exports can prove, rather than plead, the credibility of their emissions data. A Guarantee of Origin scheme for low-carbon metals – which is already underway – could turn that verification into marketing, proving that Australian inputs meet global standards.

Acting early would give Australian exporters an advantage. Predictable policy unlocks private investment, lowers the risk of stranded assets, and keeps value-adding industries onshore by letting them compete on carbon performance, not just cost. If others price carbon before we do, capital will flow offshore and facilities that could operate sustainably may close instead.

Our choice: to be a rule-taker, or rule-maker?

CBAM is only the beginning of a broader trend of defining fair play in a decarbonising world. Europe’s norm entrepreneurship shows how market gravity can export rules. Australia now faces a question – to be a rule taker, or to help shape the rules that govern its largest exports.

Australia has had a history of engagement – helping found the Asia-Pacific Economic Cooperation (APEC), leading Cairns Group on liberalising agriculture trade, and keeping the Comprehensive and Progressive Agreement on Trans Pacific Partnership (CPTPP) alive after the US’ exit. The same coalition-building instinct can shape the emerging architecture of carbon accounting – a particularly strong argument as Australia hosts the polluting industries.

Australia’s unique leadership opportunity

That history gives Australia something rare: credibility with both rule-makers and rule-takers. As a resource power that trades with a wide variety of both developed and emerging economies, Australia sits between those who design climate regulations and those who bear their cost. That vantage point makes Australia a natural bridge in the rule-writing now under way – from how embedded emissions are verified to how low-carbon goods are certified and traded.

Working through existing structures such as the G7 Climate Club, OECD, and World Trade Organization, Australia could rally a middle-power coalition on carbon accounting and trade alignment, ensuring that new measurement systems remain open, transparent, and fair to exporters outside Europe’s market. By helping design shared reporting templates, mutual-recognition schemes, and trusted digital registries, Australia can ensure its exporters’ data counts abroad.  Australia has a clear choice, either act early and shape the emerging carbon trade order, or risk having the rules – and by extension our competitiveness in traditional strengths – set elsewhere.

Proof is policy in carbon-exposed trade. Australia can set the template, or be priced to it.

Zachary Hall is the Australian Foreign Policy Fellow for Young Australians in International Affairs. Zach is a policy officer with a passion for foreign policy’s power to improve lives and strengthen democratic resilience.

Zach has worked across economic, climate, and infrastructure policy in the Australian Public Service, and previously supported trade and diplomatic engagement at the Indonesian and Moroccan foreign missions. He holds a Bachelor of Economics and is currently undertaking a Master of International and Development Economics from the Australian National University.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Young Australians in International Affairs. All content is original, and no plagiarism has been used in the preparation of this article.