Carbon leakage readiness: what businesses should be thinking about now

While the Review concludes that existing measures currently manage carbon leakage risks in the short to medium term, it also signals that additional, targeted policy intervention may be required over time for specific, import‑exposed commodities. The preferred option flagged is a phased border carbon adjustment (BCA), starting narrowly with cement and clinker and potentially expanding to other products subject to further assessment. 

For Australian businesses, this is not simply a policy discussion about emissions. It is an early indicator that carbon exposure is moving closer to the border, with implications for pricing, procurement, contracts and compliance.

The Review confirms that existing measures manage carbon leakage risks in the short to medium term, but flags that additional, targeted policy intervention may be required over time for specific, import‑exposed commodities.

A shift from broad protection to targeted adjustment

A notable feature of the Review is its rejection of economywide or open-ended protection. Carbon leakage is framed narrowly as the relocation of production due to differences in climate policy stringency, rather than as a catchall justification for shielding domestic industry. The Review explicitly distinguishes carbon leakage objectives from other policy goals such as regional development or supply chain resilience. ‑wide or open‑ended protection. Carbon leakage is framed narrowly as the relocation of production due to differences in climate policy stringency, rather than as a catch‑all justification for shielding domestic industry. The Review explicitly distinguishes carbon leakage objectives from other policy goals such as regional development or supply chain resilience. 

This matters because it narrows the scope of future interventions. Any border measure is intended to be commodity‑specific, evidence‑based and administratively feasible, rather than a broad trade instrument. The initial focus on cement and clinker reflects this logic: emissions profiles are comparatively well understood, product definitions are clear, and domestic exposure to imports is measurable. 

For businesses operating outside these sectors, the message is not that they are unaffected, but that future expansion will be deliberate rather than automatic. Assumptions that carbon leakage policy will inevitably widen across the economy should be treated with caution.

In addition to cement and clinker, the Review identifies other sectors that may face material leakage risk over time, including lime, hydrogen, and ammonia.

Border measures bring trade and customs to the foreground

If a border carbon adjustment is implemented, even in a limited form, it will shift carbon policy from a predominantly domestic compliance exercise to a trade‑facing mechanism. Importers may be required to account for embedded emissions in goods, rely on default emissions values where supplier data is unavailable, or demonstrate carbon costs already paid offshore.

This raises practical questions for Australian businesses:

• Do importers have visibility over the emissions intensity of their supply chains?
• Are contracts structured to deal with new, variable border charges?
• How will disputes over emissions data or default values be managed?

The Review acknowledges that administrative design will be decisive, including how emissions are calculated, verified and enforced at the border. The Productivity Commission has reinforced this point, warning that poorly calibrated default values or excessive compliance burdens risk turning a climate measure into de facto trade protection, even if that is not the policy intent. 

For many businesses, the first real impact of carbon leakage policy may therefore arrive through supply chains, rather than through changes to their own emissions obligations.

Data availability and integrity are likely to be the single largest compliance challenge for affected businesses, particularly where supply chains span multiple jurisdictions.

Interaction with the Safeguard Mechanism cannot be ignored

One of the most commercially significant implications of the Review lies in how a BCA would interact with the Safeguard Mechanism. The Review notes that introducing a border measure for a sector would remove the policy basis for existing trade‑exposed baseline adjustments in that sector. 

The Productivity Commission has been more direct, arguing that if a BCA is introduced, trade‑exposed concessions should be phased out, otherwise Australia risks running overlapping measures that undermine both trade credibility and policy coherence. 

For Australian businesses, this signals a narrowing of long‑term protection. While transitional relief may continue, the direction of travel is towards greater exposure to a uniform carbon signal across domestic and imported goods. Businesses whose competitiveness rely heavily on concessional treatment should factor this into medium‑term investment and pricing decisions.

The Review makes clear that introducing a BCA for a sector would remove the policy basis for existing trade‑exposed baseline adjustments (TEBA) under the Safeguard Mechanism.

Export rebates were explicitly rejected by the Review as inconsistent with Australia’s emissions reduction targets and international trade principles.

Importantly, the Review’s recommendations will feed into the 2026–27 review of the Safeguard Mechanism, reinforcing that these issues remain live for business planning.

Preparing for carbon as a trade variable

The Carbon Leakage Review does not mandate immediate change, but it does change expectations. Carbon is increasingly positioned as a factor in trade competitiveness, alongside tariffs, logistics and regulatory compliance.

Australian businesses should consider:

• mapping which inputs could fall within future border measures
• assessing the quality of emissions data available from suppliers
• reviewing contracts for carbon‑related cost pass‑throughs, and
• integrating carbon exposure into landed cost and sourcing decisions.

The businesses best placed to manage this transition will be those that treat carbon leakage policy not as a distant regulatory risk, but as an emerging commercial variable. As climate policy continues to intersect with global trade

_{Article contributed to by Chloe Cullen, Manager - Global Trade & Customs}