Chapter 4
Australia's future prosperity exposed
Introduction
4.1
This chapter of the report summarises evidence obtained on emissions
intensive trade exposed industries during the Senate Select Committee on the
Scrutiny of New Taxes inquiry into the carbon tax.
4.2
A trade exposed industry can be defined as one that is 'constrained in
their ability to pass through costs due to actual or potential international
competition'.[1]
4.3
Evidence was provided on the potential consequences for the Australian
economy, jobs and the environment. There is concern that Australian investment
and jobs will shift offshore to locations where carbon pricing is yet to take
hold. The potential for carbon leakage with no net gain to the environment and
in fact the serious risk of net detriment was raised during the inquiry.
4.4
This chapter also considers the impact of trade exposure to Australia's
farming and manufacturing industries.
Carbon leakage
4.5
The Garnaut Climate Change Review: Final Report defined carbon
leakage as:
... a loss of competitiveness and relocation of
trade-exposed, emission-intensive industries as a result of carbon penalties
applying in some countries but not others.[2]
It
also stated:
Trade exposed, emissions-intensive industries represent a
special case. All other factors being equal, if such enterprises were subject
to a higher emissions price in Australia than in competitor countries, there
could be sufficient reason for relocation of emissions-intensive activity to
other countries. The relocation may not reduce, and in the worst case may
increase, global emissions. This is known as the problem of carbon leakage.[3]
4.6
The Grattan Institute describes carbon leakage as occurring only when:
-
carbon pricing makes an Australian industry internationally
uncompetitive;
-
in its new overseas location, the industry emits more greenhouse
gases per unit of production;
-
there are no offsetting government policies to support the
Australian industry.[4]
4.7
This definition seems unduly restrictive. Clearly, the mere fact of
providing compensation does not offset the problem of leakage, as that
compensation has a net cost to the community. In other words, imposing a tax
and then offsetting its effect through compensation will still make the
community worse off, so long as providing the compensation is not costless. As
all taxes and transfers impose some economic case, the mere fact that the
outcome is neutral in terms of the industry directly affected does not mean the
community is no worse off.
4.8
As a result, in considering the impact on specific sectors, the key
issue is whether industries within those sectors are likely to lose
competitiveness. While compensation may reduce the resulting loss to
shareholders, it will not, in those cases, prevent Australia's national income
from declining.
4.9
Additionally, it is important to note that the compensation provided
typically does not reduce the carbon tax that will be imposed on the marginal
unit of output – that is, it leaves some share of output affected by the tax.
Indeed, that is crucial if the tax is indeed to change behaviour. As a result,
there can be a loss in competitiveness, and harm to national income, even if
the bulk of an industry's emissions are initially exempt from the tax.
4.10
It is important to note that carbon leakage may occur even without the
physical relocation of economic activity or capital to an overseas country. For
example, carbon leakage can occur if:
-
carbon pricing in Australia means a scaling down of production in
Australia, to the advantage of production in other countries, even if the
physical assets and some production remains in Australia, or;
-
carbon pricing lowers demand for carbon-intensive fossil fuels,
thus putting downward pressure on their global price. In this event, countries
without carbon pricing may increase their demand for the more economically
attractive fossil fuel energy sources. For example, if carbon pricing were
quarantined to developed countries, then the price of oil and gas would likely
drop, encouraging developing countries to use more of these inputs, and give
effect to an indirect form of carbon leakage.
Specific industries
4.11
This section of the report outlines the potential impact of the carbon
tax / emissions trading scheme on key Australian industries. This part of the
report provides a summary of the concerns that were put to the committee during
the inquiry process. The industries that appeared before the committee at
hearings and those that made submissions are representative of key industries
for Australia's economy.
Australia's mining and resources industries
4.12
The Minerals Council of Australia has put forward its views on the
likely impact of a carbon tax on its members and this important industry.
According to the Council, Australia's mineral sector will face carbon costs
nearing $30 billion by 2020, while '(o)nly 10 per cent of minerals sector
exports will receive transitional safeguards to protect their competitiveness'.[5]
4.13
The Council estimates that the carbon costs to just three minerals could
be more than $25 billion to 2020. Over the period to 2012-21 the possible cost for
the coal sector alone will exceed $18 billion. For gold, the likely liability
is to be $2 billion and for nickel it will be around $1.34 billion, up to 2020.[6]
Coal
4.14
The Australian coal industry has also expressed concern about the
potential impact of a carbon tax on its future.
4.15
Australia uses both brown and black coal. Black coal, is Australia's
largest export and is expected to earn over $60 billion in export income in
2011-12.[7]
On the domestic front, over 54 per cent of Australia's electricity is derived
from black coal. With the addition of brown coal, 76 per cent of domestic
electricity production comes from coal.[8]
Importantly, the coal industry employs over 40 000 people and supports a
further 100 000 jobs indirectly.[9]
4.16
The Australian Coal Association expressed concern about Australia moving
ahead of its competitors:
The government's proposed carbon-pricing timetable will have
Australia moving ahead of its competitors, involving significant risks to our
economy. Australian action on climate change too far ahead of global action,
particularly by competitors in developing countries, would be costly and
without benefit to the global climate. For example, coal not produced here as a
result of the carbon price would simply be replaced with production by overseas
competitors, none of whom have or plan to have a similar tax on coal mining, a
classic case of carbon leakage. It follows that, whatever the carbon price
policy mechanism adopted, it must include measures to preserve the
competitiveness of Australia's trade exposed industries, including coal mining.
These measures should also address the impact of pricing carbon on coalmines
that face contractual rigidities preventing them passing on costs of emission
permits to power station customers.[10]
4.17
The Association provided a more specific outline of its concerns in the
context of the future of the coal industry:
Mr Hillman: Global demand for coal is out there. It is
determined by Japan, China, India and the United States, the big coal users.
CHAIR: It is not reducing, is it?
Mr Hillman: No, it is projected to grow quite
strongly. You have to assume that if we close a mine here or diminish a mine's
output here for any reason, that that production will be taken up by a
competitor. A very good example of this was in 2004 as the sudden uptick in
global demand for coal occurred and infrastructure constraints in Australia
prevented us from meeting that demand. We were advantaged by the price
increase, which was partly driven by our inability to respond to demand. The
Indonesians picked it up. Because they have a much more flexible infrastructure
arrangement for getting coal from mine to ship, they picked up 15 per cent of
our thermal coal market and pushed us from No. 1 to No. 2 in the export stakes.
CHAIR: But to the extent that there is just a shift
and substitution internationally of production in Australia. It might be
simplistic, but on the face of it there does not appear to be any resulting
reduction in emissions.
Mr Hillman: That is right. If the coal is produced
elsewhere, the emissions will go up elsewhere. If you assume that the emissions
from a tonne of Australian coal, broadly speaking, are not vastly different
from those from other countries—and it may even be better because of more
efficient mining techniques and higher quality coal—emissions will just go up
elsewhere and probably to a greater extent.
CHAIR: And if we want to reduce global greenhouse gas
emissions then whatever we do to emissions in terms of reductions domestically
will not make much difference. If we reduce emissions in Australia in a way
that increases them potentially in other parts in the world, we are not
actually—
Mr Hillman: It does potentially, but it is hard to
measure that. Australian coals are very good quality. They have a high thermal
content and generally a low ash content, which means they are generally more
efficient coals than, say, Indonesian steaming coals.[11]
4.18
In order to affirm the importance of the coal industry to Australia, the
Coal Association has taken to advertising its policy position in major national
daily newspapers.
4.19
In addition to the Australian Coal Association, the committee also heard
evidence from Anglo American Coal.
4.20
Anglo American's position on the carbon tax is:
... we do not support the federal government's proposed
carbon pricing mechanism in its current form. The proposed carbon pricing
mechanism will severely impact Anglo American. The value of our four planned
new mines would be significantly reduced, putting at risk $4 billion of
investment, more than 3,200 jobs and $5.7 billion of ongoing royalty payments
to state governments. This is not because of an unwillingness to respond to
permit price signals by reducing emissions; it is because the absence of
readily available mitigation technologies means that for a period of up to 10
years we will be unable to sustainably reduce our emissions below current
levels.[12]
4.21
The global producer noted the potential risk of carbon leakage caused by
the impact of the carbon tax:
CHAIR: You talked about the potential of not going
ahead with mines or having to close mines or losing market share. If you were
to lose market share, where would you lose market share to?
Mr Barlow: In terms of metallurgical coal, which is
our main business, right now I know there are major developments in Mozambique,
in Mongolia and in Indonesia. They are the major three areas. As well as that,
in North America, Canada is reopening a number of metallurgical coal mines. The
US have industry there, but they have been limited by ports, and they are
putting in place more port capacity to allow them to export more coal.
CHAIR: Are any of those competitors going to face a
carbon tax or a price on carbon—
Mr Barlow: They are not going to face a carbon tax in
terms of fugitive emissions. Clearly, in Canada and the US, there is always
talk, but fugitive emissions are not included. In terms of Mongolia and
Mozambique, which are probably the two main competitors, I am unaware of any
discussion.
CHAIR: How does our coal production in Australia
compare in terms of the level of fugitive emissions or other emissions? If
activity were to shift from Australia to Mozambique, Mongolia or other places,
would there be a difference in the emissions footprint?
Mr Barlow: In terms of the emissions footprint from
burning coal, we would not think there would be much of a change at all.
CHAIR: So we would lose economic activity—
Mr Barlow: Correct.
CHAIR: and we would lose investment but there would
not be any beneficial impact on global emissions?
Mr Barlow: Correct.[13]
4.22
The response of the coal industry to the carbon tax was that:
The proposed scheme places an arbitrary cost on Australian
exporters that is not aligned with the cost being borne by competitors.[14]
The gold industry
4.23
According to the Minerals Council of Australia, the impact on
Australia's minerals will be:
The principal beneficiaries of the CPRS-style scheme will be
Australia's competitors in global commodities markets. Most of Australia's
competitors across major commodities are developing nations that have no plans
to introduce a comparable carbon price.[15]
4.24
The Minerals Council of Australia Gold Forum made a separate submission
on the potential impact of a carbon tax on its industry. The gold industry is 'Australia's
third largest export earner and is expected to contribute nearly $17 billion to
Australia's export income by 2011-12'.[16]
The industry directly employs nearly 14 000 and supports another 40 000
Australians in all states and the Northern Territory, mostly in regional and
remote communities.[17]
4.25
Expenditure on exploration is around $600 million per year.[18]
This exceeds the amount spent on commodities in the minerals sector and in the
total Australian minerals sector this outlay is second only to petroleum
exploration.[19]
According to the Gold Forum, this expenditure is 'discretionary and highly
mobile'.[20]
With more than 90 countries producing gold:
The gold sector is fully trade exposed and Australian
producers have no capacity to influence prices.[21]
4.26
While the Australian gold industry will face a $2.1 billion impost by
2020, the gold industries in major producing countries such as China, the
United States, Indonesia, Peru, Russia, Canada, South Africa and Ghana will not
face such costs 'in the near term'.[22]
Importantly, the European Union will provide 100 per cent free permits to its
gold sector.[23]
The magnetite industry
4.27
The Australian iron ore industry is undergoing a transformation with the
emergence of magnetite as an additional ore export to the traditional form of
iron ore, haematite. Haematite is typically dug up and shipped abroad.
Magnetite by contrast is dug and then processed through an energy intensive
process to be more refined than haematite.
4.28
The emerging magnetite industry is a new but important source of
employment in the mining industry:
Table 4.1: Contribution of the magnetite industry[24]
Capital expenditure |
Employment
(construction) |
Employment
(ongoing) |
Royalties
(A$) |
Annual export revenue (A$) |
$11.9 billion |
8,750 jobs |
2,580 jobs |
$345 million |
$6.3 billion |
4.29
One of the unusual features of magnetite is its emissions here in
Australia compared to overseas:
We expect that our emissions in Australia will be
approximately 10 times the emissions of a similar sized haematite operation. However,
it is important that these Australian emissions be put in the context of the
global steel production value chain, which I mentioned earlier. Across that
global value chain, magnetite has substantially lower emissions than haematite.
The higher emissions in Australia are more than offset by savings from using
magnetite in steel production overseas.[25]
4.30
The introduction of a carbon tax in the absence of an international
agreement and appropriate industry assistance could lead to a perverse outcome:
A carbon pricing scheme which taxes emissions in Australia
without any capacity for recognising overseas savings would see our
industry—which will produce lower global emissions and more Australian
jobs—taxed more than our competitors. This would be a perverse outcome from
both an economic and environmental perspective.[26]
Industry reaction to the carbon tax
4.31
The Minerals Council of Australia made a swift and decisive response to
the impact of the carbon tax on its industry, specifically one of Australia's
most important:
It will impose the highest carbon price in the world,
compromising the competitiveness of Australia's export and import competing
sectors without environmental benefits.[27]
4.32
The impact of the carbon tax on the bottom line of the minerals industry
will be substantial:
Under the carbon tax package, the minerals industry will face
costs of $25 billion between 2012 and 2020.[28]
4.33
According to the Minerals Council of Australia, the government's scheme
will hit Australia in a manner that is not comparable with other countries:
The Government and Greens are imposing costs that none of our
international competitors face, and cannot be justified in transitioning the
Australian industry to a low carbon future.[29]
4.34
The impact could see carbon leakage affecting one of Australia's key
industries:
It will simply export investment, jobs, global market share
and emissions offshore.[30]
4.35
Under the carbon tax, the minerals industry is not receiving the
assistance available to other sectors:
Ninety per cent of Australia's minerals exports receive no
safeguarding under this scheme. They will pay the full carbon price ahead of
their international competitors.[31]
4.36
One of Australia's leading miners had this to say about the government's
carbon tax:
We have to keep earning our position. We have to keep our
costs competitive. Things like the mineral resources tax and the carbon tax
really hurt that situation.[32]
Queensland Nickel
4.37
Queensland Nickel raised concerns that the implementation of the
proposed carbon tax as it now stands will place them at a significant trade
disadvantage to their overseas competitors.[33]
Queensland Nickel is a 100 per cent value-add manufacturing/processing plant
with a turnover of $1.1 billion per year.[34]
Queensland Nickel is one of the top 500 emitters – it is number 48 on the
government's list.[35]
Its operations, located in Townsville, provide the largest amount of private
employment in North Queensland as well as significant regional benefits through
payments to government, Queensland Rail, Townsville port operation and a number
of local businesses and community sponsorships:[36]
An independent assessment of direct industrial and
consumption effects, commissioned by the Townsville Enterprise group and
conducted in January 2009, estimated the impact of closure of Queensland Nickel
and the loss of then 750 direct jobs would result in approximately 2,396 jobs
lost within the Townsville community. Since the purchase of the plant by Mr
Palmer we have increased our workforce from 550 when he took over to 900 direct
employees now and a further 200 contractors, resulting in a direct positive
impact and no doubt a bigger financial impact if we were to change at the
moment.[37]
4.38
Queensland Nickel's concern is that the clean energy bills, as they
stand, will force them into a loss situation with serious impacts on their
operations and the region while at the same time providing an advantage to
their high emitting overseas competitors:
The policy intent is to direct assistance to Australian
businesses and Queensland Nickel is the only Australian owned nickel producer.
The other two are multinational companies. A single definition for nickel would
grossly under compensate Queensland nickel and deliver a windfall gain to at
least one of the multinationals because they would average all the emissions
across them, divide them by 3 and lift one out of an area where they are not
compensated.
...
Overall Queensland Nickel has significant concerns about the
clean energy future bill. The government is embarking on a massive development
program and obviously manufacturing will pay for it. Regional areas, due to
increased distribution costs, will be hardest hit, and we are in a regional
area. Queensland Nickel's significant contribution to regional development,
investment and employment is put at risk by the proposed bill, increasing the
impact in the Townsville region.
...
In short, because there is no current reduction opportunity
that would enable Queensland Nickel to utilise, say, the three-for-one offer
that is currently out there in the proposed clean technology program, and in
the absence of a fair and equitable definition for nickel, the impact of the
carbon price on the business will be serious in the short term and could be
catastrophic in the long term.[38]
4.39
The witness explained that the fact that the carbon tax would result in
an unlevel playing field would lead to these potentially negative outcomes.
4.40
At the time of writing this report the price of nickel was falling
rapidly, with expectations that it will fall further.[39]
Overall impact on Australia's
competitors: a free kick to competitors
4.41
According to the Minerals Council of Australia, '[t]he principal
beneficiaries of the carbon pricing scheme will be Australia's competitors in
global commodities markets'.[40]
The reason that the Minerals council was able to reach this position is that,
'[m]ost of Australia's competitors across major commodities are developing
nations that have no plans to introduce a comparable carbon price.'[41]
4.42
The table highlights the main competitor countries to Australia across a
range of commodities None of the countries in this table impose a carbon tax on
their mineral sectors or are likely to do so in the foreseeable future:
Table 4.2: Australia main commodity competitors, none with a
carbon tax[42]
Liquefied Natural Gas
4.43
The Australian Petroleum Production and Exploration Association (APPEA) has
expressed concern about the impact of a carbon tax on their members. The
domestic petroleum production and exploration industry is worth around $26
billion.[43]
The industry employs around 15 000 people directly.[44]
4.44
As APPEA has stated:
A point overlooked in recent discussions on this issue is the
fact that Australia's LNG projects face fierce global competition. Australia's
major LNG competitors include: Qatar, Indonesia, Malaysia, Trinidad and Tobago,
Oman, the United Arab Emirates, Egypt, Equatorial Guinea, Nigeria, Algeria and
Brunei. In the future, they will also include PNG and Russia, and could even
include the US on the back of their enormous shale gas development in recent
years. This is, I am sure you would agree, an eclectic list of countries. In
addition to exporting LNG, the one thing they have in common is that very few
are taking action to put an effective price on carbon; indeed, many are likely
to be at the bottom of the list of countries who will be taking action in the
foreseeable future.
Let me emphasise this point. All of Australia's current major
LNG competitors have not taken on binding emission reduction obligations and do
not have policies that place an effective carbon price on their LNG exports.[45]
4.45
The potential for Australian produced and exported LNG to be replaced
with that from competitor countries may in fact contribute to increased global
greenhouse gas emissions:
CHAIR: ... I understood the research which I have
read, which was commissioned by APPEA, to show that for every tonne of
emissions from producing LNG in Australia you could save five to nine tonnes of
emissions, from memory, in China by displacing coal, and about four tonnes of
emissions in Japan.
Ms Robinson: That is right. They are the projects that
I am referring to. There were actually three.
CHAIR: Can you just talk us through that research and
modelling?
Ms Robinson: There are three different research
projects. One looked at emissions on a lifecycle basis of LNG coming from the
North West Shelf and going into Japan, one looked at LNG coming from the North
West Shelf and going into China and one looked at coal seam gas to LNG going
into China, assuming a substitute for coal. They came up with different
numbers. The lowest number was that for every tonne of emissions created as a
consequence of producing LNG in Australia, around 2½ to nine tonnes are saved
when used to generate electricity in those countries. There is a large range
there, because that depends on the nature of our projects, and it depends on
the nature of the electricity generation and the assumptions that are made
around the electricity generators in those countries. Nevertheless, under any
scenario, for every tonne of emissions that we produce through the production
of LNG here we are making at least twice that amount—up to nine times that
amount—in assisting the world to reduce its global emissions. That needs to be
understood and framed as part of our policy objectives.[46]
4.46
APPEA's reaction to the government's carbon tax was direct and to the
point:
... the carbon policy announced today recognises the role of
gas within Australia but does little to protect the competitiveness of
Australia’s gas export industry and much to secure a strong future for
liquefied natural gas (LNG) producers in Qatar, Malaysia, and Indonesia.[47]
4.47
The potential for APPEA's members to reduce emission should not be
forgotten:
The export gas industry rejects the politically motivated
label of ‘big polluter’ when for every tonne of emissions produced in
liquefying natural gas, up to nine and a half tonnes are removed from the
atmosphere when substituted for coal in customer countries.[48]
4.48
Mr Grant King, the Managing Director of Origin Energy noted that:
It is puzzling that one industry that Australia could turn up
and genuinely be able to demonstrate an impact on global emissions is LNG and
yet that industry is receiving less assistance than others.[49]
4.49
The government's carbon tax appears to have moved little from the CPRS:
The Government’s policy treatment of LNG appears to be unchanged
from the outcome announced in November 2009 and:
- Will initially see LNG producers receive up to 66 per cent of their
permits, with this allocation decaying to 50 per cent;
- Will be reviewed in 2014-15, adding further uncertainty to LNG producers
contemplating major investment decisions; and,
- Narrowly defines LNG (it only considers emissions from the LNG plant
itself rather than the whole production process) and significantly reduces the
degree to which producers can access free permits.[50]
Manufacturing
4.50
The government’s package made it clear that they intended to shift
electricity consumers behaviour at both a domestic and commercial level by
raising the cost of electricity.
4.51
It should be noted that there are hundreds of thousands of small and
medium businesses across Australia that will not receive assistance under the government’s
scheme. Many of these businesses are energy intensive and cannot become more
efficient. However, at the same time, they will not be in a position to fully
pass on their additional costs down the supply chain. These are costs that
these businesses will have to absorb.
4.52
The manufacturing sector in Australia is already struggling with current
exchange rates and a substantial drop in international competiveness. The
introduction of a carbon tax will compound these problems even further through
a government initiated change.
4.53
The Minerals Council of Australia in its appearance before the Joint Select Committee on
Australia’s Clean Energy Future on 27 September 2011 provided a summary
of the overall impact on the manufacturing industry as a result of the carbon
tax.
Mr Pearson: ... I can tell you that the minerals sector
opposes the passage of this, the clean energy future legislation. ... in all
measures, the proposed legislation will put forward the world’s biggest carbon
tax. The carbon price will be the highest. It will be $23 ahead of, that’s 50
per cent higher than the EU price, two and a half times the New Zealand price
and nearly twelve times the price that applies in the regional greenhouse gas
emissions trading scheme that operates in the north-east of the United States.
The tax take per capita will be the world’s highest. The tax
take will be many, many times higher than applies in the European Union in the
past and in the six years of its operation to date and in the, as we look
forward.
The transition period for industry to adjust will be the
world’s shortest.
In the European Union, there will be an industrial firm will
not buy all of its permits until 2027. In Australia, there will be hundreds of
industrial firms, including in our own sector which will buy all of its permits
from day one.
So 25 years transition for the European industrial firm. No
transition for the Australian industrial firm.
The level of assistance to trade exposed industry will be the
weakest in the world. 75 per cent of exporting firms of European exports,
merchandise exports, will be covered by free permits after they start
auctioning off permits in 2013.
About 20 per cent of Australian exports will be exported by
firms that will receive assistance.
The safeguards for jobs in the manufacturing sector and
mining sector will be far inferior to those in the EU. 14.6 million Europeans
work in manufacturing jobs that will receive free permits after 2013. Nine per
cent of manufacturing jobs, their firms will receive assistance under the jobs
and competitors under this scheme.
The cost burden on Australian exporting and importing
competing industries will be the harshest in the world.
I can think of other average firm, you can call it the joint
select committee PTY LTD. In the first three years of this scheme, that firm
and think of a firm with an identical emissions operating in Australia and in
Europe – the Australian firm will pay for one million tonnes of Co2 per year,
that Australian firm will pay $72 million. It’s receiving no assistance, as we’ve
said before, very few Australian firms will. So $72 million burden for the
Australian firm. The same, the very same industrial firm in the EU, receiving
no free permits because of its trade exposure but receiving, will pay AU$14
million.[51]
Aluminium
4.54
By its own admission, Australia's aluminium industry is carbon
intensive:
Our alumina refineries, aluminium smelters and rolling mills
are emission-intensive and trade-exposed. By their very nature they represent a
significant carbon footprint. However, the price we receive for our product is
governed by the international aluminium price. Until the vast majority of our
international competitors adopt carbon pricing, we will not be able to pass an
Australian carbon cost on to our customers; hence, our trade exposure.
It is likely that a carbon price would need to be in place
for something like 70 per cent to 80 per cent of global production before it
would be built into the international commodity price.[52]
4.55
Australia's aluminium industry is impressive.
Currently Australian facilities are globally competitive. We
are the largest producer of bauxite. We are one of the two largest producers of
alumina along with China and we are the fifth largest producer of aluminium.
Unlike other processing industries in Australia, we have natural advantages,
including mineral resources and energy resources, that ensure that we can
compete in global markets, we will be able to compete in the future if we get
the policy right, and we will see growth in these industries. The aluminium industry
is Australia’s largest process export earner. We generate more than $11 billion
in export earnings. In international markets our major competitors include
China and the Middle East.[53]
4.56
The aluminium industry is not only important in the context of its size
and export earnings, but because of the employment that it generates across the
country:
It employs about 17,000 people directly and you could use
some standard sort of economic multipliers to take that out to probably 60,000
or so people directly and indirectly. They are predominantly in regional
areas—Gladstone, the Hunter Valley, Geelong, Portland in Victoria, Tasmania and
southwest Western Australia.[54]
4.57
The graph below is a representation of the potential impact that a
carbon tax could have on an Australia's aluminium industry. While Australia is
in the second quartile at the moment for production capacity, the potential for
that competitive position to be damaged is real:
CHAIR: Can you talk to us about the current economic
circumstances in which your industry operates and in which a carbon tax would
be introduced if it does indeed come into effect on 1 July 2012?
Mr Prosser: Eighty per cent of our product is
exported. Like a lot of industries exposed to those international markets, the
Australian dollar is making it a harder environment at the moment than it would
at other times. Despite that, these facilities can be confident that they could
compete in global markets. As to the magnitude of what is being proposed, it
would be sufficient in 2012 to shift these facilities up the global cost curve,
but looking out over investment time frames it would make it very difficult for
those owners to invest in those facilities. Without sustaining investment it is
a matter of time before there would be some closures in the industry.[55]
Graphic
4.1: Aluminium industry and production costs[56]
4.58
Given the predicament facing Australian industry, the potential movement
of investment offshore would most likely be into the Asian region:
Mr McAuliffe: I am happy to provide some figures on
this. It is available through analysts and so on, but I will do that. It is
part of other stuff that would not be appropriate to share. If you look at
aluminium production, in 2000 China had about 12 per cent of global production;
in 2010 it has in excess of 40 per cent. To coin a phrase, there is a gorilla
in the marketplace. China's growth has been stunning. Of course, that will
affect the sorts of dynamics that we were just talking about regarding metal
prices.
CHAIR: How does the emissions intensity of aluminium
production in Australia compare with the emissions intensity of equivalent
aluminium production in China?
Mr McAuliffe: It depends on aspects of the facilities:
their age, their technology and also their power supply. I will answer in two
parts. If you look at our Western Australian alumina refineries they typically
have a carbon footprint of less than half of many of our Chinese competitors.
CHAIR: Less than half?
Mr McAuliffe: Yes. So here in Western Australia we
produce alumina at about 0.6 tonnes of CO² per tonne of alumina. Some of the
other facilities—not just Chinese—that are growing quickly in developing parts
of the world can produce 1.4 tonnes.
CHAIR: So which ones are our biggest competitors? You
mentioned China, which has been growing fast, at 40 per cent? Who else?
Mr McAuliffe: China is a key competitor for growth in
particular, but as they get bigger and bigger in the marketplace they become
just a fundamentally bigger competitor. Other areas include the Middle East,
which is growing significantly, but not so much in Europe. America has lost a
fair bit of market share, particularly in aluminium.[57]
4.59
The type of possible industry assistance that might be available is
uncertain:
At this stage we are being asked to consider the CPRS EITE arrangements
as being what is being talked about. We have not seen that as being government
policy and we have not seen that as a commitment to it. Can I stress that the
costs shown in that third graph incorporate that CPRS EITE measure. Even under
the CPRS ET measures we will face a substantially higher carbon cost in
Australia than the Chinese producers.[58]
4.60
Following the release of the government's carbon tax on 10 July 2011,
the Australian Aluminium Council made a number of scathing observations about
the government's initiative to tackle climate change. According to the
Aluminium Council:
This imposes a carbon cost on Australian aluminium producers
of at least $60 per tonne of aluminium compared to only $8 per tonne in China.
Australia's carbon cost will rise every year of the scheme and over the next
decade to more than $200 per tonne of aluminium while in China it is not
expected to get any higher than $60.[59]
4.61
The permits provided to the aluminium industry under the carbon tax are lower
than under the former CPRS. The allocation of permits may be lower to the
industry in future years.[60]
The cost to the industry will be substantial:
... the total carbon cost to be paid by the aluminium
industry will rise from approximately $120 million in the first year to
approximately $400 million in 2020.[61]
4.62
The potential for investment to be hard hit without any environmental
benefits is one of the more disturbing features of the government's carbon tax:
That will have a huge impact on investment. Not only will
Australia be discounted as a site for new facilities but existing operations
will find it hard to attract the capital needed to maintain viability. If we
lose that investment, it costs Australia, but global greenhouse emissions don't
reduce they are just shifted elsewhere.[62]
4.63
The harshest impact of the government's carbon tax will fall on regional
Australia:
This is putting jobs in Gladstone, Geelong, Hunter Valley,
Portland, Tasmania and Western Australia on the line when no other country is
exposing their industry to the same risks.[63]
The steel industry
4.64
Boulder Steel made a submission to the inquiry. It is an Australian
publicly listed company.[64]
It plans to build a steel plant at Gladstone in Queensland using blast furnace
technology capable of producing 5 million tonnes per annum of steel slabs and
billets for export.[65]
The project will create up to 2 000 jobs during construction and 1 800 long-term
jobs once the project is in operation.[66]
4.65
Once it is in operation, the steel plant will emit around 9.51 million
tonnes of greenhouse gas each year.[67]
Boulder Steel states that this compares favourably with emission rates from the
Whyalla and Port Kembla integrated steel plants.[68]
4.66
The steel produced at the plant is for export to the Asia region.[69]
Importantly:
The major competitors of Boulder Steel's proposed steel plant
are located in jurisdictions that do not impose a carbon tax or similar penalty
on carbon dioxide emissions.[70]
...
There is unmet demand for Boulder Steel's future steel
production in the Asian region and steel plants in other parts of the world
would meet that demand, regardless of their environmental credentials.[71]
4.67
In these circumstances, Boulder Steel is concerned with the result as '[c]arbon
leakage is not consistent with the ultimate goal to reduce carbon dioxide
emissions on a global scale'.[72]
(Emphasis in original)
4.68
While the government's Clean Energy Package includes the carbon tax, it
also has support for emissions-intensive trade-exposed industries. According to
the company, however:
Boulder Steel disagrees with any arbitrary annual decline of
free-issue permits unless linked to similar carbon dioxide reduction programs
in competing jurisdictions. This decline is particularly inappropriate for a
steel plant built with best practice energy and greenhouse gas abatement
practices.
...
As there is currently no firm commitment in competitor
economies with regard to the reduction of carbon dioxide emissions, it cannot
be readily assumed that investors and companies factor in future action in
these countries.[73]
Automotive manufacturing
4.69
The Federal Chamber of Automotive Industries and the Federation of
Automotive Products Manufacturers appeared before the committee and expressed
some concern about the potential impact of the carbon tax on their members.
4.70
According to these industry associations:
The Australian automotive industry is a highly trade-exposed
industry. Currently, more than 80 per cent of all vehicles sold in the
Australian market are imported and up to 50 per cent of local vehicle
production goes to exports. In addition, $1.1 billion in components are also
sold for export annually.[74]
4.71
Some 50 000 Australians are employed in the automotive and vehicle
manufacturing industries.[75]
4.72
The Australian car industry has 'a significant turnover of one million
vehicle sales per year'.[76]
4.73
The two industry associations have undertaken research into the likely
impact of a carbon tax on their respective industries. According to the
economic research they commissioned:
From that assessment we have calculated that the projected
additional costs to the motor vehicle industry would be estimated to be in the
order of $56 million to $84 million a year based on a carbon price of $20 to
$30 per tonne. With assistance arrangements based on the emissions-intensive,
trade-exposed criteria developed for the CPRS, it is estimated that the cost
burden to industry would still be in the order of between $30 million and $46
million a year.[77]
4.74
The Australian automotive industry operates in an international market:
The Australian automotive industry is a highly trade-exposed
industry. Currently, more than 80 per cent of all vehicles sold in the
Australian market are imported and up to 50 per cent of local vehicle
production goes to exports. In addition, $1.1 billion in components are also
sold for export annually.[78]
4.75
In these circumstances the potential impact on the industry could be
substantial:
Given the trade-exposed nature of the automotive industry
there is little or no scope for vehicle or component producers to pass these
costs on through the supply chain. Either way, the future viability of the
Australian automotive industry is undermined.[79]
4.76
There are other matters that the domestic car manufacturing industry
would have to grapple with:
CHAIR: If I unpack that and put it in straight
language, essentially, if you are a local manufacturer servicing the domestic
market, you are going to pay the tax. If you are an importer or an exporter,
you do not pay the tax.
Mr Reardon: A low-volume importer, yes; that is
correct. So that would be an inequity.
CHAIR: Of the locally manufactured cars, what
proportion are sold to the domestic market and what proportion are exported?
Mr Reardon: It varies from year to year. Up to 50 per
cent currently—I think it is about 30 per cent of local production—is exported.
CHAIR: But it is essentially distorting the market, so
imports will become more competitive as a result of the carbon package and
exports will become more competitive. The thing that becomes less competitive
is local manufacturing for local supply.
Mr Reardon: Certainly under the carbon tax as a whole
that is true. It places an additional cost burden on locally manufactured
vehicles and it does not place the equivalent cost burden on imported motor
vehicles. Specifically—
CHAIR: Or on exported motor vehicles.
Mr Reardon: Specifically in relation to this
particular issue, yes. Imported vehicles under a CPRS model would be coming in
with, on average, a lower tax rate than those manufactured locally. A CPRS
model would not be our ideal. It would certainly be comparable with the carbon
levy in terms of its impact.
CHAIR: But presumably, whether it is domestically
manufactured for local supply or for export or whether it is manufactured
overseas for import into Australia, the emissions intensity would be pretty
similar?
Mr Reardon: Ostensibly identical.
CHAIR: So it seems odd for them to have different
treatment, doesn't it?
Mr Reardon: Yes.[80]
Cement industry
4.77
The Australian cement industry:
... employs over 1,800 people and produces over ten million
tonnes of cementitious materials, with an annual turnover in excess of $2.14
billion.[81]
4.78
The Cement Industry Foundation (CIF) represents Australia's three major
cement producers – Adelaide Brighton, Boral and Cement Australia. There are
currently nine cement manufacturing plants in Australia with an annual turnover
of $2 billion. In 2010, Australia produced 8.5 million tonnes of cement.[82]
4.79
Cement is important to Australia's modern economy, CIF states, because:
... [it] is a vital commodity for the Australian economy, not
only as a critical input for Australia’s building and construction industry,
but increasingly in resource recovery and reuse innovation – in both cases
providing significant economic and social benefits. Competitively priced
supplies of cement are essential to Australia’s continuing economic growth.[83]
4.80
Australian cement competes with alternate sources of the product being
supplied in the Asia region, specifically south-east Asia and Japan.[84]
This proximity presents challenges given the failure to secure a global
agreement on reducing global greenhouse gas emissions:
An important characteristic for the Australian cement industry
is that our competitors, almost without exception, are countries in the
developing world where there is an unlikely prospect of green house gas (GHG)
emissions penalties being imposed.[85]
4.81
The consequences for not supporting the Australian cement industry are
that:
As the Australian cement industry has emission intensity
second only to Japan in the Asia-Pacific region, and with the emissions from
shipping included, delivered cement from Japan would come at a higher CO2 cost.[86]
4.82
The impact on the cement industry would be detrimental while causing
emissions to increase:
CHAIR: So to the extent that market share is taken
away from producers in Australia and taken by producers in China and other
places around the world where there is no price on carbon, the outcome will
actually be an increase in global greenhouse gas emissions rather than a
reduction?
Mr Leon: Yes, that is absolutely correct.
CHAIR: So we would be putting the cement industry
under additional pressure, putting jobs at risk?
Mr Leon: Absolutely.[87]
Australia's farming industry
4.83
The Australian agriculture sector is important to the nation and
provides opportunities and employment for many in regional and rural
Australia. According to the National Farmers Federation (NFF) 'there are 120,941
farms solely dedicated to agricultural production'.[88]
4.84
Australian farming makes a significant contribution to the national
economy:
Australian farms and their closely related sectors generate
$155 billion-a-year in production - underpinning 12% of GDP.
Australian agriculture has important linkages with other
sectors of the economy and, therefore, contributes to these flow-on industries.
Agriculture supports the jobs of 1.6 million Australians, in farming and
related industries, across our cities and regions – accounting for 17.2% of the
national workforce.[89]
4.85
Under current arrangements:
The National Farmers Federation reinforces its opposition to
any carbon tax proposal that places the Australian farm sector’s competitive
position at risk. While pleased that agriculture has been excluded from the
direct impacts of the carbon tax, the NFF maintains its concern about the
proposal’s potential detrimental impact on the Australian economy and farmers’
ability to compete on international markets.[90]
4.86
While farming will not be directly covered by the proposed carbon tax /
emission trading scheme, the agriculture sector will still be affected by the
new taxation arrangements:
It is sometimes misconstrued that because agriculture’s
direct emissions have been excluded from the government’s carbon pricing plans
the sector will be unaffected. This could not be further from the truth. Up to
45 per cent of a farmer’s inputs are either energy or energy dependent—all
costs that will increase under the government’s plans.[91]
4.87
In particular, specific sectors within the agricultural industry are
likely to be affected according to the NFF:
... we are price takers in the market. Price increases
through the supply chain inevitably come back down the supply chain on to the
farmer instead of going the other way on to the consumer, and from that
perspective we are quite concerned, particularly for industries such as the red
meat industry with meat processing and dairy. We export a lot of dried milk
powder. That drying process is quite energy intensive. We also feel quite
exposed in other things like sugar milling, grain milling and so on.[92]
4.88
According to the NFF, the agriculture sector is not only trade exposed
but it is also a global market characterised by intervention that already
undermines the clarity of price signals to producers and consumers:
Not only do farmers export approximately two-thirds of
everything they produce; they also do so in the most distorted sector of all
international merchandise trade.[93]
4.89
Following the release of the carbon tax on 10 July 2011, the NFF moved
to affirm its opposition to the proposed tax:
... the NFF and our members remain opposed to the carbon tax.[94]
4.90
The impact on the farming sector will be felt, even though it is exempt
from the carbon tax:
... independent research by the Australian Farm Institute
over recent months has highlighted that additional costs from electricity and
other indirect energy related sources will remain embedded in the carbon tax
for all Australian farmers.
...
This research shows that even with fuel excluded, the average
Australian farmer will still incur an additional $1,500 a year in costs under a
carbon price of $23 per tonne, eroding their net farm income by 2.4 percent.[95]
4.91
These additional costs will hurt farmers operating in the globalised
world of farming:
These costs will erode the competitiveness of the
agricultural industry in the domestic and international markets on which we
depend.[96]
Sub-sectors in the agriculture
sector: dairy
4.92
The Australian Dairy Industry Council (ADIC) made representations as a
trade exposed part of the economy.
4.93
From the perspective of the ADIC:
Dairy farming and dairy processing are two segments of the
one integrated – trade-exposed-value chain.
...
As a result, the majority of costs imposed on to the dairy
industry processing sector are expected to be passed back onto farming families
and regional communities. The estimated impact of this cost pass back to farm families
could be between $5,000 and $10,000 per year (subject to the prices set for
carbon).[97]
4.94
The ADIC stated in its second Submission, lodged with the committee
after details of the carbon tax had been released, that the analysis in its
earlier submission was accurate.[98]
4.95
The Australian dairy industry's major trade competitors are New Zealand,
the European Union, the United States and Latin America.[99]
The position overseas is that:
... the EU has explicitly acknowledged the risk of 'carbon
leakage' for dried milk products by providing free permits for EU processors in
this sector within its ETS. This provision represents a real risk for
Australian export competitiveness if our firms are subject to different carbon tax
arrangements.[100]
4.96
The position of the ADIC is clear:
The current Clean Energy Future Plan incorporates anomalies
that will adversely affect dairy's profitability and competitiveness, not just
internationally but also relative to some other agricultural sectors. We
believe change to mitigate these anomalies is essential to ensure that the
passage of the Clean Energy Bill and associated legislation does not
encourage unnecessarily shifts in dairy production to other parts of the world
(carbon leakage) or reductions in dairy production within Australia.[101]
The need for a global agreement – the need for a level playing filed
4.97
Submissions and evidence provided by witnesses to the committee referred
to the absence of a global agreement to reduce carbon emissions as exposing
important sectors of the Australian economy to a loss of competitiveness,
investment and jobs. The clear message was that carbon leakage was a real
threat.
4.98
The new Secretary to the Treasury agreed when giving evidence before the
committee:
As was made clear in the context of the Carbon Pollution
Reduction Scheme, it does not serve anyone's interests if you make decisions
that essentially export emissions offshore. So in designing the previous
scheme, and this has been made clear in the Multi-Party Climate Change
Committee's set of principles, government will need to be conscious of impacts
on both competitiveness and environmental effectiveness.[102]
4.99
The committee considers that the government has failed to meet that test
set by the Treasury Secretary shortly after taking on his new role earlier this
year. The carbon tax, as put forward by the government, will reduce Australia's
international trade competitiveness, making overseas emitters not facing a
carbon tax more competitive, helping them take market share away from even the
most environmentally efficient equivalent businesses in Australia, and, shifting
emissions overseas, is not effective action on climate change but an
irresponsible act of economic self-harm.
Committee comment
4.100
Australia's past and future prosperity relies on the important role of
emissions intensive trade exposed industries, yet it is these industries which
stand to be severely damaged by the introduction of a carbon tax.
4.101
The nation's prosperity is based on a resource endowment that is highly
carbon-intensive. Moreover, and importantly, much of that carbon-intensity is
not amenable to simple or obvious technological solutions – for instance, there
is little that can be done to reduce fugitive emissions in mining. In these
circumstances acting without global agreement poses significant risks to the economy.
4.102
The government’s plan imposes an impost on the competitiveness of all
Australian businesses, without the same impost being imposed on our
competitors. This will shift economic activity from Australia to countries
without a carbon tax or an emissions trading scheme. The evidence provided to
and gathered by this committee confirms this. As the Productivity Commission
recently reported 'no country currently imposes an economy-wide tax on
greenhouse gas emissions or has in place an economy-wide ETS'.
4.103
To reduce emissions in Australia in a way that just shifts them overseas
into areas where there will be no carbon tax and where emissions will be higher
for the same economic output is pointless.
4.104
The carbon tax will have a substantial impact on Australia, given that
our economy is based around access to relatively cheap fossil fuels. Many
Australian jobs are based in industries that are carbon-intensive because our
inexpensive access to hydrocarbons is an advantage Australia has in international
markets.
4.105
Some of the hardest hit industries and towns from the carbon tax will be
the electricity and mining industry in the La Trobe Valley, the automotive
industry in Geelong and Adelaide and the steel industry in Whyalla, the
Illawarra and the Hunter Valley.
4.106
In addition, these communities are often at the frontline of the
so-called 'two-speed' or ' patchwork' economy. After becoming more
internationally competitive and resourceful from the opening up of the
Australian economy, they are seeing hard won markets disappear due to a higher
dollar and higher input costs, partly exacerbated by the mining boom. Imposing
a carbon tax on top of these pressures threatens to kindle an already
smouldering situation.
4.107
Accordingly, the carbon tax has the potential to undermine the hard-fought
acceptance of the economic reforms that have broadly benefited the Australian
economy over the past 30 years. Such a reaction can already be seen in the
calls for renewed industry assistance to the steel and manufacturing
industries. Large scale renewal of the industry assistance would be a
retrograde step.
4.108
Nonetheless, imposing a carbon tax now gives renewed potency to those
who would seek to reimpose such protections.
4.109
The committee considers that the evidence is clear – there is no
environmental gain to be experienced through the introduction of a carbon tax
in the absence of global agreement on climate change. Not only is there no
environmental gain but the imposition of such a tax in the absence of global
agreement and a level playing field is economic recklessness – it will damage
Australia's international competitiveness and drive industry and investment
offshore.
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