Chapter 5
Impact of the Carbon Pollution
Reduction Scheme on trade exposed industries
Introduction
5.1
Chapter 5 explores the evidence provided to the committee regarding the
impact of the proposed Carbon Pollution Reduction Scheme (CPRS) on trade
exposed industries. Trade exposed is defined as 'Industries that are
constrained in their ability to pass through carbon costs due to actual or
potential international competition.'[1]
This usually means that the industries are exporters or they compete with
imports.
5.2
As discussed in chapter 2, the Australian economy is heavily reliant on
exports. In evidence received, the committee heard an overwhelming number of
concerns about the likelihood of the CPRS as proposed by the government, leading
to a reduction in the competitiveness of Australian industries, resulting in
closure of, and reduced future investment in, Australian businesses. The
committee was informed that this reduced investment will ultimately lead to
reduced economic activity and loss of employment in Australia. The majority of
the evidence received by the committee, while acknowledging that the government
has made provision for some assistance to industry, argued that the proposed
assistance is insufficient to stop carbon leakage in an environment where Australia's
main competitors are not subject to an equivalent price on carbon.
The carbon leakage risk
What
is carbon leakage?
5.3
The government has defined carbon leakage as:
The effect when a
firm facing increased costs in one country due to an emissions price chooses to
reduce, close or relocate production or to close or relocate production to a
country with less stringent climate change policies.[2]
5.4
The Garnaut Climate Change Review: Final Report defined carbon
leakage as:
‘carbon leakage’—a
loss of competitiveness and relocation of trade-exposed, emissions-intensive
industries as a result of carbon penalties applying in some countries but not
others.[3]
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.[4]
5.5
The Australian Farm Institute argued:
...the term has been
interpreted quite narrowly...The reality of leakage is that in markets like agriculture
we will see the cost disadvantage reducing Australia’s share in global markets
and increasing the volume of imports into our domestic market, which we are
already seeing for example in horticulture products from China.[5]
5.6
The committee, following consideration of the evidence, viewed carbon
leakage in a broader context than as defined in the Carbon Pollution
Reduction Scheme: Australia's Low Pollution Future - White Paper (the White
Paper). That is, in the committee's view, carbon leakage includes potential
increases in global emissions due to import substitution and lost future
investment in existing or new businesses in Australia.
5.7
Importantly, the committee also considered carbon leakage to include a
net increase in global emissions due to a reduction in local emission intensive
industry, when the product of such industries, if exported, would substitute
more emissions intensive products, and therefore reduce global emissions. A
good example of this is the emissions benefit of using liquid natural gas (LNG)
as a fuel source. While the process of liquefying gas is emissions intensive,
LNG when used as a substitute for coal-fired electricity, results in a net
reduction in emissions. The environmental benefits of natural gas will be
further explored later in this chapter.
5.8
Mr David Pearce of the Centre for International Economics explained the
carbon leakage described above as a paradox:
The clearest case is LNG, I guess, where you have a paradox:
something that is less emissions intensive in its final use but it does
actually generate emissions as it is produced...you have the paradox that you do
make it more costly to achieve the global reductions in emissions that may
otherwise result from substituting other fuels for LNG. I agree that it is a
general problem that imposing costs on our export industries significantly
reduces the cost effectiveness of the policy in terms of reducing emissions.[6]
5.9
The committee noted with great concern that carbon leakage caused by the
proposed CPRS would be damaging to the global environment while also damaging
the Australian economy and reducing Australian employment levels.
What
is the extent of the carbon leakage risk?
5.10
Professor Ross Garnaut noted that 'The fear of ‘carbon leakage’ has been
a powerful obstacle to domestic mitigation policies in many countries.'[7]
5.11
Professor Garnaut also commented that:
Policy makers are
therefore faced with a truly dreadful problem. Shielding these industries from
the effects of a carbon price either undermines attempts to limit national
greenhouse gas emissions or increases the adjustment burden elsewhere in the
economy. Moreover, it results in the paradoxical outcome of shielding our most
emissions-intensive industries (with the exception of stationary energy) from the
effects of the scheme; that is, low emitters feel the effects of the scheme,
but high emitters do not.[8]
5.12
As discussed in chapter 2, the committee heard evidence about the
importance of global action to address climate change.
5.13
A large number of submitters and witnesses expressed concerns about the
likelihood of carbon leakage if Australia proceeds without similar carbon
imposts on competitors, while a limited number indicated that fears of carbon
leakage are overstated.
5.14
The Minerals Council of Australia argued:
If we move too fast
without a global protocol, energy intensive businesses will adjust by either
shutting down or moving offshore.
...
[The Australian
resource industry] cannot compete with the rest of the world in a carbon
constrained Australia that is out of touch with the rest of the world. That is
the issue...the Australian resource industry can compete in a carbon constrained
world; it cannot compete in a carbon constrained Australia which is out of
touch with the rest of the world.[9]
You will encourage a
migration...there is unprecedented mobility in global capital and resources, and
that goes for our industry right upfront, and so our companies will move. They
will shift. They will just go to where they can employ their capital and their
technology and their people far more effectively than they can when carrying
the legacy of a burden that they cannot adjust to.[10]
5.15
Similarly, the Queensland Resources Council stated:
Industry’s immediate concern is ensuring the ongoing
viability of current operations whilst encouraging behavioural changes en route
to the new carbon economy. As stated, some operations will experience
significant decreases in earnings as a result of the CPRS that will compromise
cash flow. In the absence of readily accessible and implemented abatement technologies,
short to medium commercial viability will be challenged. Job losses and carbon leakage
are therefore demonstrable risks.
The stronger finding of our analysis, and of potentially
greater significance in terms of economic consequences, is the impact that the
CPRS may have on future brown and Greenfield expansions. Again the analysis
demonstrates that, whilst earnings may be such that the operation remains
viable, earnings will be too low for a number of operations to consider
expansions of an operation of comparable size, type and location. Against the
background of strong long-term demand for most mineral and energy commodities,
competing intracompany interests and growing global resource sector investment
options, lost opportunities in Australia in the longer term appear inevitable.[11]
5.16
Mr Daniel Price, from Frontier Economics, argued that Australia has very
energy intensive industries which will suffer under a carbon price:
I know that people
say that the spectre of carbon leakage is trumped up. It certainly is not. The
industry has a legitimate claim. The reason that Australia is one of the
highest per capita emissions countries in the world is that we have very energy
intensive industries here because we have traditionally had very cheap energy.
You will push those companies which are making investment decisions offshore to
many countries that can supply these services and will not put a scheme in
place. There is no doubt about that.[12]
5.17
The following statement from Caltex Australia reflects the fears of
carbon leakage expressed by a number of witnesses:
...international competitiveness
should be maintained...If international competitors won’t face a carbon price,
why should we have to? Failure to implement such a policy threatens to destroy
Australian investment and jobs without reducing global emissions.[13]
5.18
Alternately, the Australian Conservation Foundation argued:
...in terms of the idea of carbon leakage, I think there is a lot
more talk about it than there is evidence of it. The evidence I have seen out
of the EU, where carbon leakage was raised as a significant issue in their
emissions trading debate, is that, after the fact, there has not been any strong
evidence of carbon leakage...Basically, the local factors of production, the need
to transport and all the other decisions that go into siting a plant far
outweigh whether a company is going to up and move because of the introduction
of a carbon policy in a country.
...
We are not saying
that there is absolutely no chance that it would ever be anything like carbon
leakage, but, again, there is more talk about it then there is evidence—[14]
5.19
The committee considers that carbon leakage as a result of the CPRS is a
serious and credible risk. Given the significant differences between the existing
European Union (EU) scheme and the much more complex and aggressive CPRS
proposed by the Australian government, no conclusions on carbon leakage can be
drawn from the EU experience. The over allocation of permits in the EU scheme,
95 per cent free permits issued across the board, as well as the granting of free
permits for all trade exposed, export competing industries until other
countries implement their own emissions trading schemes, means that if there
was any cost imposed on European businesses at all as a result of the EU
scheme, then it was absolutely minimal and inconsequential. In the committee's
view the same cannot be said in relation to the proposed Australian scheme.
Assistance to industry
Industry
assistance as set out in the White Paper
5.20
The government has recognised the need to provide assistance to industry
in the White Paper. The White Paper stated:
Australia’s adoption
of a carbon constraint before other countries may have a significant impact on
its emissions-intensive trade-exposed industries. The Government is committed
to providing assistance to these industries to reduce the risk of carbon
leakage and provide them with some transitional assistance.[15]
5.21
The reason for providing assistance to emissions intensive trade exposed
(EITE) industries was articulated as:
The key rationale for providing assistance which addresses some
of the competitiveness impacts of the Scheme on emissions-intensive
trade-exposed (EITE) industries is to:
The provision of
assistance to EITE industries will support production and investment decisions
that would be consistent with a global carbon constraint.[16]
5.22
The principles which guided the development of the EITE assistance were:
-
Assistance should be targeted to reduce the likelihood of carbon leakage
and to provide transitional assistance...
-
Assistance should not reduce carbon price signals...
-
Assistance to EITE industries should be balanced against the need
to assist other businesses and households...
-
Assistance should not breach Australia’s international trade
obligations...[17]
5.23
The government acknowledged the difficulty of providing appropriate
assistance to EITE industries:
This is a very difficult area of policy for a number of reasons
and the proposal to assist EITE industries was closely scrutinised and debated
by many stakeholders. EITE industries have legitimate concerns about taking on
a carbon cost before some of their competitors...
The Government also
recognises that providing more assistance than necessary to industries at risk
of carbon leakage reduces national income, reduces the amount of Government
revenue available for other purposes and redistributes resources (capital and
labour) within the economy to assisted industries.[18]
5.24
The White Paper provides the following summary of the key features of
the EITE assistance program:
Table 5.1 Summary of EITE
assistance program
|
Feature |
Policy |
|
Form of assistance |
Allocation of permits at the start of each
compliance period
Based on individual entity’s previous year’s level
of production
Upon closure, must relinquish permits for production
that did not occur in that year |
|
Basis of assistance |
Provided to new and existing entities undertaking an
eligible EITE activity prescribed in regulations |
|
Scope of assistance |
Direct emissions covered by the Scheme
Scheme related cost increase for electricity and
steam use
Scheme related cost increase for upstream emissions
from natural gas and its components (e.g. methane and ethane) used as
feedstock |
|
Eligibility for assistance |
Eligibility of activity based on an assessment of
all entities conducting an activity
Trade exposure assessed through quantitative and
qualitative tests
Emissions intensity assessment based on average
emissions per million dollars of revenue or emissions per million dollars of
valued added
Time period for assessment:
- emissions data: 2006-07 to
2007-08
- revenue/value added data: 2004-05
to the first half of 2008-09
|
|
Initial rates of assistance |
90% for activities with emissions intensity of at
least 2000t CO2-e/$m revenue or 6000t CO2-e/$m value-added
60% for activities with emissions intensity between
1000t CO2-e/$m and 1999t CO2-e/$m revenue or between 3000t and 5999t CO2-e/$m
value-added |
|
Carbon productivity
contribution |
Initial rates of assistance will be reduced by a
carbon productivity contribution of 1.3% per annum |
|
Allocative baselines |
Allocative baseline for activity based on historic
industry average level of emissions per unit of production for all entities
conducting activity
Electricity allocation factor set at 1t CO2-e per
MWh nationwide, may be adjusted in respect of existing large electricity
supply contracts
Natural gas feedstock allocation factor set state by
state |
|
New entrants |
New entities conducting an existing EITE activity
will receive the same assistance as existing entities conducting the activity
Activities new to Australia will be able to apply
for EITE eligibility -- assessment and baselines made on the basis of
international best practice
Allocations to existing entities conducting EITE
activities will not be adjusted for allocations to new entrants |
|
Quantum of assistance |
Government expects allocations to EITE sector to be
around 25% initially (35% including agriculture), increasing to around 45% by
2020 |
|
Review of assistance |
EITE assistance program to be reviewed by
independent body at each five year review point, or at request of Minister
Review would consider:
- inclusion of additional
activities in light of commodity price changes and expansions in Scheme
coverage
- consistency of EITE program with
overall rationale and principles
- existence of broadly comparable
carbon constraints applying internationally
Five years’ notice of any changes to EITE program to
be provided, unless required for compliance with Australia’s international
trade obligations |
Australian Government, Carbon
Pollution Reduction Scheme: Australia's Low Pollution Future – White
Paper, December 2008, p. 12.2.
5.25
Coal mining is excluded from EITE assistance. The White Paper provided
the following explanation:
Since the majority
of coal mines are not emissions-intensive, the Government will not provide EITE
assistance to the activity of coal mining. (An allocation based on the industry
average would lead to the majority of coal mines receiving significant windfall
gains.) However, a small number of coal mines are very emissions-intensive and
will face a significant cost impact from the Scheme. The Government will
allocate up to $750 million from the Climate Change Action Fund to facilitate
abatement and assist with the transition of these coal mines...[19]
5.26
As discussed in paragraphs 5.67 and 5.68, the coal mining industry is of
the view that they should not be excluded from EITE assistance.
5.27
The government acknowledged that there may be non trade exposed
industries that could be particularly strongly affected by the CPRS. The White
Paper stated that 'Coal-fired electricity generation has the characteristics of
a strongly affected industry,'[20]
and 'Industries other than coal-fired electricity generation do not have the
characteristics of strongly affected industries.'[21]
Assistance for coal-fired electricity generation will be provided through the
Electricity Sector Adjustment Scheme (ESAS). The White Paper stated the ESAS:
...will provide a once-and-for-all allocation of permits to the
most emissions-intensive electricity generators...[through] a fixed
administrative allocation of permits, delivering assistance of around $3.9
billion to the most emissions-intensive coal-fired generators...[22]
5.28
As discussed in chapter 7, both Queensland and Western Australian
witnesses raised the issue of the majority of the financial assistance provided
through ESAS going to brown coal fired generators in Victoria.
Evidence
concerning assistance to industry
5.29
Prior to the release of the White Paper the committee received a lot of
evidence regarding the inadequacy of the revenue metric as proposed in the Carbon
Pollution Reduction Scheme: Green Paper (Green Paper). This view was
expressed particularly strongly by the gas and petroleum industries. Following
the release of the White Paper, BP Australia stated:
...the addition of an
emissions intensity metric based on “value added” for assessing EITE activities
is a good outcome since we believe it better reflects the economic contribution
of industrial activities near the end of the value chain. These and other EITE
changes increase the likelihood that our key energy and export infrastructure
such as refining and LNG businesses will qualify for EITE treatment, and thus
limit the additional costs that will not be faced by our international
competitors.[23]
5.30
Following the release of the White Paper and therefore the inclusion of
the 'value added' metric, Mr Michael Hitchens from the Australian Industry
Greenhouse Network argued that 'the treatment of trade exposed industries does
not deliver the commitments that were made that trade exposed industries would
not be disadvantaged under an emissions trading scheme.'[24]
5.31
The majority of the evidence received by the committee concerned the
need for greater assistance for industry, while some indicated that the
industry assistance as proposed by the government is too generous.
5.32
Those that advocated greater assistance for industry in the main, either
argued that their industry should be recognised as requiring assistance, such
as aviation, or that the provision of EITE assistance on an activity[25]
basis was inadequate. In addition, some argued that assistance to industry should
not be reduced over time until overseas competitors are subject to comparable
carbon costs.
5.33
The committee heard evidence from both Qantas and Virgin Blue Airlines in
regards to the aviation industry. Qantas appeared before the committee prior to
the release of the White Paper and therefore provided evidence on the
assistance as proposed in the Green Paper. Mr Peter Broschofsky, Group General
Manager, Environment and Fuel Conservation from Qantas Airways, argued that 'The
emissions-intensive metric is not really an emissions-intensive metric at all;
it is about capacity to pay. It is a financial metric.'[26]
5.34
Virgin Blue Airlines provided its evidence following the release of the
White Paper. Mr Simon Thorpe, the General Manager, Safety Systems at Virgin
Blue Airlines argued that:
...while they [aviation] are large emitters, they already use
their fuel very efficiently and are faced with major obstacles in implementing
initiatives that will produce stepped reductions. Airlines are not considered
to be significantly affected and are not deemed eligible for assistance.
...
In a business in
which fuel can be up to 40 per cent of your cost base, to say you are not
strongly affected based on cost just does not make sense. You have to look at
the profitability of the business as opposed to the cost to actually run it.[27]
5.35
The provision of assistance to EITE industries on an activity basis was
of concern to a number of witnesses. Cement Australia summed up the argument:
The first is the
proposal to assess emissions-intensive trade-exposed, or EITE, status on an activity
basis only. We believe that this defeats the effectiveness of the EITE
assistance program. Given that EITE assistance is provided to maintain the
competitiveness of EITE industries—in our case, against imports—this proposal
simply renders the EITE assistance program ineffective, potentially doubling
the effective cost of the scheme. Cement Australia fundamentally believes that
it is the cement product that is trade exposed, as opposed to the specific
cement manufacturing activities.[28]
5.36
BlueScope Steel stated:
...the 90 per cent
headline number does not apply to the whole iron and steel industry...it actually
only applies to the really intensive steelmaking operation, where you are
dealing with red-hot liquids and red-hot materials. All of the downstream processes,
which is a very substantial operation—where steel is rolled and shaped and galvanised
and painted and formed and turned into marketable products—will receive no assistance.
So when you take into account those emissions, plus the emissions from the
really intensive part, that dilutes the amount of compensation.[29]
5.37
Similarly, Alcoa stated 'We also believe that each aspect of the alumina
and aluminium business—alumina refining, the mining, the smelting and the
rolling—should all commence at 90 per cent allocation.'[30]
5.38
Alcoa summed up the sentiment expressed by a number of witnesses relating
to the proposed reduction of assistance to EITE industries over time stating 'there
should be no erosion of the EITE allocations until our key competitors move'.[31]
5.39
Similarly, the Cement Industry Federation argued 'we must keep it [the
assistance] at 90 per cent sustained until there is a global agreement.'[32]
The Australian Aluminium Council also supported this view stating 'we argue
that the decay factor should hold steady until our global competitors face
similar imposts.'[33]
5.40
The committee again notes that trade exposed industries in the European
Union will continue to be issued free permits until other countries have
implemented their own emissions trading schemes (ETS).[34]
5.41
As stated above, some witnesses argued that the government policy
provides too much assistance to industry. For example the Australian
Conservation Foundation argued that the proposal provides 'excessive
compensation to large polluting industries.'[35]
5.42
Mr Tony Westmore, representing the Australian Council of Social Service,
expressed a similar view when he stated that the scheme 'promised very
significant amounts of money to polluters who are not going to change their
behaviour.'[36]
5.43
These views are not shared by the committee.
5.44
Alternately, the Australian Workers Union argued that the 'Measures
contained in the package balance the demands of addressing the climate change
threat through emissions targets with appropriate support for consumers,
industry and the community.'[37]
Specific industries
5.45
The committee received evidence from specific industries addressing the
impact of the CPRS on those industries. Following is a summary of the evidence
relating to the natural gas and coal mining industries which are major sources
of energy, as well as the cement, aluminium and agriculture sectors which are significantly
impacted by the price of energy or fuel.
Natural
gas
5.46
Australia has significant gas reserves, 'with 110 years of proven and
probable reserves of gas, or probably more likely 200 to 300 years of proven,
probable and possible reserves of gas.'[38]
5.47
The committee received a substantial amount of evidence about the environmental
importance of the natural gas industry. For example, the Australian Petroleum
Production and Exploration Association (APPEA) stated:
There is a global environmental
benefit in encouraging the expansion of the natural gas industry...Natural gas
produces between 30 and 70 per cent fewer greenhouse gas emissions compared to
coal when used in electricity generation, and, under an efficient carbon
pricing regime, could be expected to increase its importance in Australia’s
domestic energy mix and play a key role in Australia’s future export growth.[39]
5.48
Ms Belinda Robinson provided a more detailed explanation of the
environmental benefits of Australian LNG exports:
...for every tonne of
carbon dioxide or equivalent that is produced in the production of LNG for
export, we save in Japan four tonnes when they use it to generate electricity,
and we save in China somewhere between 5.5 and 9.5 tonnes of greenhouse gas
emissions when they use it to substitute for coal in electricity generation.[40]
5.49
Ms Nicola Cusworth, Director of Macro-Economic Policy from the Western
Australia Department of Treasury and Finance, expressed the view that 'Western
Australian gas exports, certainly in the medium term, have the capacity to
contribute to lessening global emissions.'[41]
5.50
The Commonwealth Scientific and Industrial Research Organisation (CSIRO)
also pointed out the importance of gas as the world moves to a lower carbon
economy:
Natural gas is recognised by many countries as the bridging
fuel for the next decade, as there will be a delay before several less
technically developed low emission electricity generation plants can be
progressively commercialised.[42]
5.51
The CSIRO also provided evidence to the committee that:
...the two most mature
low-emission technologies are switching to high-efficiency natural gas power
stations, because natural gas has a lower carbon content than has coal, and
combined cycle gas plants can achieve a higher efficiency.[43]
5.52
Chevron Australia acknowledged that the compensation arrangements in the
White Paper are an improvement on those in the Green Paper:
Certainly the white
paper improves the position of the LNG industry significantly from where we
have would been under the green paper model, but the white paper would still
impose significant additional costs on our LNG projects.[44]
5.53
Ms Robinson from APPEA explained that:
...if we did have a
global price of carbon, which is what everyone is aspiring to...the Australian
natural gas industry would do very well, and the gas industry would do very
well as, I guess, our key competitor vis-à-vis fuel-coal, with a price
associated with it.[45]
5.54
Ms Robinson continued by arguing:
If that is what we
are (1) seeking to achieve as a country, a global approach to carbon pricing,
and (2) we want to kick the ball off with having a scheme of our own, it
therefore becomes incumbent on that scheme to try to ensure that the sort of
outcomes that we could reasonably expect of a global scheme are delivered
through the domestic scheme as well.[46]
5.55
A number of witnesses expressed the view that the CPRS will have a
significant negative impact on the production of LNG in Australia even though
the industry could contribute to the economic prosperity of Australia as well
as provide global environmental benefits. For example, Ms Robinson from APPEA explained
that the CPRS will reduce future growth of the industry:
There is no doubt
that, unamended, it will impact on future expansion. We know this for a number
of reasons. One is because project economics of LNG projects are very marginal
and very difficult. As many of you will probably be aware, we still have only
two LNG projects in this country, despite having this massive amount of gas—well
over 100 years worth of natural gas. We still have only two LNG projects and
one being built. That in itself is testament to just how difficult it is to
make the economics of these projects stack up.[47]
5.56
Ms Robinson further explained:
The imposition of
costs on Australian production that is not faced by our customers or our competitors
ultimately will lead to higher global emissions as energy customers substitute
away from Australian gas to coal in the short term and to alternative sources of
LNG in the longer term.[48]
5.57
Ms Robinson also told the committee that the proposed CPRS:
By impacting quite significantly on the expansion prospects
of Australia’s LNG industry it is denying the world a cleaner source of energy,
which would be substituted in the main by coal-fired power generation...any
reduction of LNG production in Australia leads to a net increase in global
emissions.[49]
5.58
Chevron Australia argued that gas, like other industries, needs a
positive investment environment to attract future investment:
During this period
where we are not working in a global framework, Australia is getting ahead of
much of the rest of the world. The issue is not just about carbon leakage but
maintaining a positive investment climate in Australia for these sorts of
projects. Now, if industries do not want to invest in LNG, oil and gas
exploration or even car manufacturing and they would prefer to go and invest
those funds elsewhere, we do not get a benefit in terms of global greenhouse
emissions and Australia loses a lot of economic activity as a consequence. It
is broader than just avoiding carbon leakage. There has to be balance: it has
to be avoiding carbon leakage, but also maintaining a positive investment
climate for Australian industry across the board.[50]
5.59
Chevron Australia continued by explaining that the CPRS:
...imposes a
substantial additional cost on those projects that needs to be borne. It just
makes it more difficult to get those projects over the line...It is an additional
cost that makes us less competitive with our international competitors and it
is also an additional cost that raises the hurdle to actually making an
investment decision.[51]
5.60
ExxonMobil Australia also argued that increased costs due to an ETS have
the potential to negatively impact on the Australian LNG industry:
...if the Australian
LNG industry bears any cost associated with an ETS above those borne by its
competitors, then this has the potential to effectively price Australian LNG
out of the growing markets of the Asia-Pacific, which are particularly sensitive
to price movements, given the intense level of international competition.[52]
5.61
The analysis undertaken by Dr Brian Fisher also indicated a significant
impact on the LNG industry:
The impact of an ETS on the LNG industry is likely to be
significant for two reasons. First, both the production of gas and the
processes required to transport LNG are emissions-intensive. In addition, LNG
projects are highly capital intensive and changes in costs, such as those
imposed by an ETS, are enough to make many projects unviable.
Modelling work by Concept Economics suggests that under
plausible ETS scenarios LNG output is likely to be between a third and a half
less than it otherwise would be by 2030. This is the case regardless of whether
or not the government offers to shield the industry with assistance for a
period of time. This is based on a study of trajectories which span the two CPRS
scenarios (0, 10 and 20 per cent reductions by 2020), but with more realistic international
action and permit trading assumptions.
While 60 per cent permit allocation lessens the competitive
impact on the industry, output would still be between 16 and 37 per cent below
the reference case level in 2020, and between 39 and 54 per cent down on what
it otherwise would be by 2030. Broadly similar results are reported for natural
gas.[53]
5.62
When questioned about the impact of the CPRS on the LNG sector, Dr
Fisher further explained:
...if you think about
the capital cost associated with building an LNG plant, we are talking about
perhaps $10 and often $20 billion. These are not small amounts of money. You
need to be able to see a reasonable rate of return before you are going to
commit yourself to that sort of investment. The margins on these projects are
reasonably fine. So, if you have a situation where there is another cost
imposed on you in a particular country that is not imposed elsewhere, then the
profitability of that project has to be able to stand that cost. The LNG
industry has argued quite accurately that the cost potentially here are quite large
and, at the margin, would cause some of these projects to either not be done or
to move elsewhere. If they move elsewhere, you still might have reductions in
emissions associated with burning LNG rather than coal. But it means that we as
Australians lose that industry, lose that employment, lose those construction
jobs and so on.[54]
5.63
The committee considers that any Australian ETS should be designed in a
way that encourages, rather than disadvantages, the expansion of the Australian
LNG industry, given its potential to help reduce overall global greenhouse gas
emissions while contributing to Australia's economic growth and prosperity.
Coal
mining
5.64
As set out in paragraph 5.25 coal mining is excluded from EITE
assistance.
Coal is Australia’s largest commodity export, earning over
$40 billion in 2008. Australia is also the world’s largest exporter of coal,
exporting over 250 million tonnes in 2008. The black coal industry employs over
30,000 Australians directly and a further 100,000 indirectly. It provides 57
per cent of our electricity generation. When we add in brown coal, that figure
rises to over 80 per cent. Coal therefore underpins the security, reliability
and comparatively low cost of Australia’s electricity supply. In turn, this
supports the competitiveness of Australian industry and provides affordable
power for Australian households.
Coal is a large
regional employer, contributing to the social fabric of the nation, including through
the underwriting of significant rail and port infrastructure as well as social
infrastructure in regional and more remote communities. The industry will
provide over $4 billion in royalties to state governments in 2008-09 and
contribute over $2.5 billion in direct and indirect taxes.[55]
5.65
The committee heard evidence regarding the importance of either reducing
emissions from coal or finding alternatives to coal in addressing climate
change. For example, the Clean Energy Council argued:
...if you accept that the
risk of dangerous climate change is a serious threat, then you either have to
move away from coal-fired power or find a way of reducing its emissions
substantially.[56]
5.66
A similar view was expressed by Mr Peter Colley from the Construction,
Forestry, Mining and Energy Union (CFMEU) who argued 'There is no long-term
future for the coal industry if you cannot transform the industry, both
coalmining and coal use, into low emission industries.'[57]
5.67
The Queensland Resources Council argued that the coal industry is not
being treated equitably in terms of the assistance to be provided under the
CPRS:
Despite qualifying
for the emissions intensive, trade exposed 60 per cent assistance category, coalmining
will be unilaterally excluded from receiving such assistance. Such assistance,
if it had been available, was conservatively estimated at $2.4 billion over five
years. That compares with the $750 million over five years under the two fund
arrangements set out for coal in the white paper. These funds are conditional
upon abatement activity being undertaken—a unique request compared to the treatment
of other sectors—and will provide a much lower effective level of assistance
than if 60 per cent free permits were granted. In short, we believe the same rules
that apply to the rest of industry should apply to coal.[58]
5.68
A similar argument was put forward by the Australian Coal Association:
Our fundamental proposition is that coal should be treated
fairly in the CPRS. Coal is above the 1,000 tonnes of CO2 per million dollars
of revenue threshold, and we therefore qualified. There was a political decision
taken to exclude coal from the arrangements for the EITE.
...
Let us look at what we did get under the CPRS. The government
did not ignore the coal industry entirely. They allocated, from the revenues
that they would obtain from the sale of permits under the CPRS, $500 million
over five years to directly assist the 20 or so gaseous mines to meet their
permit bill, so to speak, and another $250 million over five years to assist with
the implementation of abatement technology at mines on a matching basis by
companies. This is a five-year package and EITE is a 10 year package. This was
done at an assumed price of $20 a tonne. Of course EITE assistance is actual
permits, which fully reflect of course the price of the permit. In addition,
the quantum is substantially less than what we would have received under EITE.
...So, out of the $5
billion that the coal industry will pay to the government in permits under the
current proposals in the white paper and the legislation, we will receive back
just $750 million. That is a very meagre level of assistance compared with that
for other emissions intensive, trade exposed industries. You can see in table 10
that LNG is getting 60 per cent; we are getting less than 10 per cent. Cement
is getting 83 per cent, with aluminium getting 90 per cent.[59]
5.69
Mr Ralph Hillman, the Executive Director of the Australian Coal
Association, refuted the government's argument for the coal industry not
receiving EITE assistance as put forward in the White Paper. He acknowledged
that 'If you allocated the permits according to the white paper methodology,
you would get windfall gains.'[60]
However, he further argued:
There is a very
straightforward solution to this. It involves tweaking the EITE allocation policy
for the coal industry so that instead of allocating the permits on the basis of
mine production, you allocate them on the basis of mine emissions...It completely
eliminates the windfall gain issue.[61]
5.70
The Queensland Resources Council argued that an additional problem for
the coal industry concerning the design of the CPRS is:
The CPRS proposes to
include methane, the gas generated by the fugitive emissions from coalmining,
despite strong reservations from countries within the EU scheme and now New Zealand.
Further, methane is extremely difficult to measure, with some companies
indicating that current measurement methodologies may overstate emissions by 30
times.[62]
5.71
A further issue for the coal mining industry in a carbon constrained
economy was explained by the Queensland Resources Council who argued that:
...abating greenhouse
gases within the sector remains costly and difficult. For example, and
specifically in relation to coal, it should be noted that, while some abatement
options are available at reasonable cost, for methane-rich coal seam gas emissions
from underground mines—typically much more gassy than open-cut mines—around half
of the methane emissions are contained in mine ventilation air, for which
economic abatement options are currently not available.[63]
5.72
The Australian Coal Association argued that 'there will be job losses as
a result of the CPRS', 'Mines will be closed', and 'new projects are at risk'.[64]
Cement
5.73
The cement industry employs approximately 1870 people in Australia, the
majority of which are engineers with an average salary of approximately
$82 000.[65]
5.74
The committee received evidence about the cement industry from Cement
Australia which supplies 47 per cent of the Australian market.[66]
Cement Australia, like the Cement Industry Federation, highlighted the
strategic importance of cement stating 'Cement is a strategically important
commodity. The security of supply of cement is critical for social and economic
infrastructure'.[67]
5.75
The Cement Industry Federation explained that the cement production
process uses a lot of energy, however 'Over the past two decades industry has
improved its CO2 output by 20 per cent per tonne of product.'[68]
Mrs Robyn Bain of the Cement Industry Federation, explained that cement imported
to Australia is more emissions intensive than cement produced and used in
Australia:
...the cement industry
is an economically competitive industry in Australia but it is also very
efficient in CO2 terms compared to our competitors. The only country that is
more efficient in CO2 than Australia is Japan, and they have nuclear. They also
have much more biomass than Australia. If you imported cement from Japan via
ship and you included the CO2 for the transport of cement into Australia you
would find that it is higher than the CO2 emitted by Australia.[69]
5.76
Mrs Bain expressed her fears with respect to carbon leakage and the industry's
experience of the European Union ETS:
...I received a report from the Boston Consulting Group which
our counterparts the Cembureau, that is, the Cement Industry Federation for
Europe, commissioned to have a look at what happened to cement and carbon
leakage. It is quite clear that when you distort your market—when you have a
cost on one country that you do not have on another—cement manufacturers will
build their plants where they have least cost.
Egypt is doing very nicely in a considerable number of brand
new best state-of-the-art plants. Egypt is exporting its clinker to countries
based around the coast. Spain is the best example of that. Spain is building
grinding plants, it is grinding clinker, and it is sending it into the market. That
is carbon leakage. Australia is in exactly the same situation as the countries
on the border of Europe, in that it is not landlocked. We have good port
facilities, we have silos sitting at those ports and we ship a lot of cement around
this nation fairly frequently.
When the assets of
those companies have a major disturbance and they need a significant input they
close down those assets, they will not invest in that new kiln, and they will
simply import the clinker, put it through the grinder here and send it out to
the market. If that is what we as a country choose to do that is fine, but it
will not assist in climate change.[70]
5.77
Mr Stuart Ritchie of Cement Australia, stated that he believes carbon
leakage is a 'real threat',[71]
and that one of Australia's major competitors in the cement industry is Indonesia,
which is more emissions intensive than Australia.[72]
5.78
Cement Australia anticipates that, at a cost of $23 a tonne 'the net
cost [of the CPRS] ranges from a $6 million cost per annum at start of the
scheme to about $13 million...depending upon which activities are included in
that [eligibility for Emissions Intensive Trade Exposed assistance] definition.[73]
5.79
Mr Ritchie stated that Cement Australia had been:
...working on a
feasibility assessment for a new kiln in Gladstone. That is currently on hold,
pending the outcome of the CPRS, because that really is a critical cost element
for that project.[74]
5.80
This project, if it goes ahead, will involve investment of approximately
$750 million, employ about 50 people in an ongoing capacity and hundreds during
the construction phase.[75]
5.81
As stated above, Cement Australia does not agree with EITE assistance
being assessed on an activity basis. Specifically, Mr Ritchie explained:
The government proposes to assess cement according to
individual activities, such as limestone extraction, clinker manufacture and
cement milling. The current draft ‘activity’ definition proposes that limestone
extraction for cement manufacture and the milling of clinker to cement should
not be considered as EITE activities. In relation to limestone extraction,
owing to the significant mass reduction that occurs during calcination, it is
critical for both energy and cost efficiency purposes that limestone extraction
operations exist in proximity to the rest of the manufacturing process. There
is no integrated clinker manufacturing operation that exists without a nearby
limestone extraction operation and, globally, there is no existing trade in the
limestone clay blend used as a raw material by our industry. But, more
importantly, should clinker manufacturing become uncompetitive under the
scheme, Australia will also lose these associated limestone extraction
operations and the jobs that go with them. In relation to cement milling operations,
the exclusion of this activity will simply result in an increasing trend
towards cement imports over clinker imports—again, with a commensurate loss in
the abatement opportunities afforded by supplementary cementitious-material
substitution, such as by fly ash and slag, and a resultant worsening of global
greenhouse gas emissions.
...
The government has
said that cement would receive a 90 per cent allocation but, with the way they
assess that, that 90 per cent is, in fact, a nominal 90 per cent. The principal
concern that we have is that that assessment is based on breaking your
manufacturing operation up into specific activities and then assessing each of
those in terms of their trade exposure. We think that has some quite perverse
incentives. But, in terms of answering your question, from a real allocation
perspective, that means that 90 per cent drops to somewhere about 83 per cent
to 84 per cent.[76]
5.82
Dr Fisher argued that the impact of the CPRS on the cement industry is
likely to be more severe than indicated by the Treasury modelling:
The cement industry is highly emissions-intensive (based on
both direct and indirect emissions) and increasingly trade-exposed with
Australia importing around 18 per cent of domestic consumption. There are few
barriers to imports of cement in Australia and well-developed infrastructure
exists for the import of cement and clinker. Domestic prices tend to reflect
import parity prices.
Major sources of imports include Japan, Indonesia and Taiwan,
while developing countries in the Asia-Pacific region that are unlikely to
impose a carbon constraint in the medium term have accounted for most of the
growth in global capacity in recent years. China is the world’s largest
exporter approaching 40 per cent of global exports of cement. Industry
estimates put excess capacity in the Asia-Pacific at more than 200 Mt
(equivalent to more than 20 times Australian consumption). This indicates a
serious risk to jobs and investment under an ETS, especially given countries
such as China, Indonesia, Thailand, Malaysia and Vietnam are unlikely to
embrace emission pricing in the foreseeable future.
In this context, the
reported results for cement in the Treasury modelling appear highly implausible.
Under the CPRS-5 scenario, cement output is only 6 per cent below the reference
scenario at 2050 and more than double 2008 output levels.[77]
Aluminium
5.83
The committee received the majority of evidence regarding the aluminium
industry from the peak industry body, the Australian Aluminium Council, Alcoa
and from Hydro Aluminium Kurri Kurri. Alumina and aluminium production are
energy intensive and therefore sensitive to any increase in the cost of energy.
Aluminium is subject to an international price as set by the London Metal
Exchange.[78]
5.84
Hydro Aluminium Kurri Kurri argued that 'as a lightweight material, over
its lifecycle aluminium yields significant emissions reduction benefits through
its application in downstream products.'[79]
5.85
Mr Michael Ison, from the Australian Aluminium Council, outlined:
In 2007 the
Australian alumina and aluminium industries generated $11.2 billion worth of exports,
employed 13,800 direct employees and 3,500 contractors, and stimulated regional
economies and communities across Australia. In 2007 Australia’s seven alumina
refineries produced 19 million tonnes of alumina, of which 80 per cent was
exported. Greenhouse emissions associated with alumina production totalled 14.3
million tonnes in carbon dioxide equivalent.[80]
5.86
Mr Ison argued:
Australia’s alumina refineries are amongst the most energy efficient
in the world. Since 1990 alumina production has increased 70 per cent, whilst
total emissions have only increased by 34 per cent. Emission intensity—that is,
tonnes of CO2 per tonne of alumina—has decreased by 21 per cent over this
period.
...
We have made
significant advances in reducing things like perfluorocarbon emissions since
1995, and that has been done for efficiency reasons—it is better for the
plants; they make more money—and also for reducing our carbon footprint. How is
that reflected in the CPRS? It might make our job a little bit harder in terms
of reducing emissions, because we are already at world’s best practice in most
cases. [81]
5.87
Hydro Aluminium Kurri Kurri, and the Australian Aluminium Council argued
that there are very few commercially viable options to reduce emissions further
from Australian aluminium and alumina production.[82]
5.88
The Australian Aluminium Council argued that the Australian aluminium
and alumina industries 'will, under global carbon conditions, continue to be competitive
growth-oriented industries' however:
Changing the nature
of our inputs in terms of a tax impost is what this represents. The CPRS is
nothing more than an introduction of another tax. However you want to describe
it, it is an additional cost tax, so it becomes another impost that we have to
bear when our competitors do not.[83]
5.89
Mr John Hannagan, the Chairman of RUSAL Australia, argued the importance
of maintaining the competitiveness of the industry, particularly given the need
for long-term investment:
I think that it
should be designed to maintain competitiveness no matter what the circumstances
are. You either have a competitive structure or you do not. You cannot tailor systems
to suit one particular set of circumstances...The long-term investment in this
industry is what is central to the companies. We are looking at 30-year
horizons for investment. We do not look at five, 10, 20 years. We look at
30-year horizons.[84]
5.90
Mr Tim McAuliffe, the Manager, Environment and Sustainable Development
at Alcoa outlined the cost impost on the industry as a result of the CPRS:
...even after the
emissions-intensive trade-exposed provisions in the CPRS have been applied, the
additional cost imposed on the Australian alumina and aluminium industry would
be in excess of $150 million in year 1. The additional cost of production will
then grow significantly each year in response to permit erosion and the
increase in carbon price. That is why this is such a significant issue to the
sustainability of our industry in Australia.[85]
5.91
In response to a question on notice, the Australian Aluminium Council
outlined its view of the impact of the CPRS on the aluminium and alumina
industries:
The CPRS will impose an extra cost on alumina refining and
aluminium smelting industries – thus helping to move our very competitive
operations up the cost curve, whilst competitors in non carbon constrained
economies remain unaffected. Given that all of the players in the industry are
global companies operating in both carbon constrained and non-carbon constrained
economies – it is almost certain that we will see the investment required to
sustain existing capital here in Australia gradually diverted away (note that
new investment will be out of the question until such action is taken
globally).
Capital will instead be most likely directed to operations in
countries such as China, Middle East, South Africa and South America – and
therefore the overall impact on global emissions is likely to be zero. The
number of coal-fired power plants is increasing around the world; China, for
example, accounted for two-thirds of the more than 560 coal-fired power units
built in 26 nations between 2002 and 2006.
The danger is that the CPRS, implemented outside of any
robust global action, will most likely deter companies from investing in
sustaining capital, and this investment will be diverted to operations in non
carbon constrained countries with zero impact on global greenhouse gas
emissions.
Why should Australia
give up economic security when there is little likelihood that global emissions
will be reduced?[86]
5.92
Both the Australian Aluminium Council and Alcoa argued that there should
be no erosion of the EITE allocation until their key competitors were subject
to a comparable carbon cost.[87]
5.93
Dr Fisher also argued that the CPRS would have a significant impact of
the aluminium industry:
The risk of carbon leakage and of perverse economic outcomes
in the sector can be illustrated most clearly by the Bell Bay smelter in
Tasmania, Australia’s only predominantly hydro-based facility. Tasmania’s
electricity price will be linked via Basslink to electricity prices affected by
Victoria’s marginal brown-coal generators. If (as the Treasury/MMA modelling predicts)
these generators are able to pass-through permit prices at more than 100 per
cent, there is a real possibility of significant value loss at a ‘clean green’
facility like Bell Bay. This would be perverse in the extreme given most of
China’s aluminium production is supplied by coal-fired electricity.
Even with 90 per
cent allocation of permits for aluminium and 60 per cent allocation of permits
for alumina, it is highly unlikely that the sort of output growth estimated by
the Treasury modelling will eventuate.[88]
Agriculture
5.94
There are a number of issues that have led the government to decide to
not directly include the agricultural industry in the CPRS at commencement.
These include complexity in estimating emissions and the fact that over 100 000
entities exist, many of which produce small amounts of emissions.[89]
5.95
The committee received evidence of the impact of the CPRS on the
agricultural industry, both from the introduction of the scheme when
agriculture will not be directly included, and if it is covered from 2015.
5.96
The agricultural industry will be affected from the commencement of the
scheme, even though it will not be directly covered, as a result of increased
costs in fuel and energy. Cropping is particularly exposed due to high fuel use,
and dairy has a high exposure to electricity costs.[90]
5.97
The National Farmers' Federation explained:
Fuel and energy represent about 10 per cent of the direct
cost base of the farmers or farm sector, but that escalates to up to 45 per
cent of the cost base when you take into account both the direct and indirect
costs, such as contracting, fertilisers and freight. It is a significant cost
for our sector and a key issue for us right now.
...the Carbon
Pollution Reduction Scheme and the impact that that will have on fuel and
energy costs, particularly for the farm sector. This is a key issue for us, especially
how it will impact on our international competitiveness moving forward. We
export 70 per cent of what we produce and we are not proud of the fact that we
have a notorious incapacity to pass on additional costs that we see through our
supply chain. Additional costs of fuel and energy will be a significant burden
on our sector.[91]
5.98
The National Farmers' Federation noted that prior to the inclusion of
agriculture in the scheme:
Even though our cost
base will increase and our international competitiveness may be exposed, there
is no plan within that EITE framework to provide any assistance along those
lines.[92]
5.99
It has been estimated that the impact of the CPRS on the agricultural
industry could be significant 'even as an uncovered sector, profit margins
could decrease by up to 10 per cent in some sectors.'[93]
5.100 Mr Leon Bradley Chairman of the Western Graingrowers Committee and
Climate Change Spokesman for the Pastoralists and Graziers Association of
Western Australia, pointed out that 'Farming is a game of fine margins and any
increase of costs is going to disadvantage farming and agriculture.'[94]
5.101 Dr Fisher was also of the view that increased fuel and energy prices following
the introduction of the CPRS will impact the agricultural sector:
Just because
agriculture is excluded from the scheme in the first five years does not mean that
farm costs will not rise. Suppliers of inputs such as electricity and diesel
will have to purchase permits and a large share of those costs will be passed
on. In the cropping sector, almost 40 per cent of input costs come from
emission-intensive inputs, while in livestock the share is about 17 per cent.
Competitors in key developing countries will not be subject to such cost
increases.[95]
5.102 It is anticipated that there would be a significant impact on the
agricultural sector if it is included in the CPRS in the future. The
'agricultural sector is very emissions intensive. In particular livestock-based
industries...are very emissions intensive...in the short term facing a carbon price
for agricultural producers will be very expensive.'[96]
5.103 The Australian Farm Institute argued that the livestock industry would
be particularly hard hit if included in the CPRS:
If grazing
enterprises had to pay for their estimated emissions on the basis of how they
are accounted now, I find it very hard to see how grazing could be viable.[97]
5.104 Mr David Pearce from the Centre for International Economics argued that
there is a significant risk of carbon leakage if Australia is the only country
to impose a carbon cost on agriculture:
In the circumstance
where only Australia imposes, for example, a carbon price on agricultural
emissions, and nobody else does, there is a big loss of competitiveness for our
domestic industry and a big impetus to reduce exports and increase imports.[98]
5.105 The coverage of agriculture is a particular issue because:
...in terms of the emissions profile of Australian agriculture
and Australian livestock production that, as per unit of production, we are a
lower-intensity emitter than are the majority of our OECD competitors. There is
the real risk that if we shut down or limit our opportunities here with our
domestic industry, then the global consumer will purchase their livestock needs
from elsewhere.[99]
The need for a level playing field
– a global agreement
5.106 The committee heard evidence from a number of witnesses stating that
without a global agreement on reducing greenhouse gas emissions, the
competitiveness of Australian industry will be significantly compromised, and
carbon leakage will be a very real threat.
5.107 The Minerals Council of Australia articulated the argument succinctly:
The Australian
resource industry can compete very well in a carbon constrained world. It
cannot compete with the rest of the world in a carbon constrained Australia
that is out of touch with the rest of the world. That is the issue.[100]
5.108 A number of industries noted that if a global agreement on emissions
reduction was put in place, with a global carbon price, all issues regarding
carbon leakage and assistance to industry would be resolved. As Ms Robinson of APPEA
stated:
If the world agrees
to a carbon price, there is no issue. The issues for us, and probably most
industry, dissolve because there will become that level playing field...[101]
5.109 Caltex Australia echoed this argument, stating:
We are not asking for
special treatment against imports, just a level playing field. Once competitors
have the same carbon costs, we are willing to bear the same costs and emission
trading should work as intended to help reduce emissions.[102]
5.110 The CFMEU suggested that to address issues surrounding carbon leakage,
global sectoral agreements could be put in place, noting that they would be
easier to achieve than multilateral agreements.[103]
Conclusion
5.111 In conclusion, the majority of evidence received by the committee on the
issue of the international competitiveness of Australian industry and carbon leakage
can be summed up with the following quote: 'it would be a perverse outcome if
the implementation of the CPRS in Australia led to a result which added to
global emissions.'[104]
Committee comment
5.112 The committee considers that in the absence of an appropriate global
framework the CPRS as currently designed will not sufficiently mitigate the
risk of carbon leakage.
5.113 The committee is of the view that:
-
EITE assistance should be expanded so that it is based on production
rather than on an activity basis;
-
EITE assistance should be maintained at commencement levels until
major competitors face comparable carbon costs;
-
The coal mining industry should not be excluded from EITE
assistance;
-
Appropriate recognition should be given to those industries that
contribute to a global reduction in emissions, such as LNG.
Recommendation 9
5.114 The committee recommends that the CPRS EITE assistance measures:
-
be reviewed to consider providing assistance on a production basis;
-
be maintained at commencement levels until Australia's major competitors
face comparable carbon costs; and
-
not exclude the coal mining industry.
Recommendation 10
5.115 The committee recommends that recognition should be given to those
industries that contribute to a global reduction in emissions, such as LNG.
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