You might have seen a lot of news coverage about a report by the Business Council of Australia that claims that Australia’s EITE industries - shorthand for “emissions-intensive, trade-exposed”, incidentally - are doomed unless the government hands out far more free permits than they currently do.
I haven’t had time to go through the detail, but Bernard Keane from Crikey has. In a nutshell, the report makes three extremely dubious assumptions:
- trade-exposed businesses have no capacity to pass on any increased costs.
- Trade-exposed businesses will not be able to adjust their operations to reduce carbon emissions.
- Trade-exposed industries can seamlessly relocate to other jurisdictions where they don’t have this greenhouse abatement nonsense.
It seems that the BCA (aside from suggesting that targets should be so modest as to be essentially meaningless) is arguing for an emissions trading scheme where emissions-intensive, trade-exposed industries don’t have to do anything different, and any changes to their operations they do make come back to them as windfall profits.
Cunning lot, the BCA…
Update [dk.au via comments]: Ross Gittins in SMH:
The media have yet to twig that all modelling is only as good as the assumptions on which it rests. And you can get pretty much any result you want by choosing the right assumptions.
In the Business Council’s case, it seems to have reached its dire conclusions by assuming its businesses have no scope to pass to customers the cost of the emission permits they’ll need to buy, no scope to eliminate wastefulness in their present use of fossil fuels and no scope to reduce the need for permits by improving their technology.
In short, the Business Council seems to assume its members are completely lacking in enterprise…
See also Peter Wood on the Aluminium case
I thought this line from Paul Kelly’s opinion piece on the emissions trading scheme was interesting…
Seems to demonstrate a fundamental misunderstanding of the entire purpose of the ETS. One has to wonder why ETS would be legislated for at all, if the purpose was to just not harm the economy rather than actually make a difference. Hopefully the Labor party won’t pay any attention to him or the BCA.
The whole line about the BCA putting the government on notice was great too, like the BCA could vote the government out if they don’t do what they want. Honestly, just reading the newspaper could give one a very skewed idea of how things work
We also don’t know who the 14 businesses surveyed are, so it’s impossible to get a feel for whether the sample set is representative or cherry-picked.
The BCA report brings the worst skeletons of 1990s neoliberalism out of the closet - a world of frictionless capital movements, asocial enterprise, and automaton managers who simply processing data. Death of Globalization Consensus My Arse http://rodrik.typepad.com/dani_rodriks_weblog/2008/07/the-death-of-the-globalization-consensus.html might as well be the subtitle of the report.
And this pleading for more public cushioning of coal fired assets is getting really old.
And fwiw, I don’t think Bernard Keane has gone through it in much detail…
I sometimes imagine what would happen if the situation were reversed and Australia had large solar/wind power/geothermal/nuclear/whatever industries and a somewhat fledgling little coal industry. Would that then mean the BCA would argue for stricter environmental standards?
John Hewson nailed the BCA last night on Lateline:
http://www.abc.net.au/lateline/content/2008/s2344030.htm
OK, All together now:
Well, they would say that, wouldn’t they?
Thanks Mandy.
Unfortunately, I think the ALP’s psyche is so scarred by the 1975 Constitutional Crisis (Yeah, I know it was over 30 years ago), whereby they learnt if they want to stay elected, Governments have to piss in big business’s pockets, (hence Hawkie setting up the BCA in the first place - my memory isn’t wrong there, is it?), Labor will buckle at the knees and do whatever business wants. Just you wait and see.
Yuk! what a turgid sentence! But I’m sure you get my drift.
Reasoning like that makes me glad Labour held on for another term.
Actually the author of the longest suicide note in history came across rather well with La Trioli, methinks. I mean…for a dead guy.
Trioli seemed to me to be pushing the BCA barrow a bit and Hewie had no trouble shutting her-down.
Perhaps Virginia will get some dude from Alcoa to agree to an interview next week and she can ask him point-blank whether they’ll pack-up their smelters and decamp to Brazil or wherever if a carbon trading scheme is introduced.
Love to see them pressed to provide an answer.
It’s probably worth Alcoa staying even in the face of a crippling ETS, because the alternative would be to pay crippling real-world electricity prices elsewhere.
It’s every business OTHER than Alcoa I worry about.
Like dk.au said what is it with this static model? Businesses constantly adjust to various changes in market and regulatory conditions. This is just rent-seeking crapola on the whole. Hewson may have been a lousy politician, but I suspect in this instance he’s being a sensible economist.
Kim @ 10:
Is it just me, or does Hewson talk a lot sense these days? I often wonder whether we would have been a lot better off if he’d won in 93…
Paul Burns @ 7
Of course they will. All governments, state and federal, are well and truly addicted to the tax bonanza coming out of the resources sector. I mean, if the politicians can’t shut down a couple of smelters that use a quarter of Victoria’s burnable-dirt generated electricity, what can they do?
So here we are, throwing money at all kinds of schemes to reduce carbon emissions, all of which will have negligible impact for decades, when with one single act, and the cost of a few hundred jobs, Victoria could reduce its emissions by 25% overnight.
“John Hewson nailed the BCA last night on Lateline
Is it just me, or does Hewson talk a lot sense these days? I often wonder whether we would have been a lot better off if he’d won in 93…”
Oh my, it’s like watching a sixteen-year-old who’s just understood the difference between a proper neoliberal and neoconservative. carbonsink, do yourself a favour and read the Fightback election document. You won’t believe your eyes.
BBB
I remember Fightback, I remember being horrified (and scared), and mightily relieved when PJK pulled off the miracle of 1993, but with the benefit of hindsight, I think a two-term Hewson government would have been preferable to a four-term Howard government.
Fair enough. I have read some of your comments here and there and I was frankly astonished that you might be in favour of even 10% of what was in Fightback!
BBB
“a two-term Hewson government would have been preferable to a four-term Howard government.”
Interesting point.
Hewie, for all his dry-as-dust Thatcherite purity, at least came equipped with a set of principles. Unlike Howard, who seemed to be fitted-out with a mere collection of prejucides. Also, I doubt Hewson would have kept petulant sulkers like Costello or that moron Downer in the Ministry for long.
Hell, we might even not have traipsed-off to join George Bush’s Grand Iraqi Adventure. I can’t see Hewie seeing much of a costs-benefits positive in getting involved in that particular bit of stupidity
Um those of you hoping multi nationals just randomly locate big investments here because its kind of nice need to expalin why so many of our neighbours to the north offer tax holidays to multi nationals for big investments. The existing smelters will probably see their existing useful lives out but you’d barking mad to set up a new one.
The idea that imposing extra cost on your own industry is the same as imposing extra costs on importers is plainly silly and just shows how hard Hewson is trying to be hip and happening and all “modern” in his thinking.
Of course they can close them down. All they’ve got to do is pony up the couple of billion or more in compensation that will be built into the contracts.
Brian Toohey had a look at the aluminium smelter issue in the AFR of 16-17 August. He pointed out that the last smelter built here was Portland 30 years ago. Since then smelters have been built in such places as Canada, Iceland, Norway, Oman and South Africa. He says that ours are inefficient and dirty. While Australian smelters have cut emissions of the potent perflourocarbons (PFCs) to the global median performance, our emissions remain almost 75% higher than those of BHP Billitons southern African smelters.
The hot places for new smelters seem to be southern Africa and the Middle East where “host countries are offering below-market prices for electricity generated with natural gas.”
So Australia share of global production is on a slide from its present 5.3% level. The current smelters may see out their lives but their are no prospects for more whether we pay more for our carbon or not.
BHP Billiton is undertaking a feasibility study for a smelter in the Congo. Whether this has anything to do with the proposed Grand Inga Dam (more than twice as large as the Three Gorges Dam, but not everyone is happy about it) I don’t know.
There are two stages in turning bauxite into aluminium. The first produces alumina from the bauxite ore. Toohey says Australia is likely to remain a major player in this part of the process.
The existing smelters will probably see their existing useful lives out but you’d barking mad to set up a new one.
= policy outcome achieved! Yay!
Of the surprising paucity of ‘carbon leakage’ research undertaken, this one is pertinent:
J.P.M. Sijm, O.J. Kuik, M. Patel, V. Oikonomou, E. Worrell, P. Lako, E. Annevelink, G.J. Nabuurs, H.W. Elbersen, (2004) Spillovers of Climate Policy: An assessment of the incidence of carbon leakage and induced technological change due to CO2 abatement measures, Netherlands Research Programme on Climate Change Report #500036 002, http://www.rivm.nl/bibliotheek/rapporten/500036002.pdf, via http://3eintelligence.blogactiv.eu/2008/03/18/how-real-is-the-carbon-leakage-threat/
I remember reading a submission to the National Emissions Trading Taskforce from the Australian Aluminium Council. As well as the usual arguing for free permits or exemptions, and veiled threats about industry having to relocate overseas, the submission states that the capital replacement value of the industry is in the order of A$30-35 billion. This capital value is the reason that the threats to relocate overseas are hollow.
For an industry or firm to even think of the expensive undertaking to “relocate overseas” depends on both the carbon price, the expected amount of time before other countries have a similar price, and a discount rate. Assuming emissions of 28 Mt CO2-e and ignoring the discount rate for the time being, a 20 year time period leads to a carbon price of $60/t being required, and a 10 year period leads to a carbon price of around $120/t being required. Including a discount rate leads to a higher carbon price being required.
Firms won’t parachute overseas but may reduce their production. This is the point of an ETS, if the cheapest way to reduce emissions is to reduce production then so be it.
There is a great low energy way of producing aluminium - aluminium recycling, also known as secondary aluminium production. Container deposit legislation will improve recyling. A carbon price will also make it easier for secondary production to compete with primary production. Free permits for primary aluminium production and other emissions intensive industries are likely to distort this effect.
Good points Peter Wood. I will read the Aluminium Council’s submission but browsing through a couple of recent editions of their in-house mag I found nothing on recycling. Considering that an aluminium can, recycled, costs one tenth the energy of producing from bauxite then this industry needs to get serious about its effort. This should include a radical appraisal of what products should be made of this wonderful metal and I doubt that drinking containers ought to survive the test.
The BCA is just attempting to frame the debate with their “10% emission reductions will shut down our industries, cause unemployment and the lights to go out”. Well guys, toughen up. The target should be 100%. Yep - zero emissions.
Just get on with it - this is where the real opportunities lie. Anything less risks dooming life on earth for the sake of “the economy” - which will no longer be relevant with a planet 3 degrees hotter and sea levels 4+ meters higher.
Or maybe the big business opportunities will be in boats?
Or maybe the big business opportunities will be in boats?
Well tinnies have been made from aluminium for a while!
According to the Green Paper, the key polluting industries, aluminium, beef, cement and steel, are responsible for 37% of national emissions but 3% of employment. But within both steel and cement production there are major emission reduction gains to be had. Looks like we’ll have to go without Aluminium from Australia, however.
Assuming Australia doesn’t turn out to be a low-cost place to produce zero-carbon electricity, that is.
The BCA report is a partial analysis with obvious bias. The analysts use the current carbon permit price in Europe as a reference point, but they provide little analysis on what is happening to European companies that are subjected to that carbon price.
Garnaut, Rudd and many experts talk about learning from the European experience. Have 4 out of 14 European businesses had to “shut”? Have an additional 3 out of 14 had to “consider closure given high risk of future negative cashflows”? If not, then what is it that Europe has figured out and why don’t we simply integrate those features into the Australian ETS design?
Ross Gittins has his say on the BCA submission in today’s SMH.
Aluminium cans are already recycled - because it’s inherently profitable to do so. Container deposit legislation won’t make a difference to that. It’s an attempt to make recycling other materials profitable, but it’s an inefficient boondoggle like most recycling.
Jamie@26 - didn’t they give a bunch of free permits out to polluters in the EU system? There seems to be a consensus that was a mistake, but its what business here is asking for.
Reminds me of the timber industry and the logging of old growth forests — huge environmental cost, very little benefit.
Here we have a few industries that support very few jobs, create a tiny percentage of national income, yet result in massive environmental damage. Call me naive, unsophisticated, or simplistic, but why don’t we just shut them down, carbon leakage or not?
Instead, we’re going create this fantastically complex bureaucracy of carbon accounting, which in all likelihood won’t deliver any reduction in absolute carbon emissions for decades.
I’m sorry, but I just don’t get it. Why do we allow 3% of the population to continue vandalising the environment?
Chris@29
Yes, the EU freely allocated permits to businesses, then businesses factored the cost of carbon into their prices anyway, then they sold all their free permits and made a windfall profit. The oversupply of permits caused the carbon price to drop to near-zero. For lobby groups like BCA… mission accomplished.
The EU has reduced the number of permits in Phase II, but the precedent has been set and the EU is having a very hard time moving from free allocation to auction. They still haven’t managed to pass draft legislation for auctioning 60% of their permits in 2013.
This is all very complicated and confusing, mainly because the goal posts keep moving. Australia can be the first nation to get this right. If we want low-carbon innovation then business needs a clear and stable price signal.
Reminds me of the timber industry and the logging of old growth forests — huge environmental cost, very little benefit.
Except of course for the environmental cost, and the benefit (particularly in a carbon constrained future).
To add to the aluminium story, the Greens did some work about a month ago pointing out our aluminium is more CO2 intensive than most of the rest of the world (because it’s coal-based), so moving it offshore would be good for the planet.
Furthermore, exempting the industry would increase subsidies by something like $290,000 per employee, which I suspect is a tad more than they are actually earning…
Actually josh, they’re already MASSIVELY subsidised (at least Alcoa in Portland is), and it would probably be better to simply shut them down right now.
Of course it would, so why don’t we? Answer: The political class is paying lip service to this problem and not taking it seriously.
What’s the subsidy, wilful?
The Portland smelter gets its electricity subsidized (and had its transmission line built for free). here is some background. The Cain government ended up taking an equity stake in the smelter as well, which only got sold off during the Kennett era.
Strange definition of a subsidy, Robert. Aluminium smelters tend to get preferential pricing on electricity because they provide considerable base-load demand, which has economic value to the prospective generator in firming up demand for capacity. In this case, the Portland smelter facilitated the expansion of Loy Yang, VIC’s dominant generator, by guaranteeing demand for incremental capacity. You can argue - probably successfully - that Cain’s government, then owner of generators in VIC, negotiated a stupid deal with Alcoa, but that doesn’t make it a subsidy.
Furthermore, if you take the smelters out of the demand base, the fixed costs of generation will have to be borne across the remaining users. Of course, this will be a positive if you’re already looking forward to more expensive electricity anyway.
From what I’ve read, the price for electricity offered in that deal was so low it amounted to a cross-subsidy.
There’s ‘preferential pricing’ and then there’s rorting the taxpayer. While resonable people could quibble on many cases, I think the subsidy of about $40 000 per worker per year easily falls into the rorts category.
“While Australian smelters have cut emissions of the potent perflourocarbons (PFCs) to the global median performance, our emissions remain almost 75% higher than those of BHP Billitons southern African smelters.”
Brian, is that referring to the smelter’s direct emissions of things like perfluorocarbons from the smelter itself, or indirect emissions of carbon dioxide from the power station?
If we’re talking about the indirect emissions from the coal-fired generators, it should come as absolutely that Australia’s emissions are higher than those elsewhere.
The direct emissions of GHGs from the smelter itself is actually not all that significant by comparison.
Hmm, I don’t know if I can edit my post on this site.
Read that second last sentence as “It should come as absolutely no surprise that Australia’s emissions are higher than those elsewhere.”
The price was low, but as I noted before, that doesn’t make it necessarily a subsidy, given the economics of generation. The problem with the contract pricing was that it had a variable component that tied the price of electricity to the price of aluminium, i.e. Alcoa would pay more for electricity as the price of Al rose. You can guess what happened to the price of aluminium in the decades after the deal was struck (though not recently, interestingly enough).
It might, if it were a subsidy AND if that were a realistic number. It’s neither, so it isn’t.