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Mar 10, 2011

Aluminium smelting: the best bang for your fossil-fuel subsidy buck

The aluminium smelting industry is demanding massive compensation under a carbon price - but already benefits from hundreds of millions of dollars in subsidies a year.

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Last week we outlined just how extensively the federal Government subsidises fossil fuel usage. Missing was, if not the biggest subsidy of all, then the most carbon-intensive. Dollar for dollar, state government subsidies for the aluminium smelting industry are the most effective at producing greenhouse gas emissions in the country.

Aluminium smelting requires vast quantities of electricity. There are six aluminium smelters in Australia, in Queensland, NSW and Victoria, and Bell Bay in Tasmania. All are run by foreign multinational companies – Alcoa, Rio Tinto and Norsk Hydro. All, except Bell Bay, which is mostly run on hydro-electric power, rely on cheap coal-fired power. Together they consume about 15% of all electricity produced in Australia. Using International Aluminium Institute figures, the Grattan Institute found that all the smelters except Bell Bay emitted two-three times as much greenhouse gas per tonne of aluminium as the global average. In total, the smelting industry adds up to 6-7% of our total CO2-equivalent emissions.

The handouts to the aluminium smelting industry are our dirty little protectionist secret. Because they’re state government-level subsidies, they’ve stayed below the radar of the economic reform push for a generation, protected by secrecy and barriers to Freedom of Information laws. And there’s bipartisan protection for them, because they benefit not just foreign transnationals but the power Australian Workers Union, which even went to the trouble of copying the tactics of the big polluters and commissioned its own report on why the industry should be protected under an emissions trading scheme. The subsidies are a product of cheap politicking and pork-barrelling (see Craig Horne’s account of the establishment of the Portland smelter), miscued regional development policies and our traditional conviction that manufacturing jobs are “real jobs”.

The subsidies, took the extent that we can find out about them, mainly take the form of a link between aluminium prices and electricity prices – if the world aluminium price goes down, so does the cost of electricity to the smelters. In Victoria, the price of electricity is linked to the 1982 cost of aluminium, adjusted in real terms, meaning the maximum subsidy applies if the global price of aluminium is below the 1982 cost.

Despite the global economic recovery, the aluminium price is still below the equivalent of the 1982 price. There was a different kind of subsidy for Comalco’s Boyne Island smelter in Queensland – the Gladstone Power Station was sold by the Goss Government to Comalco for, by some estimates, one-half to two-thirds of its actual value.

Mark Diesendorf costed the subsidies at around $400m in 2001. The Australia Institute’s Hal Turton had a go at estimating them in 2002, and found that it cost between $210-250m. The Institute for Sustainable Futures updated the assessment in 2007 and costed it at $330m. In 2011 dollars, that’s around $370m.

The smelters together employ about 5,000 workers out of an entire industry of 17,000 across mining, refining and smelting.  That means the aluminium smelting industry receives a subsidy from state governments of around $74,000 dollars a worker – higher even than that received by the car industry.

It also means, based on figures in the AWU report, a subsidy of about $8 a year for each tonne of CO2-equivalent produced smelting aluminium.

In Victoria, where the Brumby Government refused to reveal any information about the subsidies received by the smelters at Portland and Point Henry, the subsidies will continue until 2016, when they’ll be replaced with a contract between Alcoa and Loy Yang Power that locks in coal-fired power for smelting for another twenty years.

The aluminium smelting industry’s argument that it should benefit from generous handouts under a carbon price – as it would have been under the CPRS – is an extraordinary demand for more assistance beyond the billions these wealthy transnationals have received from state governments over recent decades. It also shines a light on what opponents of climate change action prefer to ignore – that for all their criticism of “green jobs”, we currently spend billions subsidising “brown jobs”.

Rather than “compensate” the aluminium smelting industry for its carbon emissions, at $70,000 per worker, it’s time to end the subsidies that prop up an industry that is far more emissions-intensive than its international competitors.

Bernard Keane — Politics Editor

Bernard Keane

Politics Editor

Bernard Keane is Crikey’s political editor. Before that he was Crikey’s Canberra press gallery correspondent, covering politics, national security and economics.

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25 thoughts on “Aluminium smelting: the best bang for your fossil-fuel subsidy buck

  1. freecountry

    Excellent work, Mr Keane.

    Michael, there is no economic argument for subsidizing an industry unless it’s for other reasons like quality of life for citizens (eg medicine, the Arts); long term knowledge investment (R&D, education); food security (agriculture); and so on. An argument can be made (a fairly dubious argument) that keeping some critical mass in manufacturing preserves it from irreversible knowledge loss.

    There are other case-by-case arguments for protectionism such as preserving global competition from cartels (which is why China subsidizes its own coal mining industry in the face of Anglo-Australian cartels, despite the deaths of thousands of miners a year) or countering a competitor’s protectionist regime. Bob Katter aroused a lot of amusement from ill-informed Q&A audience members last year when he complained about unilateral free trade:
    [BOB KATTER: The OECD countries, a third of the world’s population, enjoy a subsidy tariff level of 49 per cent. We, under the OECD figures, enjoy a subsidy tariff level of six per cent. Now, I mean, Nick is an intelligent person. Does he seriously believe that Australian farmers are 43 per cent better than their competitors? Well, I’ve got news…
    NICK MINCHIN: Yeah. Yes, I do.
    BOB KATTER: I’ve got news for you, Nick. We ain’t.]
    Aluminium subsidies probably flow through to Australian manufacturers such that they benefit from below equilibrium prices for their materials. But it’s inefficient compared to subsidizing manufacturers directly (or of course, not at all).

    In short, I can’t think of a single reason to subsidize smelting.

    There’s always someone to argue “jobs” of course. But that’s a dodgy argument which was completely discredited long ago. In competitive markets, any ten jobs that are lost when subsidies are withdrawn are replaced by eleven or more jobs that don’t need subsidies.

  2. freecountry

    Practically, you cannot tax carbon at the consumption point. Unlike GST where the end-user price carries all the necessary information about labour input values, there is no efficient way to break down the price of a birthday cake into its emission-input and other components. So the taxing has to be done upstream, at the production point, where the vast majority of emissions are brokered by less than 100 industrial companies.

    So the GST design has to be simulated rather than simply copied. If the overriding design of the tax is aimed at impacting on consumption rather than production, this implies two things:

    1. Products which go into exports are accounted for and the carbon tax on them is fully rebated.
    2. Imported products are subject to carbon tax according to the best estimate we can make of their carbon emission inputs.

    The second point would require some expensive research, approximation, and arbitration where importers or local competitors dispute the estimated inputs. But it has to be done. Unless you can make the carbon tax trade-neutral, it will be worse than useless.

    If something can’t be done properly then it should not be done at all. Note I said “properly” not “perfectly”. If it can’t be done properly, we should instead concentrate on direct taxpayer subsidies of mitigation programs such as renewable energy targets and soil carbon sequestration, funded out of consolidated revenue, until such time as a global ETS can be implemented.

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