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

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.

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  • 1
    Michael
    Posted Thursday, 10 March 2011 at 2:24 pm | Permalink

    Well golly gee, Bernard. So what? Which country does not subsidise its aluminium industry at the federal, provincial and local level, and sometimes all three? Shut it down and shift it offshore. That will certainly reduce our emissions. But not global emissions. Instead of just whining about “brown jobs” and “wealthy transnationals” proffer some alternative solutions. Rather than ranting apply your considerable intellect to illuminating a better path. Cheers, M

  • 2
    baal
    Posted Thursday, 10 March 2011 at 2:40 pm | Permalink

    I recall that back in the early 1980s when they were planning smelters in NSW’s Hunter Valley aluminium was commonly known in the energy business as ‘congealed electricity’. In 1978 I asked an expert if the problem with aluminium was all the cans that were then proliferating - no he said - it’s used to make cars lighter therefore quicker easier on fuel (and less safe).

    Nevertheless one path towards a solution would be a higher rebate for returned cans (and crashed cars for that matter)

    PS @MICHAEL - so where are your helpful answers, or or you in a ‘not my job’ situation?

  • 3
    Posted Thursday, 10 March 2011 at 2:46 pm | Permalink

    Since 5 of the 6 aluminium smelters in Australia emit from 2 to 3 times as much greenhouse gas per tonne of aluminium as the global average, closing them down and smelting the aluminium off shore would be likely to reduce global emissions as well as saving Australian taxpayers the considerable costs of subsidising the smelters.

  • 4
    Murray Hall
    Posted Thursday, 10 March 2011 at 2:56 pm | Permalink

    I for one think it would be a fantastic idea to remove all protectionism and subsidies surrounding fossil fuel use prior to considering a carbon tax. Would anyone have the guts to campaign on it?

  • 5
    Ravenred
    Posted Thursday, 10 March 2011 at 3:11 pm | Permalink

    There is (was?) a model geothermal plant near Portland and a model wave-powered generator.

    Subsidising development of these (or technology development for these) might prove more cost-effective in a carbon reduction sense, even if it’s still pretty much a subsidy.

  • 6
    Michael
    Posted Thursday, 10 March 2011 at 3:14 pm | Permalink

    Murray, that is an excellent idea. Why provide a further distortion to an already distorted market. Yes, remove all subsidies so we may start from scratch.
    Baal, happy to provide positive input but Bernard has the audience. He should use his power for good! :)

  • 7
    baal
    Posted Thursday, 10 March 2011 at 3:50 pm | Permalink

    Agreed of course but we have the opportunity he’s set up to do mork

  • 8
    baal
    Posted Thursday, 10 March 2011 at 4:18 pm | Permalink

    More that should be

  • 9
    freecountry
    Posted Thursday, 10 March 2011 at 5:42 pm | Permalink

    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.

  • 10
    freecountry
    Posted Thursday, 10 March 2011 at 5:56 pm | Permalink

    (“Anglo-Australian cartels” … Let’s change that to “oligopoly” in case anyone takes the word too literally.)

  • 11
    Frank Campbell
    Posted Thursday, 10 March 2011 at 6:01 pm | Permalink

    The handouts to the aluminium smelting industry are our dirty little protectionist secret. “

    Hardly a secret Bernard.

    And then there was the Great Wannon pork barrel in the early 80s: let’s put a smelter as far from the power supply as possible (Portland) and give the mothers a free transmission line all the way from the Latrobe Valley…

  • 12
    Hugh (Charlie) McColl
    Posted Thursday, 10 March 2011 at 7:36 pm | Permalink

    One reason to give smelters cheap electricity is to absorb the huge over-production of cheap power at off-peak times - this for state governments which used to build the coal fired generators. Maybe that’s out of date now but at the time….

  • 13
    Robert Vincent
    Posted Thursday, 10 March 2011 at 7:59 pm | Permalink

    And Rio is building a huge plant in Borneo Malayasia to hedge its bets. So its plants in Australia will be pretty irrelvent if carbon pricing is anywhere need realistic.

  • 14
    freecountry
    Posted Thursday, 10 March 2011 at 8:52 pm | Permalink

    Hugh McColl - Kind of like getting an off-peak discount for your hot water? That’s essentially a commercial matter, even if it’s brokered by the state with a public utility.

  • 15
    AR
    Posted Thursday, 10 March 2011 at 9:18 pm | Permalink

    Not only are the aluminum smelters power bills subsidised, but mining companies are reimbursed all excise of diesel, as were their advertising costs when campaigning agains the resources tax.
    The strange thing about red in tooth & claw capitalists is that they are the greatest recipients of subsidies, incentives, tax break and assiduous seekers of loopholes.
    As I suggested on another thread recently, let’s have a real tax revolution, no subsidies etc for any commercial enterprise except as suggested above by F/Cwhen there is a clear social or strategic benefit, education,medicine and basic engineering capability.
    I am so sick of the mantra that our farmers are the most efficient in the world. Far from it, the wheat yield is less that that of an Iraqi peasant behind his bullock (1.5tpHa & 1.8tpHa respectively) despite vast inputs, not the least of which is the soil itself, effectively being mined to death to produce something for export.

  • 16
    Catequil
    Posted Friday, 11 March 2011 at 12:22 am | Permalink

    Bernie, what you know about the smelting industry could be recorded on an aspro. It is false to allege that Oz smelters emit 2-3 times others. In fact potline 3 at Boyne uses AP35 cells which are up there with the best. Tomago uses similar technology. Boyne is also supplied with power from the Gladstone power station owned by Rio so is NOT subsidised. So we close our smelters down. Will the world stop using aluminium or will they open new smelters to replace ours in China where emissions are much worse than ours - think globally Bernie! And finally that is the problem with our approach to carbon dioxide - we tax the supplier not the user who in this case are overseas manufacturers and consumers.

  • 17
    Posted Friday, 11 March 2011 at 7:09 am | Permalink

    The smelters themselves may emit the same emissions as others, but they rely heavily on electricity generated by old coal fired power stations which are much dirtier than sources of electricity overseas.

  • 18
    freecountry
    Posted Friday, 11 March 2011 at 9:31 am | Permalink

    Whether aluminium smelting is being taxpayer subsidized or not, Catequil is spot on about the difference between taxing production vs taxing consumption of CO2 emissions.

    Taxing consumption would simulate the GST by treating high-emission imports the same as high-emission local products, and exempting all exports. That’s trade neutral; that’s fair. Taxing production would give foreign producers a trade advantage and a really good reason not to impose carbon pricing in their own jurisdictions. Even worse, raising the prices of our exports would amount to a mild form of economic sanctions against poor populations who depend on our exports for development.

    More than 800,000 households and businesses are already voluntarily paying a premium for “Greenpower” labelled renewable electricity supply. Those are customers who willingly recognize that it’s the user, not the producer, who is responsible for pollution.

  • 19
    Posted Friday, 11 March 2011 at 9:48 am | Permalink

    Taxing consumption of emissions may be theoretically preferable but practically more difficult to administer. As we saw from Hewson’s attempt to introduce a value added tax it is very difficult to explain and thus persuade people to accept a tax that is complicated to calculate tho it may be conceptually simple.

  • 20
    freecountry
    Posted Friday, 11 March 2011 at 10:11 am | Permalink

    Gavin Moodie - Yes and you can’t just estimate the liability based on the end-user price tag the way you can with GST; the taxing point has to be a long way upstream to get a meaningful estimate of emission inputs. But this can be simulated by -
    1) taxing at the production point;
    2) providing rebates for carbon tax on production that has gone into exported goods;
    3) carbon taxing the estimated emission inputs for imported goods, along with GST.

    This is not just a nice-to-have feature. This is crucial to avoid a whole lot of adverse trade consequences, which would reduce our prosperity, squeeze some people far away into starvation, and do practically nothing to reduce emissions.

  • 21
    freecountry
    Posted Friday, 11 March 2011 at 10:48 am | Permalink

    Maybe it’s clearer this way. Production is global; consumption is local. Tax is local (unlike, potentially, an ETS). A business does not need much reason to relocate its production to avoid a tax. As soon as the difference in costs passes the break-even point, you just sack some local workers and place an order in China — you owe it to your shareholders and your customers to do so. But consumption … what are you going to do, move your house and family to China?

  • 22
    AC4000
    Posted Friday, 11 March 2011 at 12:14 pm | Permalink

    The Gladstone power station was sold on the condition that the emission scrubbing plant would be upgraded, it was something the government was unwilling to do leaving Gladstone and surrounds with a brown sky. Comalco and its partners then spent about $300 million upgrading the plant. The government didn’t give it away they unloaded a lemon.

  • 23
    Citizen 211
    Posted Friday, 11 March 2011 at 12:39 pm | Permalink

    An interesting fact however, 80% of the Aluminiium first produced, (i.e. back in the 1800’s), is still in circulation today due to it’s re-cyclability. If you add that to the significant savings it also generates in fossil fuel usage due to it weigth to strength ratio when utilised in cars, aircraft, ships and engines etc, I suspect it will have an overall life cycle positive impact on carbon emissions. I am not an advocate for the Aluminium industry but this is indicative of the direction these debates are taking. We need to be sure to see the wood and not just the trees.

  • 24
    Captain Planet
    Posted Saturday, 12 March 2011 at 12:44 am | Permalink

    Thank you for another illuminating article, Bernard.

    Aluminium is indeed very electricity intensive to produce. As with almost all other electricity or energy intensive industrial processes, a Carbon Tax or ETS will increase the price of aluminium produced using brown coal fired power, and reduce the price of aluminium produced using renewable energy sources.

    For those who would like to ignorantly bluster that “you can’t run an aluminium smelter on solar panels” or some other form of tiresome misinformed nonsense, a MegaWatt is a MegaWatt no matter where it comes from, and wind, solar photovoltaic and solar thermal, geothermal, biomass and wave energy all produce MegaWatts just like Coal fired power plants do. Aluminium smelters and their induction furnaces really don’t care where the MegaWatts came from.

    FreeCountry, I am interested but dubious about the mechanics of taxing carbon at the consumption point rather than at the point of production. Do you not think this is a concept open to abuse? What mechanism are you suggesting for applying a carbon tax for consumption of goods rather than production thereof?

  • 25
    freecountry
    Posted Monday, 14 March 2011 at 11:51 am | Permalink

    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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