I am, I have to finally admit, a climate sceptic. A non-believer, a flat-earther, who refuses to accept the demand to believe in the new religion being propagated by a small group of biased special interests.
I reckon it’s all superstition and nonsense and can produce the figures to prove it.
I should be more specific, I guess. What I’m specifically sceptical about is carbon leakage.
No one has ever seen carbon leakage. It’s an economic theory, as yet unsupported by any real-world evidence. It postulates that any attempt to impose a carbon price ahead of a comprehensive international agreement on emissions trading will simply drive trade-exposed industries offshore, along with all the jobs they create and the greenhouse gases they emit, offshore to a country which has no carbon price.
The entire rationale of handing over billions of dollars in compensation under the CPRS is based on “carbon leakage”. Call it faith-based policy.
In the last six months, however, a giant experiment has been underway to test the claims of the likes of our minerals sector, and steel manufacturers, and everyone else who argues that a carbon price would make them pack up and head to the nearest developing country.
The experiment is the Australian dollar, which has dramatically appreciated, particularly against the US dollar. This morning is was at about 92 US cents. The earnings of most of our minerals sector are denominated in US dollars, so the terrible performance of the greenback this year weighs especially heavily on our mining companies since the Aussie began climbing off a low of 63.2 US cents in February.
But the impact of the higher dollar dwarfs any possible impact of a carbon price. Here are some examples. Last month, one analyst estimated that the impact of an appreciation from US$0.67 to US$0.95 would reduce margins on steam coal from $46 a tonne to $8 a tonne. The same analyst calculated the cost of a carbon price on coal-mining emissions would be $12 a tonne. The impact of foreign exchange movements is greater than that of a carbon price by a factor of 3.
Bluescope Steel, a persistent lobbyist for more compensation under the CPRS which has warned it will cut production or close altogether, predicted the CPRS would cost it “tens of millions of dollars” in the first year of operation, in reference to the less generous White Paper model. But Bluescope told the Bracks Automotive Review in 2008 that a one US cent appreciation of the Australian dollar cuts its EBIT by $12m. That means Bluescope’s EBIT will be slashed by $360m this year, an effect that will continue as long as the dollar remains high.
In April, the greatest of the rentseeking leaches, the Minerals Council of Australia, told a Senate committee that the CPRS would impose costs of $2b a year on the entire minerals sector. To put that bloated and unsourced figure in context, last month ABARE predicted energy and minerals earnings for 2009-10 would fall by about $30b because of commodity price movements and a higher Australian dollar.
I asked ABARE if they could separate the impacts but they were unable to given the interrelationship between the Australian dollar and commodity prices. But even assuming 90% of that fall is due to commodity prices rather than the dollar, exchange rates still account for far more than the CPRS, even on the sector’s own apocalyptic forecasts.
No one expects the Australian dollar to depreciate significantly against the greenback anytime soon. ABARE forecasts a higher dollar for the remainder of 2010, and there are plenty of analysts who see commodities prices supporting the dollar into 2011 and beyond, driving by commodity prices increases. A higher Australian dollar, even if not in the 90 US cent range where it is currently, looks here to stay for years to come.
Somehow, magically, our biggest companies are able to handle that shock to their earnings without bailing out to a country with a weak currency. Yet they claim the smaller impact of the CPRS will send them fleeing to the nearest polluters’ paradise.
The appreciation of the Australian dollar has exposed that for the rentseeking try-on it is.