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Apr 22, 2010

Official: carbon leakage is wildly overstated

A new report does the numbers on the handouts to big polluters proposed in the government's emissions trading scheme and finds they would have been a colossal waste.

The Grattan Institute has demolished the central argument behind the Rudd government’s CPRS handouts to big polluters, in a major report.  In doing so, it has shown just how close Australia came to major and costly policy debacle when the Rudd-Wong CPRS narrowly failed to pass the Senate late last year.

The Institute was established in 2008 and counts the Federal Government and BHP-Billiton as key funders.  But its report has taken direct aim at a key Rudd Government policy.

Some of us have previously tried to place carbon leakage — the shift of carbon emissions offshore as Australian industries are made unviable by a carbon price and overseas industries take up the slack — in a broader context by examining issues such as exchange rate and resource price movements. But the Grattan Institute has thrown considerable resources at evaluating the impact of carbon prices on Australia’s biggest trade-exposed polluters at the plant and project level, and determining whether a carbon price would drive emissions and jobs offshore, either by making local industry uncompetitive against imports or by making Australian exports uncompetitive in global markets.

What is remarkable about the report is just how small the impact of a carbon price will be on even our heaviest polluters.  Modelling impacts based on a 5% emission reduction target and a $35 per tonne carbon price, the report finds that an ETS without compensation would have minor impacts on most of the biggest beneficiaries of CPRS largesse.

Alumina: a carbon price would have virtually no effect on the Australian alumina industry, which enjoys significant advantages over international competitors due to the proximity of alumina plants to large bauxite deposits.  With a carbon price and no free permits, alumina production costs at most plants would still be far below international alumina prices.  The industry was scheduled to receive more than $1.5 billion in free permits over the next decade.

LNG: Led by Woodside, the loudest whinger in the CPRS debate, the LNG industry managed to coax $3.5 billion over the next decade in CPRS handouts from the government.  However, the report shows a full carbon price would have no impact on investment decisions (in LNG, the issue is not the impact on projects currently operating, but on future investment decisions) because a carbon price would be a fractional component of overall costs.  The impact of a carbon price on rates of return is dwarfed by oil price movements or construction cost blow-outs.

Coal: a carbon price impact would be minimal for 90% of coal mines, the report found, and only significantly affect 10% of mines that are the most “gassy”.  However, even some of these mines are unlikely to close without compensation because they produce premium types of coal.  In any event, a carbon price makes it more likely production will shift to lower-emissions coal mines.

Cement: the report concluded that local production of cement clinkers could be replaced by imports, but the difference in emissions was so marginal that some form of assistance to keep production onshore was justified.  The report suggested a carbon tariff on clinker imports, rather than free permits.

Steel: The steel industry was likely to see poor returns if a carbon price was imposed without compensation, forcing higher-emissions blast furnace plants to close, while lower-intensity electric arc plants would remain.  If local blast furnace output was replaced by imported blast furnace output, the report suggested this might lead to an increase in global emissions, but not if it was replaced by imported electric arc plant output.  Again, the report suggested a carbon tariff on steel rather than free permits to keep production onshore.

On aluminium and oil the report found an uncompensated carbon price would lead to the closure of local plants; in the case of aluminium smelting, particularly when coupled with the scheduled end of state government electricity subsidies, and in the case of oil refineries, bringing forward closures that would happen anyway.  In the medium-term, aluminium smelting would be replaced by lower-emission foreign production, reducing global emissions, and oil refining would be carried out by significantly lower-emissions overseas plants.  In neither case was any assistance (the aluminium industry was to receive more than $8 billion under the CPRS, the oil industry $1.5 billion) justified, although there might be a case for assisting communities disproportionately affected by plant closures.

The report even suggested the impact of the CPRS on households would have been far lower than the ordinary price movements of petrol and electricity over the past decade.

The report also put an ETS in the context of other major economic reforms of recent decades and its conclusions are surprising.  While most of us have spoken of the transition to a low-carbon economy as a massive economic reform, the price impacts of an ETS would be significantly smaller than that of the GST.  And the industries most affected by a carbon price together employ 70,000 people, only a small number of whom are potentially affected by plant closures if no compensation was paid.  But the process of reform of the Australian automotive industry has cost 55,000 jobs over the past three decades; the textiles, clothing and footwear industry — which has never had powerful lobbyists to put its case in Canberra — has lost 60,000 jobs.

The compensation being handed to the biggest polluters will cost, on average, $65,000 per job.  In the aluminium industry, the cost is as high as $180,000 per job.  It would be far cheaper simply to let it close and pay displaced workers average weekly earnings.

As the institute points out, the CPRS compensation would have totalled more than $20 billion over the next decade and would have muted any benefits from the CPRS in terms of driving the transition to lower-emission intensities.

Bear that in mind if the government ever tries to revive that appalling scheme.

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19 thoughts on “Official: carbon leakage is wildly overstated

  1. Billy Blogs

    The incompetence of this government is mind blowing. Good bye Malcolm, you were part of this too.

    I wonder if Krudd will hold a presser to make this announcment.

  2. Mark Duffett

    In the medium-term, aluminium smelting would be replaced by lower-emission foreign production

    Hmmm. On my quick reading of the main and detailed reports, there are several brave assumptions behind at least this conclusion.

  3. jack jones

    The report looks good and confirms long held suspicions. Great effort to bust through the hysterical spin and also deflate any excuses the govt has for not dealing with the Greens post election on a real CPRS vs the pretend one they’ve got now. Wot chance though that they’ll go for an even more p***weak deal with a Hockey lead ‘moderate’ opposition rather than genuine action which Greens could support….will probably dependon how the election plays out.
    Only question I had was whether the sponsorship (apparently in part at least) of this report by BHP has skewed the findings on steel at all, as the piece above suggests though they haven’t gone for the lazy option of free permits at least.

  4. JamesK

    Yes. And bear in mind that there has been massive carbon ‘leakage’ in Iceland just recently.

    Saving that much ‘carbon’ which isn’t really what Rudd means by ‘carbon’ what he means is actually carbon dioxide, would cost the whole Aussie workforce and then some…

    On the positive side sometimes apparently Rudd does like fewer words…

  5. Michael James

    Hmm, wasn’t Crikey a major voice calling for the CPRS to be passed without delay?

    Crikey, take a lesson from this, try reporting the news as it is, instead of trying to influence the issue by slanting the coverage.

    You and your writers are quick to scream bias at News when they barrack for a position you do not subscribe to, on several issues you seem to be just as guilty.

  6. surfer

    They don’t like Kevin since he changed his Asylum Seeker policy. Before that he was seen as the Messiah usually.

  7. Rohan

    Michael James – certainly this author has consistently slammed the CPRS as a dog from the very beginning.

    Of the top of my head can’t think of any other regular contributors that have supported it.

  8. EnergyPedant

    On the issue of who funds the Grattan Institute.

    Vic Govt., Feds, UniMelb and BHP all contributed to an endowment. My understanding is that there is no on-going sponsorship. The cash (many millions) was handed over and the institute runs based on the revenue stream. So now that it is established there is no external interference in what is produces.

    Other than electricity generation the carbon cost for almost everything adds only a relatively small percentage to total costs.

  9. JamesK

    @ Rohan. The ‘author’ has consistently attacked the ETS but only from the left ie. that it’s not quite looney enough for his taste. The ‘author’ is aghast that the Coalition voted against it and aghast that The Greens didn’t support it but he has never actually articulated a criticism of our looney Greens.

    What about it Bernard: Do you support the Greens position?

  10. eclectic eel

    Good article Bernard.

    Maybe Tony Abbott’s rise to Liberal leadership is more of a blessing than I thought.
    Apart from being an appalling choice as leader, he’s sunk the hopelessly inadequate and expensive
    (from the point of view of the taxpayer) proposed CPRS.

    If Rudd can win the senate at the next election perhaps he will have the balls to follow the
    Garnaut recommendations or introduce a carbon tax.

    Global warming does not go away because
    politicians want it to. And don’t give me the bit about Australia only contributing a small percentage of the total carbon emissions. That’s a childish response – we’re a rich and resilient country.

    The Grattan Institute has shown that profitable enterprises will not
    collapse because of a carbon capping scheme. Business has been ready for some time to
    adapt to it.

    We coped with two world wars the GST, and the GFC – this will be a walk
    in the park with good leadership. Get on with it!