Australia's carbon tax ? an expensive sop to the Greens? | Watts Up ...

Guest essay by Phillip Hutchings

The main political news down-under this weekend is that Australia?s flawed Carbon Tax is going to morph into an emissions trading scheme in 2014, one year ahead of schedule. That?s not surprising, as data is emerging from the one year old Carbon Tax scheme which makes it look more and more like a complex fa?ade.

?We put a price on carbon? ? the boast from Australia?s Gillard Labor Government ever since 2011. It was a promise to the small Green party with whom Labor formed a minority Government.

Yeah, sure ? but how could that be done without destroying Australia?s open economy in the absence of similar action from our trading partners? This was the puzzle facing me as I set to picking apart Australia?s Carbon Tax. It?s been in operation for its first 12 months and we are starting to see the first hard data published.

Yes, the data comes with obfuscation, so I had to dig deep. And what I found poses some intriguing questions.

The reality around Australia?s Carbon Tax seems, well, to be quite different to what the Government had promoted. On the evidence to date, it is narrow in its scope and soft in its application. In other words, it let the Government have its cake and eat it ? promoting the slogan of ?a price on carbon? while avoiding any need for hard and expensive action.

Take for example, the Government?s claims back in April 2012 about those ?500 biggest polluters? who would pay? Well, last month, that had shrunk to ?around 370? companies. And yes, the names of approximately 370 companies were listed in a database of liable companies last month. But when you merge all the related companies in that list, the group comes down to only 185 discrete affected companies who have actually paid some carbon tax.

Moreover, many of the industrial companies on the list have been handed free Carbon Units under the so-called ?Jobs and Competitiveness Program?. And thanks to those free units, it looks like industrial companies overall will pay negligible Carbon Tax.

Today, we?ll look at these non-electricity sectors, responsible in total for about two-third of Australia?s greenhouse gas emissions.

What we will learn is that these sources are either ignored altogether, or taxed so lightly that the financial imperative to make any change is pretty marginal. It?s no wonder more companies weren?t squealing about the impact of the Carbon Tax.

We?ll see that one of our biggest cement companies talks about moving production offshore to mitigate its Carbon Tax cost ? surely a rational response, but bad for Australia and hardly likely to reduce global emissions.

And that our biggest steelmaker is so well cosseted by ?industry assistance programs? that it expects no liability from the Carbon Tax.

Yes, emissions have fallen from the electricity sector, but the evidence suggests that was due to factors other than the Carbon Tax.

So what we have is a complex system imposing a large administrative burden for no real change in industrial behaviour.

Then, in the next paper in this series, we?ll have a look at why virtually all of the Australia?s Carbon Tax is being paid for by just fifteen of our large electricity generating companies.

And in doing so, set the scene for a more fundamental look at why this policy is more spin than substance.

The Carbon Tax only affects the electricity generators and around 160 other companies

The ostensible aim of Australia?s Carbon Tax was to encourage companies to reduce CO₂ emissions. And the real aim? ? prove a sop to the handful of Green members of Parliament who rely on the global warming theorists for votes.

We know the amount of greenhouse gases which Australia produces each year, and where it comes from. It is approximately 550 Mt/yr of CO₂ equivalent. We know that because we have a small army of bureaucrats publishing our Greenhouse Accounts each quarter.

So, how did the Government go about framing a tax which would be politically acceptable?

Well, let?s have a look at one extreme ? if Government really wanted to attack CO₂ across the entire country, it would set up a Carbon Tax was all embracing. So if it covered every single tonne of greenhouse gas, it would raise $12.7 billion annually (550 Mt x $23/t). Simple, right?

Except our Government knew that would not fly politically ? it would be administratively too difficult and alienate the voters with its wide reach. So, the Government decided to make three critical exemptions.

Firstly, it decided that road transport and agriculture will not covered by the carbon tax. Politically, that made sense. After all, the car owners and farmers are vocal voters.

It?s pretty easy to see the effect that these first two exemptions had. The table below shows the sources of our greenhouse gas emissions

?
Australia?s Greenhouse Gas Emissions	Mt CO2-e in the year to Dec 2012
Sectors covered by the Carbon Tax	?	Sub-total
Electricity generation	191	191
?	?	?
Non-Electricity Industrial Sectors	?	?
Stationary energy	94	?
Fugitive emissions	42	?
Industrial processes	32	?
Waste	13	181
?	?	?
Sectors excluded from the carbon tax	?	?
Transport	92	?
Agriculture	88	180
?	?	?
Total	?	552
Source: December 2012 issue of Australian National Greenhouse Accounts

Those political exemptions meant that the addressable market for Australia?s Carbon Tax had shrunk by one third to only 370 Mt/yr of CO₂.

And, then anxious that the Carbon Tax would only capture the ?big polluters?, the Government said the Carbon Tax would only apply to larger facilities ? those with more than 25,000 t/yr of CO₂ emissions.

Now the effect of that one is a bit harder to figure out. But intuitively, it?s not hard to see that Australian industry comprises a small number of large industrial companies, and lots of small ones. Politically, that one is no-brainer. I mean, why upset every hospital or food processing factory that uses natural gas, but emits a relatively small amount of carbon dioxide?

Now fortunately for us, the bigger companies that do get caught in the Carbon Tax net are easily identifiable. You see, the Government has set up a Clean Energy Regulator to ride herd on the Carbon Tax. And each year, that body has to publish the so-called Liable Entities Public Information Database (LEPID)[i] ? the list of companies which emit enough CO₂ to have to pay the Carbon Tax.

And joy of joy, this was published only two weeks ago in a lovely Excel spreadsheet. A little bit of analysis on this data is revealing. Once you identify all the related companies (for example, there are 13 AGL and seven Origin Energy subsidiary companies on the list), you can work out that there are only about 185 discrete companies in all of Australia that so far have paid any Carbon Tax.

There are 25 discrete electricity generators included in the LEPID list. Approximately fifteen of those are large electricity generators ? a who?s-who of the electricity supply industry. There is another ten or so smaller generators as well, but their contribution is relatively low. In my assessment, it is these fifteen big players who are actually paying the vast bulk of the Carbon Tax.

Let?s leave the electricity generation sector alone for a bit. There?s plenty of interesting issues there to uncover, but that is for another day.

That leaves just approximately 160 other industrial companies. These are the ones who have an individual facility with more than 25,000 t/yr of CO₂, and who are not in the electricity generation, transport or agriculture sector.

Now ? remember what our Government said in 2012?

?Around 500 of the biggest polluters in Australia will pay for the pollution they emit, under a carbon pricing mechanism? Source: ?An overview of the Clean Energy Legislative Package?, April 2012

Well, it isn?t the 500 biggest polluters ? it is just around the electricity generators and 160 other companies.

But how much financial incentive does the Carbon Tax provide?

Good question ? and what is even more interesting is that this LEPID database shows the number of Carbon Units each company has had to pay in 2012-13. Each Carbon Unit represents 1 tonne of CO₂ emissions and cost $23 in the 2012-13 year.

And here is where it gets intriguing?.

Now, a company only has to pay 75% of its Carbon Tax obligation before the end of the financial year. The remaining 25% has to be paid by February of the following year.

Let?s look at the 160 companies in the non-electricity industrial sectors ? these are larger industrial companies in activities such as steel, cement, newsprint and alumina.

Our national Greenhouse Gas Accounts show that this sector in total emits 181 Mt of CO₂ per year. But the Carbon Tax doesn?t apply to smaller facilities under 25,000 t CO₂ per year. We don?t have enough data to work out how much the 181 Mt/yr emissions would shrink by excluding the smaller facilities.

But looking at the LEPID database, we can see that this group of industrial companies lodged 77 million Carbon Units in June 2013 for their 75% down payment. So their total obligation would be 103 million Carbon Units for the 2012-13 year. 103 compared with 181 ? that is 57% and perhaps a reasonable reconciliation when smaller facilities are excluded.

That and the numbers below are my interpretation of the LEPID information, and I?m very happy to be corrected if my reading is wrong.

That tax would cost $2.4 billion per year and rising, a powerful incentive for these companies to reduce emissions, you?d think.

$2.4 billion/year free Carbon Units to Australian non-electricity companies

But?? hang on, there?s a rub.

You see, the Government knew that a real $23/t Carbon Tax would destroy the competitiveness of our industries. So it is running the so-called ?Industry Assistance? programs. These have the effect of significantly reducing the financial incentives to reduce emissions.

The ?Jobs and Competitiveness Program? is targeted at the non-electricity sector. This is meant for the ?emissions-intensive trade-exposed? activities ? that is, companies who emit a lot of CO₂ and are exposed to imports or who trade internationally. There?s a list of 48 trade-exposed activities. It includes business such as steel making, alumina refining, cement making and so on.

And depending on whether you are ?highly? or ?moderately? emissions intensive, you get 94.5% or 66% of ?average industry carbon costs? supplied as free units. In other words, you pay only 5.5% or 34% of the face value of the $23/t Carbon Tax. The recipients of the free units are public too[ii].

Well-known companies which received significant allocations of free units include Rio Tinto (aluminium), BlueScope (steel), Woodside (LNG), Caltex (petrol refining), BHP (nickel, copper and alumina).

A good example would be Adelaide Brighton, the second largest cement supplier in Australia. Making cement is significant producer of carbon dioxide. This occurs when the limestone raw material is heated to produce lime, liberating carbon dioxide. Adelaide Brighton lodged 2.1 million Carbon Units last month, indicating an annual obligation of 2.7 million units. But it has been awarded 2.2 million free Carbon Units under the ?Jobs and Competitiveness Program?. That would suggest it has to buy 0.5 million Carbon Units at a cost of $12 million before tax.

Adelaide Brighton has said that its Carbon Tax mitigation program includes additional imports and reducing reliance on domestic manufacture. A surely logical response, but how does that reduce global emissions?

Overall in 2012-13 under the ?Jobs and Competitiveness Program?, there were 104 million free Carbon Units issued to 123 applicants in the non-electricity sector. That is just almost $2.4 billion worth!

And let?s just look at that ? remember our list of 160 non-electricity generating companies who had to lodge Carbon Units from above? Well, they had a total obligation of 103 million carbon units ? and they are getting slightly more than that (104 million) for free!

So those 160-odd companies appear to face a collective Carbon Tax bill of zero. Yes, no doubt some individual companies face a carbon cost, but overall, the cost seems to be neutered by the Government programs.

Our largest steelmaker does not expect a net cost from the Carbon Tax

Under the Clean Energy Future package, there are several other programs to soften the Carbon Tax. A good example is the Steel Transformation Plan package.

It is a $300 million package for our two steelmakers. Already payments of $164 million have been made, $100 M to BlueScope and $64 M to OneSteel.

Now, what actually is the Carbon Tax obligation of these two companies? The LEPID database indicated a 2102-13 liability for BlueScope of 6.3 million Carbon Units. Yet, it has been granted 7.5 million free Carbon Units for 2012-13 under the ?Jobs and Competitiveness Program?. If the LEPID information is correct, BlueScope is in front by 1.2 million units!

Similarly, OneSteel appears to have been awarded 2.9 million free units against an apparent obligation of 2.5 million units.

On the face of it, the ?Jobs and Competitiveness Program? together with the cash grants under the Steel Transformation Plan seems to providing a windfall gain for our two steelmakers.

What are the companies themselves saying about the Carbon Tax? Well, you have to sift through BlueScope and OneSteel?s financial reporting fairly carefully to find any mention of either the Carbon Tax or the Steel Transformation Plan.

BlueScope at least said this in February 2013 ?When funds from the Steel Transformation Plan are taken into account, the Company does not expect to face a net carbon liability over the period?.

What? ? Why have the Carbon Tax regime if there is no financial incentive?

Now, don?t get me wrong. The global steel industry is having a very tough time, too much capacity and soft prices. Our steelmakers operate against global competition, and the last thing they need is an impost (carbon tax or any other) which competitors do not bear.

Yes, the airlines get caught up, but not with a Carbon Tax

Our airlines, when they operate domestically, do not pay a Carbon Tax on emissions ? no, it is a much blunter instrument. That is just another 6 cents per litre in excise duty added to aviation fuel. To put that into context, the extra excise has added less than 1% to Qantas? costs. And Qantas has added a surcharge to ticket prices to recover it.

Yes, Qantas and Virgin are progressively upgrading their fleets with more modern aircraft that are more fuel efficient ? like every other airline. The real question is whether the extra cost of domestic fuel is a factor in that decision making.

In reality, is this just an expensive political stunt?

So, if my interpretation of the LEPID data along with the free Carbon Units information is correct, it?s hard to see many non-electricity industrial sectors that actually have any financial incentive to change under the Carbon Tax.

Moreover, this weekend?s news tells us that from 2014, the pricing of Carbon Units is set to fall substantially. That is when the scheme will probably transition to ?flexible pricing? and effectively become an Emissions Trading Scheme. Australian firms will be able to use European allowances for some of their obligation. European Union Emissions Trading permits are now trading at EUR 4.30 per tonne, or approximately $6 per tonne.

So companies within Australia?s Carbon Tax net face $23/t-plus prices for only one year and then a significant reduction.

Added to that, we have a Coalition political opposition which has consistently pledged to scrap the carbon tax if elected.

Faced with that outlook, there is far from an adequate incentive to make the long term commitment in the necessary equipment to reduce greenhouse gas emissions at an industrial factory or plant in Australia.

In other words, we have the worst of all worlds ? a complex and ineffective policy imposed by a minority political party.

---

[i] http://www.cleanenergyregulator.gov.au/Carbon-Pricing-Mechanism/Liable-Entities-Public-Information-Database/Pages/default.aspx

[ii] http://www.cleanenergyregulator.gov.au/Carbon-Pricing-Mechanism/Industry-Assistance/jobs-and-competitiveness-program/free-carbon-units/Pages/default.aspx

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Source: http://wattsupwiththat.com/2013/07/14/australias-carbon-tax-an-expensive-sop-to-the-greens/

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