Carbon cost emerges as an industry killer

If you are serious about driving a company out of business there is a guaranteed way to succeed; charge more for your services than competitors.

The same rule applies to countries, which is something Australia is about to discover with our carbon price from June 30 set at $23 a tonne, and Europe’s carbon price last night dropping to a record low of $7.89/t (€6.16/t).

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Comments:

Andrew
Tim, The headline mentions that carbon cost has 'emerged as an industry killer', yet your article provides no evidence of this and instead just rant about the high Aussie dollar, the power of internet shopping and low US gas prices. Maybe you are putting your hand up for a job with The Australian where research and facts are irrelevant. Those who bothered to do minimal research will understand that under Australia's carbon price mechanism businesses that have significant carbon costs, and have to compete with international companies, will be compensated 66 or 94.5% of their carbon costs. I.e. carbon costs will not be significant for companies that compete with international companies. What does this mean in real world terms: Nickel produces - the clean ones will be overcompensated (receive money), the dirty ones will be a minimal carbon price. Ditto for all emissions intensive trade exposed industries. The companies that are not compensated are those that don't compete with international companies. I.e. China will not be exporting electricity to us any time soon. Please let me know if you need me to point you in the direction of the relevant information so that you can do some research next time. Journalism at its worst.

Bill
Andrew, You wrote above, "Those who bothered to do minimal research will understand that under Australia's carbon price mechanism businesses that have significant carbon costs, and have to compete with international companies, will be compensated 66 or 94.5% of their carbon costs. I.e. carbon costs will not be significant for companies that compete with international companies. What does this mean in real world terms: Nickel produces - the clean ones will be overcompensated (receive money), the dirty ones will be a minimal carbon price. Ditto for all emissions intensive trade exposed industries." Next time you want to accuse someone of shoddy journalism, at least try to understand how business investment works before speaking nonsense, mate. Here is why I say this: The Emission Intensive Trade Exposed (EITE) arrangement attempts to act as a Coles or Woolies-type discount coupon to so-called "exposed" industries, by saying "but you'll have a 66% or 94.5%" discount on the carbon price for five whole years!" Labour pols argue that this should be considered a "benefit" under their plan. But. EITE fails to take into account two major problems, a) long-term investment uncertainty factor; and b) indirect carbon price pass through costs. In the first problem, businesses invest in major plant on the basis of life of asset costs and benefits. The EITE scheme leaves as an open question how businesses will be treated under the scheme after 2017. All else being equal, in the absence of any guidance by Canberra on this issue, businesses are forced to consider the worst-case scenario into their capital modelling. This means that plant that might otherwise be considered a sound investment stands the risk of being reconsidered as an investment risk. Again, all else being equal. The second problem is where businesses cannot pass indirect carbon costs through to customers because those companies sell resources that are traded on worldwide indexes (e.g., NEWC coal prices; or LME copper, nickel, and aluminium prices). Already hammered by high FOREX rates and flat index prices, such businesses now have to suck up additional carbon costs that their suppliers pass on through to them, but cannot then pass on to their international customers. Their costs increase but their profits do not. But, being the genius you seem to be, you already know this. Unlike emissions that caused acid rain and smog (CO, NOx, HC, SO2, etc.), no one has been able to demonstrate a direct linkage between CO2 emissions an an immediate impact on a community's public health. When clean air laws were amended in the US and other countries 20+ years ago to make coal fired power stations clean up their smog and acid rain emissions, the general public in first world countries did not have to be convinced that lowering those pollutants was a bad thing to do. But Julia et.al. had to shell out a baker's dozen of "gimmes" to various voting constituencies to get them to agree to a tax on carbon. On top of this, the carbon tax will - not may - result in a capital flight from Australia to other countries where exposure to carbon costs is lower or else nonexistent. And when jobs dry up as capital investment in Australian-based operations drops, what, pray tell, will you have actually accomplished, other than killing one more nation's economy? China (being the example you used above) will not export electricity to Australia, but it will continue to offer favourable conditions for manufacturing and metal refining industries, as well as primary resources industries. What you claim we won't be paying in lower energy costs from China will be taken up by the fact that more and more Australian investment (and the jobs that come with it) will go offshore. But no matter, it's working out great for Tasmania, isn't it? That's why they have to have so much of WA and Queensland's GST allocation...hmmm.

Mr Ed
Andrew, I think you've missed the point in the article. Australia's starting point is way above everyone else and is fixed for 3 years while other prices are dropping. This immediately puts Australia at a significant disadvantage when compared on the world stage. This at a time when price pressure is already shifting business investmant offshore is going to exacerbate the issue. Yes, some industries will be compensated politically motivated) - another flaw in the system design because it sends incorrect price signals but that's another argument. The bottom line is that the Carbon Tax is much too high, fundamentally flawed in design and will be very bad for Australia (and it won't make one bit of difference to Climate Change). The upside is that the population will get to judge it at the ballot box next year!

Russell
I agree with Bill, and if you werento attend any mining investment summits, you would see that investors are looking elsewhere already. As the investment period is at least 3 years you won't see the impact on employment for another 2 or 3 years maybe. Australia's prevoiusly good "sovereign risk" reputation has also been destroyed with the MRRT, which means investment decisions have been harmed by the government. Seriously, people elsewhere wonder what has got into the Australians. Then the look closely and see the green hands controlling then puppet strings...

Arch
Bill, you just made my day. Someone with a functioning brain. Bravo.

Andrew
Bill, Thank you for your perspective on this. A lot of what you say makes sense at first pass but upon closer inspection or comparison to what’s actually happening in Australia, your points just don’t add up: Let’s look at the “Carbon Price Uncertainty Factor”. If you hadn’t noticed, Australia is in the middle of a massive investment boom – Investment in resources projects are at record levels in Australia and that's with a carbon price just round the corner. No, coal development and acquisitions are not falling off a cliff, they’re doing the opposite. The same is true for LNG, Iron Ore, Gold and most other resources industries. The exceptions are Aluminium and Nickel but record low LME prices and high AUD wouldn’t have anything to do with that.… The carbon price uncertainty factor must be pretty close to 1. So, if you did not realise that an investment boom was taking place then you probably hadn’t noticed the impact it is having on our exchange rate, the AUD is currently ~50% higher in value than historically against the USD – this is the true reason why many of our industries are struggling. I.e. Reducing your revenue by ~33% per unit of product funnily enough has a greater impact on businesses than a ~1% increase in your operating costs. Carbon cost pass through is interesting, particularly when you start looking at real numbers. Aside from energy there are no other business costs that will be impacted by a carbon price. Steel, Aluminium, Cement – all of these are supplied by companies based overseas not paying a carbon price or from companies based in Australia being compensated for paying a carbon price. Flights (very emissions intensive) have a price increase of on average of $3 per sector - this not exactly going to send a business under. So that just leaves energy, which is a direct carbon cost, and which is being compensated under EITE if the carbon price is going to impact a business significantly. So what were the rest of your arguments? Denying that humans are responsible for climate change – haven’t heard that one before but please, keep your head in the sand if it makes you feel better. Tasmania - Are you really claiming that it is the first carbon price impacted failed state? Tasmania’s problems started a long time ago when they based their economy on a non-renewable resource – native timber. Oh wait – this sounds very familiar to the original topic of non-renewable resources – fossil fuel energy. PS: For this of you who are unfamiliar with the regulation of emissions that cause acid rain in the US – this is a great example of how a cap and trade scheme (such as Australia’s carbon price) will work. Thank you for raising this Bill.

Jerome
The powers that be (PTB) never wanted more than about 20 million inhabitants in Australia (thus the difficulty with obtaining citizenship, unless perhaps one is from S.E. Asia) because the game plan all along has been to give Australia over to the Chinese to run. The PTB have probably gamed how many Aussies will leave the continent and how many they'll be able to take care of with soft kill methods, and how many will remain alive but cowed. They call this the century of change for a reason. The real question of this article should be, "Why is ANYONE paying a carbon tax?" Remember that (according to pop culture, sci-fi shows) we are "carbon-based life forms" so the century of change is about a "war", except it isn't a war ON terror; it's a war OF terror on all humans. The new world order has very little room for, or need of, most humans. This is the century of deindustrialization and austerity (poverty). Without understanding of the agenda, there is little hope that most humans will survive the agenda--especially since they are not meant to survive it. And it is a guarantee there shall be no political solution because the purpose of the dialiectic is to offer false solutions. Gov't exists primarily to serve itself and to guide people into their opinions. So most will believe that carbon causes all manner of problems and the "experts" must tell them who shall be born, the purpose of life, and when to die. If you think this is farfetched, then you're already among the walking dead.

Exporters

LabelValue
Rio Tinto$21.40bn
BHP Billiton Iron Ore$17.97bn
North West Shelf Venture$16.84bn
Fortescue Metals Group$8.12bn
Gold Corporation$5.81bn
Others$53.39bn
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