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).

There are many differences between Europe and Australia, but one of the common threads linking all countries is the cost of power, especially electricity

What Australia’s fixed $23/t starting price for carbon means is that our carbon tax, or buying permits in the emissions trading scheme which the Australian Government prefers to call its new tax, will be at three-times the going rate in Europe.

Differences in the way energy is produced, supplied, and taxed, make direct comparisons between countries difficult, but that three-fold gap in carbon pricing is a sobering reminder that Australia is making itself a very high-cost country in which to do business.

To understand what it means to have a cost structure higher than competitors consider two examples, internet-based retailers v traditional shops, and low-currency countries v high-currency countries.

In the world of retailing, the internet is emerging as a clear winner in certain categories, such as books and non-perishable food and household goods. Clothing and booze are following as shoppers learn how to use new technologies which permit comparative pricing.

In the currency game, Australia’s manufacturing, tourism and education-export industries are being flogged by competitors in countries with lower exchange rates.

Next cab off the high-cost rank looks like it will be the price of carbon with some countries not even bothering to put a price on emissions, and others charging a lot less than Australia.

What happened in Europe overnight was a wake-up call that power costs in Australia, even after the round-robin of compensation payments from government (a variation of a Ponzi scheme), will be forced higher in comparison with other countries.

The collapse in the European carbon price, down 14% in a day, is also an example of a government scheme not working as designed because of that age-old problem of government dabbling in the private sector speciality of determining a price by matching buyers and sellers.

What’s happening in Europe is that the rate of carbon production is falling naturally thanks in part to the region being in recession, part to an increase in renewable power production from wind and solar, but also because the government has issued too many carbon permits.

The sharp fall in the price of permits, which are now down 60% in the past year, means that there is less price-encouragement for major carbon-emitters to make further cuts in output as they can buy cheap permits and continue with business as usual.

Interesting as the European situation is, if only to watch government flop about in trying to manipulate a market, is the more interesting change is occurring in the U.S. where power prices rather than carbon prices are falling sharply.

The issue in America is the sudden arrival of an abundant supply of natural gas from unconventional sources such as once unproductive beds of shale. From around $US13 per million British Thermal Units the gas price in the U.S. last night plummeted to three-year low of $US1.88/mbtu.

If the gas glut gets worse in the U.S. some observers believe the price could drop below zero as producers and pipeline companies are forced to give it away (or pay customers to take surplus gas) because storage systems are full.

Meanwhile, in Australia a new tax with an inbuilt escalator clause looms, which will drive up the price of electricity. By 2015, the starting price of $23/t will rise to $25/t.

Little wonder that some long-term supporters of the Australian Government, and even a former Minister, Robert McClelland, are issuing dire warnings about the damage the carbon tax will do to the economy.

Europe’s record low carbon price, and falling power bills in the U.S. sit very uncomfortably for Australia’s already cost-shocked manufacturers.

Lower overseas price also make a comment from Climate Change Minister, Greg Combet, about the carbon price here being “fixed for three years” sound more like a threat than a promise.

A fixed cost when everyone else is falling has the same effect as a cost increase.