Who wins, who loses when the carbon tax goes?

Peter Hannam
July 9, 2014
The Sydney Morning Herald
Carbon price debate far from over
Now that the Abbott government has succeeded in repealing the carbon price, who stands to win and who stands to lose?
On the face of it, the winners from the repeal of Australia’s carbon price will be the 371 liable entities paying the tax and consumers who forked out more for goods and services as the emissions charge was passed on.
Losers will include firms that have profited from their relatively low carbon output compared with rivals, such as Snowy Hydro and Hydro Tasmania. Accounting and corporate advisory firms are also likely to cut jobs as demand for their expertise dims.
The effects of the Senate’s repeal of the carbon price – $25.40 a tonne as of July 1 – will take some time to play out.
Since the carbon price fell most directly on the power sector, its removal should produce winners in that industry, save for the hydro plants and wind farms which operate at near-zero emissions.
However, as former Citi analyst and clean energy campaigner Tim Buckley notes, the coal-fired power producers have been stoked with billions of dollars in compensation to ensure they absorbed the carbon hit.
“The government gave almost 100 per cent free permits to the generators, who were allowed to bank the cash,” Mr Buckley said. “Then they’ve charged consumers for the cost of the carbon and taken the difference as a profit.”
AGL on Thursday (July 17) said the repeal of the carbon price would reduce earnings before interest and tax by about $186 million. The sum includes the loss of $100 million in “transitional assistance arrangements” for its Loy Yang A power plant in Victoria and about $86 million from anticipated falls in its wholesale power prices paid to its renewable energy and gas generation units.
Perverse result
Likewise, the big trade-exposed energy users, such as the aluminium and cement industries, were given 94.5 per cent of their permits.
Perversely, since allocations were made on industry averages, some aluminium producers actually profited from the carbon price. That benefit will presumably evaporate along with the tax’s demise.
“Australia’s aluminium smelters were heavily protected from the carbon price and in some cases were over-compensated,” said Hugh Bromley, an analyst with Bloomberg New Energy Finance, noting the industry’s effective carbon price for the 2013-14 financial year ranged from minus-$34 per tonne of carbon-dioxide equivalent, to $6 a tonne.
“A plant such as [Rio Tinto’s] Bell Bay effectively made an additional $220 for every tonne of aluminium produced, while some plants on the mainland faced a cost of around $115 per tonne of aluminium,” Mr Bromley said.
Industrial beneficiaries of the end of a carbon price include the chemicals industry, particularly sectors such as refrigeration that use chemicals with a high greenhouse gas potency. Land-fill operators are other winners since many would have collected large upfront costs for waste they may not now need to manage.
“You’re talking 50 years of emissions that they are passing through,” Mr Bromley said.
Other producers of greenhouse gases, such as coal miners and gas producers, will also benefit from the absence of a carbon cost.
These sectors, particularly the new LNG exporters, happen to be among the fastest growing sources of carbon-equivalent emissions, with their expansion likely to make it harder for Australia to meet its goal of reducing 2000-level emissions 5 per cent by 2020.
Firms able to tap the Abbott government’s alternative to a carbon price to achieve that target – the direct action plan to pay polluters to curb emissions – will also be beneficiaries, assuming workable legislation supporting the policy can get through the Senate.
Details of the policy – including how baselines will be enforced – remain unclear, as is the precise amount of money available. Environment Minister Greg Hunt insists he will have access to the full $2.55 billion Emissions Reduction Fund for the plan, although the May budget allocated only $1.14 billion over the four-year forward estimates.
Consumer view
Consumers are also potentially winners from the repeal of the tax, but by how much remains less clear than the precise $550 per household routinely pledged by the Abbott government.
While some power companies say they will fully repay any carbon tax collected on electricity bills since July 1, how carbon-linked prices for other parts of the economy will be reset remains uncertain.
Tony Wood, an energy expert at the Grattan Institute, cites the case of a dairy producer sourcing milk derived from several states – each with a different carbon profile in their power sectors. How much should milk prices fall once the tax goes?
“I wouldn’t be Rod Sims for quids,” Mr Wood said, referring to the head of the Australian Competition and Consumer
Commission.
As Fairfax Media reported, Qantas, a major fuel user, has ended its “carbon surcharge” but said competition meant it had not been able to recover the carbon costs as intended. Post-tax fares may hardly budge.
Shadow price
Meanwhile, any cheering in corporate boards might not reach the accounting departments. Companies will have no choice but to maintain a “shadow carbon price” no matter the current Australian policy, analysts say.
“Regardless of what happens today, we will have a lot of uncertainty in the market, and that creates a shadow carbon price in power futures,” said Mr Bromley.
Peter Castellas, chief executive of the Carbon Market Institute, said a survey of 82 companies liable to pay the carbon price last year found almost three quarters assumed a future carbon price on their investments.
The estimated carbon price ranged from the low price for Certified Emissions Reductions, worth around 20 cents a tonne, to more than $50 a tonne, surveyed companies said.
“Any company looking at any long-term investment will be thinking of factoring in a carbon price,” Mr Castellas said, noting this is particularly true for firms with international operations.
Globally, the assumed carbon price is $20-$60 a tonne, Mr Buckley, a director of the Institute for Energy Economics and Financial Analysis, said.
One place where losses have been mounting for some time is in the area of carbon-related jobs.
The big banks scaled back or halted their carbon trading desks “a long time ago,” said Michael Green, director of Bradman’s carbon and energy recruitment unit. Business is “as dead as doornail”.
The uncertainty has spread to the renewable energy industry, the next area likely to be hit by an Abbott government roll-back.
Bradman was putting the final touches on Wednesday to sending one of Australia’s most experienced wind farm construction managers off-shore.
“He’s just bitter about the situation in Australia and he won’t be back some time soon,” Mr Green said.
The carbon industry is about to enter a period of pause which will see firms like Bradman devote their efforts to expanding in Asia or elsewhere.
“It is hibernation but at the same time [we’re] going to suffer a brain drain,” Mr Green said. “We’re just tired of the ups and downs.”
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