The BlueScope blues

Like ships passing through the night, the discussion on emission-intensive trade-exposed (EITE) industries seems to involve two separate conversations. One where those industries most affected (eg steel, aluminium, cement) talk about earnings impacts and job losses. And the other involving policy makers, equity analysts and NGOs questioning whether the impact would be quite so bad. Throw into this mix a very strong Aussie dollar with its detrimental impact on Australian-based export manufacturing and you end up with a very interesting cacophony of messages. What are we to believe is the true situation?

What’s prevented these conversations from meeting, at least through the public debate, is the lack of underpinning assumption made behind the numbers being presented. And the two critical assumptions here are the amount of assistance being provided and the proposed carbon price. [As an aside, there’s another assumption required, being the availability of abatement options, but that’s for another blog. Most estimates assume no abatement options].  A good example is BlueScope’s recent estimate of carbon costs of at least $450m through 2012-2020; how do you get to this number, what level of compensation and carbon price is assumed? Another is ACIL’s calculation of the raw carbon cost to the coal fired generation sector, the headline of which was a cut to earnings of $11bn (again, summed over the 2011-2020 period to make the number look bigger); this calculation presumably included the the ability to pass on costs, which most coal fired generators (other than the most greenhouse-intensive) will be able to do, recognising that this sector is not trade exposed. But it’s unclear whether any “compensation” or other assistance is added to the picture.

On what basis would one assume that no assistance would be made available? It’s peculiar, because EITE assistance has been a feature of ETS design in this country going back a decade. Combet recently made it clear that the starting point for negotiations on EITE assistance would be the CPRS package, which offered up to 94.5% in free permits. What’s even more peculiar is that for the company to make this case, it involves talking down to the greatest possible extent the future earnings potential, with a consequential impact on the share price.

Making steel in a blast furnace has a greenhouse intensity of roughly 2.4tCO2e per tonne of steel. So if you apply a carbon price of $20/tCO2e and then provide free permits to 94.5%, the actual price impact is around $2.6 per tonne of steel. This is in the context of steel prices forecast to rise significantly this year, and perhaps track towards US$1000/t by the end of the year according to some reports. Note also that a 10% appreciation in the Aussie dollar has a far more significant impact on exporters than a carbon price, on a $ per tonne of steel basis. I’m not saying there won’t be an impact from carbon; clearly there will be, and it will be material in EBIT terms, but given the other factors involved, it can’t possibly be the difference between continuing to operate versus shutting up shop.

Another illustration of the two conversation problem arose last week with the Murdoch press appearing to take delight in claiming that BHP Billiton CEO Marius Kloppers had changed his position in relation to carbon pricing. If you look at what he actually said, and what he said in September last year, you’ll see that there’s actually no change to his position. His well-considered speech to the Australian British Chamber of Commerce pretty much kicked off the carbon debate again in this country after the 2010 election, and included a call for a clear price signal, revenue neutrality and a trade-friendly system. His comments last week in relation to “dead weight cost” were clearly in the context of a situation of no assistance, whereas we all know that some form of assistance will be provided.

So it appears that the negotiation boils down to the gap between the government’s offer of 94.5% compensation and the EITE’s call for 100%. We are not too far apart here!

It’s easy to see how people can come to the, in my view misguided, conclusion that “a carbon price will kill the economy”. If the whole economy was populated by highly emission intensive and trade exposed activities AND there was no compensation provided, perhaps then I would agree with the conclusion. But clearly that’s not the case. Firstly the economy is a multi-faceted one with many sectors with a range of emission intensities. There will be some companies that will do well and others that will be worse off once a carbon price is applied. Secondly, clearly there will be EITE assistance. So calculation of impact should be done on that basis.

You’d expect that the EITES most impacted by a carbon price would use every tool at their disposal to minimise the cost impact on their business, including vigorous lobbying. But it would be a mistake to extrapolate the notion that just because they are thumping the table the loudest means the whole economy will be impacted in the same way. The carbon price gives effect to a structural shift in the economy, from higher emission intensive to lower emission intensive, but overall is predicted to still grow at a rate only 0.1-0.2% lower than the “business as usual” scenario. The “offset” is the range of sectors in the economy that will grow due to the carbon price signal.

I’m looking forward to seeing the outcome of the government’s deliberations on the level of the carbon price and the proposed compensation package, so we can all get on the same page.


  1. As I have noted before, it’s really perverse that these guys finger the carbon tax for their problems and ignore the dollar. Why oh why didn’t they support a resource rent tax with the same passion?

  2. Just wanted to add my thanks for this post.

    There is almost no objective coverage from the MSM, and I think it’s great that this is added to the other outstanding content on Macrobusiness.


  3. Chris Carter

    The real problem I have with a carbon tax is all it appears to do is cycle money through the government for no apparent change in global carbon emissions.

    To me it just looks like a tax grab so they can give it back to other people as ‘compensation’ to look like good guys.

    This is shown by them proposing to give low income earners more compensation than they actually require.

    Maybe I’m just a cynical accountant – but it all looks very familiar to me.

    On a positive note for myself personally, carbon tax means more accountants means more job opportunities for me.

    • An implemented carbon emmissions tax that collects new revenue for the country, should be offset by reductions in income tax and company tax.

      Overall, the government should collect the same amount of revenue as a % of GDP.

      The cost of carbon emitting generated electricity goes up, but the affordiblity isn’t an issue with greater disposable funds.

      However where the incentive is is that while carbon emitting generated electricty is now higher, the opportunity lies for non-carbon emitting generated electricty.

      An provider that comes up with either carbon sequestration, or any other alternative source, they can provide electricity without the imposition of the tax.

      The is good for the quality of our air, potentially good for the economy in the long term and keeps the fringe science, AGW believing lunatics at bay.

      • Rusty Penny, you have your opinion, but what’s with the insult???

        I suggest you do some investigative work on the subject before you start labelling opinions.

        As for power plants, 95% of the stuff that comes out of their chimneys is water vapour!

      • Jeez, some of the AGW believers get a little bitprecious when a mirror is placed in front of them now don’t they.

        In a procession of zealotry, tub-thumping, collusion of knowledge and ill-founded assertions of ‘main stream science’, where dissenting views have been vilified, and their proponents are character assassinated carte-blanche, the increasingly discredited AGW scam is no longer a high moral ground to preach from.

        Any good-will AGW believers had in debate etiquette has been extinguished.

        You yourself may not have been an instigator of above mentioned behaviour, but please don’t be surprised.

      • “Any good-will AGW believers had in debate etiquette has been extinguished.”

        You obviously haven’t listened to any of Lord Christopher Monckton’s debates. For the record he was Science Advisor to the Thatcher government.

  4. The cycling impact is one effect of a penalty only emissions trading scheme and it would be a brave person who predicted that the Government didn’t create a range of distortions in the disbursement of those funds. To put this in perspective, under the CPRS 5 carbon price path the government will receive an equivalent to roughly $30bn NPV over the first seven years of the scheme. This is a serious amount of cash to misappropriate.

    The reason for doing this is to provide a price signal to alter the operational and investment decision in the economy away from carbon intensive activities. The key to this is that the carbon tax/cost is marginal whereas the compensation is lump sum. The former effects business and consumers decisions on the ground whereas the latter does not.

  5. It is just another speculative bubble waiting to be inflated and wrapped up as an environmental benefit. These costs will be passed onto the end user and the cumulative effect will be significant. The crumbs offered to us in the form of tax relief will be dwarfed by the snowballing costs.

    A clear distinction needs to be made between actual toxic chemicals and carbon and not have the water muddied.

    Here’s some background.

    The Club of Rome (a major International Think-Tank) back in 1992 proposed this ideology of branding carbon as a toxic pollutant and this ideology was later adopted by the UN and included in part in Agenda 21. All member nations of the UN have adopted this in some form in their own environmental policies.

    For those of you who want more info:

    If we take a close look at the greenhouse gas numbers (excluding oxygen & nitrogen), they are made up of approximately:

    95% water vapour,
    3.6% Carbon Dioxide,
    0.4% Methane (CH4),
    0.9% Nitrous oxide (N2O) and
    0.1% CFC’s (and other misc. gases)

    Human activities only contribute 0.117% to the carbon dioxide level through farming, manufacturing, power generation, and transportation. These emissions are so dwarfed in comparison to natural emissions from sources such as solar activity and the oceans of the world which we can do nothing about, that even the most costly efforts to limit human emissions would have a very small – perhaps undetectable – effect on global climate.

    The farmers I speak to about this proposal call it asinine, because they are very aware that the impact and the regulations generated will send small farmers ‘to the wall’.

    Does the government care? Now with the housing bubble deflating, they need another source of revenue.

    • From Joanne Nova’s Speech March 23.11

      “How many excuses does it take?

      CO2 feeds plants. It’s the only” pollution” pumped onto farms to grow food. Did you know plant life goes dormant if CO2 falls too low? Farmers don’t just pump in an extra 5 or 10% either, they ramp up the concentration 4 or 5 fold in greenhouses. Did the government scientists forget to mention that?
      Australia is the largest exporter of coal in the world. But did they say that China digs up nearly 10 times more coal than we do?
      The famous ice core graphs of Al Gore — expanded to 20 meters square — turned out to show the opposite of what he claimed. Temperatures drive carbon and lead it by 800 years. Worse,it was well known, and not contested two years before he made his movie.
      Global warming stopped, and none of the models predicted that.
      The endless droughts — ended.
      All that CO2 and Global storms hit their lowest level for 30 years.
      And you have to wonder: nearly 90% of the thermometers in the US are too close to artificial heat sources. 90%. How much do the climate science team care about the science?
      75% of thermometers used in the 1980’s have dropped off the official record. All that money, and less instruments to measure with…
      They adjust the data — sometimes 50 years after it was recorded. Think about that. The 1970’s kept warming for the next 30 years.
      3000 ocean buoys looked and couldn’t find most of the missing heat that our planet is supposed to be storing.
      6000 boreholes tell us the world was warmer 1000 years ago, and even warmer again 5000 years ago. None of the models can explain that.
      all the models predict a hot spot, and 28 million weather balloons can’t find it;
      31,500 scientists don’t think we need a carbon tax. That includes 9000 phd’s. There’s a grassroots revolt going on out there. This was done by volunteers, and done twice. There’s never been another petition like it in science, ever. Did the media forget to tell you that too?
      For every dollar paid to a skeptic, big government paid 3500 to global warmers.”

  6. There is more hot air expended by spruikers of the carbon tax than total alleged Australian emissions.

    Their own indefatigable rhetoric will eventually exhaust any remaining support for the tax. Amen.

  7. NOD, if you think you are more capacble than the entire body of peer reviewed science then bully for you. But I know where my vote is going. Alos, do you propose we abolish banks? Regualtion is what is needed, not denial.

    3d1k, the only reason I am not deleting your comment is that it is so obviously self-incriminating. How can you accuse CC of hot air when he has argued a case and you have responded with this?

    • Houses & Holes:

      Have you actually done any investigation of the data and methods being used to promote the climate change argument?

      If you take the time to look at the underlying data and the way it is being modeled you quickly come to the conclusion that significant/runaway future warming is a fantasy of modeling and not supported by the data and actual science.

      One nice specific example, there have been reports in the media over the last couple of days that rising sea levels are “worse than we thought” and that sea levels in the future will rise between 0.9 and 1.6m and that temperatures have risen dramatically in the arctic. They state that temperatures are expected to rise between 3 and 7 degrees by 2100.

      In reality, if you look at the sea level data the trend is steady or falling depending on the time period. The arctic temperature is barely measured at all, it is modeled. They used a 5 year period of modeled temperature data to come to a conclusion for sea level rise over the next 90 years. The claimed temperature rise over 90 years has no basis at all on past trends; once again it is based on models that are consistently overestimating warming trends and getting it wrong. It is a baseless study.

      That’s the “quality” of much of the peer reviewed science you refer to. It bears little resemblance to reality.

      Any discussion of a “carbon” tax is in the context of a problem that doesnt even exist. Its a tax grab, an excuse to redistribute wealth. Australian business and individuals have a right to be extremely disturbed by such a tax.

      • One word – Venus.

        Runaway greenhouse effects are a scientific fact. Regardless of what model is used to predict specifics, do you honestly what to argue that 100+ years of humanity releasing ever increasing amounts of carbon dioxide into the atmosphere that would otherwise have remained locked up in the ground is not going to impact on the biosphere?

        That said, releasing sulphur dioxide into the upper atmosphere to mimic the effect of a volcano could mitigate the symptoms of climate change a lot more cost effectively than a global carbon trading scheme.

      • Venus? You think they are where they are solely because of greenhouse gases? You do not think their proximity to the sun in the major influence?

        “Runaway greenhouse effects are a scientific fact.”

        Yet there is no quantitative assertion to back this ‘fact’, in regards to weighting and impact of the composite gases. In a complete void of these facts, we have a observable yet dissonant theory. Therefore it is not science.

  8. Houses and Holes, I have painstakingly spent an incredible amount of time on this subject looking at both sides of the argument. I don’t just knee-jerk and accept a certain line of thought because someone says this is the way it should be. Just as you critically analysis economic matters I do the same with other subjects since I naturally have an inquisitive mind due to my engineering background.

    Am I implying that I know more than scientists? No I don’t.

    What I do question is the general ‘acceptance by concessus’ approach of science that creates a ‘ you must think within these parameters’ type of methodology by certain institutions. If they don’t, then their career prospects become limited. Historically, maverick individuals changed our view of our planet from being in the centre of the universe.

    Moreover, the number of scientists and professionals who are sceptical about anthropogenic global warming is about 30,000 to the 650 who embrace this theory. Mainstream media does a great job to suppress this and spin it the other way. We need to follow the money to really understand this.

    History is a great teacher and clues can be found that help piece together current events. The Mediaeval Warm period is one example of temperatures warmer than those of today. Historical quotes from organisations and credible individuals are also great guides. The Club of Rome is an example of many.

    As individuals we need to judge a ‘tree by the fruit it bears’. I just think the carbon tax argument has too many holes.

  9. As an individual we have no right to impose our beliefs on another, but we can and should convey our opinion when a square peg doesn’t fit in a round hole.

    Hey, not everyone will agree with my points of view and I have friends who adamantly prefer not have their paradigms altered – and for that I respect their wishes. Having said that, some do walk away and subconsciously register an alternate opinion only to have them return at a later stage wanting to know a little more because they’ve seen or heard something that didn’t quite gel.

    I must admit I was quite ignorant on a lot of subjects prior to the GFC. Wanting to know why we keep going through this cycle led me down a rabbit hole. For what it’s worth, if people knew the real reason for what goes on behind closed doors (assuming they care to know) – there would be a revolution overnight!

    As I said earlier – history is our greatest teacher – and by ignoring this we open ourselves to repeating it.

  10. “We should be responsible stewards of the environment, but we should not shut down scientific inquiry or Western Civilization itself on the hyperbolic demands of those, who, imprisoned by their own pagan idolatry, refuse to follow the scientific standards they require of everyone else.” David Limbaugh

  11. yes, arguement from authority sucks.

    But can we please not have so many of these posts deteriorate into global warming and peak oil arguements?

    there are other places much better setup for that.

    at least keep them a little shorter, or something.

    my 2c