Energy costs continue to dog industry

Bookmark and Share Economics & Deregulation, Energy and Climate Change | Alan Moran
The Australian 25th September, 2013

Mysteriously, once the election was over, an OECD report with a Treasury official's input emerged indicating the carbon tax would need to be 10 times the EU rate and twice the $38-per-tonne level posited by Treasury to allow Australia to meet its 5 per cent carbon reduction goal.

Less mysteriously, the new government has abolished the ALP-friendly Climate Commission and started to dismantle the Bernie Fraser-headed Climate Change Authority and the Clean Energy Finance Corporation with its $2 billion a year in subsidies.

The OECD report indicates that unless the developing world also implemented a carbon tax, Australia would see considerable de-industrialisation, moderated only by a retreat into an illegal protectionist regime. And the competitive pressures would further intensify if, as appears likely, Japan, the US and other OECD countries also reject a carbon tax.

This is contrary to the official Treasury line that we need a price on carbon now, that the longer we wait the more painful the transition and that the costs will be trivial. Treasury secretary Martin Parkinson would have known of the report's findings months ago.

A different dimension is offered by Environment Minister Greg Hunt, who maintains that it will be easier than he thought for Australia to meet its carbon reduction goals because we are seeing lower demand for electricity. Last year, electricity supply from generating plants (other than subsidised small-scale supplies, mainly rooftop photovoltaics) was down 1.5 per cent, and is now about the levels of 2009. But this lower demand is a result of penalties on carbon emissions.

The carbon tax alone raises wholesale electricity cost by about two-thirds, increasing final household customer cost by about 15 per cent. The demand response (elasticity) to a price increase is about 0.3 so the price rise from the carbon tax means a direct demand reduction of 5 per cent at the household level.

The price-induced reduction in demand from energy-using firms is greater. Smelters and other high-energy-using production migrated to Australia after the 1970s oil shocks made these activities prohibitively expensive in Japan. The electricity industry reforms and privatisations 20 years ago further enhanced Australia's relatively low-cost structure. But risks of carbon taxes and the progressive tightening of the renewable requirements noose have gradually reversed the competitive edge Australia once enjoyed.

The carbon tax was a factor in Ford's decision to close, but the sharpest effect is on industries where energy looms large as an input cost. Energy comprises over 30 per cent of aluminium smelting's costs, and the industry uses 13 per cent of electricity production. Energy taxes are causing the industry to pull out of Australia. Kurri Kurri in NSW was closed last year, while owners of two of five remaining smelters have announced production cuts and the commercial viability of a third one is under review.

In this respect, even if the carbon tax legislation is repealed, the subsidies to wind and photovoltaics remain through the 20 per cent Renewable Energy Target.

Aside from undermining the commerciality of lower-cost fossil fuel-based generators, by 2019 these subsidies will raise the average wholesale cost of electricity by 40 per cent. Although less onerous than the carbon tax, the RET still undermines Australia's competitiveness in energy-intensive industries where our energy resources should make us world leaders.

If the carbon tax is repealed, Australia may well be jettisoning the insanity of going it alone with an extremely high impost in a world where few nations have any such measure. But we still have the very costly RET and other subsidies to uncommercial power sources. These and seven years of regulatory threats to the power industry have damaged our competitiveness and brought incalculable costs in terms of lowering business confidence.

Australia needs to reverse these threats to tap into the higher productivity that our energy assets provide.

Josh Frydenberg has special responsibilities reporting to the Prime Minister on regulatory reform and has outlined a skeletal deregulatory framework, based on rigorous review and incentives to bureaucrats. This is designed to bring about lower costs, including energy costs, and higher productivity. If successful this would boost electricity demand and reverse the decline following from regulatory-boosted prices.

Irrespective of its success, it is pointless and needlessly costly for Australia to meet emission reduction standards by watching production shift offshore.