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STANDING COMMITTEE ON ECONOMICS
23/03/2009
Exposure drafts of the legislation to implement the Carbon Pollution Reduction Scheme

CHAIR —Welcome. Do you have an opening statement?

Ms Lyons —Yes, we do. Firstly, thank you for the invitation to appear before the committee. As an opening statement, I will read an extract from the submission we have prepared. It should provide a reasonable background to Alcoa’s position in relation to the CPRS. Alcoa undertakes several emissions intensive trade exposed activities in Australia through operation of Australia’s largest integrated aluminium business. Alcoa operates bauxite mines, alumina refineries and port infrastructure in Western Australia; aluminium smelters, a rolling mill, power station and port facilities in Victoria; and a rolling mill and Australia’s largest aluminium recycling plant in New South Wales. Alcoa has also focused on a global response to the challenge of climate change for many years. These factors ensure the potential development of an emissions trading scheme in Australia is of great significance to Alcoa. Alcoa has long recognised the importance of responding to climate change, provided it is done in a way that addresses the environmental challenge whilst strengthening the Australian economy and preserving the jobs and social benefits that spring from Australian export industries. Alcoa supports the introduction of emissions trading in Australia. This concept has guided Alcoa Australia’s contribution to the CPRS public debate, including our detailed responses to the Garnaut review process and the government’s CPRS green paper. I will hand over to my colleague Mr McAuliffe now to talk more about the specifics of the CPRS bill.

Mr McAuliffe —In relation to the specifics of the bill, part of the detailed policy design with potential for impact on Alcoa’s Australian operations has been left for inclusion in the subsequent regulations. Consequently, our comments at this time are more of a general nature and arise primarily from review of the CPRS white paper and related documents. Notwithstanding the significant consultation undertaken as part of the CPRS development phase, Alcoa believes there are a number of key changes that need to be made to the CPRS in order for it to be effective in Australia. In particular, these changes are necessary, in our opinion, to ensure EITE industries do not suffer unsustainable international competitiveness reductions that will eventually lead to carbon jobs leakage to low-cost centres in other countries.

In summary, the changes that Alcoa believes are necessary include, firstly, that Australian EITE industries should receive a free permit allocation equivalent to at least 90 per cent of their direct emission obligations. Secondly, the same principle should apply to indirect emission obligations. Alternatively, inequities in the proposed calculation of the electricity allocation factor should be rectified to avoid unsustainable impacts on the Victorian aluminium-smelting industry. Thirdly, erosion of EITE permits should not occur before international competitors are subject to a comparable carbon price.

Alcoa also believes the CPRS should not be viewed in isolation from other parts of the federal government’s climate change response strategy, such as the expanded renewable energy target. In this regard, Alcoa believes it is essential that exemptions from the costly obligations of the expanded renewable energy target should be provided for the most electricity intensive EITE industries. In seeking these changes, Alcoa well recognises there is a need to respond to climate change imperatives and does not shirk this challenge.

The following examples illustrate Alcoa’s willingness to take voluntary action in relation to climate change. Firstly, globally, Alcoa set an ambitious target to reduce its 1990 direct greenhouse gas emissions by 25 per cent by 2010. This target was reached in 2003, and we are now operating at around 36 per cent by the 1990 benchmark. Alcoa’s Australian aluminium smelters have reduced direct greenhouse gas emissions per tonne of product by 61 per cent since 1990. Alcoa’s Australian alumina refineries are amongst the most efficient in the world and have still been able to reduce greenhouse gas emissions per tonne of product by 12 per cent since 1990. Finally, our aluminium rolling businesses have reduced direct emissions by 21 per cent since the 1990 levels. Alcoa Australia appreciates the parliament’s commitment to consultation over all aspects of the CPRS, and we would be happy to provide any additional information if required. Thank you.

CHAIR —Thank you, Mr McAuliffe. I think it was Professor Garnaut who was talking about the aluminium-smelting industry generally, and he said that bauxite is a very bulky material to transport around the world and that smelting companies—particularly since you said that yours is one of the most efficient in the world—would not necessarily look at going elsewhere. So around the world it may, in effect, still be cost effective for aluminium companies to stay where they are.

Mr McAuliffe —That is a pretty broad question.

CHAIR —Yes.

Mr McAuliffe —I will have a go at it in pieces. We mine bauxite here in Western Australia. That then comes down into our refineries, where it is converted to alumina. We export alumina. We do not export bauxite. We also send alumina to our own smelters in Victoria—and, for that matter, some of our smelters world wide as well—where it is converted into aluminium. So it is value added all the way along the process.

There is some export of bauxite from Australia. Some of our competitors export a small amount, I understand. There are some parts of the world that import significant quantities of bauxite. I believe China imports a fair bit of bauxite at the moment from Indonesia. So we export two of our products.

In terms of the efficiency of operating here in Australia, these are very, very long-life assets. I think the replacement value of the assets we have in Australia would be in excess of $20 billion. So they are not something that we would want to undermine, run down or walk away from easily. We have been here for more than 40 years. We want to stay for decades to come. So we will do whatever we can to maintain the competitiveness of the Australian industry.

CHAIR —You also referred to inequities in the legislation we are considering that would need to be redressed if your organisation is to maintain viability. What kind of inequities?

Mr McAuliffe —We referred specifically to the electricity allocation factor that is dealt with in the white paper. The white paper proposes that for indirect emissions for EITE industries, there would be assistance for the CPRS driven price subject in electricity, and there is modelling that has been done to estimate what that impact would be. The white paper proposes that that assistance for smelters would start at 90 per cent, but it would be as if one tonne of CO2 is produced for every megawatt hour of electricity. For the two Victorian smelters that we operate, they purchase power which has a higher emission intensity. Like all Victorians, we rely on coal fired power. So we believe that the best that we would be able to achieve in marketplace is probably in the order of 1.22 tonnes of CO2 per megawatt hour. So if the EITE assistance is based on one but we have to pay based on 1.22, then it is actually a significant cost disadvantage to us—there are tens of millions of dollars in that calculation—simply because we use so much electricity. So the net effect, if it is implemented—

CHAIR —Sorry, Mr McAuliffe. There is a problem with the Hansard recording, I understand. Sorry to interrupt you midstream, but we do need the record.

—That is fine. It is no problem.

Proceedings suspended from 1.15 pm to 1.19 pm

CHAIR —Now, if I can just summarise, Mr McAuliffe, and you can correct me if I am wrong. I was asking about inequities in the current system that you identified. You were talking about how your operations use Victorian brown coal and the calculation used. Rather than the white paper calculation of one to one, yours is more like one to two—is that right?

Mr McAuliffe —First of all, I do not want to give the wrong connotation of the term ‘inequity’. We do not think there has been any attempt to deliberately disadvantage. In fact the people we have interacted with within government, within the agencies that have worked on this, seem quite committed. It is just that the method of calculation, in effect, disadvantages the Victorian smelters, and I will try and explain why.

The white paper proposes that the EITE assistance for the CPRS-driven price uplift in power has a factor in it called the ‘electricity allocation factor’. It assumes that you would be able to purchase power in the marketplace with up to a maximum of one tonne of CO2 per megawatt hour.

However, our experience in the marketplace—and we are going through a process of negotiating contracts now—is that we cannot achieve that. The best that we think we could achieve is probably about 1.22 tonnes, or thereabouts, of CO2 per megawatt hour. The smelters rely on very long-term power contracts—20 to 30 years. They are very capital-intensive facilities. They consume a large amount of sustaining capital just on a year-by-year basis so long-term power contracts are quite important to their survival.

If the EITE assistance, or part of it, is calculated on one tonne of CO2 per megawatt hour—so effectively, you would get 90 per cent times one tonne of CO2 per megawatt hour—but we have to pay at 100 per cent times 1.22 tonnes of CO2 per megawatt hour, there are potentially tens of millions of dollars of disadvantage in that. In simple terms, it probably takes the starting point of 90 per cent down to 74 per cent. It is not intended. We believe it is basically a result of us not being able to achieve in the marketplace what the modellings predicted. Given the amount of impact that could have on the smelters it is a very, very significant issue to us.

Senator CAMERON —Mr McAuliffe, this is a very complex issue and I am not sure whether I have got my head round exactly what you are saying. This has got to do with your contractual negotiations and the outcome of those contractual negotiations. You are basically saying that you should get permits based on the electricity prices you pay?

Mr McAuliffe —What we are saying is that the intent of the white paper is to provide a starting point assistance of 90 per cent for the indirect burden—basically, the indirect carbon burden. But the method of calculation and the modelling that has been done does not actually deliver that intent. Because aluminium smelters use such large amounts of electricity, what appears to be a relatively small change in the factors can have a very large impact.

Senator CAMERON —That also assumes that all of the costs have been allocated back to you, doesn’t it?

Mr McAuliffe —That is correct. That is a very good point. That assumes that the contracts that we would strike would have full carbon cost pass-through in them.

Senator CAMERON —How can the government determine whether you are the weaker negotiating party?

Mr McAuliffe —That is something that we have discussed with the department on several occasions, and it is a very valid question. We believe that the solution to this is probably to extend an existing provision in the white paper. The white paper has a thing in it called the ‘very large electricity user’ clause. What it says is that if you have an existing contract that has full carbon cost pass-through and the regulator determines that you have no option other than to pay more than that carbon load of 1.0, then the regulator can choose to vary the electricity allocation factor.

We believe the most straightforward solution to the problem that I have outlined is to allow that very large-user clause to extend to new contracts. Our contention would be that that obviously needs to be quite transparent in some way and we would have to demonstrate that, or in this case the electricity-intensive, trade-exposed company would have to be able to demonstrate that they could not reasonably achieve a contract that had a lower carbon pass-through. Having said that, we have tried very, very hard to reduce the carbon intensity of the power that we rely on all around the world, including in Victoria, and if we can reasonably get an electricity supply at that magnitude with a lower carbon footprint we will certainly seek to do it.

Senator CAMERON —So you are saying the government would have to basically take your word that you could not achieve?

Mr McAuliffe —No, sir. I believe it would be relatively straightforward to get third-party verification of that. There are independent specialists who are very familiar with the power situation in Australia and in every state. We have some work being done now by consultants independent of us testing what we are saying.

Senator CAMERON —If you are asking for a government subsidy, basically, government support, why would you need an independent third party? Why would the contract not be available to the government?

Mr McAuliffe —Some contracts can be available. But the point that I thought I heard you make—and it is something that the department has said to us—is that they are not at the negotiating table. They are not party to that—

Senator CAMERON —That is correct; we cannot negotiate for you. But what I am saying is that after you have negotiated, and you are saying we have got full pass-through, would not the easiest demonstration of that be to put your contract on the table?

Mr McAuliffe —Yes, I think it would be and I think that would be a reasonable request. That would be a key part of it, but government would have to have some confidence that the contract was negotiated in good faith as well.

Senator CAMERON —Have you calculated what the costs to government would be to accept this proposal?

Mr McAuliffe —I do not know what the costs to government would be. I can tell you what the costs would be to Alcoa, to Victorian operations, if it was not resolved. It would be in excess of $40 million in year 1.

Senator CAMERON —What are your profits in a year in that operation?

Mr McAuliffe —That is not something we publicly disclose.

Senator CAMERON —You want us to give you $40 million of public money but you are not prepared to divulge your profits? It is a bit like the debate in the US at the moment, is it not?

Mr McAuliffe —Senator—

Senator CAMERON —Just listen. If you want access to public support from public money, my view is there must be absolute transparency, and that transparency goes to your profitability when you are asking for government money. Why would that not be the case?

Mr McAuliffe —I understand what you are saying, Senator, but what I am asking is to take $40 million less. That money would come from Alcoa. In the example I have given you, if the electricity allocation factor was based on what we actually experienced, for that component, I think it would cost Alcoa something like $26 million in the first year, for that indirect burden. Without the electricity allocation factor resolved, Alcoa would pay an additional $40-odd million. That is what I am saying. Alcoa would still have a very significant contribution and a very significant financial incentive.

Senator CAMERON —Of course. You are saying that is a financial incentive for abatement. Is that what you are saying?

Mr McAuliffe —That is right, and therefore also a significant contribution financially to the scheme.

Senator CAMERON —Why should the public provide support to any company that is not prepared to divulge publicly its profits, especially a company that is dependent on Australian resources, Australian power? That seems bizarre to me.

Mr McAuliffe —Largely because of the intent, Senator. I think what you are really questioning, or what I am hearing you question, is some of the fundamentals of an EITE assistance program. The white paper’s intent is that there would be a starting point of 90 per cent assistance.

Senator CAMERON —I am questioning why the public should provide support to Alcoa when Alcoa is not prepared to divulge in an open way its profitability.

Mr McAuliffe —Alcoa divulges an enormous amount of information, including all of our emissions, direct and indirect, including an enormous amount of sustainability data. There are various pieces of commercial data which are not in our shareholders’ or, for that matter, our employees’ interests to divulge, given the competition in the marketplace. The fundamental provision here of why an EITE assistance program is included is because government and society have decided that the benefits that get delivered from those types of companies are significant and that they are significantly exposed to international competitiveness risks. That is the fundamental. What we are saying is, ‘Please develop and implement the scheme in a way that delivers on the intent.’ That is all we are saying. That calculation in the white paper does not deliver on the intent.

Senator CAMERON —You are saying the contracts with the ALP government—and it could mean a bigger subsidy of support and more permits issued to you by government—

Mr McAuliffe —No. In my opinion it would mean that the permits that would be delivered would be consistent with the intent rather than taking an additional $40 million worth through a calculation.

Senator CAMERON —If it costs the government more to support Alcoa along these lines, where do you propose government finds that money?

Mr McAuliffe —I will go back to what I said before. What I am asking is that government take or require of Alcoa funds equivalent to the intent. I am not saying give more; I am saying take less. Do not take $40 million that was never intended to be taken. I do not believe, and nor does Alcoa believe, that it necessarily follows that the EITE assistance program places a greater burden on some other part of society. A lot of this is around the aggressiveness of the scheme, the timing of the implementation, things like erosions et cetera. So I do not think they are mutually exclusive.

Senator CAMERON —As I understand, it was a fixed amount in terms of the income from the scheme. If there is more money to go to business, it would have to come either from other businesses in the scheme or from the support that is being given to households.

Mr McAuliffe —I do not think the whole purpose of the scheme is for revenue, Senator. I do not think that should be the starting point. I think the starting point should be around—and I believe it is—responding to the environmental challenge but doing it in a way which does not pose a significant risk on any part of the economy.

Senator CAMERON —There are plenty of arguments out there that this is a very modest start. You were saying earlier it was aggressive, weren’t you?

Mr McAuliffe —In terms of the white paper, if the white paper is applied literally, then, yes, it would be a very aggressive scheme on our company, and that is really all I can speak to.

CHAIR —Senator Eggleston.

Senator EGGLESTON —We are talking about an emissions trading scheme, but there are alternative schemes like carbon maps and so on. Would that be a system that might work better for you?

Mr McAuliffe —I think there are a lot of options that might work. Alcoa’s view, as I guess we tried to convey in our opening statement, is we believe that Australia has a role to play in this. In relation to the CPRS, we think it is primarily a matter of some modifications to make it work for our industry. Now, I am sure there are other alternative designs that could work equally as well.

Senator EGGLESTON —You are quite happy with the scheme provided there are some changes made in key areas that affect revenue?

Mr McAuliffe —Yes, that affect the sustainability of our business basically, yes.

Senator EGGLESTON —One of the other objectives is renewable energy and the use thereof in that it retains 20 per cent. Do you think that is a realistic target in the Australian corporate?

Mr McAuliffe —We think it is a fantastic thing. We see renewable energy as playing a very, very important role. It is very difficult for us in the case of our Victorian smelters because we use such a large amount of electricity and we do not have, at this point in time, cost-competitive renewable options in there. We do some things. We have assisted through providing some of our infrastructure for access to the grid for the Portland wind farm and so on, but we use very large amounts of electricity. If we were required to pay a very significant premium for 20 per cent of that power, that would be a very large cost impact. Government has recognised that. The COAG discussion paper that came out on the expanded RET, the last one that dealt with RET-affected trade-exposed industries, recognised that the potential financial impact on the aluminium smelting industry was of an order of magnitude higher than others just by that electricity intensity. We are encouraging government and all parliamentarians to recognise that that particular industry is terribly exposed potentially.

Senator EGGLESTON —It is described by some people as solid electricity.

Mr McAuliffe —Yes.

Senator EGGLESTON —If we are talking about the difficulties in Australia, there are very few real options for renewable energy in Australia. We do not have mountains and hydro. We do have the sun, but the technology there is not really for the green gross flow of electricity. Wind is a very minor supplier. It is a reasonable option, I would have thought, to be caused to consider in the Australian context.

Mr McAuliffe —You have had people appear before you today who know that history a hell of a better than I do, senators.

Senator EGGLESTON —But you are involved in it.

Mr McAuliffe —Yes, we are. We think renewables can play a real role. We would love to be able to take competitive renewable energy in all of our operations, but particularly in Victoria, because of our circumstances, we are terribly limited.

Senator EGGLESTON —Of course, everybody would, but the options for Australia are fairly limited in fact. There is a suggestion that some industries may find that the cost of the emissions trading scheme is so high that they might reconsider their position in Australia and go elsewhere. Do you see that as a reasonable consideration for your industry?

Mr McAuliffe —Depending on matters of detail, it is a real risk. There is a pretty big discussion on that. First of all, I tried to describe earlier that Alcoa makes commitments with countries for very long terms. We have a very, very significant asset base here. We are very proud of what we are able to deliver in local communities. Most of our jobs are in regional centres. Areas like Portland, for example, rely very, very heavily on us being part of the community, and so do some of the communities in the south-west here. That is important to us. We will try very, very hard to keep those facilities and keep them running sustainably. Our managing director is fond of saying that he wants his grandkids to be able to work in the smelters in Victoria, for example. It is not something we would voluntarily do, and I do not know that it is a very conscious decision either. If we collectively did get this wrong and had facilities such as ours becoming unsustainable, what would happen is that their competitiveness gradually decreases. The first effect that you would probably see is that they would just stop investing capital and effectively start to run them down. I have heard one person in business say they would never knowingly invest in a fourth quartile facility, for example. So it is not so much a conscious thing, but an outcome of a series of events that just drive you—

Senator CAMERON —On this point, if we do not know your profits, how can government make a judgment on this?

Mr McAuliffe —You are going to have an enormous amount of information just through this process. You know what our revenue is. You can pretty much work out what a whole lot of our costs are. There is a large amount of information in the public domain.

Senator EGGLESTON —I find it quite disturbing to think that industries like the aluminium smelting industry might have to shift.

Senator CAMERON —Give us a break.

Senator EGGLESTON —Given Australia’s emissions are only 1.4 per cent of the world’s emissions, I question whether what is happening is really justifiable.

Senator CAMERON —Was that a question or a statement?

Senator EGGLESTON —We have a wide variety of industries which need to remain competitive and my question, if you want me to ask a question, is: do you agree that this scheme raising, as it will, the cost of electricity may threaten the viability of a number of industries, not just your own?

Mr McAuliffe —All I can safely say is that we think there is an opportunity to get it right. We believe there is a strong need to respond to climate change. We are advocates for that throughout many parts of the world. In this instance, we believe that there are a few fundamental changes that need to be made for it to be a sustainable policy option.

Senator FURNER —The ratification of the Kyoto protocol put in place a requirement on the reduction of national emissions in accordance with a cap. What role do you think the resources sector should play in Australian emissions?

Mr McAuliffe —I can only really talk about our company and maybe our industry. I listed, in our introductory remarks, some of the targets we have set ourselves and some of the improvements we have made. We are driven by two things. Firstly, energy is a very significant part of our cost input, so we would not be doing the right thing by shareholders if we did not try and reduce those costs. We are also driven by some voluntary targets that we have set ourselves to reduce greenhouse gas emissions because we believe that is important. I would expect that it is reasonable to ask any responsible resource company to operate as efficiently as it can and to reduce its environmental footprint where it can.

Senator FURNER —Lastly, on this issue about carbon leakage, last year you indicated before the Select Committee on Fuel and Energy that for a whole lot of reasons Alcoa would never want to close its Australian facilities and reconstruct them elsewhere. What has changed since you made that statement?

Mr McAuliffe —Nothing. I hope I said something a moment ago that was consistent with that—that is, we will work very, very hard to keep our Australian facilities viable. We make very long term investments here. We are proud of what we do. We are proud of the benefits that we deliver to local communities. We will try very hard to keep those facilities viable.

Senator BUSHBY —Following up on the questions that Senator Cameron was asking, would you consider there is a difference between trying to negotiate through the impact that a government decision will have on your industry and, in the context of that, the extent to which you will be impacted, compared to a government, such as the example Senator Cameron used in the US, looking to provide support to a company that, for reasons outside decisions of government, were actually facing difficulties?

Mr McAuliffe —Sorry, Senator; I do not think I understand.

Senator BUSHBY —Senator Cameron was using the example of, in the US, the responsibility of companies that are receiving taxpayer handouts to actually come clean. In Australia, we are looking at a situation where a government policy decision is having an impact.

Mr McAuliffe —The issue I have on that point is there are matters of commercial reality which it is not in our shareholders’ or employees’ interests to reveal to the marketplace. In this instance, as I have tried to point out, what we are asking is that the government policy is structured in such a way that it poses a sustainable cost burden on us. I do not see that we are asking for handouts.

Senator BUSHBY —That is the answer that I expected you to give. There have been evidence before this committee and other commentary that the many business interests making submissions along the lines you have made today are basically rent seeking, looking for handouts. This is seen as an opportunity to get a few free dollars. How real are the threats that this scheme, as currently structured, poses to your industry?

Mr McAuliffe —If you are talking about a policy that imposes tens of millions of dollars of costs that competitors do not bear then clearly it is a business risk. Alcoa’s position on this and the sorts of things we have outlined today recognises that we need to respond to it. We also recognise that we need to have a financial incentive. Even if the changes are made that we have asked for, we would still have a financial incentive in the tens of millions of dollars in year one. So I do not think we are rent seeking at all. I think we are trying to find a balance here that recognises that industry needs to play a significant role. We believe that can be done through voluntary measures, such as the ones that we have done, and through some financial incentives from government policy. It is a matter of how hard those financial incentives bite, whether or not they increase and, most importantly, whether they remain within tolerable limits until our competitors also bear a cost. That is really what it is all about.

Senator BUSHBY —How is the price of aluminium and the products that you make actually set?

Mr McAuliffe —It is all set by the London Metal Exchange.

Senator BUSHBY —You are price takers; you do not have anything to pass on.

Mr McAuliffe —We are completely price takers. As I am sure you know, the price of commodities has plummeted in recent times as well.

Senator BUSHBY —What impact would the implementation of the CPRS, as it currently stands, have on the existing plant and future investment in it?

Mr McAuliffe —It is an important issue. The investments that we make are investments for decades. We typically model growth projects over a 20- to 25-year timeframe. We have had a couple of expansions that we see as attractive in Australia such as the expansion of the Wagerup unit 3 project. We have also spoken to governments and the public about the potential expansion of Portland, and we expanded Pinjarra recently. We model the cost implications of those projects for 25 years, so we have to predict things such as how a policy will change over that period, and some of the impacts can be brought forward. The shape of the curve, in terms of costs, from a CPRS, emissions trading or whatever type of scheme we have can be brought forward, so there is a need for them to not ramp up significantly until our competitors are experiencing something similar.

Senator BUSHBY —Finally, we had a witness appear before us in Canberra last week. He is a proponent of more expensive energy to reduce carbon, and he actually uses the aluminium industry as an example. On Four Corners on 9 March he made extensive statements about that. His view, in summary, is that it is probably a good thing that the aluminium industry moves offshore because it will go into countries where it will actually foster development in those countries and also where the electricity used to run them is primarily coming from more emissions friendly sources of power. This is just one commentator, although there are commentators who have said similar things, and I am not saying it is the government’s position at all. How do you view the fact that there are people out there who are actually advocating for the aluminium industry to leave and saying that this is one way to actually make it happen?

Mr McAuliffe —I do not think there would be many of, say, our pot room workers in Geelong who would agree with that. Their jobs are very important to them. They are very important to the company as well, clearly. They are quite well-paying jobs. They are important in regional communities. I think that there would be a number of rural communities in Australia who would see it as a very bad outcome for them if that were to happen.

Senator BUSHBY —Thank you. I will leave it at that.

Senator PRATT —I would like to return to the topic of discussion that you had with Senator Cameron in relation to the transparency required in exchange for, I suppose, a greater level of offset. On one hand you seem to have argued that the offset needs to be changed simply based on the government’s misjudgement of the higher electricity price and that the rest of the information needs to be judged from what is in the information that is in the public domain. It is a big onus on government to do that without getting greater information from the company, particularly when you look at the issue of the exchange rate, which might actually benefit Alcoa’s bottom line in relation to judging those issues. How is the government supposed to make realistic decisions about these issues?

Mr McAuliffe —If you look at the information that is currently being sought through the EITE guidance paper, there is an enormous amount of information that will be provided there. It has third-party verification requirements in it as well, but it is also down to a level of detail that I think reduces the potential for any industry to gain in the system. There is review and auditor sign-off of things like revenue. There are significant exclusions from it as well that reduce that ability. And of course there is considerable verification of emissions data. So I think the system, as proposed, has some very, very significant checks and balances already in it.

The issue of the electricity allocation factor is a very specific one. That is why I offered up what we think is a solution that can give government confidence that we are not asking for something that we should not reasonably expect, I guess, or that is not consistent with the intent. I see it quite differently.

Senator PRATT —Clearly there are those that are arguing that, in the face of the current economic downturn, we should be deferring action. There are also those that have argued that, in order to come out of the recession and provide certainty in relation to future investments, we need to be certain about what our framework is because otherwise that uncertainty in regards to what kind of change measures we need might undermine people making investment decisions. Which side of that debate do you sit on?

Mr McAuliffe —It is a little bit related to the question that Senator Bushby asked. For investments, we would much prefer to have a clear view of the next decades in relation to the costs of this sort of policy. So, yes, we would like to see the detail resolved sooner rather than later. We have tried to convey to you today that there are aspects of that detail that can actually have significant impact. Our view is it is not just a matter of clarifying but it is also a matter of getting them right.

Senator PRATT —I know government wants to be able to provide industry that kind of certainty. How do you think government is supposed to balance up the problem of the need for deep enough cuts to actually make a difference on the issue of climate change when you look at the extreme nature of the climate change events we might be facing?

Mr McAuliffe —That is the biggest challenge in this whole debate, is it not? We firmly agree that there is action required. That is why we have done the things that we have done as well. That is why we are a supporter of having a comprehensive climate change policy, including a financial incentive. So we do not disagree that there is a need to act. What we are asking is that that action happens in a way that is economically sustainable for industries like ours, and I guess that is part of the challenge of government.

Senator PRATT —It sure is. Thank you.

Senator FISHER —I have two questions, if I may. The first is on the emissions trading scheme. Mr McAuliffe, you have indicated that Alcoa supports the emissions trading scheme, but Alcoa has some problems with it. If those problems were rectified as Alcoa would have it, would the emissions trading scheme still be an emissions trading scheme and, if so, what would it actually achieve?

Mr McAuliffe —Yes, it would be the scheme. It still would have a very significant financial incentive for companies like ours to reduce our carbon footprint. That would be coupled with our own desires to reduce it, and some of the companion type policies as well. We believe there would still be an effective scheme but it would be one—

Senator FISHER —So it would be a scheme, what, trading in emissions?

Mr McAuliffe —Yes.

Senator FISHER —And achieving what?

Mr McAuliffe —For example, I mentioned the 90 per cent starting point for the various elements of our industry. That is not all elements of our industry; it would be the emission-intensive trade-exposed component. We have never argued for EITE status for our mining operations, for example, so they have a carbon footprint. The other 10 per cent would still be a very significant financial incentive for us as well. So, yes, there would still be a scheme. It would be less aggressive.

Senator FISHER —Then my second question coming off the back of that is: what is, and should be, in Alcoa’s view, the aim of the emissions trading scheme as the subject of the draft legislation before parliament? What is, and should be, its aim, and how does the legislation currently being considered by parliament contain safeguards to ensure that the emissions trading scheme is not simply a scheme trading in emissions, is not simply a scheme trading in pollution, and is in fact a scheme that will achieve a higher level objective—and what is that objective, if it exists?

Mr McAuliffe —I guess we tried to convey that in the part of the opening statement that Ms Lyons read where we are talking about something that responds to the challenge of climate change. That is an imperative; it is a very, very important one. But this is also a very significant piece of economic policy, and so it should also have an aim, in our view, to strengthen the economy and to preserve the sorts of economic and social benefits that exporting industries deliver to the country. That is far easier said than done, obviously, and there has been a lot of work to try and achieve that, but that is what we believe we should be aiming to do—find that sort of balance.

Senator FISHER —It should it have those aims but, as currently drafted, does it have those aims?

Mr McAuliffe —I think it is a genuine attempt to achieve that, in all honesty. The fact that there is an EITE provision in there recognises that the proponents of the scheme see that as a risk. What we are talking about is that some of the detail of that needs to be modified, in our view, for that aim to be achieved.

Senator FISHER —If Alcoa does not get its ‘druthers’ will Alcoa still publicly voice support for the emissions trading scheme?

Mr McAuliffe —I think Alcoa will probably continue to try and voice what I have attempted to voice today, and that is that we support a scheme that delivers that balance.

Senator FISHER —Yes or no, Mr McAuliffe?

CHAIR —Senator Fisher, I do not think you can dictate the answer.

Senator FISHER —Thank you. Thank you, Chair.

CHAIR —I think Senator Cameron has indicated he has one question on notice, and then we will conclude.

Senator CAMERON —Mr McAuliffe, I am trying to get from my mind the impact of tens of millions of dollars on Alcoa, and whether that tens of millions of dollars is sufficient for you to close your operations down within Australia, as was postulated by Senator Eggleston. I am really trying to get to grips with what your annual revenues within Australia are.

Mr McAuliffe —It is not up for me to disclose this, so I am happy to take it on notice or speak to the managing director of the company. It is appropriate for him and the board to decide what information in that sense is put before the committee.

Senator CAMERON —Could you then provide any relevant economic analysis in relation to the effect of those tens of millions? You have not really—

Mr McAuliffe —Yes, I could—certainly.

Senator CAMERON —in relation to the company. I went on to the Alcoa website and the top five American executives of Alcoa earn $US64 million. That is just five executives. So I am just trying to get the context of what this means.

CHAIR —Thank you.

Mr McAuliffe —I will add this: tens of millions of dollars, particularly to the Victorian smelters, is a very, very significant impact on them.

Senator CAMERON —That is what I am trying to understand.

CHAIR —Thank you. And thank you, Mr McAuliffe and Ms Lyons, for coming in this afternoon.

Mr McAuliffe —You are very welcome. Thank you.

Committee adjourned at 1.57 pm