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Emissions trading and reducing carbon pollution

CHAIR —Welcome. Thank you for taking the time to appear here. I invite you to make an opening statement.

Ms Bain —We thank you for your time in listening to us. We think it would be a good idea to talk in our opening statement about the journey we have been on up until today. It is not just the emissions trading scheme that has concentrated efforts on CO2 reduction in the cement industry. In fact, those efforts have been going on since 1989, with some pretty decent results being achieved: since 1990, per tonne of product, we have seen a reduction of 25 per cent of CO2. For your information, in today’s terms, a tonne of cement in Australia averages about 0.8 of a tonne of CO2.

The reason for that reduction is primarily through large technological change. The companies have taken their cement plants from wet technology, which requires water to heat limestone in the kiln; of course, with that process, you have to drive the water off as well, which requires much more energy. With today’s technology, 80 per cent of Australia’s clinker is made by dry technology, which is significantly more energy efficient. The other reason for that 25 per cent reduction per tonne is that there has been an increase in supplementary cementious materials—in other words, the increase of slag and fly ash to clinker.

One of the other areas that always attract interest is the use of alternate fuels within the cement making process. Most of the kilns are fired by goods or coal. In some cases, you can use waste or waste streams as, say, fuel to fire the kiln. In the CO2 context, you would want to see those fuels being a biomass. Currently in Australia we use waste tyres, waste oil, tallow, waste timber from landfill sites and carbon dust from aluminium smelters. There is one other that just does not come to the top of my head.

Mr Leon —Wood waste.

Ms Bain —Wood waste; that is right. About seven per cent of fuel substitution comes from alternate fuels. In terms of efficiency gains for fuel, we have seen a 35 per cent reduction in fuel use since 1990; we have also seen a 12 per cent reduction of electricity since that time. So that is the journey by which we come to you today. We are not newcomers to CO2 reduction and energy efficiency. In fact, we are quite proven players within this sphere. I might hand over to my colleague Mr Leon.

Mr Leon —As well as being Chairman of the Cement Industry Federation, I have another life, which is CEO and Managing Director of Cement Australia. Cement Australia produces about half of Australia’s cement.

Senator BOSWELL —What additional costs will Australian cement manufacturers face under the government’s climate policies, including both the ETS and the OET?

Ms Bain —Are you asking that question in terms of the context of the CPRS or the white paper, as it is today?

Senator BOSWELL —As faced on a given date, after this legislation goes through the Senate.

Ms Bain —I just have a point of clarification. The government said that the cement industry is deemed to be emissions-intensive trade exposed; therefore, it would be eligible for a 90 per cent permit allocation. The department and the industry are negotiating at the moment and still have not come to an agreement as to what constitutes the activity of cement making. What the department have put to us and the cost, therefore—to answer your question—is that, in 2010, if the permit price were $25 per tonne, it would be an additional $31.1 million; and, if the permit price were $40 per tonne, it would be $49.7 million. In 2010, the additional cost of the RET would be $2.7 million; and, out to 2020, it would be $16.2 million.

Senator BOSWELL —Would you repeat that figure? It would be $31 million for the ETS. How much would it be for the RET?

Ms Bain —It would be $2.7 million in 2010.

Senator BOSWELL —I could embellish on that, but let me go to the hub of this. To clear up the government’s repeated questions on certainty, is there any certainty regarding the actions of the Australian cement industry with regard to imports, investments and jobs, if the government’s climate policies are allowed to pass through the Senate?

Mr Leon —I do not think there is any doubt at all of what the impact would be. Fundamentally, cement plants have a life; that is just a reality. The life of a cement plant relates to the resource, which is where the limestone comes from; to energy security for the plant; to the technology that is employed on the plant; and to things like the market. So I think it is absolutely clear that, if you have the sort of impost that we are talking about, which effectively is a 30 per cent increase in taxation on the businesses levied at an individual plant level, it will simply shorten the life of those plants. I am absolutely sure that we will see plants progressively shutting down prematurely in Australia.

However, with the CPRS, one of the things that I find particularly difficult to accept is that we have been planning to put a new ‘world’s best technology’ kiln into Gladstone and it is absolutely clear that that investment would not happen. So the prognosis for the industry, frankly, is that this impost—do not forget that impost increases at a couple of millions of dollars a year in terms of cost—will just see the kilns in Australia progressively shut down and no new investment made in Australia. It is absolutely clear to us that the industry will be moved progressively offshore with there being the resultant loss of jobs, which I think is most unfortunate.

Senator BOSWELL —What capacity do you have at the moment to import cement?

Ms Bain —Last year, 20 per cent of the demand was made up by imported cement, and that was pre the financial crisis. The capacity to import cement into Australia is already here; you need a silo, a port and a market to sell it to.

Mr Leon —It needs to be said also that the base 80 per cent that is produced in Australia is largely transported by sea. You really cannot look at the 20 per cent number; you need to understand that most of the 80 per cent is transported by sea anyway. Instead of the ships coming from Devonport, where we load our product from Railton, the ships quite easily can come from Indonesia, Taiwan or wherever. Our product from Railton essentially goes into Newcastle, Glebe and Melbourne; absolutely all of those ports could accept cement from overseas just as easily as they accept cement from Devonport.

Senator FEENEY —Are you suggesting that imports have declined since the GFC and that domestic production will have increased its market share?

Mr Leon —Clearly, in the current climate, the consumption of cement in Australia is dropping dramatically. It is true that the effective market share of locally produced cement will go up. That is not because we are doing anything good but just that we are responding appropriately to the downturn; that is all.

Senator FURNER —Can I just jump in on this line of questioning?

Senator BOSWELL —I do not mind yielding to you, as long as the chairman remembers and I get the time back—which does not often happen.

CHAIR —You have no confidence in me, Bos.

Senator FURNER —Senator Macdonald and I appeared in the fuel and energy inquiry in Gladstone. We heard evidence there from Cement Australia that they rely upon imports as a result of lack of supply. Therefore, I think it is proper to draw the conclusion that it is not the case that the introduction of the CPRS will add to imported cement products; the reality is that the industry relies upon them already because of the inability of supply.

Mr Leon —I am happy to respond to that. The cement industry is very capital intensive and you cannot establish a kiln with zero capacity on day one; it would just be economically absurd. What tends to happen in the industry is that, as demand grows, you effectively absorb the increased demand through imports, as a way of bridging between one investment and the next. We had been aggressively building our business in Australia in anticipation of spending about $1 billion on a third kiln in Gladstone. All I am reflecting on is that that opportunity is now off the table because, under the CPRS, we simply would not do it.

Senator CAMERON —But wasn’t that decision made because of implications of the global financial crisis?

Mr Leon —No. Building a kiln is a 30-year plan and we would be looking out at those 30 years. Certainly the global financial crisis has had a big impact on the business and, in the short-term, it will significantly curtail our ability to access capital. But we believe that, in the long run, without a CPRS, our business is good, strong and viable, and we believe that we would be able to make that investment without a CPRS.

Senator CAMERON —But you say that decision was based solely on the CPRS and not on the global financial crisis.

Mr Leon —Absolutely.

Senator BOSWELL —Has the government provided you with any form of assessment of constraints, which may or may not be imposed on counterpart cement manufacturing industries, that would support an immediate decay in the level of trade assistance?

Ms Bain —No, they have not. Nothing has been supplied to us on that. There are two main issues for cement. One is the permit allocation. With the permit allocation, the white paper actually reads ‘clinker cement’. We were told that it was written that way because it read better and people would understand what they meant—that they really meant ‘clinker’ and not ‘cement’. It is all very confusing. So there are two issues. The 90 per cent permit allocation is not over cement. The department is proposing that it go over clinker, so the permit allocation reduces down to 83 per cent. So the first issue is that it is not 90 per cent and we are too exposed.

The second issue is the decay of the permit allocation over time. You might say that, in 2010, as I stated before, under what is proposed, there is $31.1 million of additional cost to the industry. If you then add the 1.3 per cent decay factor over time, that comes to $78,352,000. Therefore, in 2010, things look fairly grim; in 2020, they look very grim. They really are the two core issues at the heart of the CPRS for EITEs for cement. Those figures are fact.

Senator BOSWELL —Some would say that you have been pretty lucky because you did better than the mining industry with the EITE proposals. Are you comfortable with the Senate passing the government’s draft CPRS legislation that refers the details of the EITE proposals to regulations?

Ms Bain —Are we comfortable?

Senator BOSWELL —Yes.

Mr Leon —No.

Ms Bain —No.

Senator FEENEY —If you were comfortable, you probably would not be here.

Mr Leon —That is right.

Senator BOSWELL —Could you expand on that? I understand—I have not looked at it and I should have—that the legislation is four pages long.

Mr Leon —The legislation on the EITE?

Senator BOSWELL —Yes, that is four pages long.

Ms Bain —We are not comfortable. You are quite right: the legislation, as it stands, does not have the EITE regulation that sits beside it. It is very difficult for us to form a judgement when we cannot see it. Ideally, it would be much better to have the EITE in the legislation as you are debating it in the parliament so that everybody can see quite clearly what the government proposes for what particular industries and how those industries will be dealt with. Is the industry comfortable in looking at a future where, over time, there would be a readjustment of its plants, including its new plants—this industry has invested in itself extraordinarily well and has kept up with the newest technology globally—where those plants would be replaced by imported clinker, which has a higher CO2 content than this country produces it at, for the sake of climate change? So on two counts, economically, the industry is not happy. Environmentally, we are very unhappy. If this is about climate change, let us really seriously think about it. In this country we produce a tonne of cement at 0.8 of a tonne of CO2. Only one country is better than us and that is Japan. But, by the time you take the CO2 content and the transport of the product over to this country, it is higher than 0.8 of a tonne of CO2.

Senator CAMERON —What are the global emissions of CO2 from this industry in Australia?

Ms Bain —The emissions for cement globally are around five to six per cent.

Senator CAMERON —In Australia.

Mr Farlow —We account for 7.2 million tonnes of CO2 in Australia.

Ms Bain —I am sorry; I cannot remember that off the top of my head.

Senator CAMERON —Please take that on notice.

Ms Bain —Yes.

Senator BOSWELL —This is a question that Senator Doug Cameron should be asking, but I will ask it on behalf of the workers.

Senator CAMERON —I am sure that I can ask my own questions, Senator Boswell.

Senator BOSWELL —But you are not. I always like to get a picture of things in my mind. I have been to Gladstone often. If this legislation goes through, what will it do as far as the cement industry in Gladstone is concerned? Are you going to continue with the new kiln that you have proposed, or will that go on the back-burner? Will you shut down the original kiln that is working now? How many people work in that facility and are they aware that their jobs are on the line?

Mr Leon —First of all, Gladstone is the biggest and probably the most efficient plant in Australia. So, in terms of the kind of scenario that I have been painting, it probably would be the last one to shut down. I think the prospect that we find ourselves with at the moment is that, firstly, under the CPRS as currently designed, the new kiln there will absolutely not happen. All of our numbers say it does not make economic sense at all.

Senator CAMERON —Did you say that the existing kiln will be maintained?

Mr Leon —I like to talk about these things in terms of ‘the life’. The life of every kiln in Australia will be shortened by the CPRS. All I am reflecting on is that the most robust kiln and the last one to be affected in such a way obviously will be the most efficient and the biggest; all I am saying is that is Gladstone.

Senator CAMERON —What is its lifespan?

Mr Leon —Frankly, I do not know. It depends on a whole range of different things and we will see at what point it becomes uneconomic.

CHAIR —We will come back to Senator Boswell’s questions. I will come to you shortly, Senator Cameron.

Mr Leon —What really concerns me at the moment is much more the other plants. Clearly, there are plants that are less efficient, smaller—

Senator BOSWELL —What about Rockhampton?

Mr Leon —and will be much more adversely affected by the CPRS. There are plants at the moment that would be prejudiced on day one by this.

Senator BOSWELL —Can you tell us about Rockhampton?

Mr Leon —Frankly, I would like to stay away from individual plants because I really do not want to cause individual people angst about their futures. I would prefer just to talk in—

Senator CAMERON —I wish other people would be as careful as you are being—Senator Boswell.

Mr Leon —The prognosis and why it really concerns me is that the cement industry is characterised by a lot of plants that really are the mainstay of a number of regional centres. In places such as Kandos or Railton, the town is in fact the plant. I really worry as, frankly, the huge social impact on those towns will be devastating. That is why I think it is very, very unfortunate when you get to the point of those plants shutting down. Certainly the social cost will be huge.

Senator BOSWELL —We have heard from BlueScope that the CPRS poses a bigger threat to the continued viability of their operation than the biggest global downturn in three-quarters of a century. How does that compare with how you see the global financial crisis and the government’s climate change policies impacting on your industry?

Mr Leon —From my perspective, the global downturn will be a short, sharp recession. We are certainly trimming the sails of the business at the moment. We are working very closely with the workforce to try to maintain the skill base in the business; they are responding magnificently. We think it is likely to last two years. We have trimmed our capital expenditure very dramatically because, basically, we are having a hard time just getting additional financing for the business. But I think it will be a short, sharp recession and we will get through it and we will do so together. When you get to the impact of the CPRS, there is quite a different reaction. It is a situation where towns will be shut down, kilns will be shut down and the nature and structure of the industry will change dramatically. In my mind, these things are chalk and cheese.

Senator XENOPHON —You may want to take this on notice: firstly, just in broad terms, could you give the committee some information regarding the relative efficiency of operations of international plants compared with those here?

Mr Leon —It might help if we just reflect on the fact that about 85 per cent of the production capacity in Australia is world’s best practice at the moment; the other 15 per cent is where we still employ either wet technology or lower efficiency dry technology.

Senator XENOPHON —What do our competitors do? Where are they at, let us say, in our region because of the cost of shipping cement?

Mr Leon —I suppose that the biggest threat for us is the Chinese industry, which produces well over one billion tonnes of cement a year.

Ms Bain —That is 1.34 billion.

Mr Leon —The Chinese industry is an eclectic mix of everything, from backyard operations all the way through to the world’s best technology and everything in between.

Senator XENOPHON —But, in terms of the 85-15 mix that you have described here as world’s best practice and the poorer practices here in Australia, what would the mix be in China? Do you know what that is; if not, can you take that on notice?

Ms Bain —China has roughly 5,000 cement plants left; four years ago they had 12,000. Of that 5,000, there are 40 ‘best technology’.

Senator XENOPHON —How big are they, if that 40 make up a significant proportion of production?

Ms Bain —No. In percentage terms, that 40 make up around 25 per cent, so it has a long way to go.

Senator XENOPHON —So it is roughly the inverse of what it is in Australia; it is 75-25 the other way.

Ms Bain —Yes.

Senator XENOPHON —Frontier Economics has given evidence to this committee and to other committees on climate policy. They speak of a scheme of efficiencies based on a level of energy intensity; below that level, you would get credits; above it, you would be taxed, so there would be less churn. With respect to their economic modelling, their argument is that that mutes the price effects. Do you have a view on that? Is that something that your association has looked at as an alternative; and, if so, would it still achieve the same environmental outcome? The corollary of that is that you could go for a deeper cut, if you have the price effects muted on power.

Ms Bain —To some extent, the intensity measure was used in the New South Wales benchmark scheme.

Senator XENOPHON —That was the baseline and credit scheme.

Ms Bain —Yes. Chris’s company was not required to be involved in that one, but Blue Circle Southern Cement were. Their view was that it worked relatively well. They are still in operation. They have put in new investment, they are employing people and they have a market. In relation to the CO2 content per tonne, a graph on page 24 of our submission shows where Australia is at relative to the rest of the world in terms of CO2. This work was done for us by LEK Consulting. On top of the CO2 per tonne, we have added the transport implications if we were to bring it in. That is a really important graph where you are focusing on climate change, and that is really what this is about: we want to lower the impact of climate change. In reality, we should be encouraging this industry to grow and develop in Australia. We have to discourage imports coming in and encourage that plant to go into Gladstone at world’s best practice and at a lower CO2 cost. Demand for the product will continue to grow as our population grows, as happens with most other products; let us produce it here in this country.

Senator XENOPHON —I think we have heard evidence that there are other emerging technologies in terms of cement whereby it is not as energy intensive. Again, given our time constraints, you may want to take this on notice: are there emerging technologies that still allow you to produce a good quality product without requiring the expenditure of as much energy?

Mr Leon —Yes. It is true that there are geopolymers, which effectively are cement substitutes. All of the cement companies at the moment have research programs involved in that. However, we are finding that those alternatives, like many others, will have a niche market. It is almost impossible to envisage those new technologies overtaking all of the cement industry. That is one approach.

Another approach—and, frankly, the industry has been working on it very actively for about 20 years now—is looking at other cementious products. This is really one of the major strategies we have in Australia at the moment: to use products like fly ash from the power industry and slag from the steel industry. Effectively, that fly ash and slag act like cement in the presence of cement. What we have been trying to do, in terms of managing our greenhouse platform, is to substitute fly ash and slag for cement as much as we can. At the moment we are spending about $40 million at Port Kembla to try to maximise the amount of slag granulate that we are taking off blast furnace 5 during its reline. That is a major investment. We have spent $30 million on a new silo down in Melbourne so that we can take good fly ash out from Queensland to Victoria, as there is no good, natural fly ash there. These are the strategies that we are employing and that work will continue.

I think the really important thing to differentiate from the CPRS, which is a device, is our commitment to try to address the problem and encourage people. We think the CPRS has the wrong effect. It undermines all the good work that we are doing at the moment on mitigation; in fact, to a large extent, it will reduce the size of the industry here and, therefore, frustrate our ability to do anything about the problem. The problem simply migrates to another geography where we have no control over it.

Senator FURNER —Further to Senator Xenophon’s line of questioning in terms of technology and investment, Cement Australia indicated that they had introduced reductions in emissions at levels lower than those in 1990 and, conversely, had increased their sales by 50 per cent over that same period. How much is Australia’s cement industry spending on research and development for low-emission cement manufacturing technologies?

Ms Bain —I do not have a figure in dollar terms, but the three companies spend significant time and resources in looking at ways that they can be more efficient in their electrical use, where they can get better gains in terms of alternative fuels using biomass to reduce their CO2. There is one point that I possibly have overlooked and should have started with. When you manufacture cement, you heat limestone and, by that very act, you drive off CO2. That is what you do with limestone to turn it into clinker, which then goes into cement. So 50 per cent of the emissions from the cement industry go out of the stack. That is a chemical reaction when you add heat to limestone. So the three companies, as Chris has just outlined, have deployed various strategies to minimise that CO2 output. They are also looking at areas like geopolymers—that is, they are looking at the technologies at either end and not necessarily at the stack. So, until something like sequestration is realised, that is just the reality of heating limestone.

Senator FURNER —You have indicated that, as an industry body, they are putting significant investment into it. What would you define as ‘significant’? What sort of time and effort is involved in that?

Ms Bain —I would have to gather that information in dollars and I am happy to answer that question.

Senator FURNER —Can you put that on notice for us, please?

Ms Bain —Let me use the Asia Pacific partnership as an example. This government signed up with five other governments to the Asia Pacific partnership, and one of those task forces is cement. That was four or five years ago, and Chris and I both participated in that on behalf of the industry. Through that process, there have been projects in Australia where wastes—such as waste greases off spec paint, waxes, out-of-date agricultural chemicals and stuff like that, which normally lands up in landfill—goes into a plant at Dandenong. It is mixed to a fuel specification and put in an isotainer and was railed to Gladstone—now it is shipped down to the Railton plant—as a fuel. Through the Asia Pacific partnership, that plant has expanded. It is being used as a way for China and India to start to manage their waste and see it as a resource. We are working on a new project that, hopefully, will get underway in May or June. Instead of grinding cement with steel balls in a grinder, whereby it is a huge electricity user, a company in Melbourne has developed technology where, instead of it being ground, it is just zapped with ultrasonics. By doing that, there is about a 45 per cent reduction in technology. That is just one part, and government has been involved in that also. I will take on notice to endeavour to find that out, in straight dollars, from the company.

Senator FURNER —David **Pearce has released his review on the CPRS today! paper and there are two particular points in question that I would like to hear your response on. Firstly:

  • A large body of research has led to the conclusion that price based measures for targeting mitigation provide the most flexible and effective policy mechanisms for encouraging mitigation.

And, secondly:

  • If Australia is to reduce emissions (as part of an international scheme), establishing a carbon price must be central to any policies to do so.

I would like your response to those two views.

Mr Leon —I do not think the industry would disagree with that. At the heart of our concerns about the CPRS is an issue around trade. We have no problem at all with pricing being used as a mechanism to bring about changes in people’s behaviour and enhanced abatement. But the heart of the problem here is that the CPRS uniquely affects local producers. This is an internationally traded commodity. You have the situation where, at the mouth of the Brisbane River, there are three facilities. Ours brings in locally produced clinker. A new competitor opening up will use only imported clinker; the one on the other side of the river brings into that facility a combination of imported and local clinker. In a CPRS, who is going to win this race? We are unique because we employ Australians and we pay Australian tax. In my business alone, I think the cost will be something like $15 million a year. That is the problem. The problem is really a trade issue. How can we overcome the trade issue so that we stop disadvantaging Australian business? It is really about the design of the CPRS, not what it is trying to achieve.

Senator FEENEY —On that trade issue, what can you tell us about the tariff regimes that apply across the globe and how they affect your business?

Ms Bain —Cement hardly has a tariff. The Chinese had a tax to encourage exports of cement and they took that off nearly 15 months ago. Chris is right: it is a globally traded commodity. In the cement world, there is not a serious number of cement companies. Probably about 16 companies worldwide make up about 80 per cent of the production of cement. Chris is CEO of Cement Australia, which is owned by three shareholders: a Swiss, a German and a Mexican. They see an opportunity in the Australian market to grow the business. Chris, because he is a fine person, is trying to get that investment to happen in Gladstone so that we can continue to produce Australian-made cement by Australians. But he has three shareholders—

Senator FEENEY —Perhaps it is a case of it being improved by the exchange rate. That must have been a significant feature of your decision-making over the last 12 months.

Mr Leon —Certain, in Australia, the pricing of cement tends to closely follow the import parity pricing. We have looked at it over a long time and, apart from a dynamic kind of excursion, generally it follows it very, very well. In fact, that is how we set our pricing. Exchange rate is just one of those elements. An exchange rate price will filter through to the market very quickly, one way or another. Unfortunately, that situation is being compromised to some extent by the global downturn. You tend to find that the price of imported cement in US dollars is coming down as well. In a way, the two things work out, but all the time we are looking at the IPP to set our prices in Australia.

Senator IAN MACDONALD —Treasury officials, giving evidence this morning, suggested that Indonesia, which I understand is a competitor of the Australian industry, by 2025, are going to have the same sorts of ETS emissions as Australia. Is that sort of thinking part of your forward planning?

Mr Leon —Frankly, by 2025, this industry effectively would have—

Senator IAN MACDONALD —Disappeared.

Mr Leon —disappeared already; so I do not put great store in that. I have lived in Asia, where I worked in the industrial gases industry. One of my great frustrations in that environment was that our raw material was essentially power. I found it very difficult to compete in that environment because a lot of my competitors just bypassed the power meter. All I would ask you to do is just think about that same kind of environment where their cost base is heavily affected by the carbon return they put into the statutory authority every year. I would ask you to think about whether the cost of carbon would filter through accurately into the cost of their product.

Senator IAN MACDONALD —Mr Leon, I have spoken to you about this before but, just for the record, it seems that some of the questions suggested there was a confusion. Can you tell us what you plan to invest in Gladstone? You made a decision and I think you said, quite clearly, that it was solely as a result of the CPRS and not the GPS—I think you said that; correct me if I am wrong. Do you know the job factors of that particular proposal, both in construction and permanently?

Mr Leon —We were talking about building a 2½ million tonne a year kiln up there. Just to give you some idea, our current kiln in Gladstone, which is the biggest in Australia, is at 1.6 million tonnes. Of course, to achieve that, we would be required to work very hard to make sure that we loaded that kiln pretty well on day one. The other thing is that, just economically, these things are major investments; in round numbers, we are talking about $1 billion. We would build it, resting very heavily on existing infrastructure in Gladstone. In Gladstone we have a mine at a place called East End, near Mount Larcom, which is a little bit remote from the site. There is an existing dedicated rail loop that brings the product into our plant. We have existing port facilities that we would not need to duplicate. We were going to go about making this investment by resting very heavily on existing infrastructure; so it would be a brownfield investment.

Frankly, the additional manning on the plant would be relatively modest; I am talking about 30 to 50 people. However, it needs to be appreciated that we rely very heavily on an additional workforce for things like maintenance and the turnaround every year. For instance, the current facility at Gladstone employs something like 160 people but, for a month of every year, while we do the turnaround, the number of people on that site would go up by about 500 or 600. These things are very expensive. Typically, we would spend about $10 million on a kiln turnaround, so it is quite an exhaustive thing. Now all of that additional commercial benefit would be lost.

Senator IAN MACDONALD —The construction numbers would have been—

Mr Leon —Certainly hundreds.

Senator IAN MACDONALD —You might have to take some of these questions on notice because we are running out of time. This is perhaps to Ms Bain: with the 15 per cent of cement plants that would be first at risk, you have referred in your submission to Railton and Kandos; there would be others in that 15 per cent. Do you have anywhere in your submission the jobs at risk in the 15 per cent?

Ms Bain —No, I do not have it in the submission, but I could take that on notice.

Senator IAN MACDONALD —Could you get that for us?

Ms Bain —Yes.

Senator IAN MACDONALD —I also note in your submission that all you want is that the government discharge the promise it made prior to the 2007 election and, if they follow that course, you would be happy with the ETS proposal; that is what your submission relates.

Ms Bain —I think that is a key point and we have endeavoured to try to work through it ad nauseam with the bureaucracy. There were two commitments: the introduction of the cap and trade system and, at the same time, the maintenance of the competitiveness of Australian industry. The second part of that promise is not dealt with within the bill that will come before the parliament, and that is the key to it. So here we are, as I think one of the other senators said: this industry is receiving an 83 per cent permit allocation—other industries are not anywhere near that—but it cannot maintain its competitiveness under that scenario.

Senator FEENEY —Do you say that, if you get to 90 per cent, you can?

Ms Bain —Ninety per cent without the decay. The decay of the cap over time means that, in 2010, you are competitive and, in 2020, you are not. It just gives you 10 more years to redesign your business to become an importer rather than a manufacturer. So the decay and the 90 per cent permit allocation mean there will be a $20 million additional cost on the Australian industry from day one. No cement plant is placed in that way anywhere else in the world, even under the European or the US system. We will be a world first.

Senator FEENEY —Your submission reads that ‘the Australian cement industry believes it can remain competitive with a 90 per cent free allocation of permits for the entire cement manufacturing process’.

Ms Bain —No per cent, no decay.

Senator IAN MACDONALD —Again you may have to take this on notice: I understand Mr Leon saying that your price in Australia is determined in parity with the imported price. There must come a point of parity below which you cannot go and still operate at a profit; after that, you would be operating just as a charity. Cutting this down for simple politicians to understand, can you indicate in simple terms the cost of a tonne of cement bought from Indonesia or bought in Australia at the moment—and I think you are saying ‘parity’—and can you do the same if you have a $31 million impost on the Australian industry, which the Indonesian industry does not have? Can you tell me the relative cost per tonne of cement, if it is possible to do that without too many qualifications that make it meaningless? I am trying to simplify in my own mind what it would cost if it were being taken down to a builder who was building a house out of cement. Why wouldn’t he buy the imported Indonesian cement rather than bothering about good old Aussie cement from Gladstone?

Mr Leon —I think our thesis at the moment is that, because we need to match the price of the imported product, all the additional cost comes straight off our bottom line. Another way to look at it is just to think that, at the moment, the industry pays about $100 million in federal taxes. So, effectively, this is a 30 per cent increase in our tax and it just comes straight off the bottom line. That is the way we have tended to think about it. Of course, as the profitability of the business reduces, our ability to reinvest in the business declines also. There is just less money in the business then to do all of the things that we should be doing in terms of abatement.

Senator IAN MACDONALD —Why would your multinational owners take a 30 per cent cut in their bottom line when they can bring it in from your plant in Indonesia, Taiwan or wherever they are?

Mr Leon —Certainly we compete with the rest of the world for capital; that is just the way global businesses work. Once the business here has declined dramatically in performance like that, the propensity of our shareholders to put money into that business will be undermined absolutely; therefore, the very work that we need to do in abatement will be undermined. So my chances in the future of being able to put a fly silo into Melbourne and reduce our greenhouse gas platform will be compromised.

Senator IAN MACDONALD —Finally—

CHAIR —Can you take this on notice, please?

Senator IAN MACDONALD —Yes. The global cement industry produces five to six per cent of greenhouse gas emissions. With Australia producing 1.3 per cent of total global emissions, would you calculate 1.3 per cent of 5.6 per cent in order to get the impact of the Australian cement industry on global greenhouse gas emissions? Is that the right formula?

Ms Bain —We have tried to work out what it is. We think it is about 1.2 per cent.

Mr Leon —Of Australian emissions.

Ms Bain —Of Australian emissions coming from cement.

Senator IAN MACDONALD —It is 1.2 per cent of Australian emissions—

Mr Leon —Yes.

Ms Bain —Yes.

Senator IAN MACDONALD —and Australian emissions are 1.3 per cent of the world’s emissions.

Ms Bain —Yes. I can send you a pie chart—

Senator IAN MACDONALD —So your contribution to the changing climate of the world is pretty infinitesimal.

Mr Leon —Yes.

Ms Bain —Yes.

Senator PRATT —I want to ask about the cement industry’s response to moves in the US and what kind of calls internationally have been made by, as you have noted, the 16 companies that own the majority of the industry.

Mr Leon —I was heartened by what President Obama talked about because, for the first time, he coupled the issue of deeper cuts with addressing the trade issue. At the moment, unfortunately, people tend to focus on the deeper cuts without recognising the fact that he is addressing the trade issue. You cannot reasonably go for deeper cuts without addressing the trade issue—and he has done that.

Senator PRATT —But what is the cement industry itself doing internationally to say, ‘We want to overcome those trade issues and to level the playing field’? Alternatively, is the cement industry in the US saying, ‘Oh well, we’ll cry poor too there and say that we can’t do it until everyone else does it.’ Is the cement industry—those 16 companies—arguing, ‘Level the playing field for us,’ or are you all crying poor and asking for more concessions, right around the world?

Ms Bain —I do not believe—and I find it slightly offensive to think—that you think we are crying poor. We are not crying poor; we are very good manufacturers. We have an excellent footprint.

Senator PRATT —Yes, and I commend you for that.

Ms Bain —I am happy to answer the question as it applies globally. Globally, under the auspices of the World Business Council for Sustainable Development, the cement sector has the Cement Sustainability Initiative; it was one of the first ones. That initiative works to lower CO2right across the globe. Companies in Europe and the US work in line with the governments and their greenhouse policy. What is happening in the US, as has been happening in Europe, is exactly as we have said today.

Senator PRATT —What about your saying that you are happy to level the playing field on carbon price so that you do not face these trade inequities—and I recognise them—across the globe? I appreciate that the efficiencies are important but, here in Australia, we already are ahead of the game with those efficiencies. Surely having an equilibrium in the carbon price should be a competitive advantage to the industry here, particularly when you look at how much cement weighs and, therefore, at the added carbon footprint and added costs of transport.

Mr Leon —There certainly is an ongoing global debate at the moment. The cement industry is playing a major role in it, in talking about a sectoral approach. The sectoral approach essentially is about trying to get an industry or a sector across the globe to buy into the same kind of approach. I did a short paper about a year or so ago in Germany, trying to promote that idea. There is a lot of discussion and a lot of working on that concept. As an industry across the globe, we are very active in trying to promote that idea.

Senator PRATT —So you do not object to the idea that there should be a price for carbon, provided that we have a global agreement that levels that playing field.

Mr Leon —Right. Our concern all along has been the level playing field and just not uniquely disadvantaging Australian business.

Senator PRATT —How do we prevent individual advocacy coming from around the globe that undermines our capacity to get a global agreement? For example—I will not use the cement industry as an example—you have the coal industry around the globe hypothetically saying, ‘No, we don’t want you to move, because no-one else has moved.’ How do we overcome that? Surely it is through either those kinds of sectoral agreements or a strong agreement being reached as quickly as we can do so, in order to get as level a playing field as possible.

Mr Leon —One of the things that I find disappointing is the lack of involvement and engagement from DFAT in all of this because I think this, at its essence, is a trade issue. I do not think that DFAT should simply be standing back and saying, ‘The World Trade Organisation rules are what they are.’ In essence, you have to revisit that issue. I think we do need to have our trade organisations engaged in this problem of trying to understand the nature of it and trying to find an outcome.

Senator PRATT —What happens if Australia moves too slowly and we do actually get a carbon constrained globe and, in fact, the cement industry here hypothetically does not transition as quickly? Surely, if there is a global agreement and you are the most efficient in the world already, we have a lot to gain by encouraging the globe to lock into a strong agreement, because that will advantage the industry here relative to its competitors.

Ms Bain —That is right. The other way to look at that is that this industry has reduced its CO2 footprint since 1990 without any mechanism. It has done that because, at the end of the day, it is effective for the bottom line. So its energy efficiencies, the SEMS and the alternate fuel program are all part of a CO2 reduction program and at the same time it is good for its bottom line. In response to it being said that somehow the globe will have an agreement and we will be left behind, I say that this industry, like many others, will not be left behind, because now and at the end of the day the proof of the pudding is and will be in the eating.

Senator PRATT —Ultimately, the trade issues could work the other way, couldn’t they? If cement is manufactured in countries that are too carbon intensive and, therefore, those countries are not addressing their carbon liability, the very same issues could be turned on their head and argued the other way, couldn’t they?

Ms Bain —They could, but isn’t that just a reinforcement of why the world has to work together?

Senator PRATT —That is right.

Ms Bain —The question with the CPRS really is: how far ahead of the world are we prepared to go and what are we prepared to put at risk for that leadership?

Senator PRATT —But we are not ahead of the world; the European Union, the US and New Zealand are moving already. Unless they move, we have no hope of locking China in—and I concede that China is a major source of competition in this instance. But we already have all those other major economies moving. Australia needs to move too so that we can lock China in and reach that ultimate goal.

Ms Bain —Even though the systems are here in Australia, I reiterate that nowhere else in the world—not in Europe, not in the US—is a cost of carbon placed on the cement sector.

Senator PRATT —But that is what we are aiming at, isn’t it?

Ms Bain —That is right. There is an aim; it is always good to have goals and aspirations, and let us head towards that.

Senator PRATT —So who should go first?

Ms Bain —I do not think it is a question of who should go first or who should go second. Have a look at the systems that they have put in place and see how they have designed it so that it maintains the competitiveness of their sectors. Europeans do not have a cost of carbon on cement, yet the cement industry in Europe continues to reduce its CO2 levels per tonne all by itself. What is before us is the Australian—

Senator FEENEY —And the production process in—

CHAIR —Senator, we are going to—

Ms Bain —That is right, and it is in—

CHAIR —I am sorry to interrupt you, Ms Bain, but we do have to finish here. We are well over time. Thank you very much for your evidence today; it has been very valuable and we appreciate the efforts that you have put into it.

[11.53 am]