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Emissions trading and reducing carbon pollution

CHAIR —Welcome, Mr Prosser and Mr Ison. I invite you to make an opening statement.

Mr Prosser —Thank you, Chair, for the opportunity to present to the committee. To begin with, to give it some context, we understand that the challenge being faced here is developing an Australian policy response to climate change. It is an issue that is global and long term.

Senator BOSWELL —On a point of order, Acting Chair, I ask Senator Heffernan to go outside the door if he wants to conduct a conversation. He is standing right behind the witness—

ACTING CHAIR (Senator Milne)—Senator Heffernan, would you mind leaving the room so that we can hear the witnesses, please.

Mr Prosser —It is an issue that is global and long term. We have got less than perfect information about the ultimate impact of different emissions levels, where action by countries is going to be uneven for many decades yet and where there are potential economic costs and few gains for individual countries that move ahead of others. These challenges are all well summarised in the Garnaut review. This committee will have heard from experts on many of these issues. We would like to focus our input on an issue where we think we have some expertise to offer and that is the potential economic costs of moving ahead of other countries and, specifically, the potential for carbon leakage from Australia’s alumina and aluminium industry.

Australia is a global force in this industry. We are the world’s largest producer of bauxite, the second-largest producer of alumina and the fifth-largest producer of aluminium. The industry directly employs 14,000 people in skilled and well-paid positions, many in regional areas, and we are a major export earner—$11 billion per annum at the moment—and approximately 80 per cent of our alumina aluminium production is sold into export markets.

It is worth noting that there are two activities in our industry that will be heavily impacted by the CPRS and RET. The first of these is producing alumina from bauxite at a refinery, and the bulk of the emissions in this stage of the process arise from a requirement for heat. The second is the production of aluminium from alumina at a smelter, and the bulk of the emissions in this stage arise from the requirement for electricity. The different structure of those two activities leads to different outcomes in terms of scheme design.

The Australian alumina and aluminium industry has developed competitive advantages in resource availability, skilled workforce, global supply chain management, energy supply and efficiency and capital investment. The current capital replacement value of the industry is in excess of $40 billion. The industry has expanded over recent years, including investments in Rio’s Yarwun alumina refinery, expansions at Rio’s Alcan Gove refinery, Alcoa’s Pinjarra refinery and Hydro’s Kurri Kurri aluminium smelter.

The competitive advantages that we hold, combined with the future use of aluminium in a carbon-constrained but growing world economy, give reasons to be confident that further investment and expansion of this industry in Australia is achievable. There are possible additional potlines at existing aluminium smelters, possible alumina refinery upgrades at many refineries, including Wagerup and Yarwun, as well as possible new mines and refineries based in Queensland at Aurukun. This is an industry where Australia has a natural advantage in competitive markets and can be part of a strong, growing Australian economy.

The industry competes in global markets. The price for aluminium is set on the London Metal Exchange and the price for alumina is closely linked to the price for aluminium. Australia’s major competitors are China, the Middle East, Russia, Canada, the United States and Guinea. The proposed CPRS and RET will expose Australian producers to higher carbon costs than any of our competitors in those global markets. We estimate the costs on the basis of the policy as currently proposed to be in the order of $500 million per annum. Those costs are far higher even than under the European scheme. Although Europe has introduced an emissions trading scheme, aluminium smelters and alumina refineries in Europe are largely shielded from the costs of that scheme and will be for many years yet. The costs that are being proposed in Australia are far higher than costs that will be proposed in our competitor countries for many years to come.

Globally, investment in alumina refining and aluminium smelting is attracted to the lowest-cost operations. That occurs within companies and also across the industry, and it applies to investment in new facilities, expansion of existing facilities and sustaining capital investment into existing facilities to maintain quality and competitiveness. Increasing the costs of alumina refining and aluminium smelting in Australia will shift our operations. At the moment, those operations are in the first and second quartile of the global cost curve. In the first and second quartile, we can be confident about future investment in those facilities and future expansion of those facilities. The policy proposals on the table will shift those operations to the third and fourth quartile. In the third and fourth quartile of the global cost curve, investment is far less likely and closure is far more likely when markets go through low points in the cycle. So the impact of this scheme on our industry is to shift us out of that zone where we could expect future investment and expansion and into the zone where we are vulnerable to market conditions and closure is possible if not imminent.

Senator FEENEY —Are you where you are in the cost curve because of the quality of the capital in Australia?

Mr Prosser —I listed earlier what some of the competitive advantages are. They include availability of the resource, the skilled workforce we have, the capital investment that has been made, resource availability and energy costs.

This is the manner by which carbon leakage would occur—by the impact on where investment would occur. It is not the simple shifting of plant, equipment and buildings to another country, and it is unlikely to be the immediate closure of facilities when a scheme is implemented. But it is that loss of future investment that leads to eventual closure of plants in Australia. It is an inevitable result of imposing a significant cost on Australian producers that is not imposed elsewhere. It places future investment at risk, costing potential new jobs and jeopardising the operations that sustain current employment.

There is a lot of complexity in this policy area, but the view of our industry on most of these issues can be tied back to a single concern: the magnitude of the costs being imposed on Australian producers ahead of similar costs being imposed elsewhere in the world. We are concerned about the impact of that on future investment, and we believe the parliament should be concerned that these costs are proposed to be imposed with a high probability that there will be no meaningful impact on the environmental objective as a result of carbon leakage. Yet it is not a difficult transformation to go from the current policy proposal to one that will enable Australia to take early action—and, again, all those benefits—and not threaten the viability of this or other industries.

At a principal’s level, the required transformation is to develop an alternative policy either by amending the existing policy or developing an alternative policy that achieves three key outcomes: minimising the cost imposed on Australian producers ahead of the cost imposed in other countries; explicitly linking the erosion of permit allocation to Australian companies to the rate at which action is taken globally; and, as a result of those outcomes, allowing for appropriately ambitious global emissions reductions but making them contingent on global action, and that in turn will create an incentive for global action.

Our written submission provides more detail on how to meet some of these issues, but I would specifically like to emphasise that we are calling for the decay in permit allocation to EITE industries to be explicitly linked to global action by other countries and not, as it is at the moment, to the expectation of global action; for alumina refining to receive 90 per cent permit allocation under the CPRS proposals; for the permit allocation for indirect emissions to reflect the actual increase in costs of electricity—you heard from Alcoa earlier today about their concerns for the electricity factor; and for a full exemption for aluminium smelting but not necessarily alumina refining from the current and expanded RET. From our point of view, the RET and the CPRS impact on our industry in the same way. They both lead to substantial increases in electricity prices, and it is electricity prices which are felt most keenly by these industries. The changes we are proposing are all relatively simple, albeit fundamental changes, to what is being proposed, and they can be achieved within a reasonable time frame. That concludes our opening statement.

Senator FEENEY —In your submission, you indicate your preference for a consumption tax—the Carmody model. I think your affection for the Carmody model is basically driven by the belief that it is trade neutral. Could you expand on that a little?

Mr Prosser —Okay. If I can, I would like to turn that around the other way. I am not sure that we exhibited a preference for the Carmody model. But it comes back to the point where we say that our concern is the relative impact of costs on Australian producers to those of our competitors. A consumption based model is one way to address that. If it is implemented appropriately, a consumption based model can ensure that those costs are distributed evenly. Equally, a cap-and-trade emissions trading scheme model can achieve the same outcome, with some changes to what is being proposed. Ultimately, the model that is used is of lesser importance to us than ensuring that the costs imposed on Australian producers are no different from the costs being imposed elsewhere.

Senator FEENEY —It would seem to me that a Carmody model, a consumption tax, is in fact only trade neutral if there are significant carve-outs. There would still be an impact on all of your manufacturing inputs through a consumption tax.

Mr Prosser —The basic issue needs to be addressed in whatever model is being proposed. Because there is a lack of global action, whatever model is proposed in Australia needs to consider the impacts on international competitiveness.

Senator FEENEY —Do you accept the fact that the cap-and-trade model does mean that there is a price signal that it is intended to drive continuous improvement in terms of abatement and mitigation?

Mr Prosser —Absolutely. You heard Alcoa give some figures earlier, and I can provide similar figures for the industry about the extent of improvement that has occurred since 1990 as a result of the existing cost of things like electricity, which is the bulk of the emissions for this industry. Exposing the industry to a carbon cost would increase the incentive to take on things like co-generation and other investments. We are not opposing there being a carbon price signal there. What we are concerned about is imposing that carbon price signal only on Australian producers and not imposing it on other producers. I go back to the point that 80 per cent of our product is sold into export markets. The other suppliers into those export markets are not facing and are not likely to face in any near future a carbon cost. So there is a way to put a carbon price in front of Australian producers that does not impact on their international competitiveness, and that is what we are calling for.

Senator IAN MACDONALD —Thank you for your submission, Mr Prosser. As you know, we have had two major companies appear before the committee and so we have already heard a lot of the issues. Is there anyone involved in alumina or aluminium in Australia that is not a multinational company, with plants in many other parts the world?

Mr Prosser —The ownership structures of the companies involved are joint ventures between other major companies. I think it is probably fair to say that every operation in Australia is part of a global operation.

Senator IAN MACDONALD —So it is easy for those companies, no matter how much they want to be good Australians, to source their finished product from other less costly places around the world?

Mr Prosser —That is true. The issue in terms of competing for investment is that they are competing internally within those companies. If there is a proposal to expand an Australian alumina refinery, it will be up against a similar proposal to expand a refinery in another country.

Senator FEENEY —It is quite a big thing to abandoned an investment of that size, isn’t it?

Mr Prosser —Yes. There are a number of levels here. There is potential new greenfields investment—and certainly that could go anywhere in the world. Existing operations give you some ability to attract future investment, but there are existing operations all around the world. That is where we come back to this position on the global cost curve. Because of where we are at the moment, we have reason to be quite confident about attracting future investment. We have the low-cost operations in the world that will attract that future investment. Imposing the CPRS and RET costs that are currently on the table would shift those operations to the third and fourth quartiles where they will not be destinations for investment within those companies. That investment will go to the new Q1 and Q2 plants, and they will be in countries without a carbon cost.

Senator IAN MACDONALD —Just along those lines, you talked about the proposed plant at Aurukun.

Mr Prosser —Yes.

Senator IAN MACDONALD —What stage is that at? Are they still just looking at it? Has any decision been made on it?

Mr Prosser —I will either take that one on notice or defer it to Michael.

Mr Ison —My understanding is that they are still proving up the resource. The decision about whether they place an alumina refinery at Bowen or Townsville is still under decision.

Mr Prosser —I think they are due to report back as part of one of their licence conditions—

Mr Ison —They are doing an environmental impact study, which I think will run over the next few years.

Senator IAN MACDONALD —Certainly they would be looking at the CPRS.

Mr Prosser —Absolutely.

Senator IAN MACDONALD —Is it right or is it just jingoism to say that Australia has the best natural supply of bauxite in the world, in Asia or in whatever area?

Mr Prosser —As I understand it, Australia has probably close to 30 per cent of the world’s bauxite on that sort of level. I think it is the second largest in terms of bauxite reserves. Guinea appears to be higher on the list. If you compare Australia to Guinea, you can see why Australia would be a very attractive place to invest.

Senator IAN MACDONALD —There are grades of bauxite, I suspect?

Mr Prosser —There are different grades. There are different silica contents and a whole range of other factors like that. There is no question that Australia’s natural resources in bauxite are one of the main reasons that we have a competitive advantage. What we are looking to do with alumina refining and aluminium smelting is to build on that advantage and turn it into a greater investment rather than just exporting bauxite.

Senator IAN MACDONALD —You may or may not know that I come from North Queensland and hang around a bit at Weipa. If we were not producing aluminium in Australia but simply shipping the bauxite from Weipa to Indonesia, China or wherever, Weipa would be okay wouldn’t it? That would not really impact on jobs and development at Weipa?

Mr Prosser —One way to look at that issue is to understand that the final market for this product is almost certainly going to be overseas. We already export 80 per cent of our production, and a lot of growth in demand for that will be from overseas.

Senator IAN MACDONALD —Which production? Aluminium?

Mr Prosser —Alumina and aluminium.

Senator IAN MACDONALD —But not bauxite?

Mr Prosser —No. There are a lot of reasons for believing that Australia will provide much of the bauxite needed for future aluminium production globally because we have so much of the bauxite here. The question is how much we do to that before it leaves these shores and goes to other countries. Like a lot of industries, the amount of value and the amount of employment generated go up exponentially along that chain. If we were to only mine bauxite and export that, the amount of return to places like Weipa would be a lot lower than it is currently. If we convert first to alumina, we get the first stage of that increase in employment and value that have generated investment from that. If we take it to aluminium, we take a further step—and they are exponential type steps.

Senator IAN MACDONALD —Just to confirm: does the transmission from bauxite to alumina occur at Weipa?

Mr Ison —No. Weipa is just a bauxite mine. They export their bauxite by ship to the alumina refinery in Gladstone, QAL and Yarwun.

Mr Prosser —Just to clarify: when we say ‘export’, it is to another location in Australia and it is converted to alumina before it leaves Australian shores.

Senator FEENEY —How much bauxite do we export and how much do we use locally?

ACTING CHAIR —Senator Macdonald, we are going to finish at half past.

Senator IAN MACDONALD —Yes, quite right. Was there a proposal to set up an alumina plant in Weipa?

Mr Ison —Not in Weipa itself, no. They are looking at somewhere close; I think Bowen or Townsville were the two options.

Senator IAN MACDONALD —I thought Weipa was a third option.

Mr Ison —That is not my understanding.

Senator IAN MACDONALD —That is all I have.

ACTING CHAIR —I will go to that clarification question, Senator Feeney, and then I will come to you, Senator Boswell.

Senator FEENEY —I just wondered if you could tell me you what proportion of Australian bauxite is consumed domestically and what proportion is exported.

Mr Prosser —I think virtually negligible amounts are exported. Virtually all the bauxite is converted to alumina at the moment. One of the impacts of this scheme is that it may lead to a situation where it becomes more rational for a company to export bauxite overseas and do the alumina processing there.

Senator IAN MACDONALD —That was the final question I did not ask; thank you for doing it.

Senator BOSWELL —Can you explain to me what this new RET that was put forward yesterday is going to do to the aluminium industry? I know the aluminium industry did try to explain it to me. I got lost halfway through. Can you do it again?

Mr Prosser —I was there for the earlier explanation so I cannot guarantee I am going to do a better job. There are two components to RET. There is an existing mandatory renewable energy target—

Senator BOSWELL —That is two per cent.

Mr Prosser —Yes. What was being discussed was a proposal to extend that. The decision made yesterday, as I understand it—and we have only had a few hours to evaluate it—was that there would be an exemption at the 90 per cent level from the additional amount. That leaves an aluminium-smelting operation facing two costs, if you like. The first is the cost from the existing renewable energy target and the second is 10 per cent of the cost that would arise from the expansion. Those two costs together, on our quick estimates, we believe will come up to about $130 million a year by 2020 for the aluminium-smelting industry in Australia. And at that level it is as significant as the CPRS in terms of the cost.

Senator BOSWELL —That is the same cost as the CPRS.

Mr Prosser —So it is going to flow through in terms of increased power prices. That is how an aluminium smelter sees these policies.

Senator BOSWELL —There was some advance you put up—a figure of $65.

Mr Prosser —That is right. The surcharge was lifted from the previous $40 or $45.

Senator BOSWELL —Can you explain that to me? I am finding difficulty there.

Mr Prosser —Again, I might not do the best explanation. Basically, it is the cap to the price in the scheme, so if you cannot buy a renewable energy certificate you would be able to pay the surcharge, at whatever level it is. By lifting the surcharge, the price in the market is free to then float to that higher level. So, by raising the surcharge from $40 to $65, there is the potential for the price of renewable energy certificates to rise to $65—and there is an expectation in many quarters that they will almost definitely rise to that level.

Senator BOSWELL —All right. You cannot claim that $65 back on tax; that is a fine.

Mr Prosser —I am not a tax expert so I cannot tell you the treatment of that.

Senator BOSWELL —I will make this observation to you because in your presentation you were talking about amendments. You are aluminium producers; we are politicians. What I want to say is that when you get into that Senate and there are amendments going around, no-one knows what is happening except the three people who are handling it for the Greens, Labor and us. Confusion reigns. It is very difficult, particularly with a bill like this where most of it is done by regulation, not to come out with what we call unintended consequences. Murphy’s law reigns in this place; the worst thing happens at the worst possible time. We have a job to do, and it is turning this sow’s ear, as I would call it, into a silk purse. I do not think you can do it. I think the best thing to do is just dump it and come back again. So I just warn industry: do not get too carried away with amendments because you could end up in as much trouble as you are at the moment. We have heard from the steel industry, from the aluminium industry, from every industry of Australia, and it would be pointless my going over the same questions with you, because the same questions exist for the aluminium industry as for every other industry. I know what it is all about and I know your problems; we know your problems. So can I thank you for your submission and wish you all the best of luck when the RET comes up in a couple of weeks time and is followed by the ETS. God help Australia!

Mr Prosser —Could I make a comment on that?

ACTING CHAIR —Could you make it quick, because there may be a few other questions.

Mr Prosser —I fully understand and appreciate what you said about the speed at which policy is being developed. As an industry association we are feeling that as much as anybody. We see it as our role in that process to provide the best information we can within the time frame available, but I acknowledge your point that policy is being made quickly and sometimes it is hard to understand the full consequences. I think the RET decision is an example of that. We have both alumina refining and aluminium smelting being dealt with here. We were going to accept that alumina refining would not get an exemption under RET. It was much more important to us that smelting got nearly the full exemption because of the costs imposed on that industry. Without any consultation or proposals about this model put to us, we now have a situation where alumina refining will get partial exemption and aluminium smelting will get partial exemption. For us it was the wrong decision. We would much rather have all of that on the smelting and less of it on refining.

Senator BOSWELL —That is exactly what happens when you are taking policy on the run.

Mr Prosser —We had not seen that proposal at any stage publicly until it was announced yesterday.

Senator BOSWELL —And that is my warning to industry.

ACTING CHAIR —You said that if there is an emissions trading scheme you will consider putting your bauxite on ships and sending it somewhere else. In the decision on where you locate, apart from the cost of energy surely there are considerations like whether you have a stable political situation, whether you have a skilled workforce, whether you have a reliable supply of cheap electricity and so on? Where would you consider going? Where would you actually go elsewhere in the world in those circumstances, also recognising that it is only a matter of time before all those other locations will be under an ETS as well?

Mr Prosser —You are quite correct that a range of factors are taken into account. Certainly any factor that contributes to the costs of production is a major factor, but there are also things like political stability, available skilled workforce and so on. It is worth pointing out that for aluminium smelting the price of energy is about 30 per cent of the production cost. It is such a large—

ACTING CHAIR —I come from Tasmania; I am very well aware of that. I am also aware of the free ride that the aluminium industry has had for years as a result of bulk power contracts. It is not as if you have not been given a lot of assistance over a long period of time. So could you answer the question about where he would go.

Mr Prosser —There are a whole range of countries around the world. I listed the major competitors as being China, Russia, the US, Canada and Brazil. There are a whole range of options there. What a company would do would be to look at all those factors, all those costs of production and consider where they are at and where they are likely to go. I take your point about a global carbon cost, and I do hope that we get to the stage where there is a global carbon cost, but I think that within these sorts of investment time frames you could look at a place like China and decide that it is unlikely to have a carbon cost of the scale being proposed in Australia within an investment time frame.

ACTING CHAIR —What about your costs of shipping? You are dealing with quite a bulky product.

Mr Prosser —The ultimate market for this is probably going to be in China or elsewhere in Asia. We already export 80 per cent of our production. It will be a slightly higher transport cost because it is a bulky product, as you said, but again that is just one of the costs taken into account. It would be a much smaller factor than the cost of electricity.

Senator IAN MACDONALD —Do Indonesia, the Philippines or any of the South-East Asian countries have alumina or aluminium industries?

Mr Prosser —I think Indonesia does at the moment. Certainly there are prospects for expansion of the alumina industry in Indonesia.

Senator IAN MACDONALD —But they do have it at the moment?

Mr Ison —They currently export bauxite to China. I am not sure about the alumina refineries there.

Mr Prosser —There are certainly proposals to do more with that bauxite, to have alumina refineries. Vietnam is another country where there are proposals to significantly expand.

Senator FEENEY —Whereabouts in Indonesia are the bauxite deposits?

Mr Ison —I would have to take that on notice. I am not aware of that.

Mr Prosser —We will take that on notice.

ACTING CHAIR —Thank you for taking the trouble to come and present your information today. Before I close the session for lunch, I say that a number of senators and the committee secretariat have put it to me that they are anxious to see the Hansard transcripts a little more quickly than we have been able to see them. We appreciate the huge effort Hansard puts him, especially on a day like yesterday and during an inquiry when there has been a lot of evidence and very little time for lunch or other breaks, so this is not a criticism of Hansard, but I would like to put on the record that we would like to see a faster turnaround, especially because our reporting dates are coming down on us quite quickly. With those remarks, I thank you all.

Proceedings suspended from 12.25 pm to 1.15 pm