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Senate Select Committee on the Scrutiny of New Taxes
Carbon tax pricing mechanisms

PROSSER, Mr Miles, Executive Director, Australian Aluminium Council


CHAIR: Do you have an opening statement?

Mr Prosser : Thank you for the opportunity to assist with the inquiry. I have also provided a slide pack. There are four slides there which I hope you have in front of you. I will refer to those through the opening statement.

Our key concern with the carbon costs stem from its impact on the ability of Australian facilities to compete with overseas facilities within our industry. Looking at the first slide in that pack, it is a global cost curve of producers. The lowest cost producers globally are on the bottom left side of that graph, the highest cost producers globally are on the upper right.

Investment occurs in those facilities at the bottom end of the cost curve. At the top end of the cost curve you will see closure and curtailment of those facilities as the price drops in the marketplace. Companies are very conscious about where their facilities are on that global cost curve, because it really drives both investment and operation. If the impact of a carbon cost in Australia is higher or moving ahead of other countries with which we compete, Australian facilities will move up that global cost curve. As I say, that impacts on both investment and operation of those facilities.

That is different from something like an increase in input costs, such as alumina or energy, which might impact on all facilities equally. It is different from a movement in the price of a final product, which impacts on all facilities equally, and it is also different from a movement in exchange rates. They are going up and down over a period of time. Sometimes that is to the favour of Australian producers, at other times not, but they do move in both directions.

Turning to the second slide in that pack, that takes the actual international cost curve from 2009. An Australian producer who would have been in the second quartile back in 2009 has already been shifted up into the third quartile as a result of the current carbon costs we have in Australia. That carbon cost comes in the form of the renewable energy target. Even with the exemptions that exist under the RET scheme that will have shifted an Australian aluminium producer from the second quartile to the third quartile on the international cost curve.

If we impose further costs in the form of another carbon price higher than that which is imposed in other countries, those facilities will get shifted even further up the international cost curve into the fourth quartile. In the fourth quartile they would be vulnerable to being closed down or curtailed as the market hits troughs in the future.

In the political debate we are often asked if a particular facility will shut down or when it might shut down or if a particular investment will be lost. The reality is that those decisions are not made and remade on a regular basis. In reality if a facility is shifted up the global cost curve out of the first or second quartile it is going to struggle to get investment funds to keep reinvesting in that facility. If it is shifted into the fourth quartile it is really a matter of when, not if, it shuts down and that ‘when’ will be determined by the market price.

Currently Australian facilities are globally competitive. We are the largest producer of bauxite. We are one of the two largest producers of alumina along with China and we are the fifth largest producer of aluminium. Unlike other processing industries in Australia, we have natural advantages, including mineral resources and energy resources, that ensure that we can compete in global markets, we will be able to compete in the future if we get the policy right, and we will see growth in these industries. The aluminium industry is Australia’s largest process export earner. We generate more than $11 billion in export earnings. In international markets our major competitors include China and the Middle East.

We recently commissioned a study to look at the carbon costs actually paid by alumina refineries and aluminium smelters in China. It looked at both the situation now and what the situation might be over the next 10 years. There have been other studies that have looked at the China carbon cost. They focused on the national effort—the total amount being done in China. We specifically narrowed in on the actual cost paid by industrial facilities, in our case, alumina refineries and aluminium smelters, because that is the cost that will determine the competitiveness impacts on our industry. The study found that Chinese facilities currently pay only 85c a tonne per carbon dioxide equivalent for their indirect emissions, and that even under the most aggressive scenario that is only going to rise to a few dollars over the next 10 to 20 years. The study also found that a range of official and informal exemptions means that even that price is often not paid.

The third slide looks at the current and future carbon costs that might apply in the aluminium industry to Australian and Chinese producers. The Chinese numbers in that are based on that study we had done and the Australian figures in that are based on what we are being told by the government is the default scenario, if you like, the CPRS ET assistance measures, and a $20 a tonne starting price. You can see that not only is the Australian carbon cost on our industry far higher today; it will remain far higher for at least a decade and probably longer. The magnitude of that price difference, about $100 a tonne of aluminium out in 2020, is enough to materially shift investment and production decisions.

Turning to the final slide, this looks at the components of the Australian carbon price as it is being presented to us at the moment. The first point to note is that there is an existing carbon price in Australia, the dark grey on that graph. That consists of the RET scheme. While Minister Combet has quoted price impacts relating to a $20 a tonne starting price and the likely industry exemptions in the yellow on that graph, these do not capture the full costs of a carbon price on our industry. They include other impacts through the electricity sector, impacts of rising gas prices and other areas. They also do not capture the extent to which that carbon price will rise over the next 10 years as a result of the carbon price itself rising and the industry exemptions and partial exclusions declining over time.

The overall costs quickly become large enough to shift investment decisions and push Australian facilities further up that global cost curve, not just losing potential future investments but putting those facilities in a place where they may be vulnerable to curtailment or shut down if the market price drops. Returning to my opening point, our major concern with a carbon pricing policy is the extent to which it would shift Australian facilities higher up the global cost curve, impacting on both investment and production.

CHAIR: On page 4 it states, ‘Combet estimate $20—94.5 per cent exemption’; what do you mean by that?

Mr Prosser : At the Press Club a few weeks ago Minister Combet talked about the potential price impact on aluminium and he calculated the number of $19 a tonne of aluminium. We do not dispute how that number is calculated. It just does not capture the entire carbon cost on the aluminium industry.

CHAIR: On top of the $19 you get—

Mr Prosser : On top of the $19 that Minister Combet drew attention to there are also the excluded costs, which he did not draw attention to—

CHAIR: What are the excluded costs?

Mr Prosser : For example, it does not capture the rising cost of domestic gas that we are likely to see increase with a carbon price. In some cases there will be a higher cost pass-through of electricity than the CPRS scheme estimates. There are other measures, such as the 100 per cent cap on ET allocations, for various facilities that would further increase the costs.

CHAIR: How many people are either directly or indirectly employed in the aluminium industry?

Mr Prosser : It employs about 17,000 people directly and you could use some standard sort of economic multipliers to take that out to probably 60,000 or so people directly and indirectly. They are predominantly in regional areas—Gladstone, the Hunter Valley, Geelong, Portland in Victoria, Tasmania and southwest Western Australia.

CHAIR: This looks pretty dramatic, a carbon price on top of the RET, on top of other costs. You are talking about going to the fourth quartile, which you called the ‘death zone’.

Mr Prosser : That is right. The issue for us is that it does not matter where you produce aluminium; it is very electricity intensive. In Australia that electricity intensity means that it is emissions-intensive, as it is through large parts of the world. Even with the sorts of exemptions we are talking about, a carbon price would be a significant cost impact, $100 a tonne—

CHAIR: Who are our most direct competitors?

Mr Prosser : Most of the growth globally in the aluminium smelting industry has been in China. China has gone from probably 10 per cent of the global capacity 10 years ago to more than 40 per cent now. Maybe three-quarters of the new investment in capacity is occurring in China. That is coal-fired electricity based.

CHAIR: In relation to alumina production, how does our emissions intensity/environmental efficiency—for want of a better word—compare with the emissions intensity in China?

Mr Prosser : For alumina refining, most of the energy is used in the form of heat. Both our energy intensity and our emissions intensity are very good compared with that of the rest of the world. We would be world leading in terms of both energy and emissions intensity. For aluminium smelting—

CHAIR: Even though we are world best practice, would a price on carbon in Australia make us less competitive compared with alumina refining in China and other parts of the world?

Mr Prosser : Absolutely. For alumina refining we are probably well down the global cost curve at the moment. We would be in the first or second quartile. This would shift us well out of that investment zone and much more likely to be in the zone where there would be curtailments down the track.

CHAIR: It is not just theoretical? Essentially a price on carbon would result in shifts in alumina refining in places around the world that are less environmentally friendly with higher emissions?

Mr Prosser : For alumina refining I do not think there is any question of that. The companies that run these facilities have global portfolios. They would be shifting their investment around in response to these sorts of prices.

CHAIR: Would people lose jobs? We would be making a sacrifice in Australia for an actual increase in emissions, not a reduction.

Mr Prosser : In the case of alumina refining, yes.

CHAIR: Let us go to smelting. How do we compare in relation to aluminium smelting?

Mr Prosser : With aluminium smelting, our electricity intensity is world leading. We are very efficient in the amount of electricity we use per tonne of aluminium. Because Australian electricity is relatively high emissions intensity, it is a less clear story for—

CHAIR: Because we use coal?

Mr Prosser : Because we are using coal-fired electricity. If we compared that with China, which is where the bulk of the competition is at the moment, it would be pretty similar. Both countries are using black coal to fire—

CHAIR: They also use coal, but you said we were world class in terms of electricity efficiency.

Mr Prosser : Yes.

CHAIR: Does that mean that China would still emit more even for the aluminium smelting? If we use the same energy source, one is more electricity efficient than the other?

Mr Prosser : It would be similar as to overall emissions. It is hard to get quality data out of China, but overall emissions intensity—

CHAIR: The best case scenario—

Mr Prosser : would be pretty similar between China and Australia.

CHAIR: In the best case scenario, we would shift emissions to some other place—China in this circumstance—without an improvement, but we would lose jobs in Australia without actually reducing global greenhouse gas emissions?

Mr Prosser : That is right. There would be an economic cost to Australia and no reduction in global emissions.

CHAIR: When we reached this final version of the CPRS back in December 2009, what was your position on that?

Mr Prosser : At the time that legislation was being proposed there were a number of issues that were important to us that had not been resolved. We had some issues dealt with and others unresolved, including things like the electricity factor, 100 per cent cap and those sorts of issues. At that point we thought it was an acceptable arrangement assuming we could get a satisfactory resolution to those other issues, but we have acknowledged that since then there has been a substantial shift in the global environment. Back in 2009 we would have had a fairly confident view about carbon prices being imposed in other countries—competing countries. That is far less likely to be the case now, if you look at the situation.

CHAIR: Do you expect there to be an emissions trading scheme in the US or in China any time soon?

Mr Prosser : Certainly in the US we have no better information than anyone else. There are huge question marks over it. I do not think there is going to be an emissions trading scheme in China. Our information is that even if there is a carbon price it is going to be at a much lower level than what is being talked about around Australia. We are getting feedback of the magnitude of one to three dollars per tonne.

CHAIR: Can you talk to us about the current economic circumstances in which your industry operates and in which a carbon tax would be introduced if it does indeed come into effect on 1 July 2012?

Mr Prosser : Eighty per cent of our product is exported. Like a lot of industries exposed to those international markets, the Australian dollar is making it a harder environment at the moment than it would at other times. Despite that, these facilities can be confident that they could compete in global markets. As to the magnitude of what is being proposed, it would be sufficient in 2012 to shift these facilities up the global cost curve, but looking out over investment time frames it would make it very difficult for those owners to invest in those facilities. Without sustaining investment it is a matter of time before there would be some closures in the industry.

CHAIR: How significant a cost is fuel and energy?

Mr Prosser : Electricity costs could be up to a third of the cost of production of aluminium. It is an extremely energy intensive product. It does not matter where you produce it in the world it is very energy intensive. So changes in costs of energy are a huge part of competitiveness.

CHAIR: Would it be fair to say that you already have an incentive to minimise that energy use—

Mr Prosser : Absolutely.

CHAIR: and that emissions intensity given that it is such a significant cost of production?

Mr Prosser : Absolutely. Most people who manage facilities or who run shifts in those facilities are being judged on their efficiency of energy use on a shift-by-shift basis. It is one of the key metrics within the industry for efficiency of operation.

CHAIR: Is that irrespective of a price on carbon?

Mr Prosser : It is a significant enough part of the cost that it is watched very closely and has been for decades.

CHAIR: Of the additional efficiencies that you would not be going for anyway, how many additional efficiencies can you go for on top of the efficiencies you would be chasing in any event?

Mr Prosser : At the very margin it may bring into play a few investments that are slightly submarginal now, but there is no low-hanging fruit within the aluminium smelting industry. Companies have looked as close as they can on an ongoing basis to find all the energy efficiencies they can.

CHAIR: What sort of things could you do?

Mr Prosser : For example, a cogeneration investment may be submarginal at the moment and may be brought on by a change in that relative cost of carbon, but there are no easy solutions. You could not walk through a facility and find easy things here and there to reduce emissions.

CHAIR: Did you see in the paper yesterday this report about how the Australian carbon tax, if it ends up being introduced at $25 a tonne, would raise in three months what the European scheme raised in six years across all of Europe with 14 per cent emissions, whereas Australia has 1.4 per cent?

Mr Prosser : I have not seen the report you are referring to, but I am aware that the proposal as it stands in Australia would be a more aggressive start than what the Europeans had been through and would see us, at a facility level, experiencing higher carbon costs than our European counterparts.

CHAIR: A tax which would raise in three months what the European scheme raised in six years would seem to be significantly more aggressive, I would have thought.

Senator HUTCHINS: On page 3 of your document you state you are not sure that with the China carbon costs exemptions might not apply? Could you expand on what you meant by that for the committee, please?

Mr Prosser : As an example, most of the carbon costs in China at the moment consist of a renewable energy surcharge, a bit like our renewable energy target. Theoretically that applies to all electricity generation. Our study suggested that in situations where the generator is captive to the smelter, that is, it is not selling into the grid, it is selling directly to the smelter—the situation in probably 40 per cent of the aluminium industry—it is not being subjected to that nominal tax. The 85c a tonne is the nominal level. It is actually probably being applied to no more than two-thirds of the industry in that instance.

Senator HUTCHINS: You said China had 10 per cent of the world’s—

Mr Prosser : About a decade ago, China would have been 10 per cent of global production. It is above 40 per cent now and heading further up.

Senator HUTCHINS: You said that the Australian industry exported 80 per cent of its product.

Mr Prosser : That is correct.

Senator HUTCHINS: Has that changed in the last 10 years?

Mr Prosser : That level of export has not changed dramatically. Over that 10 years while China has grown there is an interesting comparison between the US and Australia. In the face of that growth in China there has been significant reduction in capacity in the US. In Australia we have managed to incrementally increase capacity despite the level of investment going into China. We take some comfort from that we are able to compete at the global level even with aggressive investment at the Chinese level.

Senator HUTCHINS: The aluminium that is going into America now from China is where that 30 per cent has come from?

Mr Prosser : It is less of it going into America from China, as it is less coming out of America to go into China if you like. China is looking after more of its domestic consumption through domestic production.

Senator HUTCHINS: Has the consumption of aluminium increased over the last 10 years?

Mr Prosser : Yes, the consumption of aluminium increases for a number of reasons. As GDP rises in a country there tends to be higher consumption of aluminium per capita. The other is that, as we head towards a carbon constrained economy, we are actually using more aluminium in things like lighter weight transport, lighter weight buildings, more efficient food packaging and a range of things. We are actually going to see a lot more aluminium used in the future than we do now. The question is where that aluminium production will be.

Senator HUTCHINS: You are alluding to the building area. What were the other areas that lead to an increase in aluminium? I suppose it could be more people using aluminium cans? Are there any other—

Mr Prosser : That is certainly part of it. The major uses of aluminium would be in transport—cars, planes, boats, trains, buses; construction uses, such as curtain wall building systems and those sorts of things where you are looking to light-weight the building to reduce the foundations; packaging applications, such as aluminium cans and food packaging. It is also used in electricity distribution in electricity cables.

Senator HUTCHINS: You said that 80 per cent of the product is exported. Has the amount of tonnage grown in the last 10 years?

Mr Prosser : Yes, that is right.

Senator HUTCHINS: What would be the major export destinations?

Mr Prosser : Throughout South-East Asia. China is one market. Korea, Japan and other countries in Asia predominantly.

Senator HUTCHINS: Does your association have any relationship with the New Zealand equivalent?

Mr Prosser : There is one smelter in New Zealand and it is owned by a company which is also a member of ours, yes.

Senator HUTCHINS: Is it as active as the Australian companies?

Mr Prosser : I guess that is a question of judgment. But they are certainly alive to the impact of the carbon price in New Zealand and have been involved in the design of the system there.

Senator HUTCHINS: I am not sure whether you know, but would they be similar to the Australian companies in that they export 80 per cent of their product?

Mr Prosser : I could not say for sure. I would imagine they are export focused. New Zealand would not be a large market, so I would assume they were exporting a high proportion.

Senator CAMERON: You have tabled graphs from the Clark and Marron report.

Mr Prosser : Yes.

Senator CAMERON: Do you have a full copy of the report?

Mr Prosser : We have provided a copy of the Clark and Marron report to the government. We would be happy to provide a copy of the summary of that to the Senate committee.

Senator CAMERON: Have you provided to the government the methodology and assumptions that underpin the work that Clark and Marron have done?

Mr Prosser : Yes, we believe their methodology and assumptions are in the material provided to the government, yes.

Senator CAMERON: You believe they are or they are?

Mr Prosser : I think they are. Someone may have a question about it. But we certainly believe the report is—

Senator CAMERON: The methodology—

Mr Prosser : It is self-explanatory, I believe, yes. I would be happy to take questions.

Senator CAMERON: We had Alcoa appear before us in Perth. Have you read their evidence?

Mr Prosser : I have not. The transcript of that was not up, so I have not seen the transcript.

Senator CAMERON: Are they members of yours?

Mr Prosser : They are, yes.

Senator CAMERON: How many members do you have?

Mr Prosser : There is a dozen member companies, but predominantly the industry in Australia—Alcoa, Rio Tinto, Hydro, RUSAL, QAL and Alumina.

Senator CAMERON: All the companies that are out there seeking exemptions from the carbon price?

Mr Prosser : I do not think that is all the companies seeking exemptions from the carbon price.

Senator CAMERON: Is your membership predominantly opposed to a carbon price?

Mr Prosser : I do not think we are opposed to a carbon price at all. I think we have been consistent in our submissions for many years that we support a well designed carbon price. From the department’s own data, amongst the most emissions intensive companies and the most emissions intensive industry sectors in Australia, aluminium features highly, so obviously they are alive to the issue.

Senator CAMERON: So, your members are some of the biggest carbon polluters in the country?

Mr Prosser : They are some of the most emissions-intensive industries. ‘Carbon polluter’ is a pejorative term, I think. There is no question—

Senator CAMERON: Is it?

Mr Prosser : I think it is.

Senator CAMERON: If it does pollute and you emit, then is it not factual?

Mr Prosser : It is carbon emissions, absolutely. An aluminium smelter is purchasing electricity in the same way that a household purchases electricity.

Senator CAMERON: Are you in discussions with government now in relation to the export exposed companies?

Mr Prosser : The emissions-intensive trade-exposed. Certainly, we put a view to government as to what we think should be there in terms of structure, yes.

Senator CAMERON: Are those discussions still going?

Mr Prosser : Yes. At the moment the government has indicated that they are interested to hear people’s views. We are one of a range of people who are putting our views to government.

Senator CAMERON: Alcoa indicated that in China they were putting in state-of-the-art applications for reducing emissions; they were not over there simply increasing their cost effectiveness through polluting in China.

Mr Prosser : Any new facility built anywhere around the world will be the most modern technology. Certainly, what is going in in China is modern technology.

Senator CAMERON: In relation to some of the issues that the industry is facing internationally, we heard from Alcoa that they list the carbon price way down in terms of the big issues. I want to take you through some of the issues so that you can tell me how important they are. For instance, in Australia one is the strength of the dollar.

Mr Prosser : As I mentioned in the presentation, the strength of the dollar certainly hurts us like any other export industry.

Senator CAMERON: They say that there are a number of uncertainties regarding the strength, pace or sustainability of the global economic downturn.

Mr Prosser : Again, I would not disagree with that comment.

Senator CAMERON: That is a challenge for you. The risk of another downturn.

Mr Prosser : Yes.

Senator CAMERON: The impact of adverse changes in aluminium industry conditions generally?

Mr Prosser : I am not even sure what specifically you mean, but it sounds like it is including companies—

Senator CAMERON: They state, ‘... including global supply and demand conditions and fluctuations, including sustained declines or further deterioration in the London Metal Exchange prices for primary aluminium.’

Mr Prosser : Certainly, the LME price. Aluminium is traded at the LME price and virtually all transactions are done at that internationally set price. Any aluminium company would be concerned about the LME price.

Senator CAMERON: They state ‘... material adverse changes in the markets served by Alcoa, including transportation, building and construction distribution, packaging, industrial gas turbine and other markets. There are all these pressures and that is not pressure simply within Australia. These are international pressures on the aluminium industry.

Mr Prosser : Absolutely. I made the point in the opening statement that there is a range of issues that affects all producers equally or, in the case of exchange rates, may ebb and flow over time. Our concern about the carbon price is the extent to which it affects only Australian producers and only in one direction.

Senator CAMERON: How many tonnes of carbon does your industry emit per annum?

Mr Prosser : In total across the industry it is of the range of about 40 million tonnes.

Senator CAMERON: Is that one of the biggest emitters?

Mr Prosser : Depending on how you would divide up the industry sector, it certainly is a significant part of Australia’s emissions, yes.

Senator CAMERON: So, that is pollution that your industry is emitting into the atmosphere. Surely there has to be a price on that. You cannot just be a freeloader and pollute the atmosphere; can you?

Mr Prosser : We have never advocated being a freeloader. We have never avoided the idea of a carbon price. We currently pay a carbon price in the context of the renewable energy target of—I could look up the numbers—tens of millions of dollars a year. We are not seeking a no-cost outcome.

CHAIR: How much is that per tonne?

Mr Prosser : About $40 a tonne of aluminium is what we are currently paying.

CHAIR: How much a tonne of carbon?

Mr Prosser : It is hard to convert the renewable energy target to a dollar per tonne of carbon. There is no question that we are significant emitter in Australia. Eighty per cent of our production is going overseas. That is going into markets being supplied by other production which is not subject to any carbon price and is not likely to be for a decade at least.

Senator CAMERON: At the moment Australian industry is not a world leader. You are in this growing and investing quartile?

Mr Prosser : I am sorry, is the question whether they are in the first quartile?

Senator CAMERON: As I understand it, in the first graph your Australian operations are in the growing plus investing sector of the quartile.

Mr Prosser : That is an indicative thing. There is a range of facilities in Australia. I am not privy to exactly where they are on the cost curve, buy my understanding is that the bulk of the facilities in Australia would be in at least the second quartile. Some may be in the first quartile.

Senator CAMERON: But it does not show any in the first quartile.

Mr Prosser : It is an indicative graph and it needs to pick one point to show what happens. As I say, there is a range of facilities in Australia and they will be at different places on the cost curve by definition.

Senator CAMERON: If you are provided support by government to make sure you continue to be export capable, would that solve the problems for the industry? It would not, would it, because there are all these other challenges.

Mr Prosser : The first statement is a fairly general one, but certainly our concern on this issue is about how we can compete internationally in the export markets. I do not think we are seeking for the government to solve every issue that we currently face. This is an issue the government is proposing to impose on the business and we are looking to deal with that. The other range of issues that you identified will continue to be there and will always be there and the companies will manage those.

Senator CAMERON: To your knowledge, are the emissions intensive trade exposed industries being provided support with any proposed carbon tax?

Mr Prosser : At this stage we are being asked to consider the CPRS EITE arrangements as being what is being talked about. We have not seen that as being government policy and we have not seen that as a commitment to it. Can I stress that the costs shown in that third graph incorporate that CPRS EITE measure. Even under the CPRS ET measures we will face a substantially higher carbon cost in Australia than the Chinese producers.

Senator CAMERON: It depends on other aspects as well. It is not as if you are investing in new capacity here.

Mr Prosser : We could be investing in new capacity here.

Senator CAMERON: That is good to hear, but the capital cost would have been paid off the majority of the smelters now.

Mr Prosser : The original capital cost may have been some time ago. They have been reinvesting continually over time. In fact, an aluminium smelter that is not being reinvested in will not be operating for many years.

Senator CAMERON: I agree with that, but reinvesting is not as big as the upfront capital costs.

Mr Prosser : We would certainly prefer to see the upfront capital costs, but there is no reason that there could not be a further increase in capacity in aluminium smelting in Australia.

Senator CAMERON: There are two options that you are facing here politically. One is a market based option and the other is what is being described as direct action. Do you accept a market based option is the most appropriate way to deal with carbon pollution?

Mr Prosser : Our view not just now but over the entire discussion of these sorts of mechanisms that has gone on for more than 10 years has been that the first decision about whether it is a tax or a trading scheme or a regulation is less important in terms of its impact on our operations than the detail of what you do under each of those options. There would probably be a preference for a market based mechanism, but you could do a bad market based mechanism or you could do a good market based mechanism. You could do a bad tax and a good tax. You could do bad regulation or good regulation. The issue for us is the detail of what is there and how it impacts on our competitiveness.

Senator CAMERON: You are not arguing that the principles underlying the government’s market based approach are bad approaches, you are arguing about the price?

Mr Prosser : We have always engaged with the government of the day to try to get the policy right. The key thing for us will be at that next level of detail below that broad—

Senator CAMERON: But you are not coming here and saying, ‘Look, the government’s market based approach is a bad approach’; are you?

Mr Prosser : The CPRS, with some modifications made, could be a policy that we could operate under.

Senator CAMERON: In terms of the Clark and Marron approach—this was done in March 2011—the direct action approach was out there as well. What did Clark and Marron tell you about the direct action approach?

Mr Prosser : The Clark and Marron study was to look at the carbon cost in China. It did not look at Australian policy. It looked at the existing and the likely future path of carbon policy in China.

Senator CAMERON: You want to look at carbon policy in China, but you have not looked at the two options in Australia?

Mr Prosser : Clark and Marron were asked to do it. We had a specific job for Clark and Marron, which was to look at what happens on the ground in China. They are experts in the Chinese industry.

Senator CAMERON: Given that you are facing a carbon cost somewhere along the line, what comparison have you made between the market based government approach and the so-called direct action approach?

Mr Prosser : We do not have equivalent detail to be able to make a comparison. For example, under the CPRS we still cannot quantify precisely what those costs will be until we see what they are. We can run the numbers based on the CPRS EITE exemptions, but we have no assurance that that is what the policy will actually be.

Senator CAMERON: Have you or any of your members engaged in discussions with the coalition on the direct action approach?

Mr Prosser : We have certainly had discussions with the coalition. As far as what our members do, they would need to answer that question directly themselves.

Senator CAMERON: How much of the $10 billion would you put a bid in for in terms of a direct action approach?

Mr Prosser : I am not sure I could even answer that question. If there were funds available to reduce emissions, there would certainly be bids from within the aluminium sector for things like cogeneration investments that would reduce emissions.

Senator CAMERON: Cogeneration investments is one. How much would a typical cogeneration investment be?

Mr Prosser : One of the companies would need to give you an answer like that. I would not know off the top of my head.

Senator CAMERON: You can give us all this stuff about China. How about giving us something about Australia?

Mr Prosser : I could take it on notice. I literally do not know at the moment.

Senator CAMERON: I am happy for you to do that. So, you might put a bid in for cogeneration. What other areas would you look at?

Mr Prosser : That is a question that the companies would have to answer. They run the facilities and would know what their emissions reductions opportunities are.

Senator CAMERON: Do you represent the companies here?

Mr Prosser : Yes.

Senator CAMERON: Have you asked the companies what bids they might want to put in?

Mr Prosser : No, I have not pursued that at the moment.

Senator CAMERON: Why would you not do that?

Mr Prosser : Because we deal with the government policy that is on the table and we have engaged closely and constructively with both the department and the government-of-the-day throughout this process and we would continue to do so.

Senator CAMERON: Have you seen the Treasury analysis of the direct action policy?

Mr Prosser : Only in the media reports thereof.

Senator CAMERON: Is there anything that says the media reports are reflecting the Treasury report?

Mr Prosser : We have a range of issues in front of us to deal with. The one that we are going to devote the most attention to is the issue of the day. The issue of the day for us is to engage constructively on the CPRS EITE measures within the carbon pricing regime.

Senator CAMERON: It seems a bit weird to me that you do not engage in this other policy area that is in direct contrast to the government’s policy. Would you describe direct action as a market based approach?

Mr Prosser : Like a lot of these things, it depends on the detail. It could be done in a way that creates a market. The government could provide funds that could provide a market of some depth and some breadth that people could get into.

Senator CAMERON: A $10 billion market?

Mr Prosser : I am not the person to answer those questions.

Senator CAMERON: You have come here and made lots of statements about the government’s position. I thought you might have some views on direct access.

Mr Prosser : We do have some views and we have engaged, but you are asking me questions of detail beyond that which we have engaged at.

Senator CAMERON: Can you take it on notice. Can you provide any information as to how this broad based market that you believe is in the direct action approach can be—

Mr Prosser : Can I just clarify? I did not say it was in there. I said it could be done. Whether it is or not is not under my control.

Senator CAMERON: I am asking how you come to that conclusion. Can you take that on notice.

Mr Prosser : I can answer that part of it now. It could be a market based mechanism, if a quantity of funds were identified there and people bid into it and the funds were awarded to the lowest-cost emissions reductions, for example. That would be a competitive market.

Senator CAMERON: But that is not a market in the true sense of the market—

Mr Prosser : Your question to me was whether it could work like a market. I believe it could work like a market.

Senator CAMERON: It could have the appearance; is that what you are saying?

Mr Prosser : No, it could work like a market.

CHAIR: In your earlier comments you said that market based mechanisms and regulation can be good or bad. In this area for a market based mechanism to be a good market based mechanism to help reduce global greenhouse gas emissions it would have to be a global market based mechanism; would it not?

Mr Prosser : Certainly the first preference would be to have a global market. It is both a global problem and we operate in global businesses. If there is going to be a subglobal approach it needs to be done in a way that minimises or preferably neutralises any competitiveness impacts. That would be the key measure from our point of view, if you like, as to whether it is a good policy.

CHAIR: The risk of having a market based mechanism in Australia which applies to businesses that operate in a global market is that you might reduce emissions in Australia but shift them into other parts of the world?

Mr Prosser : Absolutely.

CHAIR: How do you fix that?

Mr Prosser : You could impose a carbon price in Australia in a way that gives business an incentive to reduce emissions but does not expose them to a cost higher than their competitors, either by linking it to the cost imposed on competitors or by having some sort of border adjustment or having some sort of permit allocation to deal with export—

CHAIR: You would want to have 100 per cent of compensation not of what you would be paying under the carbon tax but to take you to a benchmark internationally of what other companies that may be your competitors may or may not pay directly or indirectly; is that right?

Mr Prosser : To have something that could work both now and into the future, we think it would need to be linked to the carbon price being imposed on competing countries. We are saying that you would look around at your competitors. If 80 per cent of them are imposing a carbon price at a certain level, then you could impose a carbon price of a similar level.

CHAIR: We know that is not the case.

Mr Prosser : Yes.

CHAIR: Do you agree that that is not the case?

Mr Prosser : Currently there is a carbon price in China. It is a fairly minimal one.

CHAIR: Eighty-five cents.

Mr Prosser : For our industry, we believe it is 85c and only on indirect emissions.

CHAIR: But that is not a formal carbon price that is imposed. That is part of some measures. It is not an emissions trading scheme. It is not a carbon tax. It is not a—

Mr Prosser : It is a renewable energy surcharge in the same way that we pay a renewable energy target.

CHAIR: So, in the same way as we have a renewable energy target they have a renewable energy surcharge?

Mr Prosser : That is right.

CHAIR: But already in Australia you would find—

Mr Prosser : It would be much higher.

CHAIR:—a higher carbon price now than what China faces?

Mr Prosser : That is right.

CHAIR: So, the carbon tax emissions trading scheme would come on top of it?

Mr Prosser : That is right.

CHAIR: That necessarily is going to make you less competitive internationally.

Mr Prosser : That is right. Any additional carbon price will further reduce the competitiveness of Australian facilities.

CHAIR: Are you saying that you are quite happy to go along with a price on carbon as long as it does not cost you anything?

Mr Prosser : We are talking about degrees here. Certainly we do not want to see the competitiveness of Australian industries reduced any further. It could be done in a way that provides a further incentive to reduce emissions that does not impose additional costs. Pragmatically we probably understand there is some additional costs, but we are drawing attention here to the extent to which we are drastically reducing the competitiveness of Australian facilities, not just a little bit up the global cost curve but pushing them well up the global cost curve to where their long-term viability would be questionable.

CHAIR: Their long-term viability would be questionable; you talked about the ‘death zone’ in your graph. Would all of that happen without actually having to reduce global greenhouse gas emissions?

Mr Prosser : Yes.

CHAIR: You would have to wonder what the sense is. You do deal with the government of the day, as of course you must. You say that you could live with the CPRS with some modifications. Can you just detail for us exactly what those modifications are that you are looking for?

Mr Prosser : At one level we have identified there is a range of costs there that are not covered by the simple analysis. Electricity costs that are higher than the calculated pass-through, gas costs and the 100 per cent cap—we would be looking to see those addressed to try to reduce or eradicate those costs. Then we would be looking to see the decay in permit allocation. We do not know what it will be at this stage, but we would like to see no decay in permit allocation in Australia until we are seeing an equivalent price in competing countries and then to link that decay to how much the price is rising in the other countries. We are looking in the medium term to link the carbon price in Australia to what the carbon price is faced by our competitors.

CHAIR: We have had a pretty lengthy process in the last parliament, the Garnaut review, green paper, white paper, exposure draft, et cetera, and consultations along the way. Presumably you would have put those propositions to the government before.

Mr Prosser : Yes.

CHAIR: Why did the government not go along with what you were suggesting?

Mr Prosser : I cannot answer that. That is a—

CHAIR: Has the government not explained it to you? Presumably they would have put some arguments to you as to why they were not prepared to go that next step that you were looking for.

Mr Prosser : The predominant argument is that the cost that is going to be imposed on the economy is going to be spread around and we therefore should wear some of that cost.

CHAIR: Even though it is going to make you less competitive and could cost jobs without actually having to reduce global greenhouse gas emissions and potentially increasing emissions in other parts of the world?

Senator CAMERON: Is this a speech?

CHAIR: That is a question.

Mr Prosser : I think that the answers I have given so far—yes, any further increase in carbon costs would reduce our competitiveness. As I say, we deal with the government of the day and with the policy of the day that is on the table.

CHAIR: In an ideal circumstance you would not be talking about a carbon tax now; would you? You are dealing with it because you have to deal with the government of the day, but it is not your first preference?

Mr Prosser : I can see the difficulty that is there, which Professor Garnaut and others have described, as to how you deal with getting people to move when there is no advantage for them moving initially. I can see a situation where having a carbon pricing architecture that linked that carbon price down the track to the action being taken by other countries would be one way of moving. We could be part of that way of moving if it did not reduce our competitiveness to the extent that we lost investment and production in Australia.

CHAIR: For no environmental benefit?

Mr Prosser : For no environmental benefit.

CHAIR: Senator Cameron talked you through all of the pressures that you are already facing, like the economic circumstances and the exchange rate. These are all circumstances that you can manage but you cannot directly control; can you?

Mr Prosser : There is a range of comments I would make on those. A lot of them apply equally to facilities all around the world. Some do not apply equally to facilities all around the world. For example, exchange rates ebb and flow over time, and there are measures that you can use to manage those—hedge contracts and a range of other factors. There are three things I would point to in relation to a carbon tax. Firstly, it is under the control of the government. Most of those others are the result of broad—

CHAIR: We would make the decision, if we want to, to go down that path?

Mr Prosser : It would be imposed only on Australian producers and it will only head in one direction. We are not talking about an ebb and flow over time.

CHAIR: Essentially there is already a lot of pressure; is that what you are saying?

Mr Prosser : Yes.

CHAIR: But the carbon tax would come on top of that and that of course is what then takes you into what you have described as the death zone, the fourth quartile, where plants will close and may never reopen?

Mr Prosser : Yes. All the plants on the cost curve at the moment are dealing with most of those pressures. When the price of the product does drop or the market winds back, it will be the facilities in that fourth quartile that will close down as a result of that. Particularly in Australia, where we do not want our facilities shifted up into that fourth quartile. One of the ways we manage that range of other factors is to try to make sure that we are a lowest cost producer or low cost producer, so that when those other forces come to play they are not felt as strongly in Australia as they are elsewhere.

Senator CAMERON: On this point, you say this is now approaching the death zone; that if there is a carbon tax it puts you in the death zone? Are you talking on behalf of every aluminium producer?

Mr Prosser : I think I have been more careful than that. I think I have said that the RET cost would shift a second quartile facility into the third quartile—I believe that is true—and that a carbon price would shift us further up. Depending on the detail of that carbon price—

Senator CAMERON: But not necessarily into the death zone?

CHAIR: I am looking at this—

Mr Prosser : Depending on the detail of that, it may well get into the fourth quartile.

Senator CAMERON: But it may not?

Mr Prosser : Depending on the detail.

Senator CAMERON: It may not.

Mr Prosser : And it may.

Senator CAMERON: So, you do not know?

Mr Prosser : No-one knows. We do not have the details.

Senator CAMERON: You do not know. The other issue is, you challenged—

CHAIR: If this is the supplementary, I was still asking questions.

Senator CAMERON: I have one question after this, then.

CHAIR: Let us just be fair here. I understand that Senator Cameron is sensitive about the risk of going to the fourth quartile. I am looking at your second graph of course, which does take you into the fourth quartile. Would the CPRS without the adjustments that you have asked for—without the things that you have just detailed—have taken the aluminium industry into the fourth quartile?

Mr Prosser : I believe it would have taken some facilities in the Australian industry into the fourth quartile, yes.

Senator CAMERON: If you could you give us a list of those ones that would move into the fourth quartile, that would be very helpful.

Mr Prosser : I said ‘I believe’. I did not say specific things. It is up to the companies. I cannot provide that.

Senator CAMERON: Are you sure?

CHAIR: Do you really want a list of companies that might collapse?

Senator CAMERON: No, I am asking whether he is sure. He says he believes; he is not sure.

Mr Prosser : I have seen on a confidential basis where some of the facilities are on the cost curve, and the calculations under various scenarios of what the increasing costs will be are relatively straightforward. The cost curve itself is something that is available to people who subscribe to that.

CHAIR: You might want to take this back to your member companies. But if on a commercial in-confidence basis, in camera, there is data they might want to share with the committee, we would appreciate it, but we obviously understand the commercial-in-confidence aspects.

Mr Prosser : I would be happy to pass that request on to the companies and I believe the companies will—

Senator CAMERON: In relation to the increase in the cost of aluminium per kilo—is the measure per kilo?

Mr Prosser : It is usually per tonne.

Senator CAMERON: What is your estimate of the impact of a modest carbon price of $25 to $30?

Mr Prosser : On the price?

Senator CAMERON: Yes.

Mr Prosser : Nothing. The price is set on the London Metals Exchange. It will not budge at all.

Senator CAMERON: I am talking about how much the input cost for—

Mr Prosser : For costs of production? I think they are in the data I provided. Graph No. 3 states that under what the government is asking us to look at we are looking at the moment at $40 a tonne of aluminium and by 2020, on our estimates, it would rise to about $160 a tonne. That is using the government’s CPRS EITE measures. The additional information they have suggested, based on a $20 a tonne carbon price, switching to an emissions trading scheme, in 2016—

Senator CAMERON: You have given the government the assumptions and the methodology for this?

Mr Prosser : Yes. I am happy to run through them now. There is a $20 a tonne starting carbon price, 94.5 per cent exemption with a 1.3 per cent decay and a 90 per cent floor as part of the CPRS. Switching to an emissions trading scheme in 2016, as outlined by the multiparty committee document. Then once it switches to an emissions trading scheme I have used the Treasury modelling CPRS minus-five scenario for the carbon price.

Senator CAMERON: You have made a number of assumptions about China?

Mr Prosser : That is right.

Senator CAMERON: And the government knows those assumptions?

Mr Prosser : That is based on the Clark and Marron report with the assumptions in it, yes.

Senator CAMERON: We will see how good your assumptions are.

Mr Prosser : As we can for the Australian situation. In both situations we are left trying to make our most reasonable estimates of where the carbon price is heading in both countries.

Senator CAMERON: Your assumption is that China does very little between now and 2020?

Mr Prosser : The assumption is that China introduces a carbon price, but it would be at a relatively low level initially, something of the order of $2 to $3, and it would rise to something of the order of $6 to $9 by 2020.

Senator CAMERON: We will see how good those assumptions are.

CHAIR: Thank you. We very much appreciate your contribution to the committee.