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Senate Select Committee on the Scrutiny of New Taxes
17/05/2011
Carbon tax pricing mechanisms

McKELLAR, Mr Andrew, Chief Executive, Federal Chamber of Automotive Industries

REILLY, Mr Richard, Chief Executive Officer, Federation of Automotive Products Manufacturers

[14:45]

CHAIR: I now welcome Mr McKellar, the Chief Executive of the Federal Chamber of Automotive Industries and Mr Reilly, the Chief Executive Officer of the Federation of Automotive Products Manufacturers to today’s hearing. Thank you for being here today. Would you like to make an opening statement?

Mr McKellar : Yes. Thank you for the opportunity to be here. I would like to make a brief opening statement on behalf of my association, the Federal Chamber of Automotive Industries, and my colleague will also add to those comments from his perspective representing automotive component manufacturers in Australia.

The first observation that I would like to offer is that the car industry in Australia supports action to reduce CO2 emissions and, indeed, the industry in Australia and globally has achieved very significant progress in regard to that objective. Here in Australia, for example, we have successfully reduced CO2 emissions from new motor vehicles sold in the Australian market by 11.6 per cent since 2005 alone.

Around the world global automotive manufacturers are undertaking significant investments to develop more fuel efficient and low emission technologies. To that end, manufacturers are investing in fuel efficient petrol engine technologies, hybrid engine technologies, clean diesel, electric vehicles, alternative fuels including biofuels and gaseous fuels technologies, and ultimately in future technologies such as fuel cell technology.

In Australia, local vehicle manufacturers have achieved significant advances and made very significant investments in new vehicle technologies as well. In the last year or so Toyota, for example, has started producing a hybrid Camry in Australia. Holden has just commenced production on a new small car in Australia, the first time for a number of years that a small car has been produced in the Australian market. It has other technologies that it has brought to the market to encourage enhanced fuel efficiency, including active fuel management and others. Ford is also enhancing its model line-up. It will shortly introduce production of a new four-cylinder Falcon to be powered with an eco-boost engine and will also be introducing liquid injection LPG and diesel options on its locally produced Territory.

In relation to the proposed introduction of a carbon price in Australia, we have sought to clarify some of the possible implications for the car industry. To that end, the FCAI and the FAPM have commissioned PricewaterhouseCoopers to undertake an analysis of the potential impacts of a carbon price on the Australian automotive industry. Key points arising from this analysis include the following. From that assessment we have calculated that the projected additional costs to the motor vehicle industry would be estimated to be in the order of $56 million to $84 million a year based on a carbon price of $20 to $30 per tonne. With assistance arrangements based on the emissions-intensive, trade-exposed criteria developed for the CPRS, it is estimated that the cost burden to industry would still be in the order of between $30 million and $46 million a year.

The Australian automotive industry is a highly trade-exposed industry. Currently, more than 80 per cent of all vehicles sold in the Australian market are imported and up to 50 per cent of local vehicle production goes to exports. In addition, $1.1 billion in components are also sold for export annually. The automotive industry operates in a highly competitive international market and it has little or no ability to pass on any additional cost burden. Motor vehicle manufacturers are likely to increasingly source components from international markets to avoid incurring a carbon price within automotive products negatively impacting on the competitiveness of the Australian component sector. A reduction in competitiveness in the global automotive market could ultimately result in a loss of these value adding activities offshore.

I will defer to my colleague, Mr Reilly, to also make some comments.

Mr Reilly : We are an industry association representing the Australian automotive components sector. We have approximately 100 members who employ 37,000 people with sales over $8 billion.

As Mr McKellar said, FCAI and FAPM commissioned PWC to do some work for us regarding the impact of a carbon price on our respective parts of the industry. From the component sector side of things, we have also been investing and working to reduce the carbon emissions within our componentry that has been developed within Australia, working with the car companies to improve the emissions of a vehicle.

In summary, from this assessment that we have commissioned from PWC, it is clear that the Australian automotive industry faces the prospect of significant additional costs as a result of the proposed introduction of a carbon price and, depending on the eventual carbon price, these costs over a 10-year period could exceed $400 million. A proportion of these costs will be borne by vehicle manufacturers, as Mr McKellar mentioned, and the remainder will be incurred by my side of the industry, the components sector. Given the trade-exposed nature of the automotive industry there is little or no scope for vehicle or component producers to pass these costs on through the supply chain. Either way, the future viability of the Australian automotive industry is undermined.

Crucially, it must be noted that previously contemplated approaches to compensate a narrow range of industries on the basis of emissions intensity were wholly inadequate. The CPRS definition of emissions intensity, based upon emissions per unit of revenue, tends to favour low value adding activities over those which involve advanced manufactured goods, such as motor vehicles. Each time a product is transformed or undergoes value adding the revenue created through future sale of the product increases, therefore the more highly engineered or transformed the product is, the less likely it will meet the CPRS threshold for emissions intensity.

Introducing a carbon price in Australia in advance of other major automotive producing economies, without effective and properly funded measures to offset increased costs, will adversely impact the ability of the Australian automotive industry to attract future international investment and sustain employment.

I will hand back to Mr McKellar for a conclusion.

Mr McKellar : In terms of the impact and the way forward, the industry has jointly made a couple of key recommendations in its submissions to government and what we have urged the government to consider, as a minimum, is to fully offset the increased cost impact of a carbon price on trade-exposed industries, including the automotive industry. We have argued that it is essential that any transitional arrangements should be maintained until there is clear progress towards a comprehensive and binding international framework for future action on carbon emissions. We have proposed that any additional costs could be substantially offset through a program to rebate the cost of higher energy prices to effected industries. This could be modelled on the previously proposed transitional electricity cost assistance program but would need to fully offset these costs for an extended period. In addition, we have also suggested that the government give consideration to the establishment of a climate technology fund to attract investment and to provide the more rapid uptake of emerging low emission technologies applicable to trade-exposed industries.

Beyond that, we have urged the government to consider reducing the trade distorting impact of a carbon price by adopting a nominal or low carbon price to be maintained until there is clear progress towards the implementation of a binding international framework, and by low or nominal, we would mean something in the order of $10 per tonne or less.

That summarises the key options that we have put to government and the analysis which is contained in the submission that we have made to this committee.

CHAIR: Mr Reilly, you talked about 37,000 people in the automotive products manufacturing industry. How many employees are in the part of the industry that you represent, Mr McKellar.

Mr McKellar : In automotive manufacturing there are about 50,000 currently, so amongst the vehicle manufacturers it is something in the order of 15,000.

CHAIR: So it is 50,000 across—

Mr McKellar : Across both sectors, that is correct.

CHAIR: Where is your main competition coming from?

Mr McKellar : It is from a range of markets. As I said, in terms of the Australian new vehicle market, which in total is about 1 million units per year, 80 per cent to 85 per cent of all the product sold in Australia is imported, so about 15 per cent or less is sourced or produced locally. Australian vehicle manufacturers have proven themselves to be internationally competitive and the export business is a very significant part of their business model.

CHAIR: Let me rephrase the question. I am looking at the countries around the world that are your stiffest competition.

Mr McKellar : The major producing markets from which we import are Japan, Thailand, Korea and Europe—Germany in particular, but all the countries in the European Union. Those would be our biggest source markets in terms of finished vehicles.

CHAIR: In the European Union the price on carbon is so low that we would raise with what is proposed in Australia within three months what was raised across all of Europe in six years. What is proposed in Australia is much more aggressive than what is in place in Europe. Of course, in Thailand, Korea and Japan there is no suggestion there that there would be a price on carbon.

Mr McKellar : On that point at this stage, we are awaiting to see the details of what the government will propose. Obviously there is a dialogue, a discussion, a public policy debate, that is occurring in Australia on that point and I think the automotive industry is seeking to contribute to that process. We are contributing through public submissions and direct consultations with government. Part of our submission addresses the framework that might be adopted, and that includes compensation for trade-exposed industries to neutralise any trade distorting impact but also on the level of the price. From an automotive industry standpoint we would advocate adopting a low or nominal price here in Australia. I do not think that has been set at this stage.

CHAIR: We have got to work on the best of our information. Professor Garnaut talks about a price of $20 to $30 per tonne. The new Treasury Secretary, Dr Parkinson, has said that you would need at least $26 per tonne if you are still committed to the five per cent domestic emissions reduction target by 2020. Deloitte have put something to the government today which talks about a $40 per tonne carbon price, which the Greens have said they would be supportive of. You talked about a cost impact based on your assessments of $400,000 million across the industry.

Mr Reilly : Over 10 years.

CHAIR: Is this $30 million to $46 million that you talked about per year?

Mr McKellar : If you were looking at something which was in the range of the price which I think has been put forward by Professor Garnaut, it would approach that figure.

CHAIR: Is that $30 million to $46 million?

Mr McKellar : That is based on a $20 to $30 per tonne price. If you pick something in the order of $25 then it is approaching $400 million over a period of 10 years.

CHAIR: So $40 million a year roughly?

Mr McKellar : Roughly, that is correct.

CHAIR: If you get a $40 million a year additional impost in terms of your cost of production, what effect would that have on employment in the automotive industry?

Mr McKellar : That is very difficult to say. In our submission we have identified the fact that that sort of increase, certainly if it were to be uncompensated, would have a significant impact on the profitability of local manufacturing activities, both in the supply chain and also at the vehicle manufacturing level. If that were to occur then what it would lead to is a situation where it becomes much harder for the companies, many of which in the industry are international subsidiaries and have international parent companies which are making decisions about where they place future investment, whether they continue to place that investment in an economy like Australia or whether they look to place it elsewhere around the world, and in particular in other competing markets, whether it be Thailand, China, Korea or somewhere else. The issue is how it would impact on those future investment decisions. At this stage it is very hard to pre-empt what would occur, other than to say that obviously if manufacturing profitability were to be undermined and not compensated, then it would make it much harder to secure those future investment mandates.

CHAIR: You say that it is very difficult to say, but what we know is that the starting position is where the carbon pollution reduction scheme ended up back in December 2009, so all other things being equal, if the same compensation and the same arrangements are in place as were proposed by the carbon pollution reduction scheme in its final iteration, what would be the impact on the automotive industry?

Mr McKellar : The impact in relation to what?

CHAIR: The impact in relation to cost of production, in terms of international competitiveness, jobs and so on?

Mr McKellar : The figures that we produced related to the potential cost impact on the supply chain as a whole. The $30 million to $46 million a year is our estimate. That would be based under similar compensation arrangements as were proposed under the CPRS, so it would have a material impact on manufacturing competitiveness.

CHAIR: When you say material, $30 million to $46 million sounds a lot, but it is hard to assess how relevant it is in isolation. That is $30 million to $46 million on top of how much?

Mr McKellar : The record in terms of profitability for the local vehicle manufacturers in the period since 2004 is that there has been intense competitive pressure. There has been significant global restructuring. I think we are coming back into a situation now where we are seeing returning profitability in local manufacturing, albeit in extremely tough competitive circumstances. The strong value of the Australian dollar is something that is adding to the competitive pressure that those local vehicle manufacturers face, both in terms of sustaining domestic market share and also in terms of holding on to those export markets which they have worked to build up over a number of decades.

CHAIR: The Australian dollar is a challenge, but it is there. The overall economic conditions are a challenge and they are there. I guess the carbon tax is something that we, as a parliament, will or will not decide to legislate. That is something that is in our control. What I am trying to get a sense of is that $30 million to $46 million. If things are as they were towards the end of the carbon pollution reduction scheme process, what would that mean as a proportion? Given current profitability and profitability trends, all other things being equal, what will $30 million to $46 million a year in additional costs do to the viability and profitability?

Mr McKellar : Our submission highlights that that would make it more difficult for producers and manufacturers in the automotive industry to secure renewed or continuing investment mandates. It would make the case that much harder. That is why in our submission we have urged the government and the parliament to contemplate that there would need to be additional mechanisms in any final carbon price arrangement which compensate, offset or rebate those higher energy costs, in particular. We have also said that we think it is important to encourage ongoing investment in low emission technologies to assist, aid or speed the process of transitioning to a lower emission economy in Australia. I think those two things are important. That is another reason why we have advocated starting in with a low or a nominal fixed price and extending that fixed price period until we have clear direction on the likelihood of a binding international framework.

CHAIR: You used the words that you wanted to see the costs fully offset.

Mr McKellar : Correct.

CHAIR: So what you are saying is that whatever you pay you want to get back?

Mr McKellar : In terms of the cost structure that the industry would face we would want to ensure that that was neutralised.

CHAIR: Neutralised means what you put in you want to get back.

Mr McKellar : That is right. Therefore, in terms of the competitive position of the industry that it is not disadvantaged relative to either those import industries that it competes with or other locations for investment that it also competes with around the world where there may not be an equivalent carbon pricing mechanism.

CHAIR: We have had a bit of a discussion about a magic pudding before. We have had a bit of evidence even in our previous inquiry as well where businesses or industries would come in and say, ‘We are all in favour of a price on carbon. However, for our industry we need to be fully compensated because otherwise we will be less competitive internationally.’ That all makes sense. I understand that. But if every emitter who pays a price on carbon is then fully compensated where is the government going to find the money for so-called household assistance and all these other things that they want to provide funding for?

Mr McKellar : I guess that is a broader question for government and not one that I am able to resolve or answer necessarily for the committee.

CHAIR: It is a dilemma though; isn’t it?

Mr McKellar : We have made our submissions. I represent a trade-exposed industry and obviously that is an important part of the debate. I guess the challenge for any policy maker looking at this issue is how do you square that circle? I think we have made the point on behalf of the industries that we represent. Ultimately it will be for the government and the parliament to determine whether or not other mechanisms need to be provided and at what level.

CHAIR: I appreciate that, but if we look at the picture as we currently know it because we have got the Carbon Pollution Reduction Scheme in its final iteration; you say that will not work for you. It will cost about $30 million to $46 million a year given the compensation measures that were in there. You say you want full compensation so the impact would be neutral. This is for the parliament to understand this as well: if it is what was on the table at the time of the Carbon Pollution Reduction Scheme and the government does not move, what would it mean for the viability of the automotive industry in Australia if there is no movement on that front?

Mr McKellar : I think we have highlighted that in our submission. I guess that is why we are saying that what was proposed under the CPRS was not adequate. It was inadequate—

CHAIR: If it was not adequate, what is the consequence of—

Mr McKellar : I think I have identified that. That is, that it would make it much more difficult for us to secure future investment and to sustain employment at its current levels. Therefore—

CHAIR: So employment might go down?

Mr McKellar : I am sorry?

CHAIR: I am just trying to understand what you are saying. When you say it would make it more difficult to sustain employment at its current level, what you are really saying is that jobs will reduce, will go down?

Mr McKellar : It is an additional factor that would impact on competitiveness. Other circumstances may change as well, so I cannot speculate on what the final level would be but, other things being equal, it would make it more difficult to secure future investment in model development and in component manufacturing in Australia.

CHAIR: But other things being equal, are challenging economic circumstances—

Mr McKellar : Sure.

CHAIR: The high dollar? So other things being equal, it is already a pretty challenging environment—yes?

Mr McKellar : It is, yes.

CHAIR: So the carbon tax, emissions trading scheme, or whatever mechanisms you use to put a price on carbon on top of it, unless there is a change to what it is that you are seeking—

Mr McKellar : That is precisely why in our submission and in our proposals to the government we have urged the government to consider additional mechanisms for compensation, additional measures to encourage investment in low-emission technology as well as—and I think most crucially—a low or nominal fixed starting price over an extended period for any carbon price in Australia.

CHAIR: Has the government said that they were considering it when you told them that you wanted them to consider it?

Mr McKellar : I think we, along with many others, have made submissions. It is our earnest hope that those submissions are being considered seriously. I think we certainly take the government at its word that they are. I think we make the submissions. We expect that there is a process of consideration being given to all of those submissions and my understanding is that we will see further direction from the government on this within the next few months.

CHAIR: This is the final question from me now. This might be the only opportunity you get to speak. I guess it is important for the purposes of this committee and for the purposes of the parliament for us to understand what the implications would be if there is no movement from where we ended up with the Carbon Pollution Reduction Scheme where in effect you would end up being hit with an additional $30 million to $46 million worth of cost per annum. The parliament needs to understand in very clear terms what the consequences would be for your industry if that were the circumstance.

Mr McKellar : I think I have sought to address that question as best I can in relation to what we have said in our submission. I am not sure if Mr Reilly has anything that he wishes to add.

Mr Reilly : It just gets back to competitiveness and the ability for companies to invest. It is an additional impost on the business that is currently doing it extremely difficult, certainly in the component sector which I represent. The lack of domestic volumes from the three vehicle manufacturers; lack of access to capital for investment purposes; the cash flow difficulties associated with the lack of investment volumes; vehicle volumes; competitive pressures; we talked about the Australian dollar; the global sourcing policies of the Australian vehicle manufacturers; a low or non-existent tariff wall at the moment; and then of course imports from low-cost manufacturing countries in the component sector which are currently being imported into Australia. An additional tax on the component sector will have a further impost on the competitiveness of the sector.

CHAIR: If things are this difficult and this bad and you get a carbon tax without full cost offsetting on top of it, would that potentially put your industry over the edge?

Mr Reilly : It is hard to say. It is difficult to say. I am trying to outline the situation with the business conditions of the industry at the moment from the component sector side of things, and it is an extremely difficult industry at the moment.

CHAIR: Would the last thing you need be an additional cost impost on top of it?

Mr Reilly : Yes, that is right.

Senator CAMERON: I am glad you are not predicting the demise of the car component sector. I am sure you do not want to do that here.

Mr Reilly : Not at all.

Senator CAMERON: Even with the encouragement of Senator Cormann.

Mr Reilly : Sure.

Senator CAMERON: When did the FCAI first start discussing a carbon price in Australia?

Mr McKellar : We have obviously looked at this debate now over a number of years. I think we have progressively made an assessment of the potential issues for the industry going back over the past 10 years or more that I think that has been a public policy debate in Australia. I guess we have learnt more as that debate has gone on and as specific proposals have come forward, and as the CPRS proposal was considered and debated within the parliament. Then ultimately the decision was taken to defer that and to look at alternative proposals. I think what we have done in this context is that we have sought additional, detailed input or research to confirm and verify our analysis of the embedded carbon content—

Senator CAMERON: I only asked you a simple question, if we could keep it simple so I can walk you through where I am trying to go.

Mr McKellar : Absolutely. Fire away.

Senator CAMERON: I might come to all those issues that you just outlined. You have dealt with it for a decade or more. The Howard government had their Shergold report. Are you aware of the Shergold report? Did you make submissions on the Shergold report?

Mr McKellar : I cannot recall. We have certainly been an active contributor in the past analysis and one of the key things that I think we would have observed is that up until the Copenhagen conference there was an expectation that there was a momentum towards an international binding framework. As it turned out in that particular conference that was not achieved. Equally, in other major economies such as the United States, there was a debate and an examination there of trading mechanisms that might be contemplated. Again, that has not proceeded. And we look at the situation in other major competing economies and have to make an assessment currently about what the situation is there as well. All that informs the submission that we have made in this context.

Senator CAMERON: You are good. You want to keep taking me away from my point. But never mind. We will keep coming back. I will be patient with you.

Mr McKellar : Keep trying to bring me back.

CHAIR: It is not personal.

Senator CAMERON: I know that. I know Mr McKellar has been to many of these. It reminds me of Frost and Nixon. He is a good Nixon, this guy. That is a compliment, by the way.

Mr McKellar : Thank you.

CHAIR: Calling somebody a Nixon is to be regarded as a compliment. That is interesting.

Senator CAMERON: That is as good as it is going to get. I have just gone through the submissions to the Prime Ministerial Task Group on Emissions Trading. These submissions closed in 2007 under our government. I cannot see you.

Mr McKellar : I must say the FCAI is a member of the Australian Industry Greenhouse Network and I believe they would have provided a submission. We may not have provided one under our own separate cover, but we certainly would have participated in the discussions and the debates at that time.

Senator CAMERON: Do you normally leave these big, important matters to the Australian Industry Greenhouse Network?

Mr McKellar : No, not at all but we have participated through that forum and I am sure there would have also been other representations that were made to government at the time. At that stage I was not the chief executive, so if there was a different approach taken then it is quite possible that was prior to my tenure as chief executive. In this context and given this particular set of circumstances that we face now, it has been the assessment that I have taken along with my member companies that it is appropriate for the federal chamber to make a submission to the departmental inquiry. We have taken the opportunity, given that this committee’s inquiry has been established, to also make a submission here.

Senator CAMERON: It is interesting that the Howard government raises the possibility of a carbon price, an emissions trading scheme. The Shergold report says, ‘Do not wait for the rest of the world. It is cheaper to get out and do it now.’ Yet your organisation that is now jumping up and down on the spot under a Labor government did not even make a submission to the Howard government’s inquiry. I just find that a bit funny.

Mr McKellar : The circumstances are very different for a couple of reasons. Firstly let me take you up on the point that we are jumping up and down. I do not think we are jumping up and down. I think we are making submissions in a public policy debate which I think we are entitled to do—

Senator CAMERON: I accept that.

Mr McKellar : and I think that is entirely reasonable. That is the process that has been set up. I think we would expect we will get a very fair hearing as part of that process. What occurred under previous debates and under previous governments I think was in a very different context. As I say, in the past I think the industry broadly was very supportive of an emissions trading model. Part of the context for that was that at the time it would have been our assessment that globally there was momentum towards that sort of framework. I think post the Copenhagen conference circumstances have changed quite dramatically. Clearly agreement was not arrived at in that particular context. Had it been I think we would have been entirely comfortable with moving towards that sort of framework in a coordinated way with other major economies. I think that is a very key difference in the circumstance that we currently face today.

Senator CAMERON: Is Ford Motor Company one of your members?

Mr McKellar : It is.

Senator CAMERON: Let me tell you what the Ford Motor Company said in their submission. Ford Motor Company made a submission and they said in summary, ‘Ford Australia acknowledges the role an emissions trading scheme may well play in future greenhouse gas abatement initiatives.’ That is quite unequivocal.

Mr McKellar : I am sorry, this is a submission to—

Senator CAMERON: This is their submission to the Shergold inquiry.

Mr McKellar : Absolutely.

Senator CAMERON: It was a few years ago under the Howard government. They continue, ‘However, the company believes it is important that any trading scheme be globally integrated in its initial design and application.’

Mr McKellar : That is very consistent with what I just said.

Senator CAMERON: And, ‘A design in Australia will allow for global integration under this proposed scheme that’—

Mr McKellar : I wholeheartedly agree.

Senator CAMERON: It continues again, ‘Australia should also take full advantage of being able to learn from overseas real world experiences.’ I must say that there have been more inquiries to look at what is happening around the world to develop this. Further, ‘The potential national economic significance of such a scheme also means that Commonwealth government participation is an imperative.’ We meet that approach. ‘Furthermore, different sectoral characteristics will demand a flexible approach towards the sheltering of particularly impacted sectors from any nationally based scheme where Australia sought to impose such an initiative in the absence of concurrent initiatives by its trading partners.’

Ford are actually saying that you may not get an international scheme so you have to take that into account. The Commonwealth government is taking that into account by looking at trade-exposed companies, so we are meeting everything that Ford Motor Company said to the Howard government—

CHAIR: Except for the global—

Senator CAMERON: I do not know if you have looked at the Shergold report recently—

CHAIR: Yes, I have.

Senator CAMERON: but the Shergold report says do not wait for an international scheme.

Mr McKellar : Can I just clarify one important point there? The automotive industry and our organisations are not saying that the government should not proceed with a carbon pricing mechanism. I think that is a very crucial point. We are not disagreeing. The government has announced this policy. The automotive industry seeks to work with the government the day, so I think we have taken on board the fact that that is the government’s direction. We are making submissions to the government about factors that might be taken into account in designing that carbon price mechanism.

Senator CAMERON: The only point I am making is that under the Howard government Toyota did not make a submission, GM did not make a submission, the FCAI did not make a submission and all of what this government is saying is consistent with what the Howard government was proposing, and that is to act early to make sure that we are not left behind in terms of reducing our carbon footprint. All these arguments that you are putting up now were not put to the Howard government, and it is only a couple of years ago. I cannot really understand that. Let us move on from that. That is back in March 2007. It is not ancient history.

Mr McKellar : It is prior to my tenure as chief executive so I cannot really account for what the organisation might have done before I was in the chair.

Senator CAMERON: Or your members? Your members are still your members?

Mr McKellar : That is correct.

Senator CAMERON: Toyota did not make a submission. GM did not make a submission—

Mr McKellar : As to what factors influenced their decision or our decision at the time—

Senator CAMERON: I may be wrong, but I cannot see one submission from a component sector company. But I may be wrong because there are a number there. We are faced with this—

Mr McKellar : As I say, at the time I think broadly we were supportive of the development of an emissions trading framework.

Senator CAMERON: And you still are?

Mr McKellar : Broadly we are comfortable with the direction of developing a carbon price in Australia and we understand that that is the government’s policy. We have made submissions in relation to how we believe that should be implemented and the factors that should be taken into account.

Senator CAMERON: What is the industry turnover in dollar terms?

Mr McKellar : I would have to clarify that, but my recollection is that it is in the high $20 billion—$26 billion to $28 billion I would hazard a guess.

Senator CAMERON: I am happy for you to correct the record but you would not be far out. I would not expect you to be tens of billions of dollars out.

Mr McKellar : I would hope not.

Senator CAMERON: I would hope not, too. It is in the range of $26 billion to $28 billion, subject to your checking. Your annual turnover is $26 billion to $28 billion. How much government support is involved in that?

Mr McKellar : That figure would be the automotive market as a whole. That would be my expectation.

Mr Reilly : That would be the producers plus the after-market, et cetera. It would be the whole industry.

Senator CAMERON: The $26 billion to $28 billion?

Mr McKellar : Indeed.

Mr Reilly : I would have thought that would be the whole industry, not only the vehicle manufacturers and component sector, but the after-market as well.

Senator CAMERON: Can you just check that for us.

Mr McKellar : Yes, we will seek to clarify the numbers.

Senator CAMERON: So the $26 billion to $28 billion is the whole industry. Do you have a figure for the component sector?

Mr Reilly : Sales are about $8 billion.

Senator CAMERON: Eight billion dollars?

Mr Reilly : Yes.

Senator CAMERON: What is the specific effect of this modelling you have done, this $30 million to $46 million per year? Is that across the whole industry or is that just on component and the manufacturing—

Mr Reilly : That is just on components and manufacturing.

Senator CAMERON: What is the turnover for the major vehicle producers?

Mr McKellar : I would have to seek clarification on that. In any event the figure that we have cited here is a cost impact. I think the relevant consideration is the proportion that would account for in terms of manufacturing profitability or future manufacturing profitability, not turnover. That is one of the issues. We are a high-value but low-margin industry.

Senator CAMERON: Sure, but turnover is an issue—

Mr McKellar : I think it is a distracting issue, to be perfectly honest with you. I think—

Senator CAMERON: You may think that. I am interested—

Mr McKellar : At the end of the day the thing that determines whether or not investments go ahead is profitability—

Senator CAMERON: I am just interested in your turnover.

Mr McKellar : Well, as I say, I am—

Senator CAMERON: Is it $8 billion?

Mr McKellar : more than happy to provide a clarifying figure as to what the specific turnover is for manufacturing.

Senator CAMERON: What is roughly the majors turnover per annum?

Mr McKellar : As I say, I will provide those figures to the committee but I would have to seek clarification as to how much of that related to local manufacturing versus their total product turnover.

Senator CAMERON: You cannot give me a figure for your members?

Mr McKellar : Not off the bat, no.

Senator CAMERON: Would it be in the billions?

Mr McKellar : Absolutely.

Senator CAMERON: Would it be higher than the total component sector?

Mr McKellar : I would expect it would be, yes.

Senator CAMERON: Let us say at a minimum it would be $16 billion for both—

Mr McKellar : That could be very much in the ballpark.

Senator CAMERON: A $16 billion turnover and the net effect of a carbon price is, in your estimate, between $30 million and $46 million for a $16 billion turnover.

Mr McKellar : Sure.

Senator CAMERON: Currency fluctuation would be a much bigger problem in terms of where you are?

Mr McKellar : It is a significant factor. That is absolutely true. It does impact on competitiveness and the extent of the appreciation in the Australian dollar, not against all currencies, but it certainly has had a very significant impact on competitiveness. That is undeniable.

Senator CAMERON: In this report that you have done have you provided the methodology and the underpinning assumptions to government?

Mr McKellar : I believe that there is a statement on those assumptions and methodology which has been provided with the report—

Senator CAMERON: Can you provide it to us?

Mr McKellar : I believe we have.

Senator CAMERON: That would be handy. How much do you argue it will be in terms of the cost of, say, a large, mid and small vehicle?

Mr McKellar : There are some figures that are quoted in the report and I will turn to those. But I think that with compensation there is an estimate provided in there. From memory, it would be somewhere in the order of $121 to $215 per vehicle.

Senator CAMERON: What would be the average price of the three levels of vehicle?

Mr McKellar : Generally a large sized domestically manufactured vehicle would retail somewhere in the order of low to mid thirties.

Senator CAMERON: Okay, thanks.

CHAIR: Minister Ferguson commissioned his report from Deloitte which said that in order to reduce emissions we would need a $40 a tonne price on carbon, carbon tax or emissions trading scheme. What would be the effect of a $40 a tonne price on carbon on your industry?

Mr McKellar : I understand also today that Minister Combet has indicated that the starting price would be well south of that mark.

CHAIR: And the Greens have said it should be $40. But I guess what I am trying to understand is that, given between $20 and $30 gives us $30million to $46 million a year, what would be—

Mr McKellar : As I understand it, it is a reasonably linear model so I would expect that that could well increase the costs to upwards of $50 million to $60 million a year. But again we would come back to our point that if that were to be the case in the short term and certainly until there is a binding international framework in place we would be arguing that some sort of offsetting compensation would be required for trade-exposed industries.

CHAIR: When you say ‘some sort of’, before of course you said ‘full cost offset’—

Mr McKellar : True.

CHAIR: Would you like the effective price on carbon for your industry to be zero?

Mr McKellar : We would want to see the cost impact in the supply chain offset.

CHAIR: If you want a full cost offset for every dollar in you want a dollar back.

Mr McKellar : That is correct.

CHAIR: So that means that you—

Mr McKellar : That is what we have argued for, that is correct.

CHAIR: For as long as there is no comprehensive global agreement you want an effective—

Mr McKellar : If that is achievable, absolutely. That is our submission.

CHAIR: Zero dollars a tonne?

Mr McKellar : Yes.

CHAIR: Do you think that Copenhagen changed the policy dynamic around how best to achieve emission reductions globally out of Australia?

Mr McKellar : It would be my assessment that it did change the international dynamic. Clearly I think the intent going into Copenhagen had been an objective of achieving an international framework or progress towards that objective. That was not achieved in Copenhagen and since then we have seen other significant developments, including in the United States where there was serious consideration given to putting in place a cap-and-trade emissions trading scheme. That clearly also was not achieved. I think it would be our assessment at this point that is not like to come back on the policy agenda in the United States any time soon.

CHAIR: Nor in China, Thailand or Korea.

Mr McKellar : Correct. I think that is also in our submission.

CHAIR: Thank you very much for your contribution to our committee today. We really appreciate it.

Committee adjourned at 15:32