Carbon Tax Plans Could Sound the Death Knell For Domestic Australian Steel Industry

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For supporters of carbon pricing in the US, a recent report by Credit Suisse for investors on plans being developed by the Australian government could illustrate what such national — rather than global — climate change solutions would bring. The plan could result in a carbon tax being introduced in Australia by July 2012 if a multi-party committee formed from representatives of the Labor government, the Greens party and two independent members gives the green light. According to a Credit Suisse report to investors, the plan for a carbon price mechanism will start with a fixed-price carbon tax for a period of three to five years before transitioning to a cap and trade emissions trading scheme thereafter.

Australia’s two main steel producers are One Steel and Bluescope, both integrated steel producers using the blast furnace and the electric arc production methods. As with steel producers in the US, carbon emissions per ton of steel have gradually reduced in Australia such that both producers operate some of the most efficient plants in the world. Nevertheless, Credit Suisse’s analysis suggests the impact on both producers could be so severe that it would cause their merger in order to survive. The bank estimates the impact two ways: firstly, if no credits are granted to the companies concerned; and secondly, if credits are granted for a large part of the production capacity under a set of proposals being reviewed. At full production, OneSteel generates 4.6Mtpa of carbon, of which all but 0.78Kt would be granted credits under the CPRS proposal. Assuming no credits, full exposure, and a $10/t cost, the annual carbon tax would impose a $46 million annual charge. Under the CPRS proposal it would be $7.8 million. Assuming no credits, full exposure and a $25/t cost, the annual carbon tax would be $115 million. Under the CPRS proposal it would be $19.5 million.

For larger BlueScope, the numbers are even higher. At full production, the company generates 12.6Mtpa of carbon of which all but 0.69Kt would be granted credits under the CPRS proposal. Assuming no credits, full exposure, and a $10/t cost, the annual carbon tax would be $126 million. Under the CPRS proposal it would be $6.9 million. Assuming no credits, full exposure, and a $25/t cost, the annual carbon tax would be $315 million. Under the CPRS proposal it would have be $17.25 million.

The tragedy is that imposing a carbon tax in Australia would not reduce one ton of carbon being released into the atmosphere. As the proposals stand, all that would happen is the firms would be forced to rationalize production (in Credit Suisse’s opinion, forcing the merger of the two companies in the process) and encouraging imports of lower priced steel from places like China, India, Vietnam and South Korea. If Australian producers in isolation have additional taxes applied to them in this arbitrary manner, it would result in the hollowing out of Australian steel making and the support of overseas, unregulated, steel production in other Asian supply markets. In the words of Paul O’Malley, CEO of Bluescope during an Inside Business ABC News interview: “I think to really reduce greenhouse emissions we have to reduce global emissions. I think if you look at the experience in Europe, production emissions are flat since 1990, so Europeans are a claiming victory, but carbon consumption has increased 47%. So there has been a hollowing out of manufacturing in Europe and a moving or a hiding of that carbon overseas. I think if the same program is put in place in Australia, effectively you’re assuming that policy is that they (the government) don’t want (steel) manufacturing in Australia.

So does that make all carbon tax plans pointless (unless coordinated) globally? Some people think so, but one solution could be to impose a carbon tax on imports too; at least that would have the benefit of both leveling the playing field for domestic producers and encourage overseas suppliers to reduce their carbon footprint by employing the latest technological innovations available. Unfortunately, politicians rarely look at the bigger picture and the debate in the US needs to be opened up to consider the detrimental impact cap and trade and/or carbon tax policies have had or are likely to have elsewhere in the world before getting too far down the road in applying them at home. Unless we want further hollowing out of our domestic steel industry and the loss of yet more steel manufacturing jobs overseas, we need to ensure that any discussion in Washington includes plans to maintain a level playing field with overseas producers.

–Stuart Burns

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