The impact of carbon pricing on manufacturing Media Release

Feb 10, 2012 - 2:22pm

All else being equal, the impact of the Clean Energy Future Act and its assistance package results in a slight overall medium term production subsidy for Australian emission intensive manufacturing.

The impact of carbon prices and limits on emission intensive trade exposed manufacturing industries is complex. As Treasury note, “At the broad sectoral level, structural changes due to carbon pricing are much smaller than the effects of ongoing changes in the terms of trade or tastes [and associated shift to a service based economy]. …  Sectors will grow at similar rates with or without carbon pricing.”1

This is consistent with experience in the EU. For example, a paper released this week examining the impact if the EU ETS on its aluminium industry found, “There is no evidence that the European carbon price has led to a decline in competitiveness of European aluminium compared to foreign imports.”2

The impact of the carbon price on specific industries will be affected by how polluting they are and the level of assistance they receive from the Government. 

In many cases – in particular chemicals, iron and steel, alumina and aluminium – the industry overall increases its output under carbon pricing scenarios (see Figure 1 and 2 based on Treasury, 2011).

As Treasury note: “Modelling results show this transitional assistance will support output in emission-intensive industries. Output remains as high as, or higher than, it would be in the medium global action scenario without domestic carbon pricing.”

Other things being equal, this occurs because the level of assistance in many cases is greater than the industry needs to remain competitive. This leads to the industry receiving a production subsidy thereby allowing it to compete more favourably against international competitors.

It is pleasing to note that Alcoa did not seek to draw a connection between its decision to review its aluminium operations and the carbon price.  Rather it acknowledged other forces such as the mining boom driven appreciation of the dollar and other issues as being of greater influence.

In the longer-term the entire point of the carbon price is to drive structural changes in the Australian economy. This is necessary if we are to remain competitive in the world that is limiting pollution.  This is the point Marius Kloppers made in September 2010 when he said:

Presently, Australia has a high carbon economy; we are the eighth largest emitter of carbon, and the largest on a per capita basis in the Kyoto Annex 1 countries according to 2008 figures. To remain competitive in a future carbon-constrained world, Australia will need to turn into a lower carbon economy.

The longer-term sustainability of many manufacturing and other industries will be dependent on them moving to clean sources of power generation and other low emission technologies. 

For example, global trends in aluminium investments are already shifting to countries with abundant low emission power sources – e.g. based on renewable energy. This mega-trend will only continue as countries increasingly limit and price carbon pollution.

Figure 1

Figure 2

For further information
Erwin Jackson 
| Deputy CEO, The Climate Institute  | 03 9600 4039
John Connor | 
CEO, The Climate Institute  | 02 8239 6299

1Treasury, Strong growth low pollution: modelling a carbon price, Government of Australia, Canberra, 2011.
2Oliver Sartor, Carbon Leakage in the Primary Aluminium Sector: What evidence after 6 ½ years of the EU ETS?, Working paper n°12, CDC Climate  Research, France, February 2012.
3Speech to the Australian British Chamber of Commerce, September 15 2010

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