A STRANGE thing happened as carbon pricing laws passed the House of Representatives last October. The share price of BlueScope Steel – one of Australia’s most greenhouse-intensive export businesses – rose.
By the close of business on October 12 its share price had leapt 4.9 per cent, following a 13 per cent increase the previous week. BlueScope’s market value improved by $273 million in just five days.
The company was not alone. The share prices of resources companies Rio Tinto, BHP Billiton and Woodside also rose – by between 1.3 and 0.2 per cent, as the government, Greens and independents pushed the carbon scheme through the lower house.
The sharemarket test illustrates a point: the impact of the scheme may not be quite what people expect.
Some companies and households will face a hit as prices change to favour low-emissions products; some will be better off. But while the scheme is sometimes described as the biggest change in the economy in decades, analysts say most people may be surprised how little affected they are.
To put it into context: Treasury says that by 2020 average incomes will be 0.5 per cent lower than they would be without carbon pricing, but still $9000 higher than today. The ageing of the population, and the slow decline in the proportion of people of working age, will do more to slow the growth in what we earn.
The cost of living is expected to jump by 0.7 per cent today, or $9.90 a week for an average household. The start of the GST in July 2000 had an impact more than three times bigger, pushing up the cost of living by 2.5 per cent.
In the short term, those better off include steel makers BlueScope and OneSteel. Like all big emitters that export into markets where competitors are not facing equivalent carbon prices, they will be compensated to avoid ”carbon leakage” – the environmentally pointless scenario where operations close and move overseas without cutting global emissions. They will be compensated for 94.5 per cent of their carbon bill – about $150 million – in the first year.
After an aggressive campaign by the companies and unions worried about the impact on an industry already threatened by the high Australian dollar, the steel companies will also share a $300 million ”steel transformation plan” linked to the carbon legislation.
The export industry hardest hit by carbon pricing will be aluminium smelting. Sometimes described as ”liquid electricity”, the aluminium industry uses about a third of the power generated in Victoria. When that power comes from burning brown coal, it is highly carbon intensive.
Treasury expects aluminium production to be cut by 61 per cent by mid-century as companies like Alcoa move their operation to places that run on hydropower, such as Russia.
In the short term, the industry is a winner, or at least not a loser. Its 94.5 per cent compensation is topped up by an additional package covering its electricity bill (initially all of it, then declining over time). The federal and state governments are also buttressing Alcoa’s less viable Victorian operations – notably the Point Henry smelter at Geelong that employs about 600 – from the impact of the high dollar and low metal prices with a $40 million package announced on Friday.
It has led to accusations the government is working against its own long-term goals and wasting money by keeping open operations that by global standards are old and high cost, rather than allowing market forces to play out and just supporting retrenched workers. But the government, politically vulnerable and afraid of job losses being linked to the scheme, stresses export industries will not lose out.
Deutsche Bank found the level of support for chemicals manufacturers, cement production and mining was high. All get compensation based on historic emissions and if they can take steps to reduce their footprints – for example, a chemicals company could fit equipment to reduce emissions substantially – they could end up with windfall profits.
Analysts suggest the average hit on earnings for Australian companies will be less than 2 per cent. Internal industry analyses suggest those affected could include high-volume foundries and auto-parts makers. Each could face a hit to revenue of about 2 per cent – an unwelcome stress in trying economic times, but not enough to put them out of business.
The clear loser under the scheme, and its primary target, will be electricity generation companies with investments heavily weighted towards coal.
Despite their lower emissions, black coal generators in New South Wales and Queensland are likely to be more heavily affected in the early years than Victoria’s brown coal generators, though all will face increased costs. The price of black coal is increasing as export demand grows. Brown coal has a stable price and will get $5.5 billion in cash and permits over six years to offset losses in asset value. Black coal generators get nothing.
While coal may survive for a while yet, the owners of clean power generation will immediately become more profitable. Wind farms will increase profits as the wholesale price of the electricity they generate becomes more competitive relative to fossil fuels.
At a company level, winners will include early movers such as multinational GE, which has spent years developing wind turbines, lower-carbon jet engines and cars, and innovative start-ups such as Algae Tec, which captures emissions from power plants and turns it into biofuels. Banks will develop new business around carbon permit trading.
Most households, the government is at pains to stress, will be compensated. According to updated figures released by Treasurer Wayne Swan, 98 per cent of families on incomes up to $150,000 will get some compensation through tax cuts and family and welfare payments. More than half – mostly those on low incomes – will be overcompensated by 20 per cent, and self-funded retirees are expected to be compensated up to three times the cost of the carbon scheme.
But households on more than $150,000 and singles on more than $80,000 will be out of pocket; it is considered they are best placed either to invest in ways to cut their bills or to wear the cost.
Some in the welfare sector warn averages can be misleading and some on low incomes could still be under stress. Gavin Dufty, of St Vincent de Paul, says people in cooler parts of the country where energy use is higher are more likely to find rising utility bills a stretch. ”It probably means that in places like Tassie and Ballarat and Bendigo the compensation may not be adequate,” he says.
This applies especially to renters, who tend to be on lower incomes and cannot embrace government incentives to make their homes more energy efficient. ”There will be outliers well above the average in older and larger homes that may be out of pocket,” says Mr Dufty. ”It is commendable what the government is doing, but they can’t compensate everyone and I think the review period becomes really critical.”
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