Carbon reduction scheme indigestible for Australian industry

The Australian government's proposed Carbon Pollution Reduction Scheme (CPRS), which is aimed at reducing carbon emissions in Australia by 60 per cent by 2050, is proving a difficult pill for the resource and heavy industry sectors in Australia to swallow.

The CPRS, due to be implemented next year, is a "cap and trade" system in which companies are issued permits to emit carbon to a designated "cap" (upper limit). Should this company emit above their cap, they must "trade" (buy) the extra carbon credits from another company who emits below their particular cap.

According to macroeconomic theory, setting a limit means that the right to emit greenhouse gases becomes scarce - and scarcity entails a price. According to microeconomic theory, the buyer is paying a charge for emitting carbon, while the seller is being rewarded for lower emissions.

There is no doubt the Australian government is keen to implement the plan. However, some commentators are arguing that the government is even keener to be seen to implement this scheme as a gesture toward the Kyoto accord and the domestic green vote. The reality is that the net effect on world greenhouse gas emissions that would come from Australia's reducing carbon emissions by 60 per cent would be negligible.

The resource and heavy industry players in the Australian economy question why Australian companies should be burdened with the equivalent of a substantial extra tax on production while their competitors in countries like China suffer no such burden.
Moreover, they also question why Australia, with a population of just 22 million, is clamouring to pull on a CPRS hairshirt that will have little measurable net effect on global greenhouse gases, while an emerging industrial and carbon-emitting giant such as China, with a population of more than 1.3 billion, clearly intends to do no such thing.

The concern of Australian producers is that the government, in the desire to be seen as green, will foist the impost of a domestic carbon price on Australian industry, which will eventually result in production, and consequently the emissions, simply transferring offshore to somewhere like China - all for nil net world environmental gain.

This sore point for Australian industry was well summed up by Paul O'Malley, Managing Director and CEO of Australia's largest steel producer, BlueScope Steel Limited (ASX:BSL) (Melbourne, Australia), when speaking at BlueScope's Financial Year 2009 Results Announcement in Sydney, Australia, last month.

Mr. O'Malley said: "The proposed CPRS scheme unfairly discriminates against the Australian steel industry relative to international competitors. Without comparable global action, the CPRS becomes a compounding tax on the company - needlessly putting Australian steel jobs and investment at risk for no environmental benefit."

The issue continues to be debated in the Australian Parliament, while industry continues to lobby the government in an effort to have concerns heard before the proposed scheme passes into legislation.