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Rudd’s carbon tax backflip could have upside for processors

Jon Condon, 17/07/2013

 

Resurgent Labor Prime Minister Kevin Rudd’s announcement on Monday that Australia will axe its controversial carbon tax in favour of an Emissions Trading Scheme could provide some benefits for processors and other red meat supply chain members.

While details of the proposed changes are still sketchy, some preliminary assumptions have been made within industry to give a guide to the likely impact.

From July 1, 2014 a beef processing facility with 25,000 tonnes of Scope 1 GHG emissions each year (i.e. the minimum inclusion threshold for direct liability under the current carbon tax) would pay around $212,500 in ETS permits annually, an expert source told Beef Central. That’s based on the assumption of an ETS permit price of $8.50/t of carbon dioxide-equivalent emissions.

On that basis, it would represent a saving of more than $390,000 over current carbon tax payments for a plant with emissions of 25,000t/year, currently paying more than $600,000.

In total there are between 12 and 16 processing facilities in Australia directly exposed to the Federal Government’s carbon tax, each paying at least $600,000 per year, and in some larger cases, considerably more than that.

The qualifier to the above assumption is that there is widespread expectation that the European ETS figure, currently about $6/t, is likely to increase dramatically in coming years, as considerable European political pressure is brought to bear.

Critics also say it is dangerous for Australia to link its own indirect tax to any ETS on the other side of the world, over which it has no control.

Until Monday’s announcement by Mr Rudd, the carbon tax was due to transition to an Emissions Trading Scheme in 2015, converting the fixed price under the carbon tax of $25.40/tonne to a floating price linked to the European ETS scheme.

Details are not yet thorough enough to determine savings for smaller processors and other energy users that fall below the 25,000t direct tax carbon emissions threshold, industry sources told Beef Central yesterday.

One of the downside identified with the move to an ETS is that some of the revenues raised from the carbon pricing mechanism go towards the grants being handed-out by the Federal Government under its Clean Technology Investment Program.

By reducing the carbon price under an ETS, the Government will have to find other sources of funds for the CTIP, which is open for grant applications until 2017-18 or until the funds run out.

A perceived plus in the move to an ETS is that the current carbon tax is quite distortionary, in that it applies the tax penalty only to those large emitters above 25,000t/year, while smaller processors pay nothing.

An ETS, depending on how it is finally structured, could be much more even-handed in the way the payment is distributed across the industry. Large and small processors would presumably contribute on a pro-rata emissions basis, a processing source said.

Prime Minister Rudd justified Monday’s dramatic change of policy by saying it was made to ease cost-of-living pressures on families. Treasury modelling showed bringing the ETS forward would reduce the cost of living for an average Australian family by about $420 a year.

Another issue which is likely to come into focus following Monday’s decision is the damage that such dramatic swings in policy can have on industry investment confidence.

Some processor stakeholders have already committed large funds to carbon abatement projects, on the basis of the existing direct carbon tax. Every time the playing rules change, somebody loses, and the return on investment on some projects slated under the direct carbon tax are likely to look decidedly more limp, when compared against an ETS starting two years earlier than expected, an expert contact said.

“One of the things that has been lost in all of this has been certainty in government policy. How can industry confidently commit investment funds if major policy like this can be changed overnight?” he said.

“In many of the issues requiring deep processor investment, the policy needs to be longer than the political cycle, otherwise nobody will be prepared to risk the funds in future.”

 

NFF ‘cautiously welcomes’ ETS

Meanwhile, the National farmers Federation has cautiously welcomed the Federal Government’s decision to bring forward the floating carbon price by a year – but it is critical of the decision to offset the cost of doing so by slashing farm programs.

NFF said the ETS would be offset by cutting $356 million in funding from the Biodiversity Fund and Carbon Farming Futures, among other programs.

Chief executive Matt Linnegar said it was extremely disappointing that the Government had chosen to fund its new ETS, by cutting funding to two important programs that help farmers store carbon and continue their work as Australia’s frontline environmentalists.

“Cutting the carbon tax is something the NFF had long advocated for, due to the additional and unnecessary costs it adds into Australian farm businesses. The early move to an ETS will reduce these costs, because the current international carbon price is lower than the fixed price under the tax,” Mr Linnegar said.

“But the decision by the Government to offset the cost of moving to an ETS by scrapping unallocated funds from the Biodiversity Fund and the Carbon Farming Futures program means they risk, once again, robbing Peter to pay Paul.”

The Carbon Farming Futures program delivers the science and extension to help farmers manage their land in way that reduces emissions and leads to enhanced productivity and sustainability. The Government today announced it is cutting the program funding by one third. Meanwhile the Biodiversity Fund helps farmers store carbon, enhance biodiversity and build greater environmental resilience – and its funding will be cut by close to a quarter.

“At this stage, it is unclear as to whether the earlier move to an ETS will result in a better deal for the farm sector. The first question is, will the reduced cost burden to farmers from an earlier move to a floating price outweigh the benefit that farmers would have received under these two programs, should they have remained fully funded?” Mr Linnegar said.

“Even if the answer to the first question is positive, the second question is what happens if the carbon price increases? In future years, the price of carbon is expected to rise in line with the world market and with it, so will farmers’ costs.”

He said Australian agriculture was often criticised for being a large emitter of greenhouse gases, but Australian farmers had actually led the nation in reducing emissions, by a massive 40pc between 1990 and 2006.

 

 

 

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