Assessing the carbon tax's financial impact on industries

For the vast majority of industries other than electricity generation, the impact of the carbon price will be surprisingly moderate. For those with significant exposure this will be noticeably muted through the allocation of free permits.

Partly due to the government’s own overblown rhetoric about a carbon price being the “most significant economic and structural reform undertaken in Australia since the trade liberalisation of the 1980s”, there is a pervading belief that industry in Australia is about to receive a massive economic shock from the carbon tax.

Ultimately for a carbon tax or carbon price to be environmentally meaningful it will have to almost entirely transform our energy supply. But the government has no intention of doing this within the next decade or two.

Current expectations about the level of the carbon price suggest its impacts on industry, other than electricity generation, will be mild once one also takes into account the allocation of a large proportion of permits for free to trade-exposed and emissions intensive industry.

Back in 2008 as part of the Government’s planning around a carbon trading scheme, The University of Sydney was commissioned to analyse the carbon emissions intensity of each broad industry sector in Australia. This study determined the amount of carbon dioxide equivalent that was emitted by each industry sector both directly and through its consumption of electricity per million dollars of revenue generated.

While this data is highly aggregated and based on statistical information from some time ago, it provides a rough first-cut assessment of the relative significance of  the carbon price to an industry’s overall competitiveness and cost structure.

To get a more precise understanding of the carbon price impact one needs to go down to a product by product breakdown which tends to reveal some production plants that are quite significantly exposed but have been hidden by averaging across the value chain. This data will also overstate impacts for some industries that use transport fuel which will be excluded from the carbon price, at least initially.  

Of course some industries will have a capacity to pass through the additional cost of the carbon price because they do not face overseas competition. For example a large proportion of small businesses, and businesses in construction, services and retail sectors are in such a position because all their competitors face the same carbon tax.

Another added complication is a number of the industries for which a carbon price is a significant cost and are exposed to overseas competition, such as Aluminium and Cement production, will receive a large proportion of the permits for free – as much as 94.5%.

Impact of $23/tCO2 carbon price as proportion of industry revenue

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