Hard sell to wary industry begins

THE global mining giant Rio Tinto has warned the federal government against imposing "policy experiments" on the economy, and said a plan to impose a carbon price on Australia's highest-emitting businesses would undermine international competitiveness.

THE global mining giant Rio Tinto has warned the federal government against imposing "policy experiments" on the economy, and said a plan to impose a carbon price on Australia's highest-emitting businesses would undermine international competitiveness.

Airlines, heavy manufacturers and some of the nation's biggest energy companies are forecast to suffer a hit to earnings from the new $23 a tonne tax on carbon that they emit.

But steel makers are in line for hefty compensation to ease the brunt of the new tax.

"We are deeply concerned the proposed carbon tax fails to shield Australia's export sector and leaves it at a disadvantage compared to international competitors," Rio's managing director in Australia, David Peever, said yesterday.

From July next year, 500 of the nation's biggest businesses will be charged the new carbon tax in an attempt to wean the economy off carbon-intensive fossil fuels.

Many firms will be compensated for the carbon price, and analysts said the overall impact on listed companies' profits will be modest. However, earnings in industries including aviation and heavy manufacturing are expected to come under pressure from the move to cut pollution.

The expected hit to profits sparked warnings of job losses from affected industries yesterday.

Under the scheme, the domestic arms of Qantas and Virgin Blue will be charged a carbon price through higher aviation excise, forcing the airlines to pass on the cost to consumers.

Both airlines expressed disappointment that there was no compensation, and warned that fares would have to rise.

"By mid-2012 the Qantas group will be facing a carbon price in three markets and it will not be possible for us to absorb these costs in their entirety," a Qantas spokesman said.

Analysts at Deutsche Bank have assumed airlines will be able to pass on only 20 per cent of the cost, and have projected Virgin's profits could be reduced by 20 per cent in 2012-13, and Qantas's earnings by 10 per cent.

"We believe airlines could struggle to pass on the cost of carbon in the ticket price, just as they've struggled to pass on the increased fuel cost," the carbon analyst at Deutsche Bank, Tim Jordan, said.

Industrial stocks including Orica, CSR, Incitec Pivot and Boral are also forecast to suffer earnings falls of 4 per cent or more in 2012-13, as compensation will not cover the full impost.

The chief executive of Boral, Mark Selway, criticised the government's approach but said the company had not yet assessed how it would be affected.

"We believe that imposing a carbon price on Australian manufacturing, while overseas producers are not taxed, will inevitably result in local production being moved offshore, which will mean a loss of Australian jobs," Mr Selway said.

Steel makers OneSteel and BlueScope - previously seen as among the worst affected - will receive a separate $300 million in compensation which effectively exempts them from the scheme.

Coalminers are set to receive $1.3 billion in compensation, but Anglo American's chief executive, Seamus French, said the tax threatened the jobs of 40,000 workers in the industry.

Despite these warnings, the overall impact on the sharemarket is forecast to be modest, and some companies are expected to benefit from the scheme.

The chief equity strategist at UBS, David Cassidy, said the hit to average earnings on the S&P ASX 200 index would be less than 1 per cent in the first year of the scheme in 2012-13.

"Assuming reasonable pass-through dynamics, I don't think it's going to be that big at all," Mr Cassidy said. "I think the market has factored this in to a fair extent."

AGL Energy and Origin Energy were the obvious winners from carbon pricing because the value of gas and renewable assets would gradually rise under the scheme, he said.

The carbon price - which Treasury expects to reach $29 by 2015-16 - is also expected to boost revenue of gas-fired generators by raising electricity prices.

Origin and AGL both welcomed yesterday's announcement, saying it would help provide much-needed certainty in the energy sector.

The chief executive of Origin, Grant King, said the price was high enough to bring about "real progress in reducing carbon emissions" and household compensation was adequate.

"With a carbon price in place, all energy users will have an added incentive to reduce their energy use," he said.

Mr Cassidy said the scheme could also help revive consumer sentiment now that details of compensation were available. "It's probably a net positive for consumer confidence when people can see that the hit to most peoples' household income is not really that material at all."

Although analysts said the overall effect on profits would be small, business groups were broadly critical of the plan to cut emissions.

The chief executive of the Business Council of Australia, Jennifer Westacott, criticised the $23 price and a ban on buying overseas emissions permits during the fixed-price period of the scheme.

"Such a high price in the fixed-price period and no opportunity to access cheaper ways of reducing emissions internationally will not ensure a least-cost approach to emissions reduction. International linkage is an essential feature of a least cost emissions trading scheme," she said.

The executive director of the Australian Coal Association, Ralph Hillman, said the tax would threaten thousands of jobs in the industry.

"The government has appeased some industries for political expediency but has ignored the concerns of Australia's biggest export industry and all of the small business people and employees who depend on it for their survival," he said.

Some winners, some losers

Airlines: May struggle to pass on the cost of carbon to consumers.

Gas-fired generators: Higher electricity prices will give revenue a boost.

Steel makers: Steel-making has high carbon intensity, but much of the damage will be offset by

a $300 million grant they will receive.

LNG companies: Liquefied natural gas projects will not be fully compensated for their emissions.

Building material companies: Unlikely to receive enough compensation to offset the cost of carbon emissions.

Major miners: Modest impact forecast. Most of their Australian mines have low-carbon intensity.

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