One chart exposes the big lie behind slashing the RET

The government says it wants to slash the RET to protect manufacturers. But this one chart shows why that argument is clearly a con.

In outlining that it would seek to slash the large-scale Renewable Energy Target, the government said it would also move to exempt all emissions-intensive trade exposed (EITE) industries from having to pay a cent for the scheme. This was instead of the current regime, which already exempts them from 50-70% of the cost.

This was all rather odd because this was not recommended in the Warburton Review of the RET (nor the prior review of the scheme by the Climate Change Authority). And apart from the aluminium smelters, no industry was really pushing for such an exemption.

According to the government this is all about the need to help manufacturers doing it tough.

Climate Spectator therefore put a question to the office of Industry Minister Ian Macfarlane as to whether the government had undertaken any economic modelling to estimate the benefit for manufacturers from entirely exempting EITE businesses from paying for the RET.

We never received a reply.

However, it is possible to get a feel for how significant such a move might be. In developing the regulations around which businesses do and don’t qualify as 'emissions intensive and trade exposed' and therefore eligible for exemptions from the RET (and carbon price), the government collected data from a range of businesses on their electricity consumption and emissions. This details how much electricity these businesses consume per million dollars of revenue earned. This is more precise and up-to-date than previous data Climate Spectator has presented based on ABS statistical analysis and macro-economic models.

In addition, Warburton Review-commissioned modelling by ACIL-Allen provides estimates of the extra cost to support renewables via the RET, and also how this extra supply from renewables acts to depress prices in the wholesale power market.

From that data one can estimate, in a very targeted and precise way, how much the RET is costing these businesses under the current level of exemptions as a proportion of their revenue and, also, what benefit they should see from reduced wholesale power market prices.

The chart below illustrates the cost and benefit of the RET for most businesses that qualify as emissions intensive and trade exposed.

The cost is small – only managing to get above 2 per cent of revenue for two industries (silicon and aluminium smelting) with the rest paying closer to 1 per cent or less.

Meanwhile, for all industries the benefit in reduced wholesale pool prices exceeds the cost.

Figure: Cost and benefit of the RET to emissions intensive industries in year 2020

Source: Analysis by Climate Spectator based on data from: Australian Government (2012) Establishing the eligibility of emissions-intensive, trade-exposed activities under the Jobs and Competitiveness Program and Renewable Energy Target; and ACIL-Allen (2014) RET Review Modelling
(Note: Assumes wholesale price suppression of RET relative to a repealed RET of $10 per megawatt-hour. Missing some EITE industries because emissions intensity data reported in a format that did not enable ready comparison. For example, some industries reported emissions intensity as proportion of value-added. In such cases the worst case – copper – was that the RET cost would equal 4.33% of value-added, a rough proxy for profit.)

Now, some of these industries argue they have long-term contracts which mean they are unable to capture the benefit from depressed wholesale electricity market prices. This is a load of nonsense because for most of these businesses their contracts have expired recently, or will be expiring within the next few years.

Of interest is while the government felt it was incredibly important to completely exempt these industries from a cost that represents around 2 per cent or less of revenue (but actually provides a net benefit), the government’s move to cut the large-scale RET is likely to cut the revenue of existing renewable energy projects by about 10 per cent.