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Jul 2011 - Carbon Tax

Gold Sector expected to pay $3bn by 2020 or ~A$40/oz from July 2012

Or at least that was the expectation in a MCA presentation at the Annual Stockbrokers' Conference in Sydney in late May 2011. At that conference, 3 papers were presented on the planned Carbon Tax (one by the MCA and two by Deutsche Bank) that appeared to cover most of the issues associated with it.

Australia's new Carbon Tax (CT) is based on Australia reducing its emission standards by 5% below its 1990 levels by 2020, according to the Copenhagen accord. Its impact can clearly be seen in Figure 1, which if based on 2008 represents a reduction of 20MtCO2. Which sounds like a lot until it is compared to China's emission in 2008 of 6,555MtCO2.

By 2020, it is expected that China may have increased their emissions by 500% above their 1990 levels, followed by India up by 350%, Canada up 25% and the US ~15% higher. China comprised 22.3% of the world's emissions in 2008, compared to Australia's 1.4%. After 2020 and up to 2035, it has been estimated that all the growth in emissions is expected to come from non-OECD countries.

What is it all for? Well theoretically the aim is apparently to stop global temperatures from increasing by 2 degrees by 2020. From 1881 to 1931, average global temperatures were 0.2 degrees below the normal average (based on a mean determined from NASA/GISS between 1951 and 1980). From 1931 to 1981 they oscillated about the average ie 0 degrees of difference, and for 1981 to 2011 they increased to 0.6 degrees above the average (for global temperatures).

What a number of countries appear to be experiencing is warmer summers and earlier colder winters, so the average becomes a case of "swings and roundabouts". When we were in Cue in WA in early June 2011, they had a frost and an icy wind, in complete contrast to 2 years' previously, and a number of countries have had earlier, colder, snowier winters in both the northern and southern hemispheres.

The original CPRS (Carbon Pollution Reduction Scheme of October 2009) was budgeted to raise A$5bn in the 2011/12 financial year to June. The revenue was then expected to increase to $11bn in 2012/13 and achieve $15bn per year from 2016/17. Over the 12 years to 2020, it was expected to have raised $114bn.

Well the CT replaces the CPRS, but has to be more costlier, because by 2020, the Australian Government is expected to have raised $150bn (including $18bn from the coal sector, $2.1bn to $3bn from the gold sector, and $1.3bn to $2bn from the nickel sector). The agricultural sector is excluded until 2015, when it comes up for review.

Why does the CT cost more ? Well perhaps it is also to pay for the Govt's expected capex cost on renewable energy of $28bn by 2020 to meet its large scale renewable energy targets.

Although the CT apparently needs to be legislated by the end of 2011 to start on the 1 July. If the gold sector does have to shoulder $2.1bn to $3bn, then since it produced ~ 8.5mozpa (266t) in 2010, then by 2020, that could be a total of ~70moz or a cost of ~$30/oz to ~$40/oz. Being an average, some may pay more, others less, depending presumably on their individual consumption of diesel and electricity..

Putting those numbers into context, that $5bn initially raised under the CPRS was probably less than 6 months, and in fact it is expected that the CT should raise >$3bn in the first 3 months, compared to the $2.9bn that it has taken the EU to raise in 6 years (2005 to 2011), and the EU exempts emissions from Poland's coal mining industry from paying its tax.

The CT appears to have borrowed some of the attributes of the RSPT of 2010, as the tax does operate at various activities (~33) or points in the production and use of products (which the RSPT also did). The CT is to be incurred according to 3 main scoping activities being firstly steel (chemical processes etc) and coal (eg production of methane), secondly purchased electricity by the various industries, smelters etc, and lastly such acts as using aeroplanes.

It has been estimated that it may cost the average Australian ~$520 per year.

According to the front page of the 12 June 2011 edition of The Sun-Herald, Australia's 3.4m pensioners are to receive $500pa per single person and $760 per year for couples, while 2.9m low income households and 2.4m middle income households (assuming like the old CPRS, ~60% qualify) may receive 120% of the expected cost of living increase, or $600pa for simplicity, and the remaining 40% or 1.6m would receive something less.

If it is 50% of $600 or $300pa, and of the pensioners say 50% are single, then that totals (5.3 x 600 + 1.6 x 300 + 1.7 x 500 + 1.7 x 760/2) = $5.2bn. Self-funded retirees may receive the pensioners amount too, say perhaps a total of $5.5bn, even allow $0.5bn for errors and the total could be closer to $6bn per year. In the CPRS budget numbers, $5.1bn was allowed for low and middle income households for 2012/13 and $6.4bn for 2013/14.

Using the CPRS budget numbers for 2017/18 and $15bn received as an example, $7.0bn was to be returned to low and middle income households, $4.3bn on assisting emissions trade exposed industries (apparently coal subsidies etc), and $2.4bn on fuel tax offsets, leaving only $0.9bn for the Govt out of the $14.6bn taxed. There was an allocation of ~$1bn to $1.2bn for climate change funds and for electricity & gas schemes, for the first 5 years, but then nothing from 2017/18 onwards.

China are often "painted" as the climate culprits, but actually they appear to be making the greatest progress in reducing emissions. China seems to be taking a practical approach with RMB3trn allocated to "green" programs in the 12th 5 year plan, which envisages energy being reduced by 4% in 2011, and 18% by 2015. By 2015, China expects to have added 120GW of hydro, 70GW of wind power (including 6 on-shore wind farms, and 2 off-shore wind farms), and 5GW of solar, besides its rail expansion of 4700km in additional rail.

China also expects to have increased its forest cover by 12.5mha, increased its forest stock by 600m cubic m, and increased the non-fossil fuel component of its electricity from 11.4% in 2011 to 15% by 2020.

It is recognised that Australian costs of renewable energy are far higher than other parts of the world, ranging from 1.5 x to 12x higher (geothermal), due to more expensive debt, equity, regulations and labour.

So apart from Australia, who else is doing their "bit". The US has rejected emissions trading proposals 4 times in the past 7 years, and are apparently not expected to start soon. Canada has apparently stated that it is not doing anything until the US does something, and while Japan has considered a scheme starting in 2013, that may now be delayed due to their recent earthquake, tsunami and meltdown. As for the EU, they have an emissions trading scheme planned for after 2013.

What about other parts of the world? Well as far as we know, South Africa is building a new coal-fired power station, as its current electricity production cannot meet its base level demands. There are power cuts of 12 hours to apparently up to 3 days in various suburbs, simply because the authorities cannot meet base level requirements, yet alone seasonally higher demand. However, once South Africa has doubled its power costs over a 3-year period, the money raised is expected to be able to finance at least two more coal-fired power stations.

So instead of the RSPT of 2010, Australian resource companies are now facing a CT, and for some a MRRT too. As for what impact Australia's move is going to have on the environment - well at only a 5% reduction of 1.4%, probably very little apart from some "flag-waving". It really needs the major country emitters to make changes to have any meaningful impact...

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.

Figure 1. Australia's Impact on World Carbon Emissions in 2008 (Source : Deutsche Bank)fig1_carb

  • Written by: Keith Goode
  • Friday, 01 July 2011