What the ‘carbon’ plan means for miners
The Government’s White Paper, outlining its proposed Carbon Pollution Reduction Scheme (CPRS) has invoked strong criticism from the mining sector. Whilst there are provisions for some “emissions intensive” industries, the coal mining sector and a large majority of other mining exports will not be eligible for such provisions.
Image courtesy of Donaldson Coal
By Jennifer Perry
However, until further detail is provided by the Government on who it thinks is eligible for provisions under a future emissions trading scheme, it is difficult to ascertain how the introduction of such a scheme could impact mining and minerals exploration companies. One thing which the mining industry seems clear on is that the CPRS as proposed will not bring any benefits to its business.
In December 2008, the Australian Government released a White Paper detailing a CPRS, which could take effect from mid-2010. The Government has committed to a medium-term national target to reduce Australia’s Greenhouse Gas (GHG) emissions by between five per cent and 15 per cent below 2000 levels by the end of 2020. The former figure represents a minimum commitment to reduce emissions by 2020 and the latter a reduction in emissions in the context of “global agreement”. The Government defines such as an agreement as one whereby all “major economies commit to substantially restrain emissions and all developed countries take on comparable reductions to that of Australia.”
The Government has basically retained the same facility level definition at 25,000 tonnes CO2-e/year for coverage under the CPRS as it did in its previous Green Paper. One area in which it differs from the previous Paper is in its improved measures for supporting emissions-intensive trade-exposed (EITE) industries. There are many mining companies that will not fall under the EITE criteria, with coal mining operations considered ineligible for assistance.
While eligibility for EITE status is not finalised, Brendan Pearson, the Minerals Council of Australia’s (MCA) deputy CEO said, “Initial assessments based on the White Paper suggest...that 90 per cent of Australia’s minerals exports (by value) will not fall under the EITE criteria.”
Pearson emphasises that even firms classified as EITE will pay much more than their international competitors.
“Australian EITE firms will buy either 40 per cent or 10 per cent of their permits from 2010, a share increasing by 1.3 per cent every year. By comparison, a firm based in the European Union and classified as EITE will pay no carbon costs until 2020 at the earliest.”
The White Paper refers to “iron and steel sectors” that could be eligible for EITE assistance, and Darren Murphy, a partner at Allens Arthur Robinson believes, it may be inferred that the White Paper’s reference to “specified activities in...the iron and steel sector” is a reference to activities other that integrated manufacturing (which can be interpreted as those operations which produce their own coke).
It was reported on February 18th that one of Australia’s biggest steel makers, OneSteel, said it would not support the Federal Government’s plans for emissions trading. The company’s chief executive, Geoff Plummer, reportedly said the design proposed in the White Paper was “likely to adversely impact the company’s competitive position and lead to job losses in the Australian steel industry and may lead to increased global emissions as a result of leakage.”
OneSteel could expect to receive 90 per cent of carbon permits subsidised, under the proposed scheme, for its integrated iron and steel making, and 60 per cent for its electric arc furnace operation.
The company’s half-yearly results state that the lack of clarity about the design of the ETS means its impact could not be incorporated into the company’s forecasts.
The implications of a CPRS
Why are mining companies so worried about the introduction of a CPRS, when most of them don’t use a lot of energy in their operations?
“The CPRS does not just require permits for energy production, it covers most carbon emissions including those from the burning of liquid fuel and fugitive emissions, both of which are significant for coal mining,” said Antony Cohen, head of KPMG’s energy and natural resources practice.
Murphy said there are also issues around emissions being correctly measured, particularly for open cut mines, and the number of acquired carbon permits is being correctly calculated.
“Mining companies will expect to face increases in costs along their supply chain, particularly in relation to energy and transportation,” Murphy said, “...even relatively small cost increases could impact the competitiveness and viability of projects in the present economic climate.”
So how many mining companies across the board will be significantly affected by the proposed CPRS? Cohen said that it’s difficult to specify the number and the extent to which companies will be impacted in the short- and long-term.
With the Government expecting that around 1,000 companies will incur direct liabilities under the CPRS, Pearson believes that because the trigger for liability under the CPRS is annual emissions of 25,000 tonnes of CO2e, it is likely “that most, if not all, the members of the MCA will face an immediate and significant carbon liability under the…scheme.”
The MCA currently has 35 members and 28 associate members.
The ‘problem’ with coal
There are those in the industry that believe coal companies could be hardest hit by the CPRS, especially considering this sector has been excluded from receiving EITE assistance.
A spokesperson for the Australian Coal Association (ACA) said that the international competitiveness of the industry will be significantly impacted under the CPRS.
“The White Paper is artificially and illogically discriminating against the coal industry,” the ACA spokesperson said.
“Exclusion of coal from EITE fails to recognise [coal’s] fundamental contribution to the nation’s economy or the fact that it is Australia’s largest export industry.
“The coal industry is concerned by this inequitable treatment especially considering that it is the only industry to have voluntarily established a $1billion fund to support low emission technology development.”
It states in the White Paper that the Government will provide assistance in the form of the $750 million from the Climate Change Action Fund to the “small number of coal mines [that] are very emissions-intensive.”
“To secure assistance under the Fund, the coal sector will be required to provide matching funds,” said Pearson, “in overall terms therefore, the net cost to the export coal sector in the first five years will be more than $4.5 billion.
“This will have a self-evident impact on the sector’s international competitiveness and ability to sustain or expand employment.”
The ACA agrees, stating that the package has simply not been designed to address competitiveness issues in the same way that EITE has.
According to Frank van Schagen, former CEO of CRC for Coal in Sustainable Development (CCSD), the Government has indicated that it will support the commercial development of clean coal technologies, and has already established a Clean Coal Council to oversee this effort.
“Part of the strategy is carbon capture and sequestration – however it is the only strategy for coal and therefore should be supported strongly (with real money) to establish it as a genuine solution.”
Commenting on the NSW’s Governments plans for energy reform, the NSW Minerals Council CEO, Dr Nikki Williams, said, “Whilst other trade exposed emission intensive industries such as LNG and aluminium are being provided 60 to 90% transitional assistance under the White Paper's EITE arrangements, the coal sector has been excluded on the basis of political sensitivities.
“We are asking the private sector to build new plant for which there will be no allocation of free permits, but before carbon capture technology is commercially ready.
“I would urge the NSW Government to bolster its efforts with the Federal Government to ensure EITE status for the coal industry and for the next power installation in NSW, to help provide the private sector with the certainty it needs to make such major, long-term investment.”
The benefits of CPRS to mining
Murphy believes there are benefits to mining companies under emissions trading in the area of corporate social responsibility, that is, it could enhance their ‘social licence to operate’. Furthermore, he suggested, “It would seem less likely that a Government agency would impose a carbon-related condition on a project approval when a CPRS exists.”
Murphy stated that the longer-term benefits could include the development of improved mining technologies and processes.
“As Australia is a relatively early mover, there is also the potential for Australia to develop technologies ahead of its international competitors that provide it with competitive advantage over the longer term.”
Pearson said, “In its current form, the CPRS will not help the mining industry transition to a lower emissions sector.”
“It will simply act as a tax on the bottom line that will cost jobs and drive investment out of our globalised industry because the CPRS is not aligned with global efforts to reduce emissions.”
The MCA believes the Government should consider a phased approach to the auctioning of permits for trade exposed sectors that would allow time for other nations to adopt binding emissions reductions and for low emissions technologies to emerge.
“There will be few prizes for getting too far ahead of global efforts to reduce emissions,” said Pearson.