The Grattan Institute has demolished the central argument behind the Rudd government’s CPRS handouts to big polluters, in a major report.  In doing so, it has shown just how close Australia came to major and costly policy debacle when the Rudd-Wong CPRS narrowly failed to pass the Senate late last year.

The Institute was established in 2008 and counts the Federal Government and BHP-Billiton as key funders.  But its report has taken direct aim at a key Rudd Government policy.

Some of us have previously tried to place carbon leakage — the shift of carbon emissions offshore as Australian industries are made unviable by a carbon price and overseas industries take up the slack — in a broader context by examining issues such as exchange rate and resource price movements. But the Grattan Institute has thrown considerable resources at evaluating the impact of carbon prices on Australia’s biggest trade-exposed polluters at the plant and project level, and determining whether a carbon price would drive emissions and jobs offshore, either by making local industry uncompetitive against imports or by making Australian exports uncompetitive in global markets.

What is remarkable about the report is just how small the impact of a carbon price will be on even our heaviest polluters.  Modelling impacts based on a 5% emission reduction target and a $35 per tonne carbon price, the report finds that an ETS without compensation would have minor impacts on most of the biggest beneficiaries of CPRS largesse.

Alumina: a carbon price would have virtually no effect on the Australian alumina industry, which enjoys significant advantages over international competitors due to the proximity of alumina plants to large bauxite deposits.  With a carbon price and no free permits, alumina production costs at most plants would still be far below international alumina prices.  The industry was scheduled to receive more than $1.5 billion in free permits over the next decade.

LNG: Led by Woodside, the loudest whinger in the CPRS debate, the LNG industry managed to coax $3.5 billion over the next decade in CPRS handouts from the government.  However, the report shows a full carbon price would have no impact on investment decisions (in LNG, the issue is not the impact on projects currently operating, but on future investment decisions) because a carbon price would be a fractional component of overall costs.  The impact of a carbon price on rates of return is dwarfed by oil price movements or construction cost blow-outs.

Coal: a carbon price impact would be minimal for 90% of coal mines, the report found, and only significantly affect 10% of mines that are the most “gassy”.  However, even some of these mines are unlikely to close without compensation because they produce premium types of coal.  In any event, a carbon price makes it more likely production will shift to lower-emissions coal mines.

Cement: the report concluded that local production of cement clinkers could be replaced by imports, but the difference in emissions was so marginal that some form of assistance to keep production onshore was justified.  The report suggested a carbon tariff on clinker imports, rather than free permits.

Steel: The steel industry was likely to see poor returns if a carbon price was imposed without compensation, forcing higher-emissions blast furnace plants to close, while lower-intensity electric arc plants would remain.  If local blast furnace output was replaced by imported blast furnace output, the report suggested this might lead to an increase in global emissions, but not if it was replaced by imported electric arc plant output.  Again, the report suggested a carbon tariff on steel rather than free permits to keep production onshore.

On aluminium and oil the report found an uncompensated carbon price would lead to the closure of local plants; in the case of aluminium smelting, particularly when coupled with the scheduled end of state government electricity subsidies, and in the case of oil refineries, bringing forward closures that would happen anyway.  In the medium-term, aluminium smelting would be replaced by lower-emission foreign production, reducing global emissions, and oil refining would be carried out by significantly lower-emissions overseas plants.  In neither case was any assistance (the aluminium industry was to receive more than $8 billion under the CPRS, the oil industry $1.5 billion) justified, although there might be a case for assisting communities disproportionately affected by plant closures.

The report even suggested the impact of the CPRS on households would have been far lower than the ordinary price movements of petrol and electricity over the past decade.

The report also put an ETS in the context of other major economic reforms of recent decades and its conclusions are surprising.  While most of us have spoken of the transition to a low-carbon economy as a massive economic reform, the price impacts of an ETS would be significantly smaller than that of the GST.  And the industries most affected by a carbon price together employ 70,000 people, only a small number of whom are potentially affected by plant closures if no compensation was paid.  But the process of reform of the Australian automotive industry has cost 55,000 jobs over the past three decades; the textiles, clothing and footwear industry — which has never had powerful lobbyists to put its case in Canberra — has lost 60,000 jobs.

The compensation being handed to the biggest polluters will cost, on average, $65,000 per job.  In the aluminium industry, the cost is as high as $180,000 per job.  It would be far cheaper simply to let it close and pay displaced workers average weekly earnings.

As the institute points out, the CPRS compensation would have totalled more than $20 billion over the next decade and would have muted any benefits from the CPRS in terms of driving the transition to lower-emission intensities.

Bear that in mind if the government ever tries to revive that appalling scheme.