- AAC Climate Change Policy Principles
- Australian Bauxite, Alumina and Aluminium
- Current Aluminium Industry Context
- Impact of an Australian Carbon Cost on Operations and Investment
Australia’s greenhouse emissions reduction policy should be designed to prevent international distortions in production, particularly in those industries where Australia has demonstrated global leadership. Australian producers should not be burdened with significant costs not borne by competing international producers.
The Australian Aluminium Council supports the following principles that are designed to facilitate a response to the challenge of climate change without significantly damaging the international competitiveness of the Australian alumina and aluminium industry.
- The most appropriate response to climate change is a globally consistent approach, which would include a globally consistent price on carbon;
- In the absence of a global approach, Australian policy must preserve the international competitiveness of Australian industries and the economic and social dividends they deliver.
- Australian climate change policy should be applied in a consistent manner across jurisdictions.
- Any carbon price must not materially disadvantage Australian industry against its international competitors.
- Australian climate policy should appropriately credit the considerable work already undertaken in many sectors to improve energy efficiency and reduce emissions
Even in a carbon-constrained future, increasing quantities of aluminium will be used globally as living standards improve, transport systems become more efficient and innovative lightweight construction systems are favoured.
Australia is a global force and technological leader in the production of bauxite, alumina and aluminium. Despite some disadvantages, Australia should expect to see continued expansion and investment in these sectors based on our strengths of resource availability (including 25% of world bauxite reserves and abundant energy sources), skilled labour force, available land, and stable investment conditions. Around 80% of the alumina and aluminium produced in Australia is exported for use in global markets and economies.
The aluminium industry has achieved substantial improvements in greenhouse gas emissions as a result of specific abatement actions and investment. Since 1990, the intensity of greenhouse gas emissions has been reduced by:
- 23% for alumina production;
- 62% for direct emissions from aluminium smelting; and
- 12% for indirect emissions from aluminium smelting.
Operations in the Australian alumina and aluminium industries have a replacement value of over $50 billion and annually produce more than $14 billion of product. The industry employs around 17 000 people, many in regional areas as shown on the following map.
Australian climate change policy is being developed at a time when global demand and prices have fallen for many materials, including aluminium. Both alumina refining and aluminium smelting are subject to significant cost pressures. The price of aluminium is gradually recovering from lows in early 2009. This brought about significant structural reductions in global capacity and employment with high cost operations being closed permanently and many mid-cost operations wound back or temporarily shut.
Government policy, such as a price on carbon emissions, has the potential to impose substantial costs on Australian producers that are not faced by international competitors supplying the same markets.
The impact of an Australian carbon cost on international competitiveness can be understood by considering a global cost curve. On this curve, global production capacity is arranged with the lowest cost producer on the left and higher cost producers on the right. Producers toward the low (left) end of the cost curve will be more profitable, more viable and more likely to attract investment of sustaining capital in the facilities. Investment in new facilities will proceed if they can attain costs at the low end of the cost curve.
Producers on the higher (right) side of the cost curve make lower profits and, more significantly, are unlikely to attract reinvestment. As a result they will only continue to operate while profitable but will be the first facilities wound back or shut when the market falls and will be the most likely facilities to be shut permanently (and replaced by new investment lower on the cost curve).
If the cost curve is considered in four quarters, they can be characterised as follows:
- First quartile – lowest cost, most viable, re-investment almost certain, continued operation secure.
- Second quartile – viable, re-investment likely, continued operation secure.
- Third quartile – must make substantial investment to reach first or second quartile or operate while profitable but eventually curtail and close.
- Fourth quartile – short term curtailment certain in response to market, closure virtually inevitable with capacity replaced by new investment in first or second quartile.
Figure 2: Impact of an uneven carbon cost
If costs are imposed on Australian producers but not on other producers, it increases the costs of Australian producers only, moving them up the cost curve (to the right) with a resultant loss in profitability, viability and investment. The larger the costs, the larger the shift up the cost curve.
Analysis of the range of costs that might be imposed by climate change policy suggest that they could shift an Australian alumina or aluminium producer from their current position in the first or second quartile – where the long term viability of facility is secure – to the third and fourth quartiles – where investment is unlikely and shutdowns are likely in response to market slumps and permanent closure is virtually inevitable.
That is, climate change policy could change Australian facilities from operations that would be profitable in the long term, operate at high capacity and attractive for future investment to operations that have no long term future, where capacity will be curtailed in response to reduced demand and where investment is unobtainable – leading to eventual closure.
Driving Australian facilities up the cost curve, relative to their international competitors, will inevitably lead to carbon and jobs leakage as Australian facilities are wound back or closed only to be replaced by expansion in countries that have not adopted a carbon price.