Australia’s federal government recently announced a carbon tax scheme to reduce the country’s greenhouse gas emissions. The announcement came at a time when the Australian mining industry is still trying to calculate the impact of the draft legislation for the Mineral Resource Rent Tax (MRRT). Even though similar choices cost her predecessors their political careers, Australian Prime Minister Julia Gillard has stayed the course on MRRT and decided to impose a carbon tax.
While the major miners, who had a hand in rewriting the MRRT, are supporting it, smaller miners and explorers are crying foul. They believe the policy affects the development of future projects disproportionately to existing operations and a study from the University of Western Australia supports that belief. The UWA model shows that, under the MRRT, the average total effective tax rate increases from 38% to more than 40% for projects that existed prior to May 2010, and more than 44% for future projects and those that have come online since.
The Western Australia government recently decided to raise the royalty on iron ore fines from 5.625% to 7.5% over the next two years. Royalties are one of the few options for state governments to raise revenues. Under the MRRT, the federal government would offset all present and future state mining royalties paid by miners. Western Australia Premier Colin Barnett essentially secured state revenues at the expense of the federal government vis-à-vis the iron ore miners.
The carbon price is another tax scheme disguised as an effort to combat global warming. It puts a price of A$23/metric ton (mt) on carbon emissions. If enacted, it would go into effect July 1, 2012. The cost of compliance, the carbon price, would then increase 2.5% per year until July 2015. It would then be replaced by a market-based carbon trading scheme. The carbon tax would apply to some of the largest emitters: power plants, smelters, steel and paper mills, and coal mines. Similar to failed programs in other countries, it omits farmers and motorists.
The object, according to the government, is to move Australia away from coal-fired power and toward power fueled by natural gas and renewables. It hopes to achieve a level of 20% renewables by 2020. That is an ambitious plan considering that today Australia generates 54% of electricity from bituminous coal and 27% from brown coal. The government estimates compliance will cost coal miners about A$1.80/mt. The costs could be much higher though. From an engineering standpoint, the only way to effectively mitigate methane liberation from coal mining is to not engage in coal mining.
Australia contributes a negligible 1.5% to global greenhouse emissions. An almost identical plan was defeated in 2009. Another futile attempt to do what is considered politically correct may hamstring an entire segment of the industrial sector. A carbon tax would artificially drive the price of energy higher. Why would the Australian federal government consider this path when major emitters such as China and the U.S. are doing nothing? It’s all about tax revenues.
Australia’s economy has largely outperformed the rest of the world thanks in large part to coal and iron ore exports, driven by developing Asian economies. The federal government should be encouraging projects that foster mining investment instead of discouraging it. It should also be investing in expanding its export infrastructure and preparing to actively compete on a volume basis. However, Australian politicians may repeat the mistakes of their predecessors at their own peril.