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Why I think a Carbon Price will NOT destroy manufacturing

28/06/2011

This is the part of proceedings I am still trying to get my head around. Apparently a price on Carbon here will mean the end of manufacturing here. But that is just, well, silly.

CURRENT

Currently, there is no Carbon Price. And manufacturing here is already in trouble as Bob Katter likes to scream out on occasion. Of course this is an outrageous generalisation. Something I sometimes want to scream back.

Wages in Australia and working conditions here are expensive manufacturers tell us. It is why we are getting products dumped into the country on the cheap they tell us. That is cheaply made goods with cheaper materials made with lower wages and much lower safety conditions enters the country and are purchased by consumers because they are cheaper, despite transport costs.

Of course there is another movement in these same countries. Work conditions are improving. Wages are on the rise. Their living standards are rising. But by then no doubt multi nationals will have moved to other nations where the wages are cheaper and the government turns a blind eye to working conditions.

We buy a lot of electronics from Asia and India where wages and working conditions are lower. And they can be shipped here on the cheap. We all have heard about how much an iPad costs in America and how much it cost to make in China. This of course has nothing to do with a price on carbon. But each and every year, lower working conditions and low wages are getting harder and harder for companies like APPLE to wear. 

Real heroes some of these multinationals. Eventually though, they are going to run out of third world countries. And when that happens, the cost to make it here may get cheaper then the cost to make it elsewhere and ship it here.

WITH A PROPOSED CARBON PRICE

Some say a carbon price will spell the death knell for manufacturing. But I really really doubt it. Firstly all those cheaply made goods in countries that do not have a carbon price will be hit with one for those importing them here. That is the importer has to pay the carbon price that a manufacturer of the same good here is subject too.

This may not mean anything at the start, but when a manufacturer here uses more alternate clean energy sources, then they REDUCE the carbon price imposed on the good. A country where there is no carbon price and where emissions are not reduced will not. Not unless they reduce their own emissions in the manufacturing process.

What it will mean is the those ‘cheap imports’ will be a lot less cheaper then before. Further, goods made here will be able to offset taxes by choosing lower emission energy sources. Goods made in a country where there is no carbon price cannot.

Further the transport of goods from overseas will also rise as there is also a carbon price on those.

All good you say. But that is not the issue you say. Its all about the exports.

Really? Lets be absolutely straight here. Our exports to other nations continue for a variety of reasons. As far as I know, the French make wine. A lot. Yet we export wine to France. Why? Because Australian wine is different. Made differently. Different climates. Different grape varieties. Longer sun exposure etc etc. I am sure there are many many more.

Our foodstuffs are unique. Vegemite is not Marmite. Or beef-mite or Dick Smith mite. Mind you Vegemite is owned by a foreign company.

Australian chocolate tastes different. Australian breakfast cereals are different (we prefer much less sugar then in the USA for example) and guess what Australia?! There is an international market for these goods BECAUSE of their differences.

But lets get really really serious. Our current major export is raw materials. Iron ore, coal, gas.  And even in these goods, there is a difference.

Australia is one of the most unusual land masses on earth.  It is the lowest lying human inhabited continents on Earth. Geologically speaking, we are abundant in minerals. And these minerals have also in many cases had more time to chemically form. That is our coal is older. Our iron ore is older and so on. And that means our minerals are unique.

Sure you can get coal from other countries, but not the same coal. Sure you can get ore elsewhere, but not the same ore. That is why, while countries in South America has lower wages for their miners and Australia has much higher wages, people STILL buy our ores and minerals.  A combination of quantity and quality. And the world continues to buy regardless of the cost.

Now the argument is these other carbon price free countries would instead choose to buy their minerals from cheaper carbon price free economies. But guess what? If they want to then sell their product here, then they will have a carbon price imposed on the product. Not only for the manufacturing of the good, but for the shipping of the good.

It is then in the interest of these nations to try an reduce that price burden. If we had a price of $20 and a country previously without a price imposes a scheme that acts as a $15 price, then the difference of $5 is what the importer will have to pay. But if they remain without one then the burden on the importer is 4 times as great. Further if the purchase raw materials from us, those goods are more expensive for them as we impose a carbon price.

Now they could look at alternate suppliers, but as I said, the ores we have in quality and age are unique. And different ores make different grades and qualities of steel.

Minerals and resources

Large quantities of minerals and resources are extracted in Australia. These include:

  • Iron ore – Australia was the world’s third largest supplier in 2008 after China and Brazil, supplying 342 million metric tonnes.[7]
  • Nickel – Australia was the world’s second largest producer in 2006 after Russia.[8]
  • Bauxite/aluminum
  • Copper
  • Gold – Australia is the second largest producer after China.[9]
  • Silver
  • Uranium – Australia is responsible for 16% of the world’s production and was the world’s third largest supplier in 2009 after Kazakhstan and Canada.[10]
  • Diamond – Australia has the third largest commercially-viable deposits after Russia and Botswana.[citation needed] Australia also boasts the richest diamantiferous pipe with production reaching peak levels of 42 metric tons (41 LT/46 ST) per year in the 1990s.[citation needed]
  • Opal – Australia is the world’s largest producer of opal, being responsible for 95% of production.[11]
  • Zinc – Australia was second only to China in zinc production in 2008, producing just under 14% of world production.[12]
  • Coal – Australia is the world’s largest exporter of coal and fourth largest producer of coal behind China, USA and India.[13]
  • Oil shale
  • Petroleum – Australia is the twenty-eighth largest producer of petroleum.[citation needed]
  • Natural gas
  • rare earths

Much of the raw material mined in Australia is exported overseas to countries such as China for processing into refined product. Energy and minerals constitute two thirds of Australia’s total exports to China, and more than half of the Australia’s iron ore exports are to China.

You would think as our dollar rises, and our wages rise, people would look elsewhere to get their goods. But they dont. They come here. And they buy.

Will a carbon price make them reluctant to purchase those ores. No way in the world.

Further, as one of the worlds largest exporter of ores, we also export to many many countries. And that means the ore that China buys from us cost the same as the ore the US buys from us. Or the UK. Or India. And that means a good manufactured with Australian ore in China or the UK or India has the same relative costs as they do now.  After all, a can made the same way in all those countries costs the same as they all got the minerals at the same price and from us.

As production and wage costs increase in countries that have been relatively cheap in the past, even without a carbon price, the gap between there and here in manufacturing cost lessens. But if there was a carbon price and our manufacturing industry here reduced their emissions and used lower emissions cost energy sources then that will close the gap even more.

Again. I am a simple guy using simple thinking over what is a lot more complex trading industry and manufacturing industry, but I can’t help thinking a carbon price and a strong push to lower emissions will in fact give manufacturing a renaissance.

I would like to see comments here on this from people in a much better qualified position to discuss it. Lets talk people. Lets return life into something we allowed to be taken from us by companies. The same companies who are now saying no to a price on carbon.

Lets get pride in not only how we work, but what we make. If there is opportunity here, let us explore it while we have a chance.

A. Ghebranious   2011 (All Rights Reserved)

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5 Comments
  1. Jennifer Baratta permalink

    Thanks for the information

  2. Hi Ash,

    Your argument is not bad. There are a couple of cautions however:

    1) As far as I am aware the Australian government has no intention of applying our CO2 price to imported goods, or to the shipping of goods. I think it would be a good idea if they did, but i suspect its in the too hard basket for 3 reasons:
    a) difficult to measure
    b) difficult to police
    c) WTO might have issues with it
    Remeber the Copenhagen talks were reduced partly due to the fact that China wouldnt allow UN inspectors on its soil to measure their CO2 emissions.

    2) Coal and other ores are priced globally. Its not that people pay more for Australian coal, its that we have managed to lower our costs and increase productivity through technology. Australian coal is ‘as good as any other’ which is slightly different than ‘the best in the world’, coal (for example) is differentiated into grades – metallurgical and coking (there might be others). Mettaliurgical is the best, its what you need to make steel, and we do have heaps of it. But our Metallurgical coal doesnt attract a price premium over other countries metallurgical coal. Similar argument with other ores.

    3) A CO2 price which is set too low will not create the opportunities for low emissions energy. And even if it does, it doesnt make low emissions energy cheaper, it makes high emissions energy more expensive.

    Lets say you are making a widget and your costs are :

    wages: $10
    infrastructure: $10
    coal energy: $10(coal)/$20(solar)
    taxes: $10
    total: $40(coal)/$50(solar)

    then you introduce a CO2 tax on coal (and everything else stays the same) which acts to make coal more expensive than solar:

    wages: $10
    infrastructure: $10
    coal energy: $10(coal)/$20(solar)
    taxes: $10 + $11 CO2 tax(coal) / $10 + $0 CO2 tax(solar)
    total: $51(coal)/$50(solar)

    You see that ‘clean energy’ in a CO2 taxed economy doesnt make clean goods cheaper than they are now, it just makes ‘dirty’ goods more expensive than clean.

    Rising wages in developing economies are to the benifit of our manufacturers and I hope the trend continues. Also if we imposed a CO2 tarrif on imports that would be great.

    • “1) As far as I am aware the Australian government has no intention of applying our CO2 price to imported goods”

      True. But with China buying ores and coal that is priced, then their costs will rise. And if same good can be manufactured here at low emissions the gap between good made here and good made overseas lessens. Also as oil prices soar, transport cost kicks in too.

      Have to go out for a bit. Will look at some of your other points in a bit. And thanks for visiting 🙂

    • Re point 2.

      With an assistance part of the scheme, you also have the ability to comparative price CO2 with no extra cost burden.

      Say I give the solar industry a $10 break per tonne in assistance after also assisting coal industry.

      Now the price maybe say $20 re CO2 but with the above break, renewables actually have a $30 break all up. That is the $20 from the price that affects the fossil fuel side, and a $10 rebate from the assistance closing that renewable – fossil fuel gap.

      As more and more investment enters renewable industry, that rebate will be reduced to zero but the extra investment will drive costs in that sector down, so they would still be competitive.

  3. Nice work on the ore research. Unfortunately manufacturing will continue to be hammered with / without carbon price / tax / whatever we end up with. Other points to consider, Minimum Australian Federal wage $13.00 AUD per hour, Verses China wages ten cents AUD per hour. Auto industry just got hundreds of millions in subsidies, tens of millions per manufacturer, Ford, GMC, Toyota, not sure which others. They will eventually be scrapped, unsustainable. Currency, AUD at market force whims, China has fixed their currency LOW. Vision, 3 or 4 year election cycles prevent Democratic Governments planning any further than next election, largely, historically. China considers short term planning 25 years. China not welded to any particular energy source or industry. 12 years of John W Howard and George W Bush, both welded to oil and coal. The carbon tax is the least of the problems for manufacturing.

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