Tony Abbott not telling the full story on Alcoa and the carbon tax

Updated

The Coalition has blamed the carbon tax for crippling Australia's aluminium industry.

Following Alcoa's February 18 announcement of the closure of its Point Henry aluminium smelter, Prime Minister Tony Abbott told the media that although it wasn't the only factor for Alcoa, it showed the carbon tax was "doing its job".

Mr Abbott made the point again during Question Time. "Scrapping the carbon tax will give industries like aluminium a fighting chance, not just to survive, but to flourish," he said.

"The Labor Party's own figures show that by mid-century, under a carbon tax aluminium production will be down by more than 60 per cent. So every time an aluminium plant closes or scales down, that's just the carbon tax doing its job."

But Alcoa told Fact Check: "The carbon pricing mechanism was not a factor in Alcoa's decision to close the Point Henry smelter."

Fact Check investigates Mr Abbott's claims that the carbon price is to blame for the closure of Alcoa's Point Henry aluminium smelter, and that the carbon price would see aluminium production drop by more than 60 per cent by 2050.

Claim 1: Tony Abbott says the carbon tax is partly to blame for the closure of Alcoa's Point Henry aluminium smelter.

Tony Abbott says the carbon tax is partly to blame for the closure of Alcoa's Point Henry aluminium smelter. Claim 2: Mr Abbott says under the carbon tax aluminium production would be down by more than 60 per cent by 2050.

Mr Abbott says under the carbon tax aluminium production would be down by more than 60 per cent by 2050. The verdict: Mr Abbott's first claim does not take into account Alcoa's short-term gains in the tens of millions, while his second claim does not state that the figure depends on other major economies also adopting carbon pricing schemes. Mr Abbott is not telling the full story.



Alcoa's operations in Australia

Alcoa Inc, a New York-based company, is one the world's largest producers of aluminium and alumina.

Alcoa of Australia is 60 per cent owned by Alcoa Inc, and 40 per cent owned by Australian company Alumina Limited.

Alcoa Australia Rolled Products is 100 per cent owned by Alcoa Inc.

Alcoa operates two aluminium smelters in Australia - the Point Henry and Portland facilities in Victoria. It also has a range of other operations.

Assistance provided to Alcoa under the Clean Energy Act

The former Gillard government's Clean Energy Act - which introduced a price on carbon - came into effect on July 1, 2012. Since then, Australia's heaviest carbon emitters have been required to pay for every tonne of carbon they produce. They pay the tax by buying carbon units from the Clean Energy Regulator (CER), the government body which oversees the reduction of carbon emissions. But eligible companies are also compensated, by receiving free carbon units to help them pay the carbon price. The amount of free units they receive is based on average industry emissions, so if a company reduces its emissions to below average, it will have surplus units, which it can then sell. That is the incentive for companies to reduce emissions.

Aluminium smelting and alumina refining is one of the highest emissions-intensive industries. In the first year of the carbon price the industry was eligible for maximum compensation. This meant 94.5 per cent of the industry's average emissions were paid for by the government. Under the scheme, this benchmark reduces by 1.3 per cent every year.

The CER has confirmed to Fact Check that in 2012-13, Alcoa of Australia and its subsidiaries received 13 million free carbon units, while Alcoa Australia Rolled Products was issued with 181,260.

The CER's figures do not include a breakdown of the units given to each operation, so it is difficult to determine how many each of Alcoa's individual projects received.

Alcoa has benefited financially from the carbon price

Alcoa has three options for dispensing of its carbon units: Surrender them to the CER to meet their carbon price liability, sell them back to the CER using the buy-back option, or trade them in the secondary carbon market.

The CER's Liable Entities Public Information Database lists carbon units that have been surrendered to the regulator in order for companies to meet their carbon tax liability.

The database shows that in the 2012-13 financial year, Alcoa of Australia and its subsidiaries surrendered 6 million carbon units to the regulator, while Alcoa Australia Rolled Products surrendered 83,947 units.

Fact Check calculates that once these units were surrendered, Alcoa of Australia was left with 7 million surplus units and Alcoa Australia Rolled Products was left with 97,313.

The surplus units were then able to be sold back to the CER or traded on the secondary market. The CER would not disclose if Alcoa had sold back their surplus units under the buy-back scheme. Either way, assuming a price of $23 per tonne, Fact Check calculates an asset of $161 million for Alcoa of Australia and $2.2 million for Alcoa Australia Rolled Products for the 2012-13 financial year.

When Fact Check put these numbers to Alcoa the company said they were incorrect. It said not only does it have to pay units back to the CER, it also has to pay a large number of units to its power providers. However, Alcoa refused to provide Fact Check with any figures, citing commercial in confidence contracts.

What is known is that last month, as reported in the Financial Review, Alcoa Inc recorded a $53 million gain in its annual report. That document, which dealt with the year to December 2013, contained the following declaration: "... a favorable [sic] change of $53 [million] in prepaid expenses and other current assets, mostly caused by the sale of excess carbon credits in Australia".

Without specifics it is difficult to identify exactly how Alcoa's surplus units were dispensed. Nevertheless, the company reported gains in the tens of millions of dollars after paying its carbon tax liability.

Why the Point Henry smelter is closing

When asked whether the carbon tax was a factor in Alcoa's decision to close its Point Henry smelter, the company told Fact Check: "The carbon pricing mechanism was not a factor."

In February 2012, Alcoa announced a review into the future of the Point Henry smelter, citing the "continuing difficult global economic conditions for the smelting industry".

At the time, an Alcoa press release said: "It is important to note that the review has not been prompted by a future price on carbon. The present situation is a result of low metal prices, and high Australian dollar, and input costs. The future price on carbon would be an additional cost, however Point Henry smelter is already losing money."

When it announced the closure of Point Henry in February, Alcoa claimed the smelter had "no prospect of becoming financially viable" and that the rolling mills in Point Henry and Yennora "have been impacted by excess capacity".

Aluminium prices have been dropping for the past six years, with current levels much lower than a 2006-07 peak. According to the latest Bureau of Resources and Energy Economics (BREE) quarterly report, prices declined "as production outpaced consumption growth, contributing to rising stocks".

Alcoa's decision to close the smelter was based on many factors impacting the global aluminium industry, not on the carbon price.

Future of the aluminium industry in Australia

The second part of Mr Abbott's claim about Alcoa is that aluminium production would drop by more than 60 per cent by 2050 under the carbon tax. A spokesman for the Prime Minister pointed Fact Check to 2011 Treasury modelling, and said Mr Abbott stood by his claim.

The Treasury modelling does show that the carbon price will lead to gross output of aluminium smelters in Australia declining by 61 per cent in 2050. But the modelling "assumes comparable carbon pricing in other major economies from 2015-16, and the phase out of transitional assistance over five years starting in 2022". In other words, once the industry is trading on a level playing field with its overseas competitors and has adjusted to the carbon pricing framework, compensation will be phased out.

The assumption of comparable carbon pricing in other major economies from 2015-16 is a key caveat in Treasury's projections. That's because if other countries don't take on similar schemes then the Productivity Commission - as outlined in part seven of the Clean Energy Act - may recommend maintaining a high level of compensation for the aluminium industry in Australia.

Although the 60 per cent figure used by Mr Abbott is accurately taken from the Treasury modelling, it is based on the assumption that major competitors around the world will have introduced a similar kind of carbon price by 2050.

The verdict

Claim 1: Although the Prime Minister said the carbon tax was "not the only factor in the closure of Point Henry", his claim that the Alcoa Point Henry smelter closure is indicative of "the carbon tax doing its job" fails to take into account that rather than being crippled by the carbon price, the company has benefitted from a system which leaves it with excess, lucrative carbon units.

Claim 2: Mr Abbott's claim that "under a carbon tax aluminium production will be down by more than 60 per cent" doesn't take into account that the figure depends on other major economies adopting similar carbon pricing schemes.

Overall: Mr Abbott is not telling the full story.

Sources

Topics: abbott-tony, liberals, emissions-trading, federal-government, australia, geelong-3220, vic

First posted