AFR: Lower Emissions? Try Starving Factories of Gas

Published in the Australian Financial Review on June 18, 2014

If Australia were to achieve real progress towards the bipartisan target of a 5 per cent reduction in carbon emissions on 2000 levels by 2020 it would have nothing to do with the Federal government's direct action policy. Rather, it would be largely a consequence of direct inaction as Coalition governments in NSW, Victoria and Canberra acquiesce to landowner demands for vetoes over coal seam gas developments.

Manufacturing industries in NSW that rely on gas as an energy source or a feedstock are now beginning to confront sharply rising prices and, by some calculations, looming supply shortages. The NSW government policy response has been to sterilise coal seam gas reserves through outright prohibitions near built-up areas and by giving landowners an outright veto over exploration on their land.

Canberra is nodding approval, the Prime Minister having told Alan Jones as recently as March 6th that “if the landholder says no, that should be the end of the matter.” This landowner veto right overrides more than a century of state legislation vesting ownership of minerals beneath the land’s surface in the Crown.

NSW produces only 5 per cent of its gas consumption. If the future demand of households and business is to be met, the state will need to produce more gas. If there is not enough gas in the peak winter period from 2016, the NSW government could be forced into curtailing gas supplies, starting with the 50 largest gas-consuming manufacturing sites in the state. Domestic wholesale gas prices for industrial consumers have doubled in new contracts and could treble in the next few years.

In Victoria the situation is absolute: the State government has imposed a moratorium on coal seam gas development. With an election due later this year, the present moratorium is unlikely to change any time soon.

Queensland’s large coal seam gas reserves, which are being successfully developed through agreements with landowners, will be needed for the giant LNG export plants under construction at Gladstone.

Sharp increases in domestic gas prices are likely to push major gas-using industries such as petrochemical and fertiliser production overseas, especially to the United States which is taking advantage of its extensive gas pipeline grid and huge shale gas discoveries to revitalise its manufacturing sector.

If Coalition governments in NSW, Victoria and Canberra support landowner vetoes over coal seam gas development that is their prerogative. They might win backing from the Lock the Gate Alliance and their National Party partners. But they should also be held responsible for the demise of gas-reliant manufacturing. The Opposition in both NSW and Victoria, too, should consider whether or not they support gas-dependent manufacturing in their states. 

By contrast, the LNP government in Queensland and the Labor government before it have shown genuine leadership by working with regional communities to remove barriers to the coal seam gas industry, at the same time implementing appropriate environmental regulation. But Queensland cannot and should not be expected to carry the can for the whole eastern Australia gas market.

Within the space of a single year the entire Australian automotive assembly industry has announced it is leaving the country. Large segments of the auto component-manufacturing sector will inevitably follow. Their departure will reduce demand for fossil-fuelled electricity.

A much bigger source of carbon emissions reductions will be the departure from Australia of much of the aluminium smelting industry. Most of Australia's aluminium smelters were established in the 1980s on the back of subsidised coal-fired electricity supplied by government-owned generators. As those long-term electricity supply agreements come up for renegotiation, government-owned and privatised generators are demanding higher electricity prices of smelters. Since aluminium is essentially alumina plus electricity, these higher electricity prices are rendering most Australian smelters uneconomic.

These market realities confronting the Australian aluminium industry will not fundamentally change if the carbon price is rescinded. Aluminium smelting worldwide is migrating to take advantage of hydroelectricity sites in Brazil and ultra-cheap gas in the Middle East.

Australian steelmaking will remain under pressure, owing mainly to its small scale and ageing plant.

At least half the Australian manufacturing sector is under extreme competitive pressure. It’s as if the Federal government has convinced itself that removing the carbon price will provide the tonic needed to reinvigorate manufacturing, despite the most emissions-intensive, trade-exposed industries receiving more than 95 per cent of their emissions permits free of charge.

The cavalier approach of the Federal, NSW and Victorian governments to coal seam gas development threatens to wipe out gas-dependent manufacturing and will assure no such new operations are located in Australia.

Based on existing government policy settings, much of Australia's manufacturing sector will be gone by 2020 - a perverse way of achieving progress towards the bipartisan carbon emissions reduction target.