Oz Auto Industry Cringing at Cost of Coming Carbon Tax

The Australia government’s new plan to place a A$23/t ($22.12/ton) tax on greenhouse-gas emissions starting next July will cost the domestic auto industry an estimated A$30 million-A$84 million ($31.6 million-$89 million) a year, experts warn.

The tax will increase 2.5% a year, plus inflation, before the program changes to a market-based carbon-trading scheme in 2015.

New tax would boost retail price of locally made cars.

Prime Minister Julia Gillard says her plan to fight climate change will cut 144.2 tons (159 million t) of carbon pollution by 2020.

“It’s the same as taking 45 million cars off the road,” Gillard says in a transcript of her news conference. “To give us a sense of the scale of that, there are around 12 million cars on the road in Australia today.

“We are going to get this done,” she adds. “We are going to have a clean-energy future.”

Toyota Australia chief executive Max Yasuda tells Melbourne’s The Age newspaper the tax is likely to add about A$112 ($118) to the cost of every vehicle it builds or about A$15 million ($15.8 million) a year.

GM Holden says in a statement it still is assessing the impact of the carbon tax on its manufacturing operations, but points to a Federal Chamber of Automotive Industries estimate on the overall impact of the local automotive industry that sees a cost of at least A$30 million a year.

FCAI CEO Andrew McKellar says the cost increase will further undermine the competitive position of local manufacturing, making it harder to secure future investment.

“We are also concerned the future costs to the automotive industry will be even higher when proposed arrangements for the treatment of air-conditioning gases are taken into account and if the economy moves to a fully (carbon) traded scheme too quickly,” he says in a statement.

“We support the objective of reducing carbon-emissions, but we are disappointed the government has failed to ensure trade-exposed industries like automotive manufacturing are adequately compensated for increased costs.”

GM Holden says although it designs, engineers and manufactures vehicles in Australia for the domestic and overseas markets, it still does not meet the government’s criteria as an emissions-intensive, trade-exposed (EITE) industry.

A PricewaterhouseCoopers Australia report commissioned by the FCAI says, according to guidance issued by the government, an entity may be deemed trade-exposed if it is somewhat constrained in its ability to pass through carbon costs; it is a price taker on world markets; or it faces competition in domestic markets from imports that are not subject to a carbon constraint.

“Consequently, Holden and many other major manufacturers will only be potentially eligible to apply for compensation to partly offset the impact on Australian manufacturing under the Clean Technology Program,” the auto maker says.

However, the car company believes it will be able to apply for co-investment funding for its research and development and manufacturing initiatives to help reduce emissions and improve vehicle efficiency through several federal programs.

These include the Clean Technology Investment Program, Clean Technologies Food and Foundries Investment Program and Clean Technology Innovation Program.

“Holden supports the need to reduce its carbon footprint, and that of manufacturing in general, and believes these compensation measures are a step in the right direction,” the auto maker says. “However, it is important to understand how much competition there will be for funding from other manufacturing sectors.

“It is also critical to understand the extent to which the compensation package will address the competitive disadvantage imposed on local manufacturers who compete in a market where 85% of new-vehicle sales are imported models.”

The auto maker says it is reviewing the details of the new tax program to better understand how the package will be implemented. “In particular, Holden will be discussing with the government the issues affecting Australia’s ability to compete globally for foreign investment.”

GM Holden Chairman and Managing Director Mike Devereux in an interview with The Australian newspaper says: “You have to be aware of what (the carbon tax) does from a competitive standpoint to industries as they compete with places like Southeast Asia.”

The PwC Australia’s report says the cost of the emissions tax to the auto industry could climb as high as A$84 million a year, depending on various factors including compensation.

“We estimate the vehicle-manufacturing industry faces an additional cost, without government assistance for companies in the supply chain, on the order of A$222-A$412 ($235-$437) per vehicle produced, based on a carbon price of A$20-A$30/t ($19.23-$28/85/ton) of CO2 emissions.”

The report says the projected additional annual cost to the vehicle industry, without assistance for companies in the supply chain, is therefore likely to be on the order of A$56 million-A$84 million ($59.4 million-$89 million), based on the same carbon price range.

“With assistance arrangements, based on the EITE program under the CPRS (Carbon Pollution Reduction Scheme), the cost could be reduced to A$121-A$215 ($128-$228) per vehicle, and the annual cost burden could be reduced to (about) $30 million-A$46 million ($48.8 million),” it says.

“As yet, there is uncertainty over the extent or distribution of assistance arrangements under a future carbon price, which would directly affect the size of this cost burden.”

Bit based on its research and analysis, PwC Australia believes the additional tax burden would reduce the competitiveness and profitability or both auto makers and suppliers, with or without government assistance to EITE industries.

“Due to the highly competitive nature of the industry, manufacturers would have very little or no ability to pass on this additional cost to consumers, either domestically or overseas,” the consultancy says.

A reduced ability to compete with overseas manufacturers likely would encourage the domestic auto makers to source parts from overseas markets to avoid additional impact on cost competitiveness, the report says, noting the majority of these import and export markets do not face a carbon tax.

“The additional cost burden of a carbon price will therefore make it increasingly difficult, in particular for components manufacturers, both to compete in the domestic market against imported (parts) and to compete in the international market,” the report says.

And because automotive is a highly value-added industry, “an inability to pass on additional costs is likely to encourage component makers to move offshore to lower-cost regions,” PwC Australia predicts.

Says the FCAI’s McKellar: “If Australia wants to maintain a diverse economy with a high-tech automotive industry, we need to secure ongoing investment in future automotive design, engineering and production programs.”

“Australia needs to take an internationally competitive approach to policy that supports industry and government co-investment and not penalize companies that invest in automotive capability in this country,” he adds.

“We urge the government to rethink its approach and to work with industry to ensure these concerns can be addressed before legislation is finalized.”