Alan Kohler: Market failures and political failures, made in Australia

Australia’s solution for taxing mining is to subsidise it, Alan Kohler says.

Australia’s solution for taxing mining is to subsidise it, Alan Kohler says. Photo: Getty

Twelve years ago, Labor taxed Australia’s mining companies and now it wants to subsidise them with tax credits.

The Coalition wants to repeal those subsidies, declaring them “billions for billionaires”, but two years after the Minerals Resource Rent Tax (MRRT) was legislated in 2012, the Coalition repealed it so the billionaires could keep their billions.

But consistency has never been the basis of Australian politics, so let’s move on.

The MRRT replaced a resource super profits tax (RSPT), which was one of only three of 138 reform recommendations in the Henry Tax Review that the Rudd government felt inclined or able to implement. The subsidies of 2024 are part of a new Labor policy called A Future Made in Australia (AFMA).

Take and give

And in a beautiful quirk of history, what was to be taken from miners then is almost exactly the same amount of money as is proposed to be given to them now.

AFMA is budgeted to cost $22.7 billion; the MRRT was budgeted to bring in $22.5 billion, although it only ended up making only $6 billion. The AFMA costings are almost certainly wildly wrong as well.

The proposed $2 per kilogram “tax incentive” for hydrogen production – the centrepiece of AFMA – is a case in point.

The cost of it is budgeted at $6.7 billion over 10 years or $670 million, on average, per year.

That’s an estimate of the cost, by the way, not a cap, so unlike most Labor policies it appears to be uncapped, at least for now.

Green steel

The main reason for subsidising hydrogen production is to create a domestic green steel industry, the idea being that instead of exporting iron ore, we make steel in Australia using our abundant renewable energy resources. Hydrogen will also be used for making urea and for transport, but for a future made in Australia, it’s mainly about steel.

The use of hydrogen to replace coal in the blast furnace is called direct reduced iron (DRI) technology.

Steel is basically iron with the oxygen removed. It’s usually done by melting it in a blast furnace with carbon (metallurgical coal) so the oxygen combines with the carbon to produce carbon dioxide, which then goes out the chimney, and is obviously not a good idea any more.

When hydrogen combines with the oxygen it produces water instead. Much better.

Apparently between 50 and 70 kilograms of hydrogen are needed to make a tonne of steel using DRI.

Unrealistic goals

Australia exported 950 million tonnes of iron ore last year, which ended up making about 560 million tonnes of steel. To replace all of the iron ore exports with locally made green steel would therefore require about 33 billion kilograms of hydrogen, at a cost to the budget of $2 per kilogram or $66 billion, per year.

That’s ridiculous, of course, and Treasury needn’t worry that the uncapped hydrogen subsidy will cost $20 billion more than the $46 billion defence budget. A lot of the green steel will be made elsewhere, not here, especially in China, and we’ll continue to send them iron ore, not green steel made in Australia.

Perhaps a better way to look at it is the other way round: The estimated cost of $670 million per year would subsidise 335 million kilograms of hydrogen at $2 per kilogram, which would make five million tonnes of steel requiring eight million tonnes of iron ore. That’s 0.84 per cent of Australia’s iron ore exports, also ridiculous, and hardly worth doing.

And that’s only if all of the hydrogen is used for steelmaking, which it wouldn’t be, since some would be used for making urea, driving buses and trucks and exporting as ammonia.

But it gives you an idea of the scale of the government’s ambition in AFMA, which is not very much at all.

Money issues

Which reinforces Australia’s problem in the global contest to subsidise and attract renewable energy manufacturing: We simply don’t have enough money.

It’s also in line with the general underestimate of the cost of the energy transition.

That doesn’t mean AFMA isn’t worth doing, just that it’s the worst way of reducing carbon emissions and getting a local green manufacturing industry going.

Rod Sims and Ross Garnaut, who have gone all in on promoting Australia as a renewable energy manufacturer through their Superpower Institute, like AFMA because it makes up for a market failure.

That failure is the absence of a price on carbon, which would force the suppliers and users of fossil fuels to pay for the damage they do to the environment through carbon emissions, and thereby level the playing field with renewable manufacturing inputs, such as hydrogen.

Garnaut and Sims says the best way to remove fossil fuels is to tax them; failing that, AFMA will have to do.

Expensive idea

Fair enough, but it means that instead of a tax on the bad stuff (which we did have while the MRRT was also in place) we expensively subsidise the good stuff.

It’s an expensive idea and can’t last – the government simply hasn’t got enough money to follow through and go all the way.

In conclusion, it’s worth recalling what led to the MRRT 12 years ago.

Secretary of Treasury at the time, Ken Henry, suggested in his big review of the tax system that a uniform 40 per cent resources rent tax “would ensure the right levels of exploration and extraction and provide sufficient encouragement for private sector participation”.

Treasury noted at the time that this was consistent with other developed countries, Norway being the most relevant.

As discussed, Labor ended up with a 22.5 per cent rent tax which was repealed two years later, having raised $6 billion.

Meanwhile Norway now has a sovereign wealth fund worth $2.4 trillion, or Australia’s GDP. Australia has national net debt (including the states) of about $1.5 trillion and persistent structural deficits adding to the debt every year in future.

Change of plans

When the MRRT was introduced in 2012, Australia’s terms of trade had been booming for 10 years, and the resources exporters were making tons of money.

The terms of trade are even higher now than they were then, and resources companies are making tons of money again, but there’s now a global contest for manufacturing capital in the great energy transition so we’re going to do the opposite of 12 years ago and give them money instead of collecting it from them.

As Ross Garnaut points out, a tax on fossil fuels would raise billions of dollars and not only pay for the energy transition but also help pay for the NDIS and the other growing demands on government spending.

Collective sigh.

Alan Kohler writes weekly for The New Daily. He is finance presenter on the ABC News and also writes for Intelligent Investor

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