The impact of Australia’s carbon tax on a non-qualifying emissions intensive trade exposed manufacturing industry: demonstrating the utility of systems dynamics and life cycle assessment for policy analysis

Abstract

The research imperative for this thesis is climate change; in particular, whether the policies that Australia implemented to meet its Kyoto emissions reduction commitments were both reasonable for industry and mindful of the risks of unintended consequences. Australia first implemented its carbon-pricing mechanism (CPM) in July 2012 and repealed it two years later with a view to pursuing an abatement purchasing scheme. The CPM was informed by computable general equilibrium (CGE) modelling founded on the neoclassical theory of general equilibrium, despite such modelling being criticised for theoretical and empirical weaknesses. A primary criticism is the representation of both firm and consumer decision-making as having rational expectations or “perfect hindsight” (Sanstad & Greening, 1998). Another is an over-reliance on exogenously defined parameters which are necessary to test the effect of policies or conditions if the past is not a good guide to the future (Sanstad & Greening, 1998). Despite the concerns, CGE modelling informed the Australian government’s climate policy. Many of the industries which incurred a carbon price did not have the structures necessary to qualify for the emissions intensive trade exposed (EITE) protection that other global schemes had introduced to prevent carbon leakage or loss of competitiveness. Red meat processing, which in Australia encompasses the processing of beef, lamb, sheep meat and goat meat for export and domestic consumption, is one such industry. It is a traditionally low margin industry exporting over seventy percent of production whilst operating in a price sensitive market with high levels of substitution. It is impacted by a dependence on export markets, commodity cycles, extreme weather, exchange rate movements, and global market challenges. In 2012, under the Clean Energy Policy, the industry’s largest red meat processors (RMP), who triggered a threshold, paid for their GHG emissions without direct shielding. It is this industry’s dynamic complexity that makes it anomalous amongst its global competitors and difficult to represent using traditional modelling approaches. The industry’s resilience under a carbon price (tax) is part of a larger dynamic story and it is the complexity of the story that suggests that CGE models may not be the best models for analysing climate policy impacts. In an alternative and supplemental approach, this thesis investigates whether a systems thinking framework and system dynamics methodology can be applied to assessing the impact of the CPM on the red meat processor to better understand the influence on industry of pricing carbon. A simulation model of Australia’s largest RMP and Australia’s beef cattle production system has been developed. Life cycle assessment has enabled a partial carbon footprint to be calculated which informs the simulation’s emissions parameterisation. Using a benchmark of net income, the simulations evaluate the CPM by answering the primary research question: “Can Australia’s carbon tax policy enable red meat processors not eligible for EITE protection (and so liable to pay the carbon price) to remain financially competitive in their domestic and global environment?” Implicit in this primary research question is a secondary question: “Will the carbon price and associated legislation promote greenhouse gas mitigation?” The thesis has contributed: • To the debate on the use of system dynamics as a compliment to computable general equilibrium models. Capturing industry dynamics by modelling feedback, delays and non-linearities addresses some of the criticisms levelled at CGE models. • A firm level application of system dynamics that enables an ex-ante investigation of the impact of Australia’s carbon pricing policy on the financial competitiveness of Australia’s red meat processing industry. • The development of a beef supply chain system dynamics model specific to Australia. •An analysis of global carbon-pricing policies which highlights the difference between Australian and global approaches to taxing emissions. • Input to the data available on red meat processing emissions. • An insight into the effectiveness of policy measures to induce mitigation, achieved through the calculation of before and after tax carbon footprints. •Transparency in the dynamics that flow from policy decisions through combining modelling with a case study. Forrester (2013) suggested that a system dynamics model theorises the context it represents. This thesis contributes to the general theory of economic behaviour of the red meat industry and provides a justification for a supplemental approach