The death of coal?

"I just make the point that the whole purpose of tax is to phase out the coal industry . . . I think that the coal industry is the foundation of a modem economy.

"If you look at the Government’s own figures, they say that coal will go from 80 per cent of our power generation to 10 per cent, or 25 per cent if you include clean coal using various forms of sequestration. So the government’s own figures involve a radical downsizing and ultimate demise of the coal industry."

— Tony Abbott yesterday.


Does a price on carbon spell the end of the coal industry? Tony Abbott says it will, and the Greens hope he’s right. But if so, that end is decades away, and the experts who try to gaze into the future of power prices believe that coal can clean up its act and live on.

It's a big issue for Australia. We have a few years’ supply of oil, a few decades’ supply of gas, but several centuries’ supply of coal. If a Way can be found to burn coal without filling the air with carbon dioxide, our descendants will be grateful.

What might worry us more is whether we witl still have affordable power. (No, we haven’t lost it yet, despite all the steep price hikes since 2005. On a global comparison, Australia still has cheap electricity, and is tipped to stay that way.)

But the further out you look, the less we know. Future power costs will depend on how much gas is discovered, which technologies make the biggest breakthroughs to bring down costs, and howmuch global demand raises fuel prices here.

The coal industry is no danger of being killed off by the carbon tax. The great bulk of Australia’s coal production is exported. A carbon tax of $1 or so a tonne on coal output will barely dent export growth when coal prices are more like $200 a tonne.

Treasury estimates the carbon tax will mean coal exports will grow 45 per cent over this decade instead of 48 per cent. So long as Japan, China, India and Korea keep burning coal, the industry will keep upsizing. If they stop burning coal, it’ll be because of their own policy choices.

But What is the future of coal in Australia’s power mix? The reality is that it depends on whether carbon capture and storage develops into a economically viable technology. If it does, coal — including the brown coal of the Latrobe Valley — has a future here. If it doesn’t, it won’t.

Coal is in limbo. For years, few new coal-fired stations have been built in - Australia. Projects have been put on hold until the future of carbon prices becomes clearer. They look set to stay on hold.

The power companies have turned instead to gas and wind. In Victoria, the Western District is home to the new power industiy, with Origin’s 550 megawatt (million watt) gas plant about to open in Mortlake, and AGL building a 420 MW wind farm by Macarthur.

By 2009-10, coa1’s share of our electricity supply was already down to 75 per cent. Gas now provides 15 per cent and wind 2 per cent. By 2030, officials forecast, gas will provide 37 per cent of our power, Wind 12 per cent and coal just 43 per cent.

As the graph shows, we have a range of options. It is taken from a report by the Australian Academy of Technologicial Sciences and Engineering, whose experts predict that by 2020 carbon prices will make lower-emission gas decisively cheaper than black coal, let alone brown.

Coal’s future lies with carbon capture and storage (CCS). Its progress has been disappointingly slow; industry plans have foundered, and last year Tony Abbott promised to withdraw all government funding from CCS programs. But in the long term, it has to work if coal is to have a future in a world of carbon pricing.

The experts believe coal will make it. As the world cuts emissions, carbon prices rise, CCS technology will become cheaper, and finally, economically viable. By 2050, Treasury forecasts, almost 30 per cent of Austra]ia’s electricity will come from coal and gas-Fred power stations that Will bury their carbon dioxide underground.

Let’s hope it’s right.

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Time to change this silly game - REALITY CHECK

ON PAGE 2 of the Coalition's policy costings, the principals of accounting firm WHK Horvath put a crucial caveat on their endorsement of it. The numbers add up, they say, "based on the assumptions provided" to them by the Coalition.

The Coalition, they write, "provided access to the assumptions used to determine the cost of individual initiatives". But the assumptions were never independently tested: not by Horvaths, not by Treasury, not by the Finance Department.

Any costings are accurate only if the assumptions on which they are based are accurate. We have only the Coalition's word on that. Labor disputes it, on several big-ticket items, with arguments that look persuasive.

But because the Coalition refused to submit its policies to be costed by the officials in Treasury and Finance, what we have will be no independent judgment. Which side you believe is up to you.

In 2007 Labor refused to submit its most sensitive policies for costing until it was too late. In 2010 the Coalition likewise has refused to have its policies costed by the experts who know exactly how to do it.

The claim that it couldn't trust the officials is a phoney excuse. The truth is that Coalition didn't submit their policies because they feared the experts would find mistakes. Just like Labor in 2007.

OK, we've now had two elections in a row when whoever is in opposition has boycotted the process. Why? Because they get access to the experts only when it's too late — once the campaign has started, and their policies have to be made public.

Please, guys, can we make this process work in the interests of taxpayers? How about you sit down together when the election is over and come up with a better set of rules?

When Labor was in opposition, Lindsay Tanner proposed that oppositions be allowed to submit policy proposals privately to Treasury and Finance for costing for a year before an election is due. That would give them the same access as the government has. It would be fair. It would be democratic. It would be in the interests of us — the taxpayers who pay for all this.
What did Labor do when it came to office to reform the process? Nothing.

Labor's critique raises serious doubts about billions of dollars of the Coalition's claimed financing sources, savings and spending plans
.
What the true bottom line is, frankly, is anyone's guess. Until they fix this silly game, and agree on rules that are fair to all — including the Greens — I'd be sceptical about anything they claim.

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REALITY CHECK: Big promises, small costings

THE Coalition's health policy takes the four-year cost of its promises of new spending and tax cuts to at least $32.5 billion. Yet less than 1 per cent of that has been submitted to the Finance Department and Treasury for costing.

With just a week left before the deadline for submitting campaign promises for official costing, it looks unlikely that the Coalition will be able to prove its claim that it will reduce the budget deficit (or lift the surplus).

While its new spending would be offset by savings and new taxes that the Coalition estimates will reap $37.7 billion, only 15 per cent of the savings and tax rises have been submitted to be officially costed.

Key policies released earlier this year have still not been submitted for costing. They include:

The proposed two-year freeze on hiring for the public service, which Tony Abbott announced in his budget reply (claimed saving: $3.8 billion).

The interest saved by not building the National Broadband Network ($2.4 billion).

The climate change policy that Mr Abbott announced in January ($2.05 billion).

The education tax refund announced two weeks ago ($734 billion).

Also yet to be costed are the big-spending policies and savings the Coalition has released in recent days.

They include $8.8 billion in just two years for paid parental leave, the $2.55 billion for one year of company tax cuts, and almost $6 billion over four years in new or repackaged health spending.

Shadow finance minister Andrew Robb said yesterday the Coalition had "submitted a large body of work to our independent accounting group" a week ago, and was still waiting to hear back.

"As they work through programs, we are then submitting them to Treasury," Mr Robb said. "We will demonstrate that on the savings side and on the spending side, that we can produce a stronger surplus."

But so far the Coalition has sent the Finance Department just six new spending programs, totalling $288 million, or less than 1 per cent of the new spending and tax cuts it has pledged.

It has submitted 34 proposed savings measures adding up to $5.7 billion. But all were measures the department had recently costed, or were patently obvious.

For example, the Coalition asked the department the cost of giving the Productivity Commission an extra $4 million a year. Yesterday the department replied poker-faced that it would cost $4 million a year.

Labor by contrast has run a low-key campaign with relatively little new spending. As of yesterday, it had announced $2.1 billion of new spending, offset by $2 billion of savings measures. Half the spending promises and virtually all the savings had been sent off for costing.

Labor similarly delayed submitting most of its costings until the final week of the 2007 election. It had also submitted only 32 policies for costing at this stage. As a result, most of its savings and spending plans were never costed.

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Mining tax revenue is a guessing game - REALITY CHECK

"WHERE is the money coming from?" the Coalition wants to know. How can the government reduce the revenue base for its mining tax so drastically, yet reduce the revenue forecasts so little?

It's a good question. After all, the original tax applied to nearly all minerals, the new tax to just iron ore and coal. The old tax was to take 40 per cent of all profits above a return of 5 per cent or so.

The new tax will take 22.5 per cent of all profits above a return of 12 per cent. And that's not all the changes the miners won.

Sure, there are offsetting factors. The government will no longer have to pick up 40 per cent of mines' losses or pay royalties for miners now outside the tax. But several private analysts estimate the tax take will be far lower than Treasury has forecast.

Who is right? Yesterday's budget update shed some light but left uncertainty. It told us:

Treasury now thinks the prices and volumes of mineral exports will be much higher than it predicted earlier. It now says the original version of the tax would have raised $18 billion in its first two years, not the $12 billion originally forecast.

So the revised mining tax reduced its take in the start-up years from $18 billion to $10.5 billion. The government misled us by not mentioning this when it announced the new version on July 2.

The impact in years one and two of the new tax is stunningly different. In year one, the original version of the tax would have seen many companies claim losses. Under the new version, revenue that year is now forecast to fall by just $1 billion. But in year two, the forecast revenue will be cut in half by the new version of the tax: from $13 billion to $6.5 billion. That's a huge change. And surely, isn't year two the best guide to what will happen in years three, four, five, six and so on?

Not necessarily, says Treasurer Wayne Swan. We don't know what future prices will be.

"Prices will go up, they'll come down, they'll bounce around," he said. "But they will be a higher level [than] the historical average was."

Well, maybe. But that's exactly the point.

If Treasury can revise its revenue forecasts from the tax by 50 per cent in just two months, how can anyone seriously know how much it will raise in two years, four years, let alone 10 years?

Like everyone else, all Treasury can do is guess. The May estimates are guesses. The new estimates are guesses. The forecasts by the Coalition and private analysts are also guesses.

Treasury's forecasts are for the terms of trade to peak in the second half of 2010, then fall slowly. But if they fall fast? Or if companies find ways to avoid the tax? We could easily end up with too little revenue to pay for the tax cuts and new spending it is meant to finance. That's the risk.


THE MINING TAX

OLD AND NEW

REVENUE FORECASTS FOR: 2012-13, 2013-14 TOTAL

$b $b $b

Rudd version

Budget 3, 9 12

Now 5 13 18

New version

Now 4 6.5 10.5

Revenue loss -1 -6.5 -7.5

SOURCE: TREASURY

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REALITY CHECK: Few boat arrivals sent home, but most cases unresolved

ONLY 6 per cent of recent boat arrivals whose cases have been finalised have been rejected and sent home, official figures reveal.

But the Department of Immigration and Citizenship figures show few arrivals so far this year have had their cases resolved.

Almost 1000 Afghans and Sri Lankans arriving in the past three months have not been processed at all, under a government-imposed freeze. More than 3700 others still wait. Many have been told their applications have been rejected.

The figures depict a system pushed beyond limits. Officials struggle to cope with the number of arrivals — and the government struggles to cope with community hostility to them. Let's look at the facts and figures.

How many asylum seekers have arrived here?

So far this year 75 boats have reached our waters, carrying 3532 asylum seekers. That is already more than for the whole of last year, when 60 boats arrived, with 2726 passengers. Roughly three boats arrive each week, carrying 133 asylum seekers. Those rates have been steady in recent weeks.

Where are they being housed?

At last count, 2571 "irregular maritime arrivals" were being held on an over-capacity Christmas Island, and 1503 asylum seekers and 151 boat crew on the mainland, mostly in Darwin and the north-west.

How many have been granted asylum?

Of 6258 asylum seekers intercepted at sea since the start of last year, only 39 per cent have had their cases finalised. Some 3724 people still await a final decision. Of the 2534 whose cases have been finalised, 2382, or 94 per cent, have been accepted as genuine refugees and granted visas; 152 have been rejected and sent home.

That is similar to the outcomes under the Howard government. Most asylum seekers sent to Pacific islands ended up being accepted as refugees into Australia. So far, just two Afghans have been sent home, while 1622 have been granted refugee status. All 169 Iraqis whose cases are finalised were accepted.

Most of those sent home have been Tamils from Sri Lanka. But even in their community, 79 per cent of applicants were successful — before the government froze processing on April 9.

Are we overrun by queue jumpers?

Hardly. Last year 508,000 permanent and temporary migrants arrived. Asylum seekers made up 0.5 per cent of arrivals. This year it is about 1.5 per cent. The risk comes if that keeps growing.


WHO COMES, WHAT HAPPENS
BOAT ARRIVALS, REFUGEE STATUS

GRANTED SENT HOME (PENDING)

Afghans 3558 1622 2 (1934)
Sri Lankans 1129 324 85 (720)
Iraqis 495 169 0 (326)
Others 1076 267 65 (744)

Total 6258 2382 152 (3724)

DEPARTMENT OF IMMIGRATION

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REALITY CHECK: Labor bows to mining, but ultimately we're better off

THIS is more like it. The negotiations between the government and the miners have finally given us the kind of tax we should have started with.

The miners were right to bring out the champagne after the deal was done. They have won big time. The concessions they won are bigger than most expected, well beyond the changes needed to make it fair.

Then why did the government give them so much? Because politically, they had got themselves most indelicately stuck on a barbed wire fence. That's painful. The more they tried to wriggle free, the deeper the wires went in. Only the miners could lift them off. And they charge a big fee for help.

What went wrong? The original tax plan defied commercial sense, and imposed tax rates much higher than other countries charge.

Its big selling point was that it would pay miners 40 per cent of their losses as well as taking 40 per cent of their profits. But the miners didn't plan on making losses, and weren't keen on losing so much profit. Taxpayers didn't like the idea of paying out failed miners either.

Then the government's selling of the plan was just as bad as the design. And you can't run an election campaign when you're stuck on a barbed wire fence.

Hang on. The government says the tax will still raise $10.5 billion in the first two years, compared with the original estimate of $12 billion. That's not much of a cut. Sure, but look at the detail. In year one, they now expect to raise more money than under the original proposal, $4 billion instead of $3 billion. That's because they've ditched the part where they would have to pay miners 40 per cent of their losses.

But look at year two. On the original plan, Treasury forecast the tax would raise $9 billion once it was bedded in. That's now been reduced to $6.5 billion and some question if it will even get that much.

The year two estimates, assuming they're right, show the real cost of the deal. Yesterday's changes add $1.6 billion to the estimated surplus in 2012-13, more than doubling it from $1 billion to $2.65 billion. But they cut the estimate of the 2013-14 surplus from $5.4 billion to $4.1 billion.

Well, the deal does exempt most minerals, doesn't it? Yep, it now just covers iron ore and coal, with the old petroleum tax now extended to cover all oil and gas. But between them, they account for two-thirds of our minerals exports the most profitable two-thirds. The main reason the tax take is expected to be so much smaller is the decision to slash the tax rate.

From 40 per cent to 30 per cent? More than that. It's really been almost halved, from 40 per cent to 22.5 per cent. To disguise the size of the backdown, part of it has been labelled an "extraction allowance", to recognise "the contribution of the miner's expertise to profits".

How can you mine anything without extracting it from the earth? It's ridiculous.

So they gave away too much? Yes. But politically, they had to buy a deal, at taxpayers' expense. Still, we've ended up with a better tax than we started with. Miners will pay more for our earth. We won't drive them away. That's a deal.

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40% of minerals go to the nation - REALITY CHECK

THE modesty of Tuesdays budget has put the spotlight where the government wants it to be: on the one big reform it accepted from the Henry report, putting a resource rent tax to mining.

Kevin Rudd and Wayne Swan say they are imposing the tax because Australians are not getting a fair share of the wealth generated from mining their resources. They believe most voters will ultimately rally to that cause rather than identify with the mining companies.

But the polls to date have shown the nation divided, with serious damage to Labor in Western Australia. Rudd and Swan have struggled to explain clearly why the tax is needed, why it has been designed as it has, and what impact it is expected (or intended) to have.

Questions about the tax are growing daily with the misinformation flung around by both sides. Lets try a few.

Why is it needed?

The government says mining companies have pocketed huge gains from soaring prices, but state government royalties have remained low. By 2008-09, pre-tax resource profits had soared by more than $80 billion in nine years, yet only $9 billion extra went to taxpayers in royalties.

But the miners say this ignores the far greater sums they pay in company tax and other taxes. In 2008-09, they say, miners paid $25 billion in taxes, making them the highest-taxed industry in Australia. The government has failed to spell out why mining should be taxed more than other industries.

Nor has it explained that what the tax does is give Australians a 40 per cent stake in the mining of their resources in good times and bad.

The tax is double-sided, so that not only would mining companies making money pay over 40 per cent of it to the government, but mining companies losing money would get 40 per cent of their losses back from the government.

How much will the tax cost?

This is where it gets complex. The 40 per cent tax would be charged on super profits, which are defined as profits in excess of the 10-year bond rate (currently 5.5 per cent, which serves as the benchmark of a risk-free return).

The Minerals Council, opposing the tax, quotes a hypothetical example of a (very small) mine generating $300 of revenue, with $195 of expenses. Assume a 5 per cent bond rate, and its super profit is $100.

It pays a 5 per cent royalty, which takes $15. The federal government would refund the $15 royalty but take $40 with the resource rent tax, leaving a pre-tax profit of $60. Company tax would take $17 of that, leaving a total split of $43 for shareholders and $57 for governments. They say thats the highest tax rate on mining in the world.

Any benefits for miners?

Miners benefit in three ways. The aforementioned repayment of 40 per cent of their losses, usually offset against future taxes. It would in effect pay their state royalty taxes. And it would return part of the tax through a tax break for exploration.

What would be the net impact?

The government has muddled its messages. On one hand, Rudd and Swan have implied the tax would help to rebalance the economy, so that sectors suffering from the dollars mining-driven rise manufacturing, farming and tourism would have better prospects ahead. But that would happen only if mining activity declined.

The governments modelling, by economic consultant Chris Murphy of KPMG Econtech, finds that the long-term impact will increase mining activity by 5.5 per cent, or 6.6 per cent including the cuts in company tax.

They cant both be right.

Treasury secretary Ken Henry sharply rejects the Minerals Councils claim that the tax is intended to slow the mining sector, pointing to the modelling. But Treasury and the Reserve Bank agree the strength of the mining sector is pushing up interest rates and the dollar, making life harder for everyone in the rest of the economy.

But wouldnt the mining move offshore?

Only if Australias mineral deposits moved offshore.

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