The Real Cost of Carbon Pricing

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-By Aleisha Parr

As the heated debate over Labor’s proposed carbon tax begins to smoulder, we are poised to discover just how strong an impact the controversial legislation will have on Australia’s already hard-pressed construction industry. With its 1 July introduction, the government hopes to use carbon pricing to encourage consumers and producers alike to be cognisant of the effects of pollution on our environment and ultimately more responsible by utilising cleaner processes.

“When you purchase a product that relies on carbon-intensive materials or manufacturing processes,” explains a Daily Wire publication, “the price you pay does not represent the cost incurred by the environment. The iron ore used to create the product could be sourced from the highest polluting mine in the world, the electricity used to power the manufacturing plant could be provided by the dirtiest coal mine in the world, and the trucks used to transport the product to its final destination in a supermarket could run on the dirtiest fuels in the world, and it would make no difference to the price. With a price on carbon, this equation would change.”

The introduction of carbon pricing, of course, will require construction businesses to factor these additional costs into jobs which will run past – or start after – 1 July 2012. This presents a complex situation for many builders, with the cost impact varying in accordance with the specific materials used, the size of the building and its location, as just some of the numerous factors at play. While all efforts have been made in modelling the impact of the carbon price using estimates, builders must be careful that they do not overestimate the impact of the carbon price when quoting clients – else they may face severe penalties under the Australian Competition & Consumer Commission (ACCC) and may even run the risk of breaking the law.

“You would think it is straightforward to pass on these additional costs,” comments Master Builders Director of Housing Policy, Paul Bidwell. “However, unless they are very confident of their estimates and can attribute the cost increase directly to the carbon tax, they cannot increase contract prices with the explanation that the increase is to cover the carbon tax. Understanding and factoring in these additional costs are both challenging tasks given that many suppliers, manufacturers and distributors are still not sure how the carbon tax will affect their prices post 1 July.”

Climate Change Minister Greg Combet, responsible for the introduction of the carbon tax, insists though that the way forward is clear because “pricing pollutions was the right thing to do.” He has also stated that for the “overwhelming majority” of companies it would be business as usual once the $23-a-tonne cost was imposed – as only three hundred major emitters would be required to pay the tax.

Despite Minister Combet’s assurances, a recent survey of the building and construction industry has revealed that an astounding eighty-eight per cent of those polled believed that their business would be negatively impacted over the next year by the introduction of the carbon tax. The survey included more than five hundred builders and contractors currently operating in the commercial, residential and engineering construction sectors throughout Australia.

“The Federal Government has tried to assure the building and construction industry the carbon tax will have little to no impact. This is at odds with consumer behaviour and consumer confidence – and it is at odds with Treasury’s own modelling,” said Wilhelm Harnisch, CEO of Master Builders Australia in a media release published by the industry’s peak organisation.

“Treasury’s carbon tax modelling indicates that the carbon tax will reduce the gross output in the building and construction industry by 5.6 per cent by 2050. This impact is considerably higher than negative impacts on mining and manufacturing, which are anticipated to go down 4.3 per cent and 2.8 per cent respectively.”

Although that percentage reduction might sound slight, in lost output it cumulatively equates to just over twenty-four billion dollars from 2013 to 2020.

“The Federal Government response so far has been to downplay the negative impact of the carbon tax on the building and construction industry,” claims Mr Harnisch. “We call on Minister Combet to be open to dialogue and work with industry during the transformation period.”

Furthermore, Mr Harnisch asserts that the carbon tax introduction this month could not come at a worse time for the building industry, which is already facing pressures from an overextended economy.

“Industry is trying to come to terms with a host of unknown factors,” he states. “This includes how to deal with supply cost increases and how they can be recovered in new and existing building contracts. New homebuyers are delaying their decisions as they assess the impact of the carbon tax. This confirms other surveys that show consumers are already exercising even greater caution over fears of increased cost of living. The increased cost of home ownership and of living flowing from the carbon tax will only make matters worse.”

Mr Harnisch’s very real fears for the industry’s success have been echoed by the building and construction community, confirming that work in the pipeline is at very low levels and profit margins are low to non-existent. “Builders and contractors have no capacity to absorb any cost increases incurred as a consequence of the carbon tax,” he asserts.

His colleague, Mr Bidwell agrees, saying that despite the concentrated media and political attention the carbon tax introduction has had, “Master Builders has been surprisingly unsuccessful in pointing the spotlight at the inevitable impact the carbon tax will have on the cost of building and, in turn, housing affordability.

“Unlike some industries, the building and construction sector is in a unique position – it is neither emissions intensive nor trade exposed. However, despite direct emissions from the industry being quite low in comparison to other sectors, the price on carbon will have a significant impact because the sector uses many emissions intensive inputs, such as cement, bricks, aluminium, steel and glass.”

He adds that this rise in the cost of construction will in turn impact both supply and demand. Mr Bidwell does, however, concede that the government’s plan for offsetting the carbon pricing does appear to have some potential for assisting with this potential crisis.

“We know the government’s compensation package will offset some of the impact. Steel producers and other trade-exposed emissions-intensive industries, along with around four million Australian households, are set to share billions of dollars in financial assistance for rising costs.”

In fact, it is the long-term adjustment implications of the carbon tax which have caused the most concern for the industry, with the majority of work coming from other businesses and households who are meant to become more cautious by the very nature of the carbon pricing scheme. Estimates made by the CIE have indicated that overall, production could decline because of the carbon tax by 1 to 2.6 per cent – figures likely to increase over time as the carbon price steadily increases.

“Any measures that will counter the rising cost of building and make the building industry less vulnerable are imperative to Queensland’s overall economic recovery,” says Mr Bidwell, noting that the existing First Home Owners Grant could be one of the numerous areas in which proceeds of carbon pricing could best be utilised.

Ultimately, the real cost of Australia’s carbon pricing will remain conjecture for some time yet, forcing businesses throughout the construction and building industry to carry on and play by the rules with fingers collectively crossed for the best. And while all of this is so that we might sleep better with the knowledge that we are building towards a more conscientious future, some might ask, ‘in what buildings might we lay our heads?’

Home Automation

Call it ‘domotics,’ and you are likely to receive a blank stare, but refer to it as ‘smart home’ or ‘home automation,’ and you will get a nod of acknowledgement. For the past few years, consumers have heard the word ‘smart’ attached to countless products and services, from food and drink to snacks like popcorn and mobile phones, which no one seems to refer to as a ‘cellphone’ anymore. Yet what, exactly, constitutes ‘smart’?

January 17, 2019, 5:35 AM AEDT