The Full-Cost Economics of Climate Change: An Aluminium Case Study

July 24, 2008

Progressive Economics

By David Hetherington

This report applies a full-cost economics approach to climate change adaptation, using the aluminium industry as a case study to illustrate the complexity of the policy challenge. The report examines the positive value of jobs within the upstream aluminium industry, and the negative value of carbon emissions from the sector. It estimates the value which flows from aluminium jobs to individual workers and to the wider community. The report provides a demographic survey of aluminium towns and finds that aluminium towns are less economically vibrant than the Australian economy as a whole, with lower median incomes (despite high aluminium wages), lower employment and lower workforce participation. This highlights the critical importance of aluminium to these towns, employing thousands of local workers at an average wage more than double the national median.

This report argues that the value of an aluminium job considerably exceeds its nominal wage, and includes health, justice system and social capital benefits. This value is shared between the individual and the community. Our analysis shows that an aluminium job generates a total value to the community of over $89,000 p.a., and that around $25,000 of this is social, or public, value. Across the 12,000 workers in the upstream aluminium sector (i.e. aluminium refining and smelting), the total value of these jobs is $1.215 billion per year.

The report considers the estimated costs of plant closures under various scenarios. Depending on the number of plants which may close and the potential re-hiring rates of displaced workers, the cost to the community of job losses in the sector ranges from $285 million to $1.124 billion. Against this, we have estimated the current value of carbon emissions from the sector at $861 million per year. Our analysis shows that in some scenarios carbon savings from plant closures exceed the social value of jobs, while in other cases, the carbon savings would not match the value of jobs lost.

We argue that government and the aluminium industry must work together to ensure the sector to deliver an appropriate balance between meeting its carbon reduction obligations and continuing to provide high-value employment to thousands of Australians, and the ensuing flow-on effects to their communities.

The report offers four specific recommendations in this regard:

– Government should consider providing a partial exemption to the aluminium industry for a maximum of five years. This may take the form of a temporary exclusion from the ETS for alumina and aluminium, or a discount on the carbon market price which progressively reduces to zero;

– The aluminium industry should use this exemption to aggressively invest in developing its own carbon-neutral energy sources, particularly from sources whose construction will generate significant employment. Solar power, hydroelectricity and uranium are all options worthy of consideration;

– The industry should seek to meet future demand growth through efficiency gains including, but not limited to, recycled aluminium; and

– Government should offer income tax credits to companies for each additional employee hired, in order to stimulate further job creation which delivers an estimated $25,000 in social value per worker. This proposal is not specifically related to climate change adjustment, but reflects a broader full-cost economics view that both positive externalities (from employment) and negative ones (from carbon emissions) should be priced in wherever possible.