Carbon Tax: BHP Billiton Group

About BHP Billiton Group

BHP Billiton Group is a natural resources group engaged in diversified mineral exploration and processing. The company’s key fields include aluminium, nickel, manganese energy coal, oil and gas, nickel, metallurgical coal, and iron ore as well as gold, lead, diamonds, uranium, and zinc. BHP, headquartered in Melbourne, Australia, operates in twenty-five countries in over 100 locations.

Climate Change Impacts of the Mining Sector

The mining industry is highly energy-intensive and among the largest greenhouse gas (GHG) emitters. In Australia, mining is the fourth biggest energy consumer and also reported the biggest growth rate in energy consumption in the past 30-year’s period from 1980 to 2013. Furthermore, the mining sector develops fossil energy resources, which adds to global carbon dioxide emissions. For instance, coal accounts for about 20 percent of the global primary energy demand, which causes global warming via direct emissions from coal combustion. Global warming also results from fugitive emissions generated throughout the coal mining process. High carbon dioxide emissions from coal combustion and considerable emissions of methane from coal mining processes contribute to the accumulation of atmospheric greenhouse gases, which traps solar energy in the lower atmosphere thereby preventing it from escaping back into space.

The concentration of GHG in the atmosphere has accelerated since the industrial revolution, particularly from fossil fuels combustion. Carbon dioxide represents the largest share of greenhouse gases in the atmosphere. In industrialized countries such as Australia, fossil fuels combustion accounts for almost 98 percent of overall carbon dioxide emissions. Currently, the level of carbon dioxide in the atmosphere surpasses preindustrial revolution levels at 385 ppm compared to 280 ppm.

Coal mining processes also produce methane as another major greenhouse gas attributed to global warming. Methane is formed during coal formation and released to the atmosphere during coal mining processes. Since methane is an occupational hazard due to its explosion risk, the mining process entails removal and ventilation of methane from underground coal mines to the atmosphere or methane combustion. Coal mining accounts for 10 percent of methane emissions. Energy sources used in the mining operations including hydrocarbons such as marine gas, petrol, diesel, and oil as well as electricity also generate greenhouse gases into the atmosphere, which in turn leads to global warming through greenhouse gas effects. Furthermore, the industrial activities that produce electricity for supply to the mining companies also contribute to greenhouse gas emissions into the atmosphere. Such activities include power generation from coal power plants.  Overall carbon dioxide emissions differ throughout the mining sector, with respect to the types of minerals mined and the nature and design of the mining activity.

Rationale and Theoretical Underpinnings of a Carbon Tax and Direct Action plan

Carbon Tax

The carbon tax is rationalized on mainstream economic theory, which proposes special, indirect taxes for internalization of the externality costs incurred during the manufacture or consumption of certain products and production techniques. In line with this economic theory, the Australia’s Future Tax System review proposed an emission or carbon tax to privatise or internalise the external costs incurred by greenhouse gas emissions. Theoretically, the rate of extra tax is set at the marginal externality cost. A typical example of carbon or emission tax is Australia’s Clean Energy Future carbon tax introduced in July 2012-July 2014. The tax generated from the carbon tax is then redistributed to low- and middle-income families and as subsidies to industries exposed to energy-intensive trade as well as for investment in energy efficiency improvement and renewable energy. The rationality behind carbon tax policy is that imposing a cost on pollution helps in the mobilization of information held by households and businesses across the economy, but unavailable to the government on the least cost-effective alternative to reducing pollution (Freebairn, 2016). Carbon tax option exploits Polluter Pays Principle (PPP) rationality in which greenhouse gas emissions are considered as an external or extra cost to households and the need to pay for that extra cost in the form of an external cost or carbon tax.

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Carbon tax contributes to distortions throughout the economy through a reduction in effective purchasing power of households due to the increase in the cost of consumer goods attributed to the extra pollution cost. A carbon tax also distorts indirect tax and income tax in the labour market. However, redistribution of the extra government revenue from pollution tax to households reduces tax distortions in the labour sector. Furthermore, most of the redistribution distortions of pollution such as a decline in effective purchasing power are offset through revenue windfall recycling in the form of lower income tax and higher payments of social security and through maintenance of changes in relative incentives and prices to select fewer pollution alternatives. Carbon tax effect in lowering greenhouse gas emission also translate to less climate change, which in turn lower adaptation costs in the future (Freebairn, 2016).

Direct Action Plan

The Direct Action Plan alternative to carbon tax introduced by the Coalition administration in 2015 entails a tax subsidy in return for private sector commitment to cut greenhouse gas emissions as well as safeguard measure to control greenhouse gas emissions by the biggest polluters who do not secure or bid for a subsidy. Direct Action programme was allocated a $2.55 billion Emission Reduction Fund for a four-year financial term to finance a reverse auction for private industries bids to cut pollution for the next decade with the prospect for more funds (Burke, 2016). The $13/tonnes average cost for the Direct Action subsidy was rationally considered as a more cost-effective alternative to pollution reduction compared to the $23/tonne average cost for the Clean Energy tax (Burke, 2016). Supporters of Direct Action Plan option also cite the programme’s flexibility, cost-effectiveness to business, and encouragement for more participation by polluters. Thus, Direct Action Plan adopts a Provider Gets Principle (PGP) by assuming that carbon emission cuts beyond the business-as-usual limit are a public good and entitled to Emission Reduction Fund subsidy in the same way as the social security programmes (Clarke, Fraser, and Waschik, 2014).

The Direct Action Plan subsidy alternative has several cost efficiency shortcomings (Clarke, Fraser, and Waschik, 2014). First is the net pollution cuts realized by the subsidy programme relative to those realized by alternative pollution reduction policy mechanisms. The subsidy programme also faces information limitations on the actual business scenario for the right amount of subsidy allocation and preferential distribution, which leads to a higher mean price per unit pollution cut relative to the price instrument. The second limitation is the higher compliance and administrative costs of a subsidy programme relative to the price and enforcement instruments, which in turn limit the set of pollution cuts decisions sourced, most of which are low-cost alternatives. Budget constraints also limit the efficiency of a subsidy. A subsidy scheme also creates an ethical dilemma where the polluted taxpayer pays the polluter through the subsidy programme. Accordingly, a subsidy scheme raises households’ income tax to fund the pollution subsidy scheme (Burke, 2016).

Risks and Opportunities of Climate Change Policies to the Mining Sector

BHP Billiton is among the largest manufacturer of energy-related products including oil and gas, uranium, coal, and liquefied natural gas. Energy further accounts for a considerable part of the group’s mineral exploration and production operations. Emission of carbon dioxide from fossil fuel energy sources contributes to greenhouse gases effects, global warming, and climate change. Most governments across the globe have enacted regulatory changes to tackle the effects of climate change. A typical example is the European Union Emissions Trading System (EU ETS) legislation that impacts energy-intensive and greenhouse gas companies within the European Union. Accordingly, BHP Billiton’s petroleum plants in the United Kingdom are now under the EU ETS legislation. In a move to tackle climate change, the government of Australia also declared the launch of the countrywide emission trading program and statutory renewable energy projections of 20 percent before 2020. Similarly, the government of South Africa introduced plans for a carbon tax in 2013. These current climate change legislations affect BHP business by influencing energy prices as well as margins and demand for carbon-intensive consumer goods. Compliance and remedial cost imposed by climate change and greenhouse gas regulations consequently increase BHP’s operation costs, which impact its operating margins. Accordingly, these regulatory statutes adversely affect the production, cost, and financial status of the company’s operations.

Climate Change Mitigation Strategies

In acknowledgment of the scientific agreement on climate change, BHP Billiton set aside $1 billion for a programme to tackle greenhouse gas emissions and enhance energy efficiency. The programme succeeded in the achievement of six million tonnes of GHG cuts by the start of the 21st century. Besides GHG reduction, BHP also focuses on building resilience to the natural effects of climate change. The company is also committed to research and development of low-emission technologies and an effective global response to climate change-related disasters such as hurricanes (Cho, 2016). Furthermore, BHP embraces a carbon price on its products under the previous carbon tax policy regime and the current Direct Action Plan policy regime. However, BHP also acknowledges the importance of the increased supply of affordable and reliable energy to sustain a higher standard of living for the rapidly growing global population. Accordingly, the company emphasizes the importance of both GHG reduction and increased production and supply of minerals products but expresses reluctance to pursue GHG reduction goals at the expense of its growth and expansion prospects. Similarly, BHP acknowledges the importance of tailoring its growth and expansion prospects to the global climate change goal of limiting the world’s mean temperature rise to 2 degrees Celsius (University of Cambridge, 2016).

One of BHP strategy to address climate change problem is through reduction of its GHG emissions. Currently, the company targets to limit its GHG emission to 2006 financial year baseline. In line with this plan, BHP emissions in 2015 were at 38.5 million tonnes (Cho, 2016). The company’s GHG reduction strategies are designed throughout its entire value chain operations including project design and choice of equipment. Accordingly, the company achieved 680,000 tonnes of GHG emissions reduction in 2015. For instance, the company’s coalmines at BHP Billiton Mitsubishi Alliance (BMA), Queensland Australia cut its GHG emissions by over eighty thousand tonnes through improvement of resources identification, control of overburden blast and removal, and improved equipment utilization and mine productivity.

BHP also adopts a multifaceted strategy to develop resilience to the physical effects of climate change. These strategies include development of BHP operations resilience, climate change adaptation, and investment in ecosystems and communities threatened by climate change (United Nations Framework Convention on Climate Change, 2013). For instance, BHP has implemented adaptive management practices to address the projected rise in cyclone intensity around its mining plants in Pilbara region in Western Australia. These adaptive management practices include the building of a higher loading facility at the Queensland-based Hay Point coal depot as part of the company’s expansion plan.

BHP also has an integrated sustainable development strategy that supports GHG reduction projects, improved GHG emission regulatory framework, and market promotion for carbon credits. A typical example is BHP carbon pricing programme that analyses carbon-pricing sensitivity of its asset decisions for capital not less than $100 million or those that release over a hundred thousand tonnes of carbon dioxide annually. The company also trade emissions cuts under the government Direct Action Plan as a strategy to manage emissions exposure and help customers to control their emissions exposure. BHP also engages in research and development of low emission technologies such as geosequestration and carbon capture technologies. The company further sponsors’ internal energy programmes with GHG emissions cut component, but uncompetitive in a conventional capital allocation activities.  BHP is also committed to research and development of alternative, environmentally friendly, reliable and affordable energy. Among these projects include the company’s $5 million donations to Alto Mayo programme in Peru for the conservation of 182,000 hectares of forests as greenhouse has sunk. BHP also commissioned the SaskPower’s Boundary Dam in 2014 as the first-ever post-combustion, coal-fired power plant in the world. The company further installed Lakeland Solar and Storage plant for supply of renewable base load energy in a 13-megawatt project for the solar photovoltaic power station and additional 5.3-megawatt lithium-ion battery for power storage across Australia.