Do you know who sank the boat? F c dbacks Do you know who sank the boat?
State of sy sim =O Wee ee Behaviours
Dynamic complexity
Could the carbon tax sink the boat?
The impact of Australia’s carbon tax on the Red Meat Processor.
Dr Sue McAvoy, Post-doctoral Research Fellow, University of Queensland Business School, Australia
smote _ Processing Plant ye Two models were created. Results are presented for base case Model 2 which is a
The Australian Carbon Pricing Mechanism (CPM), was implemented in July 2012 ee ee Pg Hie apie a va van . a : yearly time step, parametised at an initial year of La Nina (rain) followed by El
eproduce Dge Limes]? # ‘
and repealed two years later. Computable General Equilibrium Modelling (CGE) As 16 8 ES ooo Nino (drought) and CT at $0, $24 and $100. The exchange rate constant at
modelling, founded on neoclassical economic theory, informed the \. C, cng ia mr wad fa, FY USD.94c as is the AUD gross sales value. Model 2 is initialised with beginning of
government’s policy decision to impose a non-shielded carbon tax on behets ARI) =n — 2 2012 data. The dt is % and simulation period is 12 years. Base case livestock
Australia’s value added manufacturing export industries, despite such Nef “oe price, production (slaughter) and net income are presented (LHS). The base case
modelling being criticised for its theoretical and empirical weaknesses. : a is varied on the RHS for La Nina weather dynamics.
Many of these industries did not have the structures necessary to qualify for eer Livestock oN = Aves Supply a ee]
+ Ny Price- Beef Nee = CT=$0
h j j j j d d EITE t ti d l b tl t cnt Reproduction eo, reeders Ny :.] a 7] 4: Actual Turnoff Demand
the emissions intensive trade exposed ( ) protection used globally to <Ssiag gupwsper J “Se : Bee ee ree ere gee
prevent carbon leakage /loss of competitiveness. Red meat processing is a 83) Netinome awe Aaa ee ee ee
significant Australian export industry. Under the CPM, it paid a non-shielded “feo icrgany ny — at ee
carbon price which neither its international nor smaller domestic competitors Wot Dea Demand for Cattle 7 es eee ees ; =
. . . . . . . . . or Bee! - scene e — ieee ort eT
paid. Commissioned studies to investigate the impacts of this policy on es oO COL mee, 60 Cnn ooo ees conc
competitiveness have relied almost exclusively on CGE modelling. vat! — Bia) Pee .
. . ° . ° . : ++ a Sa * ieee me _ = wea wa va - = pe a ae Tue, Peel
This thesis offers an alternative investigation based on Systems Dynamics, a Schedule Pressure ds/_? = taltstie a2f ? fe Production
methodology that can accommodate the industry’s dynamic complexity. Cepacty oe so Pee 2. Sie
Utilisation B5 mee 2]
. . ° Production Cost et Income 5
SD modelling outcomes suggest (1) that the carbon price contributes to an to | ee eee eee jo 2
uncompetitive operating environment under certain scenarios, even though the FCs Press —_
carbon tax is only .35% of total earnings and (2) that in successfully addressing a RE wr Nvoms oo ‘
criticisms levelled at CGE models, System Dynamics offers a valuable ee —
supplement to the dominant modelling paradigm. .
Available CA PEX J “id 19 38 48 at 2] | +87 313 48 es
Figures 6a, b, c, d Conceptual diagram and causal loop diagrams for livestock market, supply chain and net income eet ? — Livestock Price | | a ? wetarrce lnvestocl Ene
| CT=$24]] | cT=$24 |
¢ a pe 2
. oe Processing Module in days as . = —_
* Red Meat Processors (RMP’s) are Australia’s # 7 = J
largest food manufacturer and exporter,
contributing $16.2 billion or 1.3 % of total
GDP and .9 % ($5.5 bill) of Australia’s . NEA 4
household income (AMPC, 2013-2017). Rare and? Red meat process Suc aechee ne. Lenore : Rid Sornaweay Pe ey 7 wes “em ne rr
2 ae Sa ea ° a Bae ? LiwstockPrce Livestock Price |x a ar ? Lnestock Pee Livestock Price
¢ The sector ranks fourth nationally in export =a
contribution to FTE behind coal and metal ore @ “Se oe
mining and primary metal manufacturing
(AMPC, 2013-2017). ae
| oe k : i : n Gi sovveses mo a - : 1 Fn
* The area of grazing land operated by beef ied i sa yaaa ee eee ee ae ae
cattle/sheep businesses is estimated to be — ii J oe
more than 336 million hectares; over 40 per SAUL meee ace “ova Tae .
* Beef Processing Supply Chain © saa Ee Pare mS eo PPO 156.75 312.50 468.25 624.00
cent of the total area of Australia. ABARE-BRS " renee. = Se 2! eft 2 ts Ft fe,
(201 0) Figure 7. Processing stock and flow model a Bf? me Production | E4 = ane Production
Figure 12. Net Income under CT $0, $24 and $100 for El Nino (left) and La Nina (right)
=. ribution of Dairy —— a 8 8 Neempriepe ine se a9 9 sanhccatahomtne 1-8-3:
oo four | —
_ — “2 °SUPPLY MARKET for = “Y"? besos OS d orneree
The Main Problem ane ex i
Re aths ; & end, —, =a ; . Se ger ae
U Australi ) oe Sf] meee ke, [Y SN OA NS
Will Australia’s carbon tax enable red meat processors (liable to pay the tax) to PHECING Wouter lated _ Deaths Out 2—Ze ; : ee oo |
remain financially competitive in their domestic and global environment? i A? srccreetieg_{ Wenteriated y —
Heated = ; r, a $ ~~ 1.00 156.75 312.50 468.25 624.00 ‘ saa 18.79 s12.90 82 2409
At $24/tonne, the tax adds 1.73 cents/ kg of HSCW or $17.30 per tonne. The RMP pemenme - O} VV —*- beet os wat wt von starans] es Ps _ psoalt Tu tite 2
: io i see. ‘Gip~_ Breeders sg nena breeders retiring aaF ? vain Net Income. (drought)) agar 7? vee Net Income (no drought)
industry has reported the pressures that the additional carbon costs are bringing es pm = Potts AC)
F ‘ : P ‘ : —— —— + ( —— i Live export
to an at times marginal industry (Linden et al., 2011; Meta Economics Consulting ec ong Fareseive Conse Bening Soc a
Group, 201 1 ). ; on gee (reiaiien oe Sev — pea cS om Grass Holding Stock
A desktop analysis suggests the RMP’s es \ (see oO |IIF | ESeI Or | | || -O= alll <4 a
profit margin is highly variable and aoa re ison “hele + Reference vs Historical Behaviour
; a * Them h n able to
carbon costs (.35% of gross sales) will SN as — Ley e model has bee
be a financial impediment when the sine ~ sal ie ee wfenmmt | “EEE. represent the components of Stugher (Ata
. . . af toot {t} . ‘hal woah he in nd pr
profit margin oscillates around zero. - [— Ages Dest arama C © dustry and p oduce Siaughter( Model
sey 7 Ea, Th Feedot 15 O simulations that replicate past 3
Cimate factor mS Chinta eco a Dairy Live Export . . m2015
' , waa projected Converter Feed = behaviours and industry trends #2014
This outcome does not consider the Figure 8. Livestock supply stock and flow model Population (Actual) #2013
impacts of adverse exchange rates 35 = 5 in key output variables. System 22012
weather or global market failures ee wrt acne et Dynamics does offer a useful Population (Model)
, Figure 4 and 5: Dynamically complex industry IN PURPLE ~~ supplement to the computable 0 56 0 6 2» 28 0 3
Dynamic complexity of LT avg normal price over 2year general equilibrium modelling. million head
INVENTORY
Red Meat Processor Figure 13. Model performance analysis
Direct/Indirect _
¢ The simulations suggest Australia’s carbon does impact competitiveness. Under
El Nino conditions (low livestock price, high turnoff) the RMP can operate
profitably. However, when livestock prices are high and herd rebuilding
programs are in expansion (La Nina weather) RMP margins are traditionally low
meaning they are less able to absorb the additional costs.
, . - ¢ In isolation, the carbon tax appears to make little difference to the firm’s
ee a . profitability. However, the tax needs to be assessed in light of the dynamic
ee ll Se . “ee operating environment and consequential prevailing profit margins. Insights are
, re! ™ that the dynamic operating environment of the RMP can erode profit margins
Sone Poe to the point where the additional .35% of gross sales cost added by the tax
Diversity of dobal cannot be afforded. To this end, the carbon tax can be said to be affecting the
action on carbon Figure 9. Livestock market supply and demand dynamics stock and flow model. ee
J competitiveness of the RMP.
ffect ofMeat Margin on
ecma!l Turnoff Demand
