Yesterday I explored a small part of the confusing world of carbon leakage, which, despite remaining a very interesting economic theory, has become the basis for Kevin Rudd and Penny Wong’s $35 billion handout to big polluters under the guise of their Carbon Pollution Reduction Scheme.

Based on work done by Riskmetrics for the Australian Conservation Foundation last year, it’s possible to compare the impact of the CPRS in its first proper year of operation (2012-13) with the sorts of cost pressures big polluters are feeling now, based on their most recent financial results.

Rio Tinto will be the biggest beneficiary of CPRS assistance. In the absence of EITE assistance, the company would pay just under $600 million in carbon permit costs in 2012-13 — but as it stands, it will receive nearly all of that in free permits.  To put that in context, last year it suffered a $5.5 billion reduction in underlying earnings due to lower commodity prices.  However, it picked up $484 million on exchange rates fluctuations.

Bluescope Steel is the next biggest recipient of CPRS largesse after the second-biggest, multinational Alcoa.  Without compensation, Bluescope would have faced additional costs of $223 million under the CPRS.  The company has warned that the CPRS might lead to it closing the Port Kembla steelworks, among other wild claims.  Bluescope reported a $2 billion fall in revenue for the second half of 2009 (six months only) and blamed it on both lower prices and a $US0.09 rise in the value of the Australian dollar.  It’s half-owned North Star BlueScope Steel suffered a separate $73 million hit because of the Australian dollar in just the six months of the reporting period.

OneSteel also reported lower prices and said it had suffered margin reduction across the board due to the impact of the rapidly appreciating Australian dollar.  Together, they slashed $600 million in revenue from its manufacturing division and another $600 million from its Australian Distribution division for just the half year to December 2009. Onesteel would have faced a $112 million carbon cost in 2012-13 without compensation.

And then there’s Woodside, led by corporate Australia’s biggest whinger, Don Voelte, which overrode its own no-donations policy to tip money into the WA Liberals to fight the CPRS.  Without compensation — compensation that it has successfully lobbied to boost — it would face a $96.9 million cost increase from the CPRS in 2012-13.  In 2009, Woodside saw a $1.6 billion drop in revenue, to $4.3 billion, off lower gas and oil prices.  But — the rising Australian dollar knocked $620 million off Woodside’s US debt.

BHP reported a $1.5 billion hit from currency movements in the second half of 2009 alone.  Under the CPRS, it would have faced a $115 million cost increase.

Boral would have been up for emissions costs of $67 million.  It recently reported a favourable currency effect of $142 million in its report on the second half of 2009, although it anticipates that Blue Circle’s volumes will suffer because of the higher dollar.

Caltex picked up $92 million last year off currency movements, compared to a $243 million loss the year before.  It would have been up for $77 million in carbon permit costs (the company itself told a Senate committee that it would be $90 million).

The effect of currency movements often hasn’t been disentangled from that of price movements for investors looking for reasons for a fall in the earnings of our biggest polluters; price movements obviously affect industries globally, no matter where they are located, while currency impacts are peculiar to each country in which companies operate or borrow.

However it’s clear that in all cases the cost of emissions permits is far below that of the combined revenue impact from both movements in commodity or finished product prices and currency movements.  Even assuming a relatively minor role for the Aussie dollar in that mix, currency movements appear at least of the same scale as a carbon price.  And in cases where they have been disentangled, the annual putative cost of carbon under the CPRS is utterly dwarfed by exchange rate benefits or costs, even within a six-month period.

This sort of scale reflects the finding of Goldman Sachs JBWere’s examination of the CPRS in May last year, when it found that the cost of carbon permits without compensation was a small fraction of these companies’ EBIT — Bluescope was the highest, at 11%, then Boral (5%), Rio Tinto (4%), Woodside (3%), Caltex 2%.

Which leads to the question: if carbon costs would be such a small component of the costs of even the biggest polluters — so small that a rise or fall in the Aussie dollar could swamp them — why are we handing $35 billion to them to prevent “carbon leakage”?