In October I pointed out the idea of carbon leakage — that placing a carbon price on trade-exposed polluters leads to lower emissions here and more overseas — had yet to be proven anywhere and that carbon costs were so small as to be dwarfed by common or garden factors in company results. Especially exchange rate movements.

I was criticised at the time for not being aware of the concept of hedging, and I do confess I wasn’t aware of the magical property attributed to it of wishing away all exchange rate movements, especially long-term ones.

Assuming that some form of emissions trading scheme or carbon tax eventually becomes the long-term Australian climate change policy, carbon leakage — and the attendant problem of jobs leakage — is going to haunt us for a long time.  And, if our politicians have anything to do with it, we — that is, you, and me, and others taxpayers — will fork out a lot of money for it.

In November, the Government suggested it would be assisting trade-exposed emissions-intensive industries to the tune of $35 billion over the next decade. The Government’s deal with Malcolm Turnbull — now enshrined in amendments to the CPRS bills — guaranteed high levels of industry handouts in the scheme well into the 2020s.

Carbon leakage is the key reason why the Government’s CPRS is such terrible policy.

It remains the case that carbon leakage — either of the unsubtle kind where firms pack up and move overseas, or the more subtle kind driven by relative declines and increases in market share of domestic and imported products — is little more than a theory.

A recent study of the European ETS showed no carbon leakage — unsurprisingly since trade-exposed sectors in Europe had been generously compensated.  An earlier European study had suggested global demand was the biggest driver in the relative decline of European market share in energy intensive industries like cement, steel and aluminum, rather than shifts in competitive advantage like those caused by the unilateral imposition of a carbon price.

But a very recent paper by the Oxford Institute of Energy Studies suggested quite the opposite: its modeling showed carbon leakage could be a substantial problem for firms affected by even small changes in competitive advantage. However, that paper noted several caveats — in particular that being trade-exposed and emissions-intensive were not the sole criteria for exposure to carbon leakage; the state of competition in the relevant industry was also critical.

Moreover, the study suggested that in many cases carbon leakage would not be 100% — that is, a reduction in emissions in one place might only be partially offset by a rise elsewhere, meaning a net reduction in emissions (although the transfer of jobs overseas might be 100% even if this was the case).

The paper also suggested that, beyond a certain point, handing out free permits (the European solution, and the one at the heart of the CPRS) ran the risk of simply increasing company profits rather than preventing leakage.

Thus we have a dilemma: outside models, in real-world global markets where emissions-intensive Australian firms variously play dominant, unremarkable or downright trivial roles, just how likely is it that a carbon price in Australia will mean production, jobs and emissions just move elsewhere?

Fortunately our biggest polluters have released their annual or half-year results over recent weeks, so now we can consider their recent performance against how much they would likely be charged for their emissions under a proper ETS.

Tomorrow: How Rio Tinto, Bluescope Steel, OneSteel, BHP, Boral and Caltex fared — and how they’d fare if they paid for their emissions.