Carbon Price Makes Business Sense

Carbon Price Makes Business Sense

Superannuation funds have thrown their weight behind the government’s plan to introduce a carbon price, saying the Opposition’s pledge to roll back an emissions trading scheme would hurt investment in cleaner energy. While business commentator Josh Dowse in Climate Spectator says the industry group leaders are misleading the public as very few of their members would be affected, as many firms who are feeling pain from rising energy costs, a carbon price is the least of their worries. But Prime Minister Julia Gillard still has a fight on her hands. 

Clancy Yeates In Sydney Morning Herald

March 4, 2011

SUPERANNUATION funds have thrown their weight behind the government’s plan to introduce a carbon price, saying the Coalition’s pledge to roll back an emissions trading scheme would hurt investment in cleaner energy.

With $1.3 trillion in assets, super funds are tipped to play a crucial role in funding the move towards a lower-carbon economy.

But amid a fierce political debate over pricing polluting, key funds have said they would be unable to invest with certainty unless there was an economy-wide carbon price.

The chief executive of construction industry fund Cbus, David Atkin, said a carbon price was ”critical” for backing cleaner investment, but that Opposition Leader Tony Abbott’s policy of direct action would not allow this.

”We think getting a price on carbon is critical to enable investors to allocate more capital to low-carbon assets,” he said. ”The difficulty with the direct-action policy is that it doesn’t provide an investment signal to the private sector, which is critical to the transformation required.”

The Investor Group on Climate Change, which includes private sector giants AMP, BT and Colonial and represents fund managers who control $600 billion, also backed carbon-price certainty.

The group’s chief executive, Nathan Fabian, said after pushing for a price on carbon for years, institutional investors were frustrated by the opposition’s pledge to roll back the scheme.

”Introducing doubt about the future regulatory environment undermines investor confidence,” he said. ”This is quite simple. Provide a long-term signal to investors and they will invest. Introduce significant regulatory uncertainty and they will not.”

The acting chief executive of the $8 billion VicSuper fund, Michael Geraghty, echoed other funds’ support for a carbon price, saying it would ”allow institutional investors to consider investments in climate solutions with confidence”.

The president of the Australian Council of Superannuation Investors, Michael O’Sullivan, estimated at least half the private capital needed to be committed to tackle climate change would come from pension funds. But he said the opposition’s roll-back pledge would introduce a ”profound sovereign risk” to the equation for institutional investors.

The comments come after a Mercer report last month advised investors to reallocate funds towards climate-friendly assets over coming decades as a hedge against the earnings risk that climate change posed to companies.

But Deutsche Bank analyst Tim Jordan said policy ambiguity was the ”great enemy” of low-carbon investments, which required the long-term certainty of a carbon price.


4 March Climate Spectator

Josh Dowse

Business Spectator

Australia’s largest businesses are more than capable of looking after themselves, financially and in policy negotiations. Always have, always will, and rightly so. So it seems a little strange when the Australian Industry Group (AiG) and the Australian Chamber of Commerce and Industry (ACCI) shout loud for our largest companies, to the detriment of the vast majority of their members.

First, let’s take the proposed carbon price. Despite all the noise, what is being proposed will have only the smallest effect on all but a literal handful of companies. The AiG’s own research, which I’ll get to below, shows this very clearly. In any case, the government has said that businesses will be “assisted”. Many question the wisdom of that largesse – the small potential cost is quite avoidable by most businesses and, if they do take energy-efficient action, their investments will have a financial return that most businesses would be more than happy with.

A few weeks ago, the AiG released its research report Energy shock: confronting higher prices. Though its sample size was small, it tells a great story. Firstly, most companies spend very little on electricity – two-thirds spend less than 2 per cent of sales (Figure 1). Accordingly, very few do anything to reduce that cost, and very few intend to (Figure 2). The cost of energy isn’t a big deal for most companies. If it was, business would be doing something about it.

Figure 1: What was your company’s electricity spend as a percentage of sales in 2009-10?

Source: AiG, “Energy shock: confronting higher prices”, February 2011

Figure 2: How do you expect your company’s energy efficiency to improve in the next 2 years?

Source: AiG, “Energy shock: confronting higher prices”, February 2011

A carbon price of $30 that might raise a firm’s electricity cost by a nominal 20 per cent won’t make that big a difference to most firms. That’s a nominal 0.2-0.4 per cent rise in the cost of goods sold – not really enough to send a business to the wall, despite what Tony Abbott, Heather Ridout and Peter Anderson might claim. If anything, it’s the uncertainty that is debilitating.

Why do I say ‘nominal’? Because it’s avoidable. Companies who have looked at energy efficiency find that reductions of 5 to 10 per cent per year are commonplace. There are strong government programs such as the NSW Energy Savings Credits to reduce the up-front cost. In any case, investment in energy savings has a typical return on investment of 30-50 per cent in the first year, and 15-25 per cent after that. Simple behaviour change programs greatly improve those returns. If the cost of energy or a reputation for sustainability is important, firms will act. But for most firms, it’s just not an issue. Those in the business of improving energy efficiency know that only too well.

For the many firms who are feeling pain from rising energy costs, a carbon price is the least of their worries. In NSW, IPART has confirmed that retail electricity will be 40 per cent dearer in 2012-13, without a carbon price. The AiG research confirmed why: electricity prices have been rising, and will continue to do so, due to rising generation and network costs. The resources boom has increased costs for skilled labour, building and maintenance materials, and of course thermal coal prices. It notes that “Nearly 60 per cent of Australian coal-fired generation capacity, including all of NSW’s coal plants, appears potentially exposed to these coal price movements.”

Network costs have risen by 58-93 per cent in NSW and Qld over the past five years, and the underlying causes are only getting worse: rising per capita energy use and peak demand, past under-investment in network assets, and more rigorous licensing conditions imposed by governments to avoid unpopular blackouts. There are also stronger incentives for companies to seek higher capital allowances from regulators than there is to manage demand: that is, they are rewarded for network spend, but not to reduce energy use.

As the resource boom continues, all sectors pay more for labour, materials and energy, while interest rates may rise. If the AiG and ACCI were truly acting for their members, they would be trying to dampen these impacts, pointing members to energy efficiency programs, identifying the opportunities in low-emission and energy efficiency businesses, not scaremongering on a carbon price.

Indeed, far from helping to reduce the business costs of their members in these ways, both AiG’s Heather Ridout and ACCI’s Peter Anderson this week insisted on prolonging the uncertainty over the carbon price, further increasing generation and network costs, by backing Tony Abbott’s intention to ‘roll back’ this ‘great big tax’.

The carbon price is not the only policy issue on which ACCI, at least, has supported the big boys at the expense of its larger constituency. The resource rent tax was designed by the Henry Review to restore the national share of mining proceeds to historic norms (Figure 3), but more importantly as a targeted policy lever to slow down the pace of that mining and so get better returns from it in the medium term.

Fig 3: Mineral tax and royalties as a share of mineral profits

Source: Australian Government, Australia’s Future Tax System, December 2009, chart C1-1.

The resources boom is undeniably putting upward pressure on costs and interest rates for the whole economy. Yet ACCI was happy to risk rising interest rates for its members, and indeed lose a reduction in company tax, by cheering for the short-term profitability of some mining companies rather than the short- and medium-term interests of its members.

As we’ve seen, those miners are in very healthy shape and well able to look after themselves in Canberra. As indeed are our heaviest emitters, trade-exposed or not. It’s not so clear who is looking after the other 1,100,000 businesses in Australia.


Josh Dowse is an independent consultant on sustainable business and investment:


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