Australia | Jul 17 2008
By Greg Peel
The Rudd government yesterday released its “green” paper (the colour traditionally used to signify a policy up for scrutiny and debate, not to signify environmental issues specifically) on what it has dubbed a Carbon Pollution Reduction Scheme (CPRS) proposal.
Recommended reading as an adjunct to this article is the FNArena Special Report on carbon trading available in the Special Report section of the News menu. While written in February 2007, the details are no less relevant today.
Having said that however, consider that in February 2007 the then Howard government had suddenly realised just how important an issue emission reduction was to the Australian electorate, and so it began to work swiftly on a policy. But also consider that oil was only US$60/bbl, and at that price we were all very concerned with the “high” cost of energy.
It is also important to consider that the planned imposition of a carbon trading scheme on Australian industry is by no means a bombshell. We have been inevitably building towards this point for several years now, and industry has not only been fully aware of this eventuality, but had also begun to act in response at least a year or more ago. Such a response has included both looking into ways to reduce carbon emissions, or to horizontally invest in carbon reduction businesses on the one hand, but also to prepare a powerful lobby on the other. The games have only now just begun.
It was always feared by industry that a Labor government would take a tougher stance on emission control than a Coalition government, albeit without wishing to upset the applecart too much. And on last breath the Coalition government was going to wait until an international scheme was in place anyway, which effectively meant sometime in the unforeseeable future. The Labor government has acted swiftly as promised, but the heavy polluters would have been breathing somewhat of a sigh of relief yesterday. The scheme in its current form outlines a very softly-softly approach at best.
The bottom line is that the heaviest polluters are also among the greatest contributors to the export dollar, or to employment, or both. At the consumer level, the majority belief in helping to sustain a better world will have been severely compromised in the interim by the 133% increase in the oil price since February last year. To that end both groups need to be compensated, in any political party’s vision of a sustainable economy, and that is basically what we have so far with the CPRS.
The important element is that those companies with an emission intensity above 2000 tons of carbon dioxide equivalent per million dollars of revenue will receive a free allocation of 90% of industry average emissions allowances at the outset. Put it another way, their impact will only be 10% of what it might be at first. Companies with between 1500-2000 tons will receive a free 60% allocation. All up, some 20-30% of permits will be allocated free, according to Macquarie’s analysis.
Industries falling into the first category include aluminium smelting, lime production, cement clinker production and steel manufacturing. The second category includes ceramics, alumina refining, parts of the oil & gas sector, some chemical manufacturing, some mineral product manufacturing, some paper manufacturing, and some non-ferrous metal-smelting, on the Macquarie analysts’ reading.
So far coal-fired power generators are up in the air, although some form of assistance is being considered.
Transport – which is the largest single contributing industry to carbon emissions – will initially be affected by obligations on upstream fuel suppliers, with a tougher stance somewhere down the track. From the individual car-driver’s point of view, any increase in petrol price brought about by the CPRS will be equivalently offset by a reduction in excise.
The next step is to put a price on the cap, and pricing for the initial cap period to 2012-13 will be announced in December. Citi has done a lot of work on carbon pricing over a period of time, as is evident in the Special Report referred to above. Citi is sticking to its original expectation of a $20/t cap or possibly lower, rising to $50/t by 2020. But even Citi concedes “there is little data for making forecasts”. Deutsche Bank draws on “industry sources” to suggest an initial price of $35/t, so we can see this is all a lottery at the moment.
While it is clear Australia will have to start getting used to the idea of a carbon-traded world, and act accordingly, the transition phase will be smoother than environmental groups or Professor Garnaut would advocate. RBA chairman Glenn Stevens is set to treat a carbon cost in the same way the central bank dealt with the GST, and we all managed to survive that transition. At first blush, what the government has in mind should also be absorbed relatively easily.
From a stock-specific point of view, there are winners and losers, but (a) we knew this was coming anyway and (b) the impact of other global factors will be much more influential than the CPRS at this point.