Australia Carbon Plan May Chill Investment Climate
By Mark Bendeich , Planet Ark, September 29, 2008
SYDNEY - Australia's plans to protect its climate from global warming, by cutting greenhouse gases, could end up playing havoc with its investment climate instead.
The government has promised to make polluters pay for their carbon emissions within two years, but there is still confusion and controversy over how the system should work.
Even a very modest reduction target could wipe out billions of dollars in profits from listed firms, such as steel-makers and mining companies, without major compensation, according to preliminary estimates by investment bank Goldman Sachs JBWere.
But analysts and fund managers say too much state compensation could also distort the market, handing windfall profits to polluters and drawing some investors into the very industries that pose the biggest threat to climate change.
"The key issue is how that compensation issue plays out," said Andrew Gray, Melbourne-based head of environmental, social and governance research for Goldman Sachs JBWere.
His preliminary estimate, based on voluntary disclosure by just 40 listed companies, suggests at least A$3 billion (US$2.50 billion) in earnings before interest tax and depreciation (EBITDA) could go up in smoke without compensation.
Australia's top steel-maker, BlueScope Steel, has the biggest exposure to carbon costs: without compensation, Goldman estimates about a third of its EBITDA is at risk. Not far behind are rival OneSteel, refiner Alumina and airline Qantas with 10 percent to 15 percent of profits at risk.
The analysis is based on 2006 earnings, the most recent period for Australian data under the Carbon Disclosure Project (http://www.cdproject.net/index.asp), and assumes a carbon price of just A$20 a tonne, 40 percent less than in Europe, which began trading carbon-emission permits in 2005.
Green Versus Greed
The government says it will cushion the blow by compensating big polluters which, if saddled with carbon-emission costs, would be overtaken by foreign rivals. Initially, the heaviest polluters would need permits for only a fraction of their emissions.
But Australian industry is fiercely lobbying government for more compensation before Canberra finalises its carbon scheme around year-end, with chief executives warning of collapses in investment and profits.
(For a graphic on Australia's carbon footprint, click on https://customers.reuters.com/d/graphics/AU_CRBNFT0908.gif)
Pressure on the government for subsidies has only increased as the Australian economy slows and a global recession beckons, raising the prospect of polluters making even fatter profits.
"That's exactly right," says Patrick Noble, senior investment specialist with Zurich Financial Services Group which has A$6.3 billion (US$5.26 billion) under management in Australia.
"The key is to ensure that there is not a misallocation of resources," he said, citing Europe's experience in the first phase of its carbon-trading scheme when electricity generators made windfall profits by on-selling their free emission permits.
European generators not only pocketed the trading profits, they also used the carbon scheme to raise electricity prices.
"In Europe, generators reaped an estimated 9 billion pound (US$16.51 billion) windfall gain through 100-percent free allocation whilst still passing on the cost to consumers," Australian investment bank Macquarie said in a recent report.
Australian generators, which burn coal to produce about 77 percent of the country's electricity, have been put in their own category of "strongly affected" businesses and are eligible for direct state assistance to help them adjust.
Generators are largely state-owned anyway, but listed coal-fired power businesses include Australia's AGL and a local unit of Britain's International Power.
Missing In Action
No matter whether the government takes a hard line or soft line on greenhouse gases, fund managers expect a carbon-reduction scheme to funnel money into clean-energy technologies.
The trouble is, says Zurich's Noble, there are few pure renewable-energy firms of any real size on the Australian stock market, and it will take a long time for some of the market's minnows to move to the centre of the investment radar.
There are a growing band of small and mid-cap stocks flying the green flag, from wind-power firms such as CBD Energy and Dyesol to a new breed of so-called "hot rock" companies such as Petratherm and KUTh Energy, which harness power from heat trapped inside the earth.
But Australia remains largely a destination for investment in old dirty business such as open-pit mining rather than new green technologies -- and that is not expected to change anytime soon.
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