Carbon Trading Triple Backflip with a twist
My gut feeling tells me that this backflip has a twist. Usually the answer is easy, it relates to fear and greed. That is, the making of money or the potential loss of it.
Who are the players in this game?
The Investment banks have clients like hedge funds and superannuation companies who have very large debt and equity stakes in the coal industry between them. These debt instruments particularly on the coal producers can be very fickle in their valuation. Often very illiquid, they are worth billions so small % valuation changes hit hard. There’s a good chance you own some of these in your super fund. So these institutional stakeholders would be fairly keen (along with the boards of those fuel commodity companies) to ensure continuance of the Australian coal industry and the minimisation of term environmental liability through trading and hedging using a carbon credits market. Some investment banks would like the market to start, e.g. commodity traders like Macquarie Bank who are likely to play a big part and reap the hedge trading profits from corporate hedge and risk books.
The coal producers effectively have a future environmental liability not booked on their balance sheet at present. How this will appear in the future hasn’t played out yet. To add to this there is a contigent liability linked to future production should any carbon trading system go live in the coming years. i.e. for every tonne of carbon generated there will be some carbon credit cost. The energy and coal producers. For these companies it’s a case of the further away the problem is the better. For example, had carbon trading started 7 years ago they would have had 7 years of carbon credits to purchase over that time. While delays continue their stock valuations should hold up and the future liabilities get pushed out in time.
The government at last has realised that they have a lot at risk:
- Precious tax revenue is at risk. After all tax revenue is mostly a derivative of company profits and the PAYG wage tax on their employees.
- The government has a protectionist philosophy toward industrys that employ a lot of Australias. I cite the car industry as an example. The coal, oil and gas industries share similar backing. After all it was our government who did the corporate sales job to get the Chinese to buy our gas. With hindsight, a disaster given they didn’t factor global energy demand.
- They are starting to beleive the economic reports that the climate change has an environmental cost that is now measurable in an economic sense. They acknowledge this.
- I dont think they are saying it but I beleive their biggest fear is environmental liability. This liability is only notional at present. It exists in a relative comparison between the developing worlds energy consumption and carbon emissions versus the 1st worlds. Australia doesn’t perform very well even against our 2nd and 1st world peers on a per capita historical basis.
While the government holds of any environmental initiatives industry puts forward the voters will expect that the government probably should take on the liability of the impact caused by not supporting them.
The voter finally has some power. Not being able to wash your car, water your garden or even shower in some places in Australia has really hit home. The government (state and federal) has failed on water and many people have drawn a quick link to climate change. As basic, unscientific and factually incorrect as this is I’m happy to let it slide for the benefit of the environment. Most agree that consumption is the heart of the problem and the bi-product of that is climate change. It’s not that climate has changed so much that there is no water.
So really what has changed to change their minds on this issue? The liberal party really does look the fool and has frustrated people like myself on this issue.
Do they really believe we think they have had a social conscience experience all of a sudden. I feel quite certain this isn’t about the environment but all about tax revenue, investment banks and industry protectionism. Dogs are always most loyal to those that feed them and endangered species don’t pay much tax or vote. The only certainty I can draw from all of this is that sadly this change of heart by the government isn’t about the animals. You all know this instinctively.
November 20th, 2006 at 1:36 pm
Hi Marc.
I agree with your sentiment. However, I think this particular backflip has more to do with a looming election that straight out profiteering.
I suspect Howard’s pollsters have tipped global warming as an election issue, so they’ve announced an inquiry into it - and I suspect the results of that enquiry will be announced in the leadup to the next election.
The recent frenzy of media following Al Gore’s visit and An Inconvenient Truth have really rammed home the urgency required on this issue, and Howard needs to catch up. He is using the “China and India must be part of the trading scheme” line as justification for the long delay on acting.
So the inquiry has been launched, essentially ignoring the trading mechanisms embedded into the Kyoto Protocol, and those recently floated by the Australian State governments. Howard wants something he can call his own at a politically convenient time.
I think that Howard’s nuclear push is much more closely related to his industry backers than the trading scheme. But I think the nuclear inquiry has also moved him towards trading, as it is the only way local nuclear production can be justified (and even then the justification is tenuous).
November 20th, 2006 at 8:47 pm
The other thing I meant to mention earlier was that there is a scientific basis linking climate change to drought and water shortages. The link is not as direct as many people think, but it does exist.
November 21st, 2006 at 7:01 am
Yeah I agree on water above I was mainly pointing to the sydney siders saying climate change is why sydney has a water shortage. when really that is mainly a demand side imbalance.