News & Events

Giles Parkinson, The Australian

FOR an event billed as one of the most radical transformations of a national economy -- or labelled ruin of the nation -- the introduction of the carbon price on July 1 is going to be a bit of a damp squib.

Not much will happen, at least on listed equities markets, and not much has happened since the details were unveiled and passed through parliament last year.

And that's a mixture of good and bad news for some listed stocks: the good news is that those companies deemed to be disadvantaged by the carbon price will be little affected. The bad news is that those presumed to benefit from the new deal -- such as clean energy developers, carbon offset providers and the like -- won't get much of a fillip either.

There are several reasons why this is so -- mostly the levels of compensation and preparation in the former, and lack of certainty about future policy in the latter.

Despite the incredible noise at the political level over the carbon price, the impact on most listed companies will be minimal. And the market as a whole has a lot more to worry about, such as the financial crisis in Europe, the value of the dollar, Chinese economic growth rates, and the cost and availability of labour.

Analysts say investors are not that concerned about the short-term impacts of the carbon price, even if a growing number are starting to focus on the long-term challenge of recalibrating their portfolios to take account of the inevitable decarbonisation of the global economy.

"Investors realise the costs of the carbon policy are small," says Tim Jordan, an analyst with Deutsche Bank. "After free units, direct cash grants or cost pass-throughs, the impact over the first few years just isn't material for listed companies."

Citigroup has estimated the across-market valuation impact of the policy at less than 1 per cent.

The crucial point is that most companies have seen this process coming, and are -- or should be -- well-prepared. Some businesses have been factoring a carbon price into their investment decisions for the best part of a decade, or at least since John Howard established his taskforce on emissions trading in 2006.

The crucial point is that most companies have seen this process coming, and are -- or should be -- well-prepared.

An internal carbon price has been common practice at companies such as BHP and Rio Tinto, and banks have been factoring in carbon to financing agreements with energy utilities for years.

Basically, they've been doing what Microsoft announced to the world two months ago, when it introduced a shadow carbon price into its internal systems, even though the prospects for any sort of carbon price in the US by the end of this decade are dim. But in the long term, it is inevitable.

Microsoft is using an Australian company called CarbonSystems to help manage that process.

The head of commodities, carbon and energy at Westpac, Geoff Rousel, says most large companies regard carbon pricing as an inevitable economic reform.

"The liable entities are well prepared," Rousel said. "They are larger companies, adept at dealing with these types of risk.

"They know what their obligations are, and they know how they're going to meet them.

"The focus has shifted across to innovation and competition, and how they position their company in the industry. We're seeing a lot more investment in R&D -- companies are looking to investigate opportunities."

Those companies indirectly affected by the carbon price through increased electricity costs are finding that other factors, such as network investment, are having a greater impact.

Those companies indirectly affected by the carbon price through increased electricity costs are finding that other factors, such as network investment, are having a greater impact.

And judging by revised forecasts from the energy market operator, and comments by Energy Minister Martin Ferguson this week, these companies are responding by being more efficient in their energy use. Demand is expected to be 10 per cent below forecasts of just a year or two ago.

Ironically, it is that reduction in demand and the resulting fall in wholesale electricity prices -- now at record lows -- that is likely to have a greater impact on the earnings and prospects of generators, both the fossil fuel incumbents and new capacity operators, both black and green.

The carbon price has not killed investment in those industries deemed most vulnerable to the new regime.

The mining boom seems constrained only by the ability to source capital and labour, and the structure of the compensation has encouraged some companies, such as AGL Energy, to temporarily abandon their commitment to lower their emissions intensity by snapping up a bargain -- in this case the country's biggest single emitter, the Loy Yang A brown-coal power station.

AGL Energy reasoned that because Loy Yang had a distressed seller, the Fukushima-afflicted Tepco, it could not pass up the opportunity to make a sale.

But clean energy companies have been struggling. Most are trading at or around record lows, even if some enjoyed a brief flurry of activity after the Clean Energy Future package was unveiled.

The carbon price is unlikely to have much of an impact on generation choice until it reaches a level of about $50 a tonne, and on current scenarios that seems unlikely for a decade at least. So the fortunes of clean energy technologies, particularly those in emerging technologies, will lie mostly in schemes such as the Renewable Energy Target, financing through the Clean Energy Finance Corporation, and grants from the Australian Renewable Energy Agency.

But the future of all three schemes is clouded. And the one sector that is approaching the point where subsidies are no longer needed, solar photovoltaic, is grappling with that very virtue, plunging costs.

Getting to market

AUSTRALIA may well have a national carbon price come July 1, but it will be a while before it has a national carbon market. According to Westpac's Geoff Rousel, that is likely to remain the case for at least another year.

However, carbon is being traded in some form, and that is in the electricity futures market.

AGL Energy managing director Michael Fraser noted recently that carbon had been fully accounted for in futures contracts in 2012-13, but had been discounted by about 50 per cent in the following year, representing the market view of how the next election might turn out, and on whether Tony Abbott can or will deliver on his pledge to repeal the package.

In the past few weeks, that discount has narrowed a bit, to about 25 per cent, according to Rousel. Perhaps the market is not so confident the carbon price will suddenly disappear.

Assuming it stays, however, carbon trading is unlikely to gather much steam in Australia until the first series of permit auctions are held in 2014.

Some trading or hedging might take place on international permits, but is unlikely to attract any significant volume until Canberra has settled on the mechanism to translate the inferior price of international permits to the proposed floor price in the Australian scheme.

It is those international prices that will dominate at least the political sphere for a while to come.

The European price, the one most often compared with Australia's, is languishing at about 7.50 ($9.35).

It's been lower, but in the past week it has surged nearly 10 per cent, mostly on speculation the EU will finally act on its massive overhang of credits.

But even the proposed holding back of 900 million permits may not be enough. According to the independent analyst group Sandbag, the overhang in the European carbon market caused by over-allocation and economic contraction amounts to 3.1 million tonnes. Sandbag says the EU climate target and emission caps are effectively obsolete while that overhang remains.

The outlook for the international price, which represents the permits that Australian liable parties will be able to use to offset up to 50 per cent of their emissions, is not good.

The EU has restricted demand to credits created in the least developed countries, which excludes China.

And no one is certain where the demand will come from, apart from Australia.

Point Carbon released a report last week that said unless the overhang is addressed, the price of EU allowances will be unlikely to exceed 16 by 2020, and international permits could trade for as little as 1.60.

At that point, local analysts say, Australia will be faced with a crucial decision -- extend its floor price beyond 2018, or allow the traded price of carbon to fall to those levels.