Let's have some clear thinking on carbon price

23 Oct 2010Archived News Energetics in the News

PUBLISHED: The Age - by Paddy Manning. Jon Jutsen, Founder and Executive Director of Energetics talks about Australia's inefficient centralised energy supply.

THE morbid rhetoric is increasing already, ahead of next year's main game when the new multi-party climate change committee tries to nut out a policy that will put a price on carbon, garner support from the business community and pass through a greens-controlled Senate.

One commentator moaned this week the government-appointed business committee on climate change was a "hanging committee" designed to "string up" the foreign owners of coal-fired power stations in Australia.

Such hysteria augurs badly, as the fossil fuel lobby - and outright opponents to a carbon price - are very well represented on the committee, and there is nobody representing the renewables sector.

NAB and Woodside Petroleum chairman Michael Chaney recently complained about how "thin skinned" politicians were, "threatening" business leaders who expressed their views.

I'd say last parliamentary term - both with the emissions trading scheme and the original resources super profits tax - we saw business people talking in wild terms about the potential impact of reform, often taking no responsibility whatsoever for the truth or accuracy of their statements.

I'm all for free speech, but surely there's some obligation on well-paid and well-briefed industry figures, engaged in a serious debate of major public importance, to try and tell the truth?

Nah, that'd be hard. Unless misleading public statements are made in trade or commerce and are actionable under trade practices law - or are released to the stock exchange and so are actionable via the listing rules and the corporations law - business people can gild the lily as much as they want.

Cutting through the climate change rhetoric has been Elaine Prior, head environment, social and governance analyst at Citigroup.

Last week, in the wake of a Greenpeace report on lending to the coal industry in Australia (covered previously here), Prior and her colleagues tried to quantify the exposure of our big four banks if a price on carbon were to wipe out the value of their loans to coal-fired power stations.

This is not far-fetched. As Greenpeace this week leafleted a Melbourne presentation by ANZ chief Mike Smith, and scaled the bank's Brisbane office to unfurl a huge ''ANZ: polluting your world'' banner … the banks are definitely worried - especially in Victoria's Latrobe Valley, where the first plant shutdowns are expected.

Bank shareholders are worried, too. "Investors including super funds have expressed concern about bank exposures to coal-fired power," Prior says, "more than about the banks' internal carbon footprint".

Citi is not valuing coal-fired power stations or saying that valuations will fall to zero - Prior thinks a sudden collapse is unlikely. But there will be a transition away from coal-fired power and recent loans have been more expensive or have included terms to restructure deals if, or when, carbon policy is clarified.

"I don't think bringing in a carbon price will be a dramatic, instant and widespread event," says Prior. "Change will be brought in gradually, rather than in such a way that it will decimate Australian industry on day one."

Citi's numbers on bank exposure to coal-fired power stations are rough and some data are inconsistent but in ballpark terms they total $2.6 billion comprising: NAB (under $1 billion), Westpac ($717 million), ANZ (about $650 million) and CBA (under $250 million). Dividing the total by the market value of the banks, Citi concluded: "in an 'extreme' scenario whereby coal generation asset values fall to zero, impact is roughly 0.2 per cent to 1.3 per cent of capitalisation - not a material share price risk."

It's an emerging theme in Prior's work. After 20 years in broking and four years since she switched to the green side of the sharemarket, Prior thinks most environmental issues are "fairly marginal in terms of the valuation impact".

Yes, she says, we've all been reminded of environmental risks by the Gulf of Mexico oil spill but it's easy to say that in hindsight. "What do you and I do when investing now … wipe $30 billion off the value of every oil company? No."

Generally, however, she's seen some opportunities arising for investors - like renewable energy - and few material risks.

No, Prior's analysis showed last year, the emissions trading scheme would not have had a material impact on earnings for any of our top listed companies. No, another note found, she could not identify 16 coal mines that faced closure if the scheme was brought in, as the Australian Coal Association claimed.

At the same time Prior takes a swipe at "two-faced" environment groups which, she says, during last year's emissions trading scheme debate, argued for legislation that would have a substantial impact on heavy polluters but were soon "crying wolf" when those same companies protested.

That is a reference to the Australian Conservation Foundation's unsuccessful attempt to take six companies - Rio Tinto, Woodside, Xstrata, Boral, Caltex and BlueScope Steel - to the competition watchdog for misleading and deceptive conduct because their restrained disclosure to shareholders didn't match their exaggerated public claims about the damaging impact of the ETS.

Prior wants none of the argy-bargy. "They don't stick to the numbers," she says. "We try to do the numbers."

MAYBE I had the wrong end of the stick last week, arguing we should concentrate on opportunities to reduce energy waste in power generation and distribution, before we worry too much about cutting electricity consumption.

I cited a Cambridge University paper (by J. M. Cullen and J. M. Allwood, published in Energy magazine) which showed 88 per cent of world energy is used up in the supply chain while only 12 per cent is used in providing useful energy services.

It's true, as Energetics' Jon Jutsen says, our centralised energy supply is inherently inefficient and "the big opportunity is providing a different energy supply chain, through locally distributed cogeneration and solar".

It's also true any savings we can make at the point of consumption are magnified back up the supply chain. RMIT energy expert Alan Pears thinks we can save more coal by driving appliance and building and industry efficiency than by fighting with the power companies. "If we improve the efficiency of an appliance, we save on all the upstream energy (including losses).

"Say it takes three-four units of coal energy to produce one unit of electricity … so if I save one unit of electricity by using less at the point of use, this means I have actually saved three-four units of coal energy."

The upshot? We can halve greenhouse gas emissions by doubling the efficiency of power generation and distribution, or by doubling energy efficiency at home and at work. Better, we can - we must! - do both.

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