Investing after Garnaut

The recently released Garnaut Climate Change Review follows in the footsteps of the Stern Review, and emphasises that the costs of preventing climate change will be far less than the costs of adapting to it. Garnaut’s review recommends the implementation of a comprehensive carbon emissions trading scheme as the lowest-cost means of tackling climate change.

The idea behind emissions trading schemes is the imposition of a cost on carbon pollution. This provides an incentive for polluters to become more efficient, and it makes cleaner forms of energy more cost-competitive. With implications for company profitability, emissions trading will become an increasingly important consideration for investors. The following table provides a summary of a few of the likely ‘winners’ and ‘losers’ under a comprehensive carbon emissions trading scheme.

Potential Winners	Potential Losers
Companies dealing in energy efficient appliances and insulation	Coal-fired electricity generators
Renewable energy providers	Petrol refiners
Alternative fuels	Parts of the motor industry
Financial institutions involved in trading emissions permits	Road transport industry
Public transport providers	Airlines

Australia is not the only country where the impact of emissions trading will be felt. Europe already has a scheme in place, and it’s likely that the US will go down a similar path under its next president.

Before jumping on the emissions-driven-investment band wagon, it’s important to look at the government’s response to the Garnaut Review. In contrast to Professor Garnaut’s recommendations, the government has opted for a ‘soft start’. In the initial phases of the scheme consumers will be cushioned from higher petrol prices, and broader assistance will be provided to industry than was envisaged by Garnaut.

A further complication for investors is that we don’t know what the initial emissions targets will be, and we don’t know the price cap that will be applied to emissions permits in the early years of the scheme. These things should be clearer by the end of this year. If the government is too generous in issuing free emissions permits, and if the carbon price is low, we may not see much change to the investment landscape.

On a more sobering note, the Garnaut Review refers to only a “slender chance that Australia and the world will manage to develop a position that strikes a good balance between the costs of dangerous climate change and the costs of mitigation”. If Professor Garnaut is right about the impacts of climate change, and if we miss that chance, then there’ll be quite a different list of winners and losers.

Nelson Wheeler Nexia is also able to provide you with an assessment on your carbon emissions as we are in the process of establishing a new audit division which will provide you with a written report on your carbon exposure and potential liability.

Sources:
Garnaut Climate Change Review Draft Report, June 2008
Carbon Pollution Reduction Scheme Green Paper, Department of Climate Change, June 2008