The Carbon Tax and Ethical Investments

By Victor Bivell (Guest Writer for Ethical Investment Advisers)

The government's plan to introduce a carbon tax in July 2012 is a positive development for ethical investors both from an ethical and an investment point of view.

By making companies pay to pollute, the tax will encourage everyone, and particularly the large greenhouse gas polluters, to move towards energy efficiency and clean energy.

Ethical investors win because the tax will help the environment and greatly improve the sustainability of many companies; yet overall it will be only a small financial cost to many of the companies in ethical portfolios, and help small and innovative clean energy companies to develop.

Working out which companies will pay the tax and exactly how much they will pay is not possible at this stage, but we mostly know which companies will be affected and have a ballpark figure for how much.

The tax will apply to what are known as Scope 1 emissions. These are greenhouse gases released because of activities at a power station, industrial facility, mine site, etc.

Beginning at $23 per tonne and rising, the carbon tax will be paid by the top 500 Scope 1 emitters, the largest of whom are brown and black coal fired power stations; large industrial manufacturers such as steel, aluminium and cement manufacturers; oil and gas producers; and coal and other mining conglomerates.

Many of these companies are listed on the ASX, but would not normally be part of a rigorous ethical share portfolio.

The exception to this may be best of breed investors who invest in the most sustainable companies in each sector. In these portfolios, there may be some companies such as for example steel maker OneSteel and the airline QANTAS that will be liable for a substantial amount of tax.

Fortunately, the sort of larger companies typically found in ethical portfolios, such as banks and property trusts, are towards the bottom of the top 500 list.

The final cost to affected companies will also depend on implementation costs, competition in the energy market, the cost of carbon offsets, and energy efficiency measures.

The biggest short term savings are likely to come through energy efficiency, and the government has provided the $1.2 billion Clean Technology Program to help manufacturers improve their energy efficiency.

Over the longer term the government intends that most of the greenhouse gases and the costs to business will be reduced by making renewable energy technologies more cost competitive.

Along with the carbon tax, it has introduced the $10 billion Clean Energy Finance Corporation, the $3.2 billion Australian Renewable Energy Agency, and the $200 million Clean Technology Innovation Program. These will help to improve the commercial viability of renewable energy technologies such as solar, wind, geothermal, wave, and biofuels.

Some companies with sales that should benefit from the tax and supporting measures are wind farm developer Infigen Energy, carbon sink developer CO2 Group, solar and wind energy developer CBD Energy, and solar installer Solco.

But most of the companies developing these technologies are at an early stage in their commercialization and are not expected to become energy suppliers for a number of years. At present they are mostly speculative technology stocks with a high level of risk.

Companies in this group include fuel cell developer Ceramic Fuel Cells, wave energy developer Carnegie Wave Energy, and geothermal energy developer Geodynamics, among many others.

Most of these companies have welcomed the carbon tax and their shares have enjoyed substantial gains since the carbon tax was announced.

How much will the big emitters pay?

For example, the largest Scope 1 emitter in 2009-10 was power station owner Macquarie Generation with 23.4 million tonnes of carbon dioxide equivalent gases. In the mid range, Qantas emitted 3.9 million tonnes and OneSteel 2.5 million tonnes. In contrast, Commonwealth Bank emitted 25,100 tonnes, and property group Stockland Corporation emitted 19,100 tonnes.

If the tax had applied in 2009-10, then multiplying the Scope 1 emissions by $23 would have given a figure of $540 million for Macquarie Generation, while for QANTAS the figure would have been $90 million and for OneSteel $58 million. For Commonwealth Bank it would have been $577,000 and for Stockland $440,000.

But the tax alone does not give the full picture of the costs or impacts.

On the benefit side, many of the big emitters such as Macquarie Generation and OneSteel will receive some compensation to ease their transition into lower carbon companies, and OneSteel should also benefit from a $300 million steel industry assistance package.

On the extra costs side, there are also Scope 2 emissions. These are the greenhouse gases created elsewhere but emitted because of the use of electricity or heating and cooling at a facility. An example is the electricity from the grid to run a factory. The government points out that Scope 2 emissions from one facility are part of the scope 1 emissions from another facility.

So companies will also have higher costs through using energy. In our example above, OneSteel had Scope 2 emissions of 1,302,000 tonnes, QANTAS 224,000 tonnes, Commonwealth Bank 407,600 tonnes and Stockland 128,800 tonnes.

If the $23 per tonne were passed on in full, this would add costs of another $30 million to OneSteel, $5.1 million to QANTAS, $9.3 million to Commonwealth Bank, and $2.9 million to Stockland.

But a straight pass through is unlikely. Over time the power generators such as Macquarie Generation will reduce the carbon intensity of their electricity. Users such as OneSteel, Commonwealth Bank and Stockland will reduce their energy consumption through efficiency measures. And QANTAS is looking to biofuels.