Corporate Newsletter – September 2011

Carbon tax winners

Learn which sectors and shares have most to gain – or lose – from the tax.

Photo of Victor Bivell By Victor Bivell, Eco Investor

The planned introduction of a carbon tax in July next year has already given a big boost to the clean energy sector, which was dealt a huge blow and is yet to recover from the Government’s failure to introduce the Carbon Pollution Reduction Scheme (CPRS) in 2009.

The share prices of most clean energy companies are yet to return to their levels of that time, but the sharp kick up for many when the carbon tax was announced means they are at last starting to point in the right direction.

Sharemarket history is full of industries and companies that have risen and fallen, developed or been held back, through changes in government policy. Agriculture, mining, oil, gas, and power generation are examples of key industries that have long benefited and still profit from government policy.

Changes in policy add another layer of risk to the market, which is why investors prefer governments to be consistent. Since the failure to introduce the CPRS, the clean energy sector has been asking for consistency and is hoping it now has it.

The Government has put its substantial policy and fiscal power behind the sector. Along with the carbon tax, it has introduced several major programs to speed its development: the $10-billion Clean Energy Finance Corporation, the $3.2-billion Australian Renewable Energy Agency, and the $200-million Clean Technology Innovation Program.

Between the carbon tax and the $13.4 billion in backing for these programs, the first message to the market is one of sentiment: the Government wants the clean energy sector to succeed.

The carbon tax will make renewable energy more price competitive with carbon energy, and the other programs will improve the commercial viability of renewable energy technologies such as solar, wind, geothermal, wave, and biofuels. The market responded with an immediate jump in share prices in these companies.

Wind and solar companies

(Editor’s note: Do not read the ideas below as share recommendations. Do further research of your own or talk to your financial adviser before acting on ideas or themes in this story.)

Companies that currently provide clean energy and should benefit from the tax and related measures are wind farm developer Infigen Energy, solar and wind developer CBD Energy, and solar installer Solco. Another is fuel cell developer Ceramic Fuel Cells, which is at the stage of making its first sales.

Another group that can benefit are Australia’s two listed carbon offsets providers, CO2 Group and Carbon Conscious. These companies plant native trees to offset the carbon emissions of large corporations, including some listed companies.

Also anticipating to benefit is consultant Pacific Environment, which assists companies to monitor and report their greenhouse gas emissions.

However, most clean energy developers are at an early stage in their commercialisation and are not expected to become energy suppliers for a number of years. At present they are mostly speculative technology shares with a high level of risk.

That did not stop the environmental technology punters. The tax and other polices immediately spurred almost the entire emerging geothermal energy sector, which is aiming to produce zero emissions baseload power. Geodynamics, Petratherm, Greenearth Energy, KUTh Energy, Torrens Energy and Hot Rock all had big share price rises.

Other early-stage companies whose shares responded to the carbon tax announcement were wave energy developer Carnegie Wave Energy, photovoltaics developer Dyesol, algae-for-biofuels developer Algae.Tec, and waste-to-energy developer WAG.

Not surprisingly, almost all these companies have welcomed the carbon tax.

But there is a long way to go before Australia runs on clean energy and before these companies can turn into profit makers and dividend payers.

In the short term the tax must pass through Parliament; in the medium term it must resist Coalition threats to repeal it; and in the longer term at least some of the emerging renewable energy technologies must prove they can provide substantial baseload energy at a profit.

Australia is fortunate that its clean energy sector, while nowhere as big as it needs to be, is big enough to provide investors with a good range of near-term and long-term investment opportunities across a wide range of technologies.

Other ASX sectors

Obviously there will also be some losers from the carbon tax and some of them have already identified themselves.

The sectors that are unhappy are the big carbon emitters such as fossil fuel utilities; large steel, aluminium and cement manufacturers; oil and gas producers; and coal and other mining conglomerates.

But exactly how quickly or badly they will be affected is hard to tell at present, partly because there is still a fair amount of political rhetoric, and partly because many factors such as their taxable emissions, emissions reduction strategies and how much of the tax they can pass through, are still unknown.

What is certain is that the list of ASX companies that will pay the tax is not large. If we go by 2009-10 data of the top 500 emitters, it looks as though less than 100 of the 2300 companies on ASX would have paid the tax. And of those, only about 20 emitted more than a million tonnes of CO2 equivalent gases. Many of the rest have comparatively small emissions.

How it works

This is how companies will be affected:

The tax starts at $23 per tonne and is applied to what are called Scope 1 emissions. These are greenhouse gases released because of activities at sites such as a power station, industrial facility or mine. For example, in 2009-10 the largest Scope 1 emitter was power station owner Macquarie Generation with 23.4 million tonnes of carbon dioxide equivalent gases. Also near the top was Bluescope Steel with 10.8 million tonnes, followed by Woodside, Rio Tinto and BHP Billiton.

In the 2-3 million tonne range were Qantas, Santos, Adelaide Brighton, OneSteel, Wesfarmers, Boral and Orica.

By way of contrast, towards the bottom of the top 500 were Telstra with only 57,200 tonnes, Commonwealth Bank with 25,100 tonnes, and property group Westfield with 9500 tonnes.

With only one or two exceptions, these companies have very healthy profits and balance sheets that far exceed what they would have been required to pay.

However, simply multiplying the tonnage by $23 does not give an accurate picture of the costs and impact.

Many of the big emitters will receive some compensation to ease their transition into lower-carbon companies. And Bluescope and OneSteel will also divide a $300-million steel industry assistance package.

Another factor is Scope 2 emissions. These are the greenhouse gases that are created elsewhere but emitted by a facility’s use of electricity and heating and cooling. An example is the electricity drawn from the grid and used to run a factory or retail outlet.

The Government points out that Scope 2 emissions from one facility are part of the Scope 1 emissions from another facility. Although there is no tax on Scope 2 emissions, they will add to everyone’s energy costs as Scope 1 emitters seek to pass on the costs of the tax.

Therefore the cost of energy will rise. From our examples above, Rio Tinto had very high Scope 2 emissions at 9.6 million tonnes, Telstra had 1.3 million tonnes, Commonwealth Bank 407,600 tonnes and Westfield 328,500 tonnes.

But a clean pass of this extra cost is unlikely. Over time the power generators will reduce the carbon intensity of their electricity, and users such as Telstra, Commonwealth Bank and Westfield will reduce their energy consumption through efficiency measures.

Although working out the effect of the carbon tax on a company begins by adding its Scope 1 and Scope 2 emissions, the actual cost is much more difficult to arrive at because of unknowns such as implementation costs, competition in the energy market, the ability to pass on costs, the cost of carbon offsets, and energy efficiency measures.

Energy efficiency is the short-term goal and the Government has provided the $1.2-billion Clean Technology Program to help manufacturers improve efficiency.

Overall, as the carbon tax begins to work through the economy and corporate Australia, it will create some near-term uncertainty, threats and opportunities. But it is a case of no pain, no gain. The long-term result is companies that are much more sustainable, which is a big win for everyone, including investors.

About the author

Victor Bivell is the editor of Eco Investor magazineAccess free samples and articles.

From ASX

ASX Resources has useful information on investing in the resources sector.

There are also Listed Investment Companies that specialize in the resource sector and Exchange Traded Funds and Commodities listed on ASX that provide exposure to this sector.

The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate (“ASX”). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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