Garnaut's Theorem : E = M - C  

One of the better pieces commenting on the Garnaut report was this one from the Business Spectator - noting just how much money private individuals have to invest in clean technology if carbon pricing or mandatory renewable energy targets are put in place.

It will be interesting to see what the most vocal industry groups have to say in response. So far, we have seen little more than the expression of vested interests.

For instance, Brad Page, the CEO of the Energy Supply Association of Australia, was on the radio this morning claiming that energy generators needed to be protected from a scheme because they were the only ones in a position to invest in new energy technology. Pure hogwash. The flow into new and renewable technologies in places like California, where they have been smart enough to encourage such investment, is just extraordinary. In Australia, the renewable energy target attracted nearly $12 billion of investment before grinding to a halt when the Howard Government acceded to lobbying from the likes of the ESAA and decided to can the target.

And an extra thought. A recent report commissioned by Merrill Lynch into the global private banking industry found that more than a quarter of the world’s 10 million people who count as high net worth individuals and have some $US40 trillion to invest between them, wanted to invest in green technology. The figure for the second generation of these wealthy individuals was a staggering 80 per cent. No one is as keen to protect their wealth as the ultra rich.

But back to another point made by Page. He admitted that some generators are particularly vulnerable to a carbon price because they have huge debts. That’s because the financial engineers have geared them up to the eyeballs and structured them so they can take dividends now from future cash flows. That’s why they are in no position to invest in anything much at all. What the world needs is engineers who can make investments now to create a future dividend, the ones that will be appreciated by the next generation. Not the other way around.

Of course, not all generators find themselves in such a predicament. Origin Energy CEO Grant King says he wants an emission trading scheme. That’s because his company has been smart and has seen what’s coming. It has invested heavily in gas resources, which have much lower emissions than coal, and in renewables, particularly wind and geothermal. Not only does King want a carbon price, created by the issuing of permits and other constraints, he wants to ensure it is high enough to achieve the desired reduction in emissions. If heavy emitters such as coal are excluded, then there is no reductions scheme.

So at least some companies are prepared for the future. Garnaut agrees there will be winners and losers. But, he notes, there will be big winners. Everyone just needs to get used to the new economic formula. The economy and the environment will only thrive if carbon is taken out of the market. E=M-C.