Hot air on both sides of political fence

climate change

CARBON emissions trading has now joined fibre broadband networks in the wonderland of politics, which means no one will talk any sense on the subject for nine months.
Oh well. At least with carbon trading, unlike fibre broadband, there can't be any permanent damage done this year - just a lot of lies told and time lost.
Global warming is a highly appealing subject for the political parties because they can use it to assert their green/economic credentials, but not enough people understand it for them to easily move the Public Bewilderment Gauge into the red with very few details.
But it is the detail on which the whole thing rests.
No matter who is in power, Australia will introduce a "cap and trade" system for limiting carbon emissions. That is, emissions will be capped, both for the nation overall and for individual firms, and permits, or credits, will be created by those who emit less than the cap (or none at all, in the case of wind and solar). Those who would otherwise exceed the cap will be able to buy these credits.
To help existing carbon emitters such as coal power stations with the transition, the Government will issue them with free credits for a while.
It's a simple system, and it should work. Essentially it is a market-based global insurance scheme - that is, price signals are used to insure against a possible catastrophe.
We have moved on from arguing about whether global warming is real to just how much insurance to take out. The problem is that the system is market-based, the decisions are political and the supervision is bureaucratic.
Europe did it with a cap set at 90 per cent of current emissions, but the trouble was the power generators "gamed" the regulators - absolutely ran rings around them. The generators overestimated the base level of their emissions, which meant the European Union's regulators issued them with too many credits. The generators ended up making billions of dollars in profits selling the excess carbon credits and the market price collapsed from €30 ($49) to €3 in a month.
In Australia the differences between the parties on this subject are rhetorical rather than substantial, and they will try to keep it that way until the election so no one is pinned down.
The key issues are: Is the cap uniform or will different industries have different caps (and certain emitters "let off")? What level of "free credits" will be issued to coal generators (see European debacle)? At what rate will the cap be reduced (which flows from the long-term emissions target) and what will be the penalty for non-compliance?

It would be possible for two major parties to have apparently similar climate change policies that were different in effect. The Coalition could impose selective caps that applied only to those industries that found it easy to cut emissions, overallocate initial permits to coal generators, and then impose financial penalties for exceeding caps that were less than the cost of buying more permits.
I'm not saying John Howard will do that, but his rhetoric certainly suggests he wants to make the whole thing as painless as possible for coal-based generators.
As the ALP rises in the polls, there is the beginnings of a colossal gas rush because gas looks like the only viable way of meeting any serious attempt to reduce carbon emissions. The long-term scientific view is that clean coal is the answer, but this is 15 years off, perhaps longer. It involves concentrating the CO2 at the smoke stack and then piping it to old oil and gas fields and injecting it into underground spaces.
Seems to me that this will turn the earth into a giant soda fountain. What with that and nuclear waste, we'll be looking for a new planet around 2350. But scientists are apparently happy that burying the carbon dioxide will fix the problem - at least until they die.
In the meantime, it has to be gas.
That is, unless John Howard is returned and the pain for coal-fired power stations is kept to a twinge.
* * *
In my view, the Alinta board should publicly release the five-year forecasts that were contained in the due diligence material provided in data rooms to the two bidders - Babcock & Brown/Singapore Power and Macquarie Bank.
There are suggestions around the market that the company's forecasts differ materially from the analysts' consensus forecasts. Company sources say the difference is only 2 to 3 per cent. Nevertheless, whatever the difference between forecasts, the buyers have seen them, the vendors have not. It is hard to imagine any reason for the board not to provide those forecasts to the shareholders they represent.
Macquarie, meanwhile, still says it is about to come back with a new offer … any minute now. Maybe everyone's a bit busy over at MacBank; then again perhaps they're having trouble making the numbers work.
As I understand it, Macquarie is planning a fully underwritten cash-out option for Alinta shareholders who don't want scrip in the new vehicle designed to hold Alinta assets. Macquarie will underwrite the cash for no fee, which makes Alinta an historic transaction since Babcock & Brown is also proposing to forgo transaction fees.
However, that is unlikely to overcome the reason the Alinta board knocked Macquarie back, which is that the scrip offer was the default (shareholders who made no decision get what the board regard as dodgy paper).
So unless Macquarie makes the default cash, or somehow improves the quality of the paper, the break fee with Babcock & Brown won't be triggered.
Alan Kohler publishes Eureka Report, an investment newsletter financially backed by Carnegie Wylie & Co, an adviser to Alinta. The views expressed here are Kohler's alone.
ak@eurekareport.com.au
Page 1 2
Next page
Email
Print
Normal font
Large font
When news ha