Citi nicely captures everything that’s wrong with the Coalition’s carbon policies today:
- Huge Uncertainties — There remains considerable uncertainty around whether and in what shape the repeal bill, and the government’s proposed Direct Action scheme bill, will be enacted. Running company valuation scenarios seems unproductive, given the rapidly moving political landscape. On balance, we expect the repeal bill to succeed in some form, but DA may fail to be legislated, leaving a regulatory vacuum.
- What Might Matter to Listed Companies? — The PUP amendment appears intended to mandate that electricity and gas companies pass on carbon-related savings to customers, and sought a fine of 250% of savings for contravention. Clive Palmer’s recent media comments suggest he may now be considering whether the concept should apply more broadly, eg to airlines or retailers. Back in June 2013, we assessed that aviation stocks may be the most significant beneficiaries of repeal since they had been unable to pass carbon costs onto customers (see related report). Any move to apply PUP’s concept beyond the energy sector could impose significant bureaucracy on companies. Even if full pass-through is achieved, we suspect consumers will see little material impact beyond the energy sector.
- Direct Action? — DA may fail to be legislated. If it is legislated, we do not expect to see much participation by listed companies in the Emissions Reduction Fund, as we see considerable bureaucracy and limited potential benefit. More recently, there is talk of Senator Xenophon pushing for an immediate “safeguard mechanism”, rather than for this to be delayed until mid-2015. The nature of any safeguard mechanism to avoid emissions above an (as yet undefined) baseline is unclear, and may be complex.
- Why Bother? — We suspect that repeal of the existing carbon scheme, particularly if delayed further into the 2014/15 year, will create bureaucratic headaches for companies that are unwinding the systems they put in place. In reality, it may be preferable to retain the existing scheme, but with a zero or very low carbon price, with the condition that Australia would move to a floating carbon price once similar actions are undertaken by key trading partners. PUP has previously indicated that, in return for its support for repeal and for DA, it seeks legislation providing for an ETS that would be activated when certain trading partners implemented similar measures. We are unclear how Palmer intends to negotiate for this provision.
In a word: debacle for all, especially business. The end of the carbon price is only the beginning.
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