We will not find out the putative cost of carbon per tonne under the proposed emissions trading system until August, but the BG Group’s hostile $13.8 billion bid for Origin Energy raises an important question about carbon taxes. Should takeover law should be changed immediately to enable valuations to better reflect the change in store?
Some might argue that the huge BHP Billiton (valued at $160 billion) bid for Rio might be a better candidate to use to change the law, but it’s a global bid. That should not stop some consideration being made because there won’t be a decision from the European Commission on the bid until November 11, and if it’s a rejection, BHP could very well appeal, or offer changes to try and meet the objections.
The BHP-Rio tie up is full of implications for carbon tax and emissions valuations in Australia and around the world. BHP is a major global producer of oil, gas, coking and thermal coal, copper, gold, lead, zinc, mineral sands and other minerals. Likewise Rio Tinto.
BG’s bid for Origin is simpler. It’s limited to Australia and that should make it a bit easier to examine. This bid in particular raises all sorts of questions about valuations above and beyond the financial.
The draft report from Professor Ross Garnaut, released Friday, means that all future commercial activity in this country will have to change, and will have an additional cost/benefit to be turned into a financial equation: carbon footprint, carbon credits, carbon tax, emission trading system/securities are all going to be terms we will have to get our minds around.
A market will have to be created, financial instruments created to allow hedging and other activity and for trading; some sort of agreed upon indicator rate will have to be evolved quickly, perhaps something along the cash rate of the Reserve Bank that can be changed to reflect the market and or Government involvement in the new market.
If we can do that, there are huge benefits ahead in setting a pattern for the rest of the world to follow in trading. The European system was flawed from the start by the way it was introduced with free permits given out (too many).
The Garnaut Report shows that for some industries it’s going to be tough at first, while others will have a big asset they can sell — the carbon value of this production and the methods of turning raw materials into finished goods.
Coal mining, aluminium production, copper etc and a slew of packaged goods should have high carbon values at the end of the production chain. The losers already seem to be the likes of BlueScope Steel, OneSteel, Alumina, private and public coal groups (Xstrata), and government and private owned coal-based electricity generators. Winners should be companies with low carbon footprints or those producing goods that have a low carbon emitting value, such as natural gas and renewable energies. Some products will have a high carbon value, or will be valuable because they can lower the carbon emissions of other companies/consumers.
Origin Energy is one such company, as are the likes of Santos, Queensland Gas, Woodside Petroleum and the many companies off working the natural gas/coal seam methane gas sectors. That’s why the bid for Origin is light on. Its gas reserves and their possible use in an export LNG plant in Gladstone (or somewhere else), or used to supply gas to industrial and domestic consumers across the country, has a real value because it is not as big a carbon footprint as coal and electricity from coal fired power stations.
And yet, there’s no value ascribed to Origin for that gas and low carbon potential. Even though it is early days, should there be some attempt to put a carbon value on Origin, as well as a conventional financial valuation?
The environmental and low carbon attraction of Origin is not being reflected in the offer from BG Group. It should be. At worst a carbon audit of Origin should be undertaken as a matter of course to make sure we are not selling an asset too cheaply. The same applies to Origin’s defence and its attempts to turn a dollar from its gas assets by getting involved in a joint venture.
Given that emissions trade is going to be a reality and that carbon will have a value, negatively or positively for every company and individual in the country, we need to be working on the mechanics of a market, valuation principles and thinking of the necessary changes to corporate and other laws to accommodate this brave new world.
If we can do this, it’s a potential winner for the country. A market that’s open, transparent and produces easily understood values that are acceptable in accounting, financial and environmental terms is something Australia should be aiming to design, not waiting until someone overseas does it. If we can do this it will make the likes of China, India, Brazil and other emerging economies that much more interested in going down the same route. The point missed by many in the media and politics isn’t the danger of not going first. They (like Gerard Henderson on Insiders yesterday) should realise that if we, a middle- ranked economy with a high carbon value, can manage to introduce a carbon based market system that’s easily understood by everyone and easy to adapt, then it will be easy for larger and more complex economies to do so.
All the scaremongering about jobs going off-shore is hard to understand. Which jobs? which industries? Power won’t, retailing won’t, coal mining, iron ore mining, gold mining won’t. The public service won’t and it’s a very large employer in this country. Home building and construction won’t. Metal processing? Why should they move when the capital cost would be prohibitive. Why neglect the intellectual capital we can generate from moving first and getting it as right as possible, starting with Origin?