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The Real Price of Carbon

03/10/2010

Photo sourced from news.com and used by the SMH in their story

The Coalition claim is the introduction of a Carbon Pricing will be terrible for the every day family. They cite the ever increasing spiralling energy prices we all face as evidence. What the tend to gloss over is why is the price rising now?

Well quite simply, there is money in it. And from the looks of it, it’s a good business to be in one of the top jobs.

A Carbon Price threatens the profits that the energy companies make and as a result will hurt these big salaries we see. And do not think it is just these men (it’s still a mans world by the looks) but also affects all those other salaries in those boards these men are beholden to.

Those people  are what the Coalition would term the ‘faceless’ and they too are profiting from the way energy businesses are running the game.

Now while the thrust of the SMH story seems to be an outrage on the salaries the executives are making, to me they skip the REAL story. Why are these businesses doing so god damn well?

You see I am a firm believer that a business that thrives and does well is entitled to spread its profits to those that helped make that business thrive. So what an executive makes or how much is not that much of an outrage to me. But these businesses raised their prices claiming their costs have gone up or will do if a Carbon Price was ever introduced. So what did these clever companies do? They preempted the Carbon Price and increased prices.

This of course raised costs and gave the companies much-needed cash flow that they then claimed they were using to upgrade their equipment to move to greener sources. Of course this also gave them justification to raise the prices again and the whole cycle was rinsed and repeated.

And now the Coalition is making these men smile once more. The Coalition claim is a rise in the Carbon Price will increase our bills by 25%.

Wait a minute. These companies just raised prices in an attempt not get caught out by a Carbon Price didn’t they? Well it was actually the ETS which looked certain to get in until the Coalition lost it’s head and replaced it with another. But too late for these poor energy companies who had changed business practices in anticipation of it coming in and by not coming in, these poor businesses were left with these profits just lying around.

Look at the dip of the GFC in 2008. Then the steady rise till OCT 2009 and the flatening/dip during the will we or wont we go Carbon Price and now the rise again as it seems we will. PPP is pretty flat and declining!

If you talk to anyone in the sales/retail business, you do NOT try to make it a practice of having fluctuating prices. It does not inspire confidence in the community when they see that a TV they purchased 3 months ago is now on sale for one half the price they purchased it for. Supermarkets are attempting to quieten this community concern by saying they are returning to the prices of yesteryear. The truth is, somewhere between yesteryear and this year, they too had started to increase prices also in anticipation of the ETS.

What is Purchasing Power Parity?

One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by Bloomberg. We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.

Now there is another elephant in the room. The rising Australian dollar. For years the petrol companies have been telling us that the price of petrol was so high here because they had to go off the price of oil set by the Saudis and in that US dollar cost. As you can see the Aussie Dollar was far below the PPP (see quote) and started a rise in 2001 while under a Coalition Govt (1996-2007). It continued to rise as the US lost its favoured place leading to the GFC and as you can see Australia also suffered a steep decline. However the stimulus package worked and the angle of decline in the dollar is on par with its angle of recovery.

All seems fine and then in late 2009 we have uncertainty with the ETS being scrapped and even a sharp dip when the possibility that a Coalition government was returning to rule. But wait! That seemed to have been spoiled when Julia Gillard became the leader of the ALP and returned some hope that the ALP will remain in power so once more the dollars ascent began. The diagram I have sourced stops at the 4th of August.  It dipped again during the election campaign as once more the Coalition took an advantage. But in September, when it became clear that the Coalition had failed to win government and that in fact the Greens had achieved over 10% of the vote, the dollar rose again. In September alone it rose 8.7% of its value to soar to 97 cents US and it now higher than its peak in 2008. It is like the GFC that has cost so many other countries so much, has skipped us totally.

Now this is exciting and terrible. The PPP fanatics still think of us as beneath them. They in fact think our dollar is really only worth 69 cents US. Most of these people are trying to protect themselves. They wish us to suffer like them if you will. They control a load of purse strings so if they want to make this a reality, they could do this to us in an attempt to remind us of our place in their world. They holiday in Cannes and Monte Carlo! Not Wagga Wagga and Broken Hill. That is the terrible part.

The exciting part is we have a chance to show them that their opinion of us and our opinion of us is at odds. European markets and US markets are currently very busy trying to shore up these markets. And while they are unable to manipulate our market as much, we continue to scoff at their opinion of us. So much so that now those that had sought to “keep us in our place” are using our market as a way to make money. Investment possibilities are going to be high for a while.

So what has this got to do with the salaries of the men pictured above? Well what the SMH seems to skip is a lot of these companies have overseas creditors and the rise of the dollar has helped them to make those repayments at much smaller than originally anticipated costs meaning bigger profits for the company and therefore bigger salaries for these men.

But wait Ash! You started talking about the Carbon Price thingy. What happened to that?

Ahh yes! Lets return to that shall we? These energy companies have been and continue to move to greener energy sources. Their infrastructure costs will soon begin to decline again and once more the companies will see it in their interest to start to lower the cost to the consumer who has actually been good to them by buying more electronic stuff that helped them sell consumers more needed power! What they lost to the insulation scheme they made up for with Wiis and wide-screen TVs. Now like all people in retail, they can afford to drop the prices. The point is why should they when people are already willing to pay? And lets not forget, they claim, that when Carbon Pricing comes in, it will hurt their profits.

No. It wont. You see they have already moved to the greener cleaner phase. They did it years ago in anticipation of the ETS and many have already dropped their carbon emissions by 20% by moving to greener sources. Yes it was costly to do so. But according to Tony Abbott, the price of coal will rise by $30 a tonne. According to the same man who gave us an 11 billion dollar black hole in his budget figures, this will cost Australians 25% more for their energy costs. No it will not Mr Abbott.

If an energy company has already moved 20% of its companies business to greener sources then the carbon price only affects 80% of their remaining business. Further the CURRENT price of Carbon per Tonne is $300! So a 10% rise in carbon pricing can only affect 80% of their business. And 10% of 80% is a 8% rise in their effective costs. BUT!!! Since they have already paid for the infrastructure move to greener sources, then that itself is no longer a cost to be passed on to consumers. This cost was around 20% of their costs last year which they passed on now. Cant pass that on again! This will taper off slowly and perhaps even drop to what it was before the rise between 2007-2009. So effectively I reckon prices will actually go DOWN by 12% over the next 10 years and not as Mr Abbott claims increase by 25%. Mind you do not expect the this to be seen too soon. Companies like profits after all.

So there you have it! My opinion is the Carbon Price will not be as devastating to energy companies as the Leader of the Opposition claims. I see the scope for prices to actually drop as demand continues to rise and costs (due to the dollar and their early move to greener alternatives) drop.

But then again. I’m just a Nutter on a blog and I am not a financial expert. I might be talking out of my arse here for all I know! The question I ask then is this.

If I am talking out of my arse, what is Tony Abbott using?

A. Ghebranious      2010            All Rights Reserved

Sources: http://www.news.com.au/money/money-matters/energy-bosses-awarded-huge-bonuses-as-bills-go-up/story-e6frfmd9-1225933301013

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4 Comments
  1. nice share,,,

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    keep posting,,see you…

  2. Interesting and thought provoking. It is just outrageous the way electricity pricing has sky rocketed.

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