Carbon change will be fundamental for businesses and investors

ROBERT GOTTLIEBSEN

FEBRUARY 14, 2020

The Australian

Sometimes a single and apparently unimportant national event can signal a fundamental global change that should put all enterprises on the alert.

Paris has declared that from 2025 – just five years away – cars driven by diesel and petrol engines will not be allowed into the city. Now it is true that not many cars go into Paris anyway, so it doesn’t affect the vast bulk of French motor traffic, but it is a clear confirmation that increasing regulation is going to change the way we use carbon-based transport fuels.

And it also and marks a fundamental change in the global warming debate from what was happening just five years ago.

At that time, we were playing with quotas, that were often rigged, and not taking much action. Now the climate rubber is hitting the road and it is going to mean that all countries and all enterprises in those countries will need to evaluate whether their activities are going to be made obsolete by the fundamental changes taking place. Carbon emission-based tariffs are ahead.

There is still considerable community debate about climate but, at the public level, vast numbers of people, particularly in large cities, have now accepted that we have a climate problem caused by increased carbon in the air and that view switch changes the game.

During the week I was yarning with Frédéric Samama, head of responsible investment at Amundi, one of the world’s largest fund managers.

Amundi has made a major thrust into green investments, so Samama has a vested interest in the change. But his conclusions are important. He points out that the motor industry faces a revolution as it changes from the piston engine cars that have dominated the industry for a century to electricity-driven. It is no coincidence that shares in the change leader, Tesla, have skyrocketed. Samama believes that companies like Volkswagen will struggle while others like Toyota are far enough down the track to substantially change their business model to meet the new community demand.

Business models in most industries are set to change, driven by three forces: government regulation, community demand and, perhaps most important of all, the allocation of capital away from carbon-based companies.

Samama says that in Sweden young people are urging their parents not to fly to, say, Thailand for holidays, because the journey requires too much carbon. Australia, being further away, is even more vulnerable if such a view gathers pace. .

Unlike the motor industry, at this stage the airline industry doesn’t have an alternative fuel so may require a whole series of strategies to maintain its current place in the transport network.

Maybe Australia should have erected an electricity-driven fast train between Melbourne and Sydney rather than a second Sydney airport.

Global backlash

Australia has already experienced a global community backlash as a result of the bushfires. Australia’s carbon emissions are minor in the world scene, but the media blamed our carbon policies for the bushfires. Community attitudes are not always rational but that does not diminish their power.

And we have a controversial policy of counting past carbon credits in meeting quotas and we are constructing a new coal mine.

Australia has an added problem because electorally important Queensland, at least outside Brisbane, is a pro-coal region.

Global attitudes are going to force Australia to look more closely at innovative strategies. The plan to generate solar energy for Singapore in the Northern Territory and to use solar energy in a massive pumped hydro scheme to bring water to Murray Darling river basin are among projects that will capture global public imagination. We also need to manage our forests a lot better.

The change in global community attitudes is fostering research and product development which will accelerate that change. The allocation of capital away from high emission industries, means that world central banks are concerned at the impact of massive asset writedowns likely in coal, oil and power generators. Highly leveraged groups may go to the wall.

But look around and you will see many large non-transport industries still based on carbon. For example, the building industry uses large amounts of cement and steel which have large carbon emissions. In contrast, timber stores carbon. Networks to service and fuel petrol driven cars are extensive and will have to be radically changed. Australia also uses airlines more than most other countries.

Institutions around the world are currently focusing on obvious targets like coal, but later they will start to look more closely at a much wider range of industries. London based Rio Tinto exited coal, but its carbon footprint is linked to steel because it is a major iron ore producer.

World institutions like Amundi are trying to prepare for this major change in the way business is conducted. The fundamental view-change over last five years is merely the precursor the actual events that will unfold in the next five years.