Durban: A polite shuffle in the right direction, no more than we could hope for.

It is indeed good news from Durban that all the world’s governments have “agreed to agree”. For the first time, nations rich and poor have said they would agree to legal binding commitments to reduce greenhouse gas emissions. The developing world (India, China etc) have never so agreed before. These things are really something, to be sure.

My joy though is modest. Here are three basic concerns:

• Countries have “agreed to agree” only. The target date for agreement is 2015. Who is to say that governments, particularly the US, will agree then. We’ve been down this road before: negotiated agreements that are not ratified by governments.
• If we do agree, it’s for 2020 targets, rather than any immediate progressive reductions. What those targets are, and what happens if they aren’t met, will be the subject of the next four years’ debate. (Death by a thousand cuts. You’d almost prefer the Blues Brothers’ brake method—“strong stuff” applied to the accelerator pedal, guaranteeing a thrilling van chase down to a spectacular jetty crash. [Note to 2GB celebrants of ignorance: that was a joke. Not my best, but practice passes the time, as my 80 y.o. music teacher used to say. A socio-economic-ecological crash would not be a good thing, even if it did render shockjocks finally irrelevant.])
• The meeting is exultant that it has for the first time linked the targets to scientific evidence of the need for action. Here is the clause which does that:

“To launch a workplan on enhancing mitigation ambition to identify and to explore options for a range of actions that can close the ambition gap with a view to ensuring the highest possible mitigation efforts by all Parties.”

Fills you with confidence, no?

So it seems we’re continuing to run with the Paul Gilding Great Disruption script: we’ll act, but only after we’ve lost the Great Barrier Reef and seen the very real suffering of millions. When even Nick Minchin agrees that things aren’t quite the way they were under Menzies and the Queen. The action will be something to see, real world-changing stuff because the US and China will be competing in the new rather than the old economy, but such a shame for what and who we’ve lost.

What of Australia? Australia is said to have sided with the US, Canada and others, against Europe and the developing world, in opposing anything stronger. As with the recently-passed carbon price scheme, this confirms our position as ‘acting under duress, not leading’.

Can you imagine the government’s pain had their actually been a global agreement? Our policy is for 15-25% reductions by 2020 to kick in with a global agreement, rather than the current 5% reduction for which the carbon price scheme is now set. The government would have had to recalibrate the scheme for a much tougher target. Now, if that is to happen, it won’t be before 2015, in the term of the next government. Much will be made of it by Mr Abbott and Ms Gillard. It will hard to believe either of their spin.

All that said, the direction remains clear, and is compatible with the 2020 commitments that countries have been making since Copenhagen. The stronger a country prepares for its 2020 cuts, the better shape it will be, in technology and in economic wherewithal, to serve the globe’s needs in reducing emissions. Countries everywhere will be looking for skills and technologies. The start Australia has made, albeit modest, has set the ball rolling for us to join other innovative developed economies – China, the US and Europe – in delivering them. With a bit of luck, when the world no longer needs our coal and gas, we’ll have something else to sell.

Josh Dowse,  12-Dec-11

Carbon another pane in the glass?

As published in Business Spectator 29 September 2011

It’s hard to think of a product that we see more of every day, and think so little about. Yet it seems to be a highly relevant case of another Australian manufacturing industry that is close to the end of its tether. We’ll buy and use a lot more glass in the future, but making it here may be harder and harder.

I was invited to speak at the annual industry conference, Ausfenex 2011, at the sustainability hub of Jupiters Casino. The set up was a 2-on-2 debate, ox-style (short-Oxford) on ‘whether the carbon tax would be good for the industry’.  Five minutes each. Go crazy.

Our speakers, for the affirmative, went hard on facts, logic and the future. The negative went hard on rhetoric and fear: “every screw, every nail, every tile, every brick, every pane will be more expensive”. We got smashed.

Actually, that’s a bit hard on the negative. Tennant Reed from AIG broadly supported pricing carbon, but had problems with the supposed price (too high), timing (too soon), and compensation (not enough). Graeme Wolfe from HIA blamed the lack of government facts for his stirring fact-free call-to-the-barricades. The feeling in the room of 500+ seemed to be that it’s potentially a good thing, but not now, and certainly not from this mob.

Not now, especially. The industry knows that the carbon price will add only cents not dollars to the cost of a window. They know that international competition is their real issue. But whether the carbon price is large or small, right or wrong, it feels like a nail in the coffin driven by a hopeless political culture. That’s why the debate is emotional. It just feels like they’re putting the boot in.

For like so many other real-economy industries, the glass sector is doing it tough. The design, sales, marketing, distribution and installation sections are all hurting from a building sector in the doldrums. A rebound might come, but no one’s talking about it yet. Manufacturing though is fighting on like the limbless Monty Python knight. Major players such as Viridian (a subsidiary of CSR), G.James and Australian Glass Group, down to the smallest local manufacturers, are all feeling the pressure.

 There is strong international competition from Taiwan, Vietnam and Indonesia. But the frowns really appear at any mention of China. It’s not hard not to see why, looking at their advantages in domestic market base, regulatory and labour costs, building sector growth, other glass-using manufacturing, and effective industry policies.

The big differences are China’s energy and currency policies. While China might be making its energy generation more efficient, introducing renewables and closing down high-emission coal-fired plants (while of course building many more new-generation ones), it can afford to subsidise energy costs to underpin its manufacturing. And while the Aussie dollar is the plaything of speculative trading that likes a safe proxy for commodities, and has doubled against the US dollar in the past 10 years. China’s is tied ruthlessly to the US dollar. If it floated, it would be 40% more valuable, and it would be game on in glass again.

And what a game it could be, for the future of glass is bright indeed. Both domestic and commercial occupiers want more glass for their buildings than they ever have before, as a proportion of the building envelope. By some estimates, external-wall glass areas in a domestic project home have risen from 25% of floor area to 40%, and up to 140% for an architect-designed home.

That’s impressive, because if the average insulation value of Australian walls and ceilings is R3.2, standard single-glazed glass comes in at R0.33. Despite that drawback, more glass is being demanded because we have smarter glazing available: insulated, laminated, curved, toughened, annealed, light-sensitive and reflective – whatever’s needed to help buildings be more energy-efficient and more habitable.

The demand for that more energy-efficient, higher-value glass will only rise: energy use in residential and commercial buildings make up 25% of Australian emissions, and glass has a strong role to play in reducing that figure. Accordingly, the industry claims to have invested $400million in the last 3 years in plants that can produce more and more energy-efficient glass. That investment is now very much at risk.

The other growing global market is related to this story. How may glass panels has a coal-fired power station? How many has a solar array? Solar energy is a small but rapidly growing market for glass. Currently, it is just 2.5% of the international market, but that’s still 150 million square metres of production. The demand is anticipated to double in the next two years, and double again in the two years after that. With the cost of solar power now reaching grid-parity with coal, it won’t be looking back. But the panels will be made overseas.

It would be a sad irony if the Australian glass manufacturing industry went the way of our solar one – watching that growth from a distance – but that seems to be the case. All this technology here, all these people, all this sun – yet again we have to send our designs to ‘the world’s factory’, and bring their realisations back. Once again we should think of Zhengrong Shi, the graduate of UNSW and Australian citizen who become China’s richest man making solar PV panels that we weren’t interested in.

While I can understand that China is making most of the new solar industries, and also becoming a world leader in design, I still can’t get over the fact that Germany leads the world’s PV solar technologies. In a thermal heat map of the globe, Germany shivers in a band of pale blue, while Australia covers itself in searing red. They dig coal and catch whatever sunlight they can. We just dig.

One distributor of German glass at the exhibition was dumbfounded by the high cost of glass windows and frames in Australia compared to Europe. Labour costs in Germany are no lower than here, so other factors are at play: the larger European market, very different industry policies, determination to leverage higher investment in public education into high-value high-margin manufacturing. And the currency, again. While China pegs its currency to the weak US dollar, Germany pegs its to the economic gloom of Europe.

There are no easy solutions here. As in other industries, part of the answer lies in being less concerned with where a product is made, and more about why people might want it. For glass, that keeps the design, engineering, marketing, sales, distribution and installation teams busy enough if good enough.

Another part is to chase the markets that might be there. One exhibitor tried, as an experiment, to advertise direct to the renovation market for the first time. They couldn’t believe the response. Someone had forgotten that although there are 150,000 new homes built in Australia each year, there will be $35 billion in home renovations in 2011 (which would seem to equate to 300,000 projects), according to the Construction Forecasting Council, and that figure may double in 5 years. Consumers control their renovations, and may be more inclined to ‘buy Australian’ than commercial and home builders, for whom cost is the issue, with function some distance behind, and source a lightyear behind that. After all, not even the Department of Climate Change itself could get its builder to buy Australian for its new Canberra headquarters.

Australia will always have a glass industry, just as it will always have a beer industry. But if we want to own its production, or manufacture more of the stuff here, then our community through our parliament would have to change some pretty fundamental economic policies. That will be expensive, and involve other trade and industry complications. We may well decide it’s worth the cost. At the moment, though, as with so many other things, we can’t decide which is the lesser of two evils, nor how to leverage our current mining windfalls into longer-term prosperity.

Josh Dowse works on sustainability business and investment.

* For the record, the debate was split: equal numbers shifted from undecided to either for or against the carbon price. But the clear majority remained against. I can only hope that they and they undecideds left a little more accepting of the need for a carbon price than they did coming in!

People: social capital, News, supply chain, women

And why not step into the fire? The Economist has again raised the low number of women on corporate boards. It looks at quotas and mentoring, before settling on the bigger issue: “In most rich countries sexism and the lack of role models are no longer the main obstacle to women’s careers. Children are. Most women take career breaks to look after them. … Such choices should be respected. But they make it harder for women to gain the experience necessary to make it to the very top. What is more, big companies … want a boss who has worked in more than one country. Such foreign postings disrupt families; many women turn them down. Many also prefer not to prolong their working day by networking after hours.” To aspire to leadership in the corporate system is a 70+ hour, 50-week commitment. All or nothing. Facing such an unreasonable choice, there should be enormous respect for women who take either option, not to mention those who hang on tight for both. But the choice simply shouldn’t be so unreasonable. “Wise firms will strive to remove barriers for women,” the wise paper says.

Something never really rang true to me about an annual ‘audit’ of factory working standards in Vietnam or Bangladesh through an afternoon’s visit by a youthful merchant of hope with an on-line accounting degree from the Uni of Mid-West Utopia. Oxfam UK has a lot more experience than this black duck on the issue, having seen tricks such as “the national anthem being played as a signal for underage workers to go out the back of a factory as the auditor comes in the front; software that shows how to keep double books …; unregistered workers sliding down a chute into an unauthorised factory beneath the one slated for audit”. Balanced scorecards through the supply chain and mature industrial relations and HR management skills will be more effective, and a sound investment.

“What goes around comes around”, tweeted independent guardians and observers of News International, with more melody than usual. An amazing story that has far from played out. It’s another stark reminder that ESG and sustainability issues reach far beyond low-emission light globes. A business model that relies on the abuse of someone else’s rights is not sustainable. As ESG analysis matures, those investors and employees who have a choice start to drift away from the corporate culture and governance practices that allow such abuse.

Is social capital declining or just changing places? Robert Putnam’s pathbreaking book Bowling Alone argued that in the 25 years to 2000, attendance at club meetings had fallen 58%, family dinners 43% and having friends over 35%. If FaceTwitLinkia provides more social interactions, does it offer the social capital that researchers have consistently found delivers resilience and innovation in communities and companies? In the meantime, employee volunteering is now a permanent fixture in CSR strategies, having now increased 150% in the US over the last decade to reach 1/3 of all US corporations. Well-directed volunteering or, more beneficially, engagement on non-immediate projects on social or environmental issues, foster working relationships across the firm: are extremely valuable when immediate, commercial projects are launched.

Innovation: efficiency finance, Google, geothermal, the loo

We all know the barriers to investing in energy efficiency (EE): upfront costs, uncertain savings, uncertain payback periods, EE not a budget priority, no managerial capacity, limitations on external financing, split incentives, operational interruptions, lack of multi-plasma offsets etc. The EDF in the US has provided a handy guide to Efficiency Services Agreements and other means to overcome these barriers. An investment fund finances the energy efficiency kit, then draws its payments from the energy supplier under an agreed savings plan. Neat. Top

Having been moderately successful in its first round of ventures, Google has embarked on its next –clean energy innovation – helpfully setting out its thinking here. Using McKinsey data and analytics, Google looks at clean energy’s potential for the US economy and sees lots to like, which must be welcome news for anyone else looking at the US economy. Given a free hand, new technologies would add 1.1 million jobs and $155 billion to GDP each year to 2030, while reducing household energy costs by $942 and oil consumption by 1.1 billion barrels. Emissions would also fall. If matched by sensible policies (that old big “if” again), the GDP and job benefits would both increase by a further 55-75%. Top

Hybrid power plants offer heavy emission reductions, and will be more likely with the carbon price in place. The latest probability is for coal-fired plants to tap into the geothermal energy that typically lies at relatively shallow levels beneath coal. Energy is generated by burning coal to turn water to steam, which then drives the turbines. Pre-heating the water with geothermal energy could add 12% to the plant’s efficiency – that’s a real step-change in performance. The Liddell power station in the Hunter Valley already does the same thing with solar. Geothermal would be cheaper and more stable. Top

It’s hard to imagine the amount of energy innovation and policy going on if you’re listening to the Australian polimedia. Every day it comes in waves. Take Friday 5 August, the first day of the latest market meltdown, as a random day. News comes of Nissan’s electric car that feeds energy back into the home, of Obama’s package to double US car MPG standards by 2025 (saving its economy 1.6 trillion when it’s most needed), of Indonesia’s $16 billion geothermals plan, of the UK’s expectation to reach 21TWh of tidal power by 2025, of the use of salt-based energy storage for solar thermal plants that can store power for 24 hours and deliver it to grid. Top

“No innovation in the past 200 years has done more to save lives and improve health than the sanitation revolution triggered by invention of the toilet,” says the Gates Foundation rep in her speech at AfricaSan, the third African Conference on Sanitation and Hygiene. “But it did not go far enough. It only reached one-third of the world. What we need are new approaches. New ideas. In short, we need to reinvent the toilet.” The Foundation is offering $42 million in grants to come up with a better loo. “Not only is using the world’s precious water resources to transport human waste not a smart solution, it has simply proven to be too expensive for much of the world”. Shovel suppliers need not apply.

Colbert and the amazing fracosaurus!

How not to do it! Fracking is not a pleasant word in sound or meaning. It may well spell the end of coal seam gas exploration in NSW. Original exploration rights never contemplated such risks. No amount of stakeholder engagement would remove those risks, but the Canadian gas drilling company Talisman has tried hard. Cited in the US for 143 environmental violations, why not issue a colouring book for the kids? The Colbert Report drilled it brilliantly. Triple Pundit blog takes a more earnest look.

Time to import the UK’s climate

I’m exceedingly concerned that the amount of good sense coming from the UK in recent days will overturn my natural, well-honed and heartfelt antipodean prejudices. Ashes aside, it’s a climate I could well appreciate.

First, we all saw the performance of the UK House of Commons as David Cameron withstood a 2 ½ hour, 139-question grilling. Rapiers and respect at 2 paces. Question time not playtime. Hauling an arrogant press to account. Chipping decay off a cosy polimedia.

Next, Giles Parkinson interviews Sir Richard Lambert in Climate Spectator.Lambert headed the UK Confederation of Business Industry in 2006, a group that “was being torn asunder by differing views on climate change”.  He brought together 17 companies from all sectors, who concluded that the world was changing and that regulation of greenhouse gases was inevitable. Over to Lambert:

“‘We’re not evangelists, and we are not scientists, but we are paid to understand and manage risk. And they said we think it is a significant risk and we need to mitigate it. We are also paid to understand opportunities and we think a shift to low-carbon economy will create opportunities.’ And the most efficient way of reducing emissions, the taskforce found, was establishing a price on carbon. And the most efficient way to do that was cap and trade.”

Understand and manage risk? Understand opportunities? Yes, that’s what this is all about.

“Lambert was concerned that the conclusion might have caused some of the 200,000 member companies to resign, but it actually had the opposite effect – it attracted more companies. The CBI has since been supportive of the carbon pricing policies; the UK industry considers itself to be in competition with Germany – and of course economies in east Asia and elsewhere – to develop opportunities in the low carbon economy.

“Lambert also made some interesting points about so-called carbon leakage, noting that fears had been overplayed. ‘Business is worried about these things and they want a level playing field.’ But he said the most successful manufacturing economy in the world is Germany. ‘They sell massive amounts of goods around the world, and they have a carbon price.’”

Oh, and Lambert’s final word?  “As for the science, and the prognostications of Lord Monckton, Lambert said he was definitely an export. ‘Nobody in the UK has heard of him,’ he said.”

And third, we have this exchange last month between a UK business lobby group, the Corporate Leaders Group on Climate Change, and the responsible UK minister. Remember that David Cameron’s Tories had gone to the last election with a greener policy than the Labour Party, and that a bipartisan UK has committed to reducing emissions by 50% by 2025 and by 80% by 2050, has had a price on carbon since 2006, and has triggered wholesale changes in its energy generation and transmission businesses.

The business lobby included Shell, Tesco, EDF Energy, Lloyds Bank, Philips and Unilever – far from a ratbag fringe – and it wasn’t happy. It wanted the UK government to do more. Its fear? That the UK was being left behind by Germany and China in the opportunities of the lower-carbon economy.

The response of the Energy and Climate Change Secretary, Chris Huhne? Full agreement – that further green policies will help bolster UK GDP, enhance economic competitiveness and protect British firms from future oil shocks. He said that the UK would enjoy an annual increase in GDP growth rates of 0.8% if the EU moved to a reduction target of 30 percent by 2020.

Yes, the UK economy is very different to Australia’s. As is its politics.

Yet many would like Australia’s economy to offer more options for tomorrow’s workers and graduates than resources and finance. Many more would like the current strength of these sectors, driven almost wholly by the emerging wealth of China and India rather than by some miraculous national foresight (compulsory superannuation aside), to underwrite a broader, stronger Australian economy, rather than entrench a narrow and ultimately weaker one.

Reserve Bank Governor Glenn Steven said it this week. “As I am sure people are sick of hearing me say, Australia is in the midst of a once-in-a-century event in our terms of trade. I won’t recite the facts yet again. Suffice to say that this is, at least potentially, the biggest gift the global economy has handed Australia since the gold rush of the 1850s.”

There is $394 billion in resource investment underway – that’s investment to extract more resources, not the value of the resources extracted. Amazingly, the minerals boom is only just beginning.

It’s up to us what we do with it. To guide us, perhaps we should go back to the 1850s, and look more to a nice afternoon tea than to the Tea Party. Cuppa anyone?

The Australian – A step too far?

For reasons best known to its editors, The Australian has been crusading against climate science and policy since 2006. That’s the year when the Stern Review (to which I was a very small contributor) and Al Gore’s movie came out, and the drought made it seem like they had a point. The other critical shift in that year was News International’s dramatic change of mind in the UK, with The Sun coming up with a front page along the lines of: “We were wrong on climate change! Turn to page xx for a 16 page lift-out on how we can all do our bit .” When it did, it left The Oz as the only newpaper in the Murdoch stable that questioned the science on climate change. Sydney’s Daily Telegraph was at the time supportive of climate action. It has since been taken over by The Australian‘s former editor, and adopted the anti-climate line.

Over the years, there has been countless instances of misinformation and bias in The Australian‘s reporting. The aphorism “Never let the facts get in the way of a good story” has applied throughout. Not content with its opinion pages being the sole preserve of climate sceptics, The Oz has allowed the lead pages of its “Inquirer” section to be handed over to the anti-climate action lobby The extent to which it will knowingly mislead the public is beyond alarming, and well into the depressing. 

On the climate issue, The Australian leads the charge against objectivity. The latest of its deliberate inaccuracies is clearly documented in this blog: http://scienceblogs.com/deltoid/2011/07/the_australians_war_on_science_67.php. The Oz contacted a scientist to comment on sea level rises, then deliberately misquoted him, then got a non-scientist to agree with the misquote. Why that paper holds its agenda is anyone’s guess, but it’s pretty clear that it has one.  

Just thought you’d like to know. We’re really struggling when respected newspapers are playing at this level.

Carbon Price – Time for action

Draft legislation was released yesterday, on a tight timetable, with submissions due on 22 August.

Here is our review of the pending Carbon Price scheme. We offer more detailed analysis for particular firms and investors, and in particular assistance in preparing submissions to the government if appropriate, and in engaging with staff and other stakeholders on the real impact of this Scheme, to your business and so for them.

Although Dowse CSP works mainly on broader sustainability and ESG approaches, the carbon price is the elephant in the room at the moment. A carbon price was the focus of my Masters degree back in 2001, and I’ve been following the permutations closely ever since.

Although my bias is that the carbon price is the right way to go nationally, and its effect very positive on average, each firm will experience it differently, and needs an objective view and a clear articulation of that impact. That is hard to find in the press at the moment.

I look forward to your thoughts.

Residential housing and carbon price

Published in Sold! magazine July 2011

This carbon-price-Kyoto-global-warming-thingo just won’t go away, will it. If only it would! If only there wasn’t a real problem to deal with.

Alas there is, and there’s rarely been a more difficult one. Responding to the threat of climate change is an international conundrum of the highest order. It ropes in many old issues – population growth, energy security, the old world v the new, industry and technology policies – as well as the obvious environmental ones.

Governments haven’t stopped worrying about it since scientists put it firmly on their doorstep back in 1990, when the first international scientific report was published. Since then, the data has just got worse and worse. Every prediction on global temperatures, ice melting and sea-level rises has actually been exceeded by reality. And there is now no doubt that these changes are “anthropogenic”, or human-induced.

What’s that got to do with housing?

Overall, global emissions of greenhouse gas emissions in the developed world have to be reduced by 60% to 80% by 2050. Other countries – the US, the UK, Germany, France, Spain and the rest of Europe, China, Japan, Korea, Brazil and the list goes on – have all made commitments to make cuts with that goal in mind. Australia is still debating what it can manage but, ultimately, if it wants to continue to trade long-term with Europe, China the US, we will need to do something. (Besides, as those countries are demonstrating weekly, doing so is driving energy security, new technologies and new markets. They no longer need convincing; the only question is how best to engage in these new opportunities.)

Housing is a major part of the solution. Residential energy use contributes about 10% of Australia’s greenhouse gas emissions. Estimates suggest that this figure could easily be reduced by the 60% to 80% needed. Accordingly, governments are looking at household energy efficiency as a major contributor to reducing emissions. More reductions will come from our housing than from transport or agriculture, though not as much as from commercial buildings, power generation or forestry.

Importantly, if the policies and incentives work properly (a big “if” given recent debacles), the reductions from residential and commercial buildings can be achieved at negative cost – that is, owners and occupiers can keep their lifestyles, reduce their emissions and save money all at the same time. Some new habits, new technologies and new materials may be needed, but more than enough are available now, and more and more are becoming available.

Why would we change?

Governments will therefore continue to target the energy efficiency of residential housing – reductions are necessary, achievable and financially viable, so they will be pursued with regulation. They won’t be working alone, because others will also be trying to reduce energy use in homes.

Homeowners will be among the first. Energy costs are rising far in excess of our wages, and it’s got nothing to do with climate change or a carbon price.  The price of household energy is literally going through the roof – rising 39% above the CPI in our 8 capitals since September 2006.  That’s primarily due to under-investment in infrastructure through the 1980s and 90s, so utilities are playing catch-up and hitting us with the bill.

What’s more, our use of energy is also increasing with air-conditioners, plasma screens, computers and iPods. There have been a great many innovations and a great number of efficiencies in appliances, yet energy consumption per person has increased by 20% since 1990. (For example, our modern fridges are 3 times more efficient than those of 40 years ago, but we have on average 3 times as many per household.)

Add the price and usage together, and household energy bills are cutting deeper. The CSIRO’s research suggests that over 41% of households will “definitely” try and reduce their household energy, and another 36% are “likely” to.

Homeowners are not alone. New to the market are household smartmeters – devices that monitor energy use and prices, and switch appliances on and off when the price is low or high. Some banks are investigating having discounts on mortgage rates tied to a house’s energy performance. Councils are investigating linking property rates to energy performance, particularly where energy performance is subject to building standards or disclosure on sale.

What might an agent be looking at?

So this problem won’t go away, and homeowners and others are becoming increasingly interested. What then might real estate agents take into account in assessing a home and advising their clients?

Is a knock-down re-build a better option?

The first thing to keep in mind is the difference between “operating energy” and “embodied energy”. The average household contains about 1000GJ of energy embodied in the materials used in its construction. That’s about 15 years’ worth of normal operating energy – the energy used by the people living in the house. If the house lasts 100 years, then the construction accounts for about 13% of the household’s total energy footprint over that century. Buying or renovating an existing home obviously retains some of that embodied energy. A knock-down re-build may waste it, though better design and thermal properties may make up for the loss over time.

Does the home meet minimum energy standards?

Energy standards take into account embodied energy, but more so the thermal dynamics, insulation and design elements that determine how much energy those living in the house will use for heating, cooling, hot water, cooking and lighting.

New homes must comply with those standards, while there is a push to disclose the energy performance of homes for sale. This trend to disclose energy efficiency has already swept through industry, vehicles, commercial property, household whitegoods and listed public companies. Residential housing won’t long stay an exception.

For new homes, the Building Code of Australia has ratcheted up minimum energy performance standards three times since 2000. From 2003, new homes were to be built to a 4-star minimum energy efficiency ratings. Stricter regulations (to 5-star in 2005, and to 6-star in 2009) have followed. The federal government claims that the building cost impact of 6-star ranges from a saving of $8000 to an additional $2,240, depending on the building’s design and use of newer, lighter materials. Many builders agree the cost impact is negligible, but that energy use may drop by 20% to 25%. The HIA disputes this, claiming that the 6-star standards overstate the proportion of heating and cooling costs on total energy use. Nonetheless, the 2009 6-star standards were adopted in ACT, Qld and SA in 2010, with other States following through a national agreement.

Disclosing energy performance?

The ACT and Queensland has led the charge on vendor disclosures, though their approaches are miles apart and the best solution may lie in the middle.

In Queensland, sustainability declarations have had to be issued by vendors since January 2010. They need no particular expertise to fill out, and the requirement is only to answer “to the best of the sellers’ ability and knowledge” rather than pay for a sustainability expert. But a great number of vendors take the allowed opt-out option: “If you don’t know the answer to any question, please leave the box blank”.  Blank forms are of course a waste of everyone’s time; and few buyers have got used to knowing what to look for. Time may change this.

In the ACT, a “star” rating has been required for houses for sale since 1999. It’s not been universally popular, as you need to pay for an expert’s report, and not everyone agrees with the accuracy of the star rating. However, an owner’s investment in better energy performance has proven to be a good one. Studying the sales of over 5000 houses in 2005-06, the federal government study found that a half-star rise in rating equates to a 1-2% rise in property value; while a one-star rise adds about 3%.

Are there any new financial options?

One problem with environmental investments is that the party who controls the initial investment (the builder/developer) can’t necessarily pass on the cost to the party who recoups the benefit (the home occupier), because the up-front price hike may be too great. New financial instruments are being investigated by banks and energy retailers to close this gap. For example, the additional costs of rooftop PV solar and other more expensive investments may be added to a mortgage, and energy bills kept at the pre-existing level despite the energy savings. The energy retailer then agrees with the bank to apply the ‘overpayment’ for energy directly to the mortgage, so that the underlying mortgage is paid off more quickly than otherwise.

Is the house at risk from climate change?

There is no question that some of Australia’s beautiful though low-lying seaside areas may not be the wisest place to build new houses or buy existing ones for the longer term. Councils are taking legal advice on their liability if they approve a new construction in an area at risk. The larger real estate groups may be seeking similar advice on potential liabilities for selling houses in the same areas, without disclosure the risks.

Insurance companies are under no doubt where those risks are, and are in constant talk with their reinsurers about whether they can remain insurable. Similar concerns have been raised in councils and insurers of the ability of our housing stock to stand up to more frequent and more extreme storms.

Is this all a little unreal? Not this decade or perhaps next, but after that there could be some rude awakenings. The 2011 report by the Australian Government on “Climate Change Risks to Coastal Buildings and Infrastructure” went through the evidence. While our shoreline rose only 3cm over the last decade, the rate of sea-level rise is accelerating and is now faster than at any time in the last several thousand years. It is predicted to rise by about 1.1 metres through to 2100. If major slices of the Greenland or Antarctic ice sheets calve off, as many anticipate, that rise will occur more quickly.

At last count, there are between 187,000 and 274,000 residential buildings at risk of such a sea-level rise, valued at between $51 billion and $72 billion. New South Wales and Queensland would be most affected.

Yes, yes. But what about a carbon price?

The HIA has recently said that the average $300,000 house has 240 tonnes of embodied CO₂e emissions, so with a carbon price of $25/tonne, the cost of building the average home would increase by $6000 – a 2% rise.

This simple calculation may be correct. Treasury puts the carbon price’s overall effect at about 1.25%, but building materials would be hit harder, so 2% sounds about right. (By comparison, when the GST was introduced, prices rose by 2.8% on average, so the carbon price will have a much lesser effect.)

But a straight dollar-per-tonne calculation is not how a carbon price would work through the building industry. A carbon price is intended to drive innovation, and so reduce carbon emissions and so the total carbon bill: see sidebar “How does a carbon price work?”

So, it may be that, before long, the price rise for new homes is less than the expected 2%. How would that happen? Either by innovation in our existing plants and mills, or by replacing them with newer ones, or by replacing traditional materials with new substitutes. All would reduce carbon emissions and so the additional carbon cost.  There is room for innovation in all of the major material segments – particularly in the potential use of fly-ash (a by-product of coal burning) for cement and bricks. New competitive cladding materials are already commonplace.

Or, it is possible that the government will compensate these industries, giving them no reason to pass on a carbon cost to consumers (though taking away their incentive to innovate). Without compensation, materials may be sourced more cheaply overseas. An international carbon price may tip trade to the newer, larger, cleaner cement plants in South East Asia that would then be able to deliver cement more cheaply in Australia, even after shipping costs.

Or, the government may decide that compensation is not sustainable. For example, the Grattan Institute has calculated that the compensation sought by the aluminium sector amounts to $161,000 per job per year, which is a lot for other taxpayers to pay.

How might a buyer view a carbon price?

As seen above, the ‘assumed’ building cost rise of 2% may well not occur, but let’s assume that it does. How might the buyer look at it?

Firstly, such a rise would only be in keeping with recent rises in building costs. In the 11 years since 2000, housing construction costs in Queensland have risen by about 82%, according to the Master Builders-Cordell Housing Cost Index. They have run at double the CPI, and outstripped wages by 20%. A 2% rise is certainly significant, but would it change a decision to build or buy?

If it did, the homebuyer might think of reducing the size of their intended home a little. In the 20 years between 1984 and 2003, the average floor area of new Australian homes increased by 40%, from 162m² to 227m², with NSW homes growing from 159m² to 245 m² in the same period. They have levelled out since then, but remain easily the world’s largest, with the US next at 201 m².  Shaving a metre of two off that total area may well be possible.

Finally, it’s worth keeping in mind that the federal government’s stated policy is that 50% of any income it receives from a carbon price scheme will be returned to consumers as compensation. They then have the choice as to where to spend that compensation – against their house or somewhere else.

* * *

The residential housing sector contributes about 10% of Australia’s greenhouse gas emissions. Every study into the issue has suggested that these might be reduced by 60 to 80 percent, at little cost. So policy makers will continue to look at ways to trigger those reductions. A carbon price is the most efficient way of doing that, though energy-efficiency regulation and disclosure will become stricter to assist in the process. Those who build, buy or sell houses – and particularly those who do so for a living – are opening their eyes to that future.

Brokers add to the carbon fog

As published on Business Spectator 15 July 2011

In these early days after the Clean Energy Futures announcement, the brokers are releasing their analyses. As a client of Macquarie and CommSec, I’ve only received and been able to review theirs. If they are indicative, investors may not be being as well served on this issue as they would normally expect.

Macquarie’s steelco EBIT forecasts seem to omit the $300m steel transition plan, while the starkly political opinions of CommSec’s chief economist seem to have clouded his objectivity. If readers have other reports, I’d welcome the opportunity to similarly review them.

First, a little background. Five years ago, when the first ‘impact of a carbon price’ analysis was undertaken by Elaine Prior at Citibank, it was a simple, but then very useful, analysis. If a company emitted 1 million tonnes of greenhouse gas emissions (CO2-equivalent or “CO2-e”), and the price was $25/tonne, then the company’s liability was $25m, and its EBITDA would be that much less. Of course, nobody believed that would be the actual effect, because the company could reduce emissions, or secure permits in other cheaper ways, or get some compensation, or pass on some of the cost. But it was a useful apples-for-apples analysis.

Carbon-price-impact analyses may have advanced since then, but it would pay to be sure. Macquarie’s sector analyses simply quote the company’s emissions, multiply it by the rising carbon price, and take away the top-line scheme compensation. No further company reactions are considered. The idea that firms operate in a complex system and respond dynamically to material price signals is not yet orthodox, nor is the idea that the culture of firms and their capability to respond differ markedly.

Take the steel sector analyses. Using the above arithmetic, Macquarie declares that Bluescope earnings for FY13 will be down $34m, and OneSteel’s will drop $25m. While it notes that the companies will receive $300m in compensation over 5 years from the Steel Transformation Plan, it does not take that into account in its EBIT conclusions. This exclusion is unlikely to be an oversight; more likely to be a deliberate choice, on the basis of uncertainty over how the $300m will be applied.

However, the amount of the Steel Transformation Plan – $60m per year – is not coincidental. It matches the nominal losses of Bluescope and OneSteel. The government has compensated them for those nominal losses for 5 years. If BlueScope did anticipate a $34m p.a. or 7% drop in EBIT, it would be obliged to declare it to the market. Has it? No. Quite the contrary.

BlueScope’s ASX release declares that the Steel Transformation Plan “materially reduces the overall cost of the carbon tax on BlueScope”. It confirms that the $300 million “will be split approximately 60% to BlueScope Steel and 40% to OneSteel based on an agreed production/emissions formula”. OneSteel’s ASX release similarly states that “our concerns about the adverse impacts of the proposed carbon tax on our competitive position have been recognised and substantially addressed”.

Macquarie’s overall Clean Energy Futures analysis, a separate paper, seems more informative. It recognised that “the short-term impact of carbon pricing is relatively muted”, was concerned about the uncertainty of the carbon price in 2015–20 and its effect on longer-term investment planning, and otherwise kept to the pricing and investment implications. It seems typical of the objective view of carbon price proposals that financial market researchers have offered over the past decade.

Not so CommSec’s overall analysis. This was a real eye-opener. The chief economist of Australia’s largest broker could not have released a more political document if it were written by Tony Abbott’s press secretary.

First, the chief economist declares himself a climate sceptic: “The United Nations climate change conference in December may not renew the Kyoto agreement on carbon emissions. Simply, there has been a re-assessment of the climate change theory. While the Clean Energy Future documents warn of global warming and point to a similar situation in Australia, long-run figures from the Bureau of Meteorology indicate that the gradual upward trend in temperatures has occurred for almost 150 years. The risk is that Australia ends up leading the world on an issue whether[sic] there is less agreement on the right response.”

The Bureau of Meteorology as evidence against the climate change “theory”? The Bureau has been absolutely unequivocal on this, declaring with CSIRO time and again that climate change is happening, and that it is anthropogenic.

The only re-assessment being done by scientists advising the UN Framework Convention on Climate Change is to conclude that the climate risks are getting worse and worse. The 1997 Kyoto Protocol will not be renewed, and was never going to be, because it is now 14 years old and is not nearly strong enough to meet those risks.

After some further comments on international climate policy (disagree, happy to discuss, no room here), Commsec’s economist puts a view on how ineffective the scheme might be: “The aim of the tax is to increase the price of goods produced by carbon-intensive industries and thus change behaviour of consumers and businesses. But … if consumers are no worse off, and in fact many are better off, then you don’t have the incentive to change behaviour.”

Here, the economist is on ground closer to his field of expertise. However, he may be misinformed, because the policymakers are not pricing carbon as a direct incentive to change behaviour. So, as covered in an earlier article, and again by Ross Gittins this week, compensation is irrelevant to the carbon price’s effectiveness.

A carbon price triggers the availability and adoption of low-emission technology, regardless of compensation. When high-emission products and services become marginally more expensive, then low-emission or energy-saving solutions become that much more cost-competitive. They become that little bit more attractive for investment. As investment flows, the scale of production increases and distribution channels improve. As prices to consuming firms and households then fall and margins for suppliers rise, there is further investment in the low-emission technologies. Further innovation results, continuing the cycle. Consumer firms and households will have more low-emission choices for whatever their current activity, and can spend their compensation there or anywhere else they choose.

The CommSec note finishes with a list of “implications for investors”, which might draw the following responses:

• A repeat of the Bureau of Meteorology verbal – enough said, though not sure why repeated as an “implication”.

• “The Government gives the impression that it has created the perfect tax. But if it was that easy and painless then Governments would have done it years ago.” – Easy and painless? No one claims that. A necessary and sound investment? Discuss.

• “The budget bottom line is worse off by $4.3 billion” – Is that over one year, or four?
• “Foreign investors will continue to be cautious on investing in Australia” – The RBA has seemed very pleased with levels of foreign investment, given the global situation.
• “The Australian dollar is unlikely to be significantly impacted.” – Agreed.
• “The extent of change and uncertainty for the coal and steel sectors as well as manufacturers will lead to a softening of investment support in the short term.” – As well it might, with this sort of advice. Though in the very short term (ie today), Peabody’s support for the coal sector has hardened.
• “Electricity and gas are inelastic goods meaning that substantial changes in prices lead to only small changes in demand.” – Demand-side policy measures continue in addition to the carbon price mechanism. It’s the substitution between low- and high-emission energy sources that’s the key issue here.
• “Any increase in the headline rate of inflation makes the Reserve Bank nervous.” – The RBA may see through the one-off impact, just as it did with the much higher one-off GST impact.

The performance of the ASX 200 this week has been dominated by international factors, but there’s no doubt that Monday’s losses carried a significant element of carbon price reaction. When in time investors consider more complete advice, they may consider even that modest reaction overdone.