Carbon conflict looms as turn-off for investment Carbon tax conflict will hit investment Source: The Sunday Mail (Qld) IN the absence of a price on carbon, investment decisions by companies and institutional investors will be based on a false premise. This risks damaging the long-term performance of the Australian economy by encouraging investments in areas that are not sustainable in the long term, wasting invested capital. Continuing to base the future of the Australian economy on the false premise that carbon emissions are free would be a dangerous step. We are moving towards a carbon-constrained world and carbon will increasingly be priced internationally and face a rising price to reflect the external costs it imposes. This will enable investment to be cost-effectively diverted towards less carbon-intensive activities. International investors in Australia have been watching the debate on a carbon price with interest and some concern. The debate has focussed on potential damage to the economy from pricing carbon, and on the threat to Australian jobs from changes in the economic mix that might result. Investors who need to consider the relative attractions of the various markets globally, of which Australia is just one, have a different perspective on this issue. A carbon price will recognise the costs that carbon emissions impose on the wider economy and society. The science of climate change involves some uncertainties, but the current rate of emission of carbon dioxide and other greenhouse gases is unsustainable without serious consequences. Australia has felt as clearly as any country the impact of a range of extreme weather events becoming more common. The high costs of these extreme weather events are just the most obvious impact of climate change. Costs imposed by climate change range from reduced crop yields to higher insurance premiums and investments in infrastructure to mitigate risk. In economic jargon, these are costs that carbon-intensive industries are externalising on the community. As long as carbon is not priced, society is subsidising businesses that emit carbon dioxide. The initial price may not reflect in full the costs that emitted carbon imposes, but it is a useful first step towards eliminating this subsidy, to require companies imposing costs on society to recognise part of those costs in their business. The short-term consequence of not pricing carbon is that selecting the next round of long-term investment is made more difficult. In the energy market alone, a carbon price is needed to drive investment, regardless of the technology chosen. The lack of a carbon price risks stalling investment decisions. It is for these reasons that major economies in which our clients invest have pledged material reductions in greenhouse gas emissions by 2020. Countries and regions including Brazil, Russia, India, China, the European Union, Japan, the US and Canada have all made such pledges, and many are creating, or already have, carbon pricing mechanisms to ease the move to less carbon-intensive technology. The current price on carbon does not fully reflect its externalised costs, but countries that have carbon trading systems have begun influencing investment flows to favour lower greenhouse gas impacts. A country that decides not to follow this route risks wasting investment by continuing to expect high returns from activities that will be less viable and valuable in a carbon-constrained world. It risks becoming less attractive to international investors. A country lacking political consensus on the need to move in this direction also makes itself less attractive. Institutional investors favour certainty, which provides a firm foundation for investment decision-making. A threat hanging over policy choices undermines that certainty and investor confidence. We would therefore urge a reassessment of the tone in the debate on carbon price policy in Australia. Putting a cost on carbon will help ensure that investment flows reflect the reality that we all face carbon constraints. If Australia acknowledges that it will make itself a much more attractive venue for investment. Colin Melvin is chief executive of Hermes Equity Ownership Services, which is responsible for pension funds under advice worth more than $120 billion