Guest essay by Eric Worrall
What do you do, if governments are threatening to impose damaging new taxes on your business, in the name of combatting “climate change”? The answer is surprisingly simple. It is a clever solution which creates a devastating setback, for politicians who were hoping to raise serious revenue from carbon taxes.
Back in 2014, E.ON split into two businesses – a politically favoured “renewable” business, and a bucket which contained their old school fossil fuel business assets.
According to the Wall Street Journal (in 2014);
E.ON, Germany’s largest utility company by market value, said it wants to shrink its core to focus on renewable energy, its distribution network and providing customer solutions.
The split will provide a clear distinction between business portfolios that vary in risk, with each company appealing to different investor groups, E.ON said.
Utilities in Europe have been hit hard by a surge in renewable energy generation, which Germany and European Union governments have heavily subsidized in the hope of curbing carbon-dioxide emissions. But the resulting oversupply of electricity has depressed wholesale prices, rendering power generation from conventional plants unprofitable.
E.ON said the renewables-focused EON SE would have low volatility and could tap growth potential from the transformation of the energy market.
Why does this strategy benefit investors? The reason is it catches green politicians in an economic pincer. Politicians know that their economies can’t do without the old fossil fuel generators, and other carbon intensive assets. By isolating carbon intensive businesses in a separate corporate entity, business strategists turn carbon politics into a macroeconomic game of chicken. Raise carbon taxes, and nobody in the corporate world will come to the aid of stricken carbon intensive businesses. They will be allowed to simply collapse. No carbon taxes will be raised, and politicians will be left with the consequences – job losses and economic damage.
It gets better. European politicians are too committed to green subsidies and carbon pricing to openly reverse their carbon pricing and green subsidy policies. But they also can’t afford to let energy intensive businesses which are important to their national economies collapse. European politicians are now being forced to pay subsidies, not only for renewables, but also for unfashionable, energy intensive businesses, to keep them from closing.
The Department of Energy and Climate Change (Decc) has declined to comment ahead of a formal announcement today, but has previously argued these subsidies would ensure security of supply by providing a payment for reliable sources of capacity to ensure they delivered energy when needed.
“This will encourage the investment we need to replace older power stations and provide backup for more intermittent and inflexible low-carbon generation sources,” it has said.
But analysts believe it highly unlikely that any companies would have submitted bids to construct new super-efficient gas-fired plants at the price of £15-£20.
“This low price is better for consumers but it looks like it is being used just to keep existing coal, nuclear and gas-fired plants running. You have to wonder whether these plants would have remained open anyway and really need these capacity payments,” said one analyst. Energy companies say privately that they need the payments to modernise and refurbish plants that would otherwise close.
The subsidy game appears to be spreading and accelerating beyond energy generation. Resource giant BHP has also demerged carbon intensive assets into a separate business.
BHP Billiton has also modelled the impact on its balance sheet of a range of different carbon prices.
The demerger earlier this year of BHP Billiton’s most carbon intensive assets into a new entity named South 32 had also improved the resources giant’s climate risk profile, AMP Capital head of ESG investment research Ian Woods said.
“Carving out the aluminium assets into South 32 has enabled BHP Billiton to reduce its carbon emissions by around one third, in exchange for a relatively small drop in market capitalisation”.
Anyone who thinks aluminium plants can be allowed to fail – I doubt anyone is more than a few yards away from something which is made of aluminium. Be it the tin foil in your kitchen drawer, the corrosion resistant window frames in your new double glazing, the aluminium flashing which keeps your roof from leaking, the lightweight high tech engine block in your new car – its a long list. Yet as BHP indicated, Aluminium is not a major part of their market capitalisation. Now the energy intensive Aluminium business has been spun into a separate company, its not BHP’s problem anymore.
The British steel industry is already in my opinion playing this game. As WUWT reported, the British Steel industry is demanding subsidies, to keep the doors open. A major steel business in Britain just collapsed, with devastating job losses in a working class area. If steel receives support, Aluminium will demand similar support, then copper, then plastics and pharmaceuticals. There is a long list of businesses which are in a position to fragment into de-merged entities, each of which can then separately demand subsidies and special treatment from politicians, on pain of devastating macroeconomic damage if they collapse.
What can governments do to halt this explosive growth of corporate subsidy gaming? There is only one strategy which might work. They could attempt to reset the game, and restore a level playing field, by removing the excessive subsidies for renewables which initiated this ugly mess. In an environment where businesses survive or fail by their ability to solicit political favour, private investment is a risk, especially in unfashionable sectors, regardless of how vital they are to the overall economy.
A renewed and genuine commitment to a level playing field would in time restore confidence, and would allow market forces to begin to function normally once again. This subsidy gaming would never work in normal market conditions. In a healthy market, bankrupt factories are quickly acquired and re-opened by new investors. Only in a damaged, subsidy driven market, do political fashions take precedence over economic opportunities.