What you need to know about the changes to the carbon tax

Kevin Rudd has announced that he wants remove the fixed carbon price of about $24 per tonne and replace it with a floating price linked to the European carbon price (and likely to be about $6 per tonne). The change would take place on 1 July 2014, a year earlier than would be the case under the current legislation.

A further complicating factor is that Tony Abbott maintains he will “axe the tax” on carbon dioxide. Under Abbott, the coalition has moved away from supporting a market based mechanism to address climate change, although the popular Malcolm Turnbull (who lost the leadership by only one vote), was willing to cross the floor on the issue. Although uncertainty persists, it does seem unlikely that the tax will remain in its current form. Investors should consider the impact on their share portfolio.

Conventional wisdom says that companies such as BHP (ASX: BHP), Fortescue (ASX: FMG) and Rio Tinto (ASX: RIO) stand to benefit from the reduction (or removal) of the carbon price. However, the biggest winners from such a scenario are likely to be airlines such as Qantas (ASX: QAN) and Virgin Australia (ASX: VAH). In its current form, the carbon price cost the two major airlines $55 million and $24.4 million respectively, in the first half of FY 2013.

The broadest impact of a price on carbon is to increase the cost of electricity, and it is likely that manufacturers would benefit somewhat from a reduced electricity bill. One company on my watch list that might benefit is Korvest (ASX: KOV), a small-cap company that galvanizes steel and manufactures steel supports for cables and pipes. Even a short-term reduction of input costs would improve cash flow for energy intensive manufacturing.

Rudd’s proposal doesn’t have a huge impact on most businesses, as it simply brings forward a floating carbon price by one year. On the other hand, Abbott’s promise to get rid of carbon pricing altogether is considerably more significant.

Many commentators have pointed out that the most damaging aspect of the ongoing debate about carbon pricing is that it creates uncertainty for business. Many jurisdictions around the world have a price on carbon including California, British Columbia, the European Union, and Shenzen (a major city in Guandong, China). Many more carbon pricing schemes are expected to be enacted in the coming years.

It’s not clear how Abbott would remove the carbon price given that he is unlikely to control both houses of parliament. I also suspect that if the price were to be removed, pressure would mount to reinstate it. In my opinion, the removal of the carbon price will merely ensure years of uncertainty for businesses about whether there will be one in the future.

Foolish takeaway

It is in the long-term interests of most businesses to end the uncertainty around carbon pricing. The alternative “Direct Action” policy does not run beyond 2020, and considers CO2 abatement at a price of $15 per tonne. If we do have a change of government, investors should consider the possibility that uncertainty regarding carbon pricing will persist for a number of years.

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 Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. Find him on Twitter @claudedwalker.

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