China to introduce pollution taxes and expand emissions trading schemes

Global trends vindicate BHP's decision to shelve its Abbott Point coal terminal.

a woman

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There are strong indications emerging that China will expand carbon pricing. This would be in addition to the pilot emissions trading schemes that were launched in Beijing, Shanghai and Guangdong in 2012.

The Australian Financial Review quotes Jia Chen, of the Chinese Ministry of Finance as saying that the Chinese government will "collect an environmental protection tax… as well as levy a tax on carbon dioxide emissions."

JP Morgan chief China economist Zhu Haibin has said that the intent behind the existing and proposed policies is to reduce reliance on coal-fired generation and "support new energy industries like nuclear, solar and wind." Yet in Australia, we continue to hear the tiresome line that we should not act against carbon pollution until other countries do.

Coal is by far the worst fuel in widespread use for power generation. Coal mining scars the Australian land and causes health hazards to nearby residents. There is strong evidence that coal mines increase the likelihood that children living in nearby areas will develop asthma. While shareholders reap the rewards (or, more likely, lose money) children struggle to breathe at night, and taxpayers shoulder a greater healthcare burden. It makes sense to internalise some of the external costs of coal mining.

Yet Whitehaven Coal (ASX: WHC) has recently announced that it will continue with the development of its controversial Maules Creek project. This indicates that the company is aiming to significantly increase production. It's interesting to note that New Hope Corporation (ASX: NHC) has slowed production, and BHP Billiton (ASX: BHP) has recently shelved its plans to build a coal terminal at Abbott Point. Incidentally, the proposed Abbott Point development would have done unconscionable damage to one of Australia's major economic assets: the Great Barrier Reef.

Mercifully, many countries are pricing carbon emissions. Australia, meanwhile, considers the regressive step of replacing a carbon price with a poorly articulated "direct action" policy. This has the added disadvantage of stifling the development of clean industries. Australian companies like Cochlear (ASX: COH) demonstrate that Australian ingenuity can reap massive rewards. Where are our emerging clean technology companies?

The vast majority of economists agree that a price on carbon emissions is the most efficient way to reduce them. Unlike the Liberal Party, however, most economists don't receive large donations from the coal industry (although some probably do). To quote John Connor of the Climate Institute:

"The leader of the Coalition declared 'the rest of the world was not going anywhere near carbon taxes or emission trading schemes.' This is manifestly untrue. It's becoming increasingly difficult to ignore the mounting evidence that carbon pricing is both widespread and growing."

Investors who believe Tony Abbott's utterances on carbon taxes and emissions trading run the risk that they will make investment decisions based on assumptions that were accurate 20 years ago, but are inaccurate today. While it is impossible to forecast demand for coal in a month's time, let alone in a decade, the general trend is that people are realising that the burning of coal is a curse on future generations. Coal mining destroys viable land and causes local pollution. It is then (usually) shipped to wherever it will be burnt, where it causes further pollution.

Foolish takeaway

While it is likely some low-cost, well-run coal producers will earn decent returns for shareholders, the risks of investing in coal companies far outweigh the rewards. Whitehaven Coal is down over 29% (in a rising market) since I warned investors to avoid it. Investors who want peace of mind should invest in companies that have bright long-term futures in growing industries. It is the future, rather than the past, that will determine your investment returns.

Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. .

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