Calculating Carbon – Investing in Energy

Calculating Carbon – Investing in Energy

by David Redmond on 29 Mar, 2011

One aspect of the 2011 budget that hasn’t been seized upon much is the introduction of a ‘price floor’ for carbon, making the UK the first country in Europe to have a minimum price for carbon emissions.

From 2013 the price of carbon for energy companies will be set at £16 per tonne of carbon dioxide emissions, rising to £20 by 2020.

This is intended to provide a significant incentive for energy companies to invest in renewable energy sources, or rather, a disincentive to use fossil fuels.

Although this will primarily affect energy companies, as carbon penalties are rolled out to non-energy companies, the price floor will become an important factor in any investment decision.

For now, anyone investing in energy would be well advised to factor in the cost of carbon penalties and similar. The more a company has to pay in carbon taxes, the more profits are hit and the less they can pay out in dividends to directors and shareholders. Simply put, as carbon prices rise, and the tax rolls out beyond the energy sector, the less energy efficient a company is, the less they can pay out to their shareholders.

Not only should this cause pause for thought amongst investors looking at traditionally robust shares in areas such as oil, but it should have a more positive effect on investments. Rather than just act as a deterrent thanks to the prospect of lower share payouts from emissions heavy organisations, it should encourage long-term investment in companies with a lower carbon footprint.

It’s well worth remembering that the £16 per tonne of carbon is merely a minimum price, not a fixed price. Depending on how market forces play out, it could go much higher than that, and have a potentially disastrous effect on environmentally unfriendly corporations.

At the very least, there is now another factor that needs to be accounted for when making investment decisions. How well it plays out as environmental policy is a matter for the politicians and green lobby. As investors, the message is clear: it’s time to wise up to sustainable energy.

About the Author

David Redmond

David Redmond is a Partner of Don Gilliard Finance Group. He is a fee-only, independent financial advisor and financial planner. For over 15 years, he has been helping individual investors and their families realize their investment goals.