Email of the day (1)
Comment of the Day

November 22 2013

Commentary by Eoin Treacy

Email of the day (1)

on carbon valuations:

"Have you heard of the carbon bubble or done any research on it? Big banks (HSBC) and big investors (WHEB) consider the risk real. I'm curious how you and the collective perceive this."

Eoin Treacy's view

Thank you for this question which is sure to be of interest to others. At FT Money we apply ourselves to problems in the market and I attempt to limit my comments to topics which can be related back to practical applications of our macro behavioural technical analysis. Occasionally politics encroaches on the market in the form of regulation which we are forced as investors to consider the implications of. 

I clicked through to the link you supplied. This organisation appears to seek to supplant the dividend discount model of equity valuations with its own carbon based model. As such it falls into the carbon fanaticism camp, in my opinion, since this represents not only a massive departure from the norm but an ideological shift. As an aside it is worth remembering that even Karl Marx realised that all ideology is false, because an ideal can never be attained outside the field of mathematical a- priori truths. 

Therefore the more relevant question is not whether a carbon bubble exists but to what extent those who support the idea have been successful in imposing their will on policy makers. It is indisputable that such organisations are well funded and have succeeded in having their views heard. Carbon trading mechanisms in various jurisdictions, especially Europe, and forcing corporations to trade carbon credits are evidence of this. Governments are often complicit in this policy not least because it offers a way of taxing corporations at a time when public coffers are empty. 

When my children were toddlers and hurt themselves by bumping against the coffee table they would turn and hit the table back and say "Bad table" You might ask why this is relevant to a discussion of carbon credits and the so called carbon economy, but let me explain. One of the defining attributes of crowds is that the larger they are, the more emotional they become. As emotions intensify, they regress so that the more powerful the crowd, the more base the emotions it displays. We have all been hurt by the high price of energy over the last decade, it is therefore reasonable to expect a vengeful response. I do not see it as a coincidence that carbon fervour has coincided with a high energy price environment. 

The question then becomes one of regulatory arbitrage. Valuing anything on the basis of carbon is entirely dependent on the regulatory environment in which we are active. We can already see that Europe is working at a competitive disadvantage relative to the rest of the world in the energy markets because of its policy framework. How likely do you think it is that the USA will adopt a similar framework when it is now the largest producer of energy in the world and is benefitting from a natural gas revolution? How likely are countries like China and India to eschew fossil fuels when they are under domestic pressure to deliver on promises of economic growth? 

We have expounded our view that unconventional oil and natural gas resources represent a game changer for the energy sector since at least 2010. We believe that energy prices will begin to trend lower in real terms from later this decade and that the use of natural gas as a feedstock for utilities, factories and transportation is on a secular uptrend trajectory. As a result the output of carbon will probably peak and trend lower without the hysterical response expounded in the link you provided.


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