Profit from the Aussie Carbon Tax

10/17/2011 11:00 am EST

Focus: STOCKS

James Fink

Editor, Jim Fink's Options for Income and Stocks to Watch

Carbon tax legislation is now law in Australia…and it isn’t so bad. As with most things, you just have to find the winning side of the trade, writes Jim Fink of InvestingDaily.

Back in July 2010, I argued that the United States needed to pass carbon-cap legislation immediately in order to reduce our country’s dependence on foreign oil—oil that helps finance dangerous governments hostile to our Western freedom-loving values.

Soon after my article was published, the carbon bill died in the US Senate, leaving no doubt about the influence my writings have on public policy (none).

But wait—maybe I have a strong readership in Australia. Why? On October 12, the Australian House of Representatives passed Prime Minister Julia Gillard’s carbon tax plan by a razor-thin 76-74 margin.

According to analysts, passage through the Australian Senate is guaranteed, so the carbon tax will become law effective July 1, 2012, and Australia will join a growing list of countries with taxes on carbon.

The law will initially impose an A$23 ($23.33) tax per metric ton on the carbon produced by the country’s 500 largest emitters. This tax rate will increase 2.5% each year until 2015, when the plan will shift to a market-based cap-and-trade system.

Australia needs the tax because 80% of its power is currently generated from dirty coal, making it the biggest carbon emitter per person of any developed country in the world. Carbon dioxide-induced global warming is widely believed to be behind the devastating floods Australia suffered earlier this year, as well as the ten-year drought before that.

No doubt about it, extreme weather destroys economic productivity. Australia’s carbon tax should, therefore, actually increase the country’s long-term economic growth.

According to David Dittman of Australian Edge, the tax will not hurt consumer demand because, "Fuel for most business and personal transportation is excluded from the carbon tax, and the average assistance to households under the plan is forecast to offset the cost-of-living increases that will result as carbon-tax-paying polluters pass on costs to customers."

In fact, 90% of tax revenue will be recycled back into the Australian economy through payments to consumers and businesses. The objective of the tax is not revenue generation, but changed behavior, so I believe it’s a net plus for Australia’s economy.

Critics who claimed the tax would hurt the country’s coal industry were stifled after Peabody Energy (BTU) and ArcelorMittal (MT) made a bid for Macarthur Coal (MACDY) just one day after Prime Minister Gillard announced the carbon tax plan on July 10.

I don’t think that these sophisticated companies would have been willing to pay A$4.7 billion for an Australian coal company if they thought it could not generate significant profits under the new tax regime.

While I am confident that the carbon tax is a win for Australia’s economy, I can’t same the same for Prime Minister Gillard, who will likely suffer significant negative fallout for flip-flopping on the issue. Back in August 2010, Gillard made a pre-election promise that was unambiguous and clear: “I rule out a carbon tax.”

Based on that promise, the Australian Labor Party won re-election. Gillard has now broken that promise, and we’ll have to wait and see how much this broken promise will cost her and the Labor Party politically.

Liberal Party opposition leader Tony Abbott has called Gillard’s flip-flop an "utter betrayal of the Australian people," but Gillard may have been forced to flip-flop because she is the head of the weakest Australian government in 70 years, and she needed the support of the environmental Green Party to stay in power.

NEXT: Australian Mining Tax is Next

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Australian Mining Tax is Next
Also coming down the pike is a mining tax officially named the mineral resources rent tax (MRRT). The tax legislation is expected to be introduced into parliament this year and would take effect at the same time as the carbon tax—July 1, 2012.

Passage of the mining tax is likely because the Australian public supports it by almost a 2-to-1 margin, partly because some of the tax revenue will go towards increasing pension (locally called superannuation) contributions.

Opposition from miners and other corporations is muted because tax revenue from the MRRT will fund a 1% reduction in the corporate tax rate, and because the MRRT is much less burdensome than the previous “resource super-profits tax” (RSPT) proposal made under former Labor Prime Minister Kevin Rudd.

The only constituency that is truly angered by the MRRT is China, because it correctly realizes that the brunt of the tax will end up being paid by foreign purchasers of Australia’s coal and iron ore. But China doesn’t have a vote in Australian politics, so who cares?

Bottom line: Australia is taking a global leadership position on both climate change and reducing income inequality. Even with these taxes, Australia imposes on its citizens one of the world’s lowest net tax rates.

Australia’s Institute of Chartered Accountants has stated that these taxes will provide business and investors with the certainty and confidence that they require to make long-term decisions about the future allocation of their capital. In today’s highly uncertain economic climate, a little certainty and confidence goes a long way.

Here are the 3 Down Under stocks that will benefit from a carbon tax:

  • AGL Energy (AGLNY), the largest private owner of renewable energy;
  • APA Group (APAJF), the country’s largest gas distributor;
  • and Origin Energy (OGFGF), a leading integrated energy company.

Read more from InvestingDaily here…

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