Capital spending subsidies at last

Not since the days of accelerated depreciation have businesses, large and small, been given such significant incentives to invest and improve system efficiencies as we are now seeing with the government's Emissions Reduction Fund.

And its potential impact will be multiplied by the impact of the US-China emissions accord and the China free trade agreement.

Most of the commentary on the emissions scheme has been pursuing the extreme Greens agenda, rather than the opportunity for a wide array of businesses to gain government investment subsidies.

Simply saving carbon might make an enterprise feel good, but for it to be worthwhile it must also deliver a wide range of productivity gains.

As I will explain below, the emissions reduction plan covers almost every significant service, transport, processing and rural industry in the land and allows small operators to aggregate to put forward a proposal. That incredibly wide ambit means the plan is not just about better plant and equipment but encompasses better information and communication systems. In days gone by, such better systems would require extensive investment in software. Now the necessary software can be downloaded from the cloud, substantially improving the economics. Carbon reduction becomes a systems by-product, albeit an important one given the government subsidy.

Naturally the Emissions Reduction plan covers all the usual carbon reduction areas including tree planting, power generation, chemical processing, boiler usage, methane capture in waste water treatment, and modernisation of cement and aluminum plants. If that was all it did then the impact would be limited. But specifically highlighted in the scheme is a much wider agenda, including:

• Emissions reductions from the transport sector -- covering air, sea, road and rail activities -- from technology upgrades, low-emission vehicles, to operational changes. Better usage of trucks and company cars via information systems will be at the top of many organisational lists that will also slash other costs.
• Energy efficiency improvements in the commercial building sector, including offices, retail chains and education facilities. This could include partial and full retrofits of existing commercial buildings, installation of energy efficient lighting or fans, or the installation of co- and tri-generation. That opens up the scope for enormous system changes in schools and shops.
• Improvements in the efficiency of household electricity consumption through aggregating up individual changes at large numbers of households, reducing household energy costs. Smart power companies and banks may use systems to mobilise their customer base to reduce carbon and lower power usage.

In all these activities you must aim to get an agreement from the government to pay on the basis of forecast carbon reduction. If you win via the reverse action the actual payment comes when the reduction is delivered. It will require a new form of bank finance -- again new systems will be required.

The extreme Greens movement believes that the carbon reduction from the scheme will go nowhere near the required levels. They may be right but 300 organisations, businesses and individuals have made contributions to the design of the Emissions Reduction Fund. It also incorporates and simplifies the ALP's Carbon Farming Initiative.

The basic Emissions Reduction Fund will be conducted via a series of reverse auctions next year so that enterprises will offer to reduce carbon for a price. My guess is that the China-US initiative, the G20 discussions and even the free trade agreement will mean that a lot more projects will pass the action hurdle -- and more money will be made available. The US-China in-principle agreement was designed to make carbon reduction easy for both countries. China will use Russian (and Australian) gas; nuclear energy and the replacement of very inefficient coal burning plants as the lynchpin of carbon reduction. The US uses fracking technology to extract gas, which replaces poor quality coal burning as its lynchpin. Unfortunately Australia has big curbs on fracking and has banned nuclear, plus we have exported most of our natural gas to help reduce the carbon of others (Australia must use its brain power to get carbon efficient, November 14).

We have been plain carbon dumb.

Fortunately we have abandoned the crazy high carbon tax, which had the effect of cutting carbon by lifting unemployment. The US and China are too smart to make that mistake.

Australia has underinvested for close to a decade, so there is scope for substantial productivity improvements that cover a much wider area than just carbon reduction. But the fact that the carbon reduction aspect to these investments will carry a government subsidy will change the game.