The writing on the wall

CBA's decision to write down its investment in Hazelwood is a very significant event in the evolving carbon pricing debate.

CBA's direct stake was hardly a significant financial investment in the first place. But the decision to essentially write-off their investment in Hazelwood will have been considered very carefully. We can expect that International Power, Hazelwood's dominant shareholder, would have done all it could to dissuade CBA from this decision.

What the decision signifies is, firstly, that CBA expect that an emission price will soon wipe out the very substantial operating margin that Hazelwood delivers and, secondly, that Hazelwood will not be compensated for this. The significance of these future predictions will not be lost on anyone close to the emission reduction debate.

More generally, it suggests we might think differently about the apparent political failure to make decisions on emissions policy.

Financiers are showing that they have moved on. They have not waited for governments to make up their minds.

This will feed back into the policy and financial decisions governments will make.

In the specific case of Hazelwood, in any subsequent discussions on compensation, the Victorian and Commonwealth governments will be emboldened by CBA's decision.

The whole debate has been shifted. If governments commit substantial sums of public money to compensating Hazelwood's owners for lost profit, they will need to explain why they are seeking to prove CBA's predictions wrong. Perhaps governments might think about redirecting transition funds from the compensation of Hazelwood to the facilitated entry of cleaner gas generation.

In the general case, we are now seeing an increasing lobby of investors putting their money where their mouths are on lower emissions. The voice of this lobby will be growing louder, and governments will find it increasingly hard to resist.

Of course it is still a long way before we reach the end of this story. Its one thing to decide to write off an existing investment, and another altogether to commit fresh money to higher capital, lower emitting technologies.

For this, the flood may only be released when governments make serious commitments. The CBA decision suggests the day of reckoning may come sooner than we think.

Bruce Mountain is director of energy and policy consultancy Carbon Economics