Climate Change 2011 Part 3 - Government policy and subsidies

Steve Triantafilidis

Clearly government policy has had a large impact in the last year or two with changes in subsidies, particularly notably in Germany. It probably has seen some distortions in where, for example, the solar industry has developed. I think that is of concern to investors in this space that a lot of the investing has been driven by subsidies, rather than truly being an alternative to traditional sources of energy. It seems, from outside, somewhat unusual that, for example, Germany is a big player, when it actually has less sun than many other countries with more natural resources, in terms of quantity of sun hours. Those countries are not actually big players in this space.

Within Europe, that Northern Europe is further ahead is somewhat unusual, but it is driven by the subsidies. In China, overall the government is very interested in the topic and wants to be a player in new technologies related to alternative. It has simply realised that it cannot use oil and coal in the quantities that a large, industrialised nation would normally. So, obviously they are trying to develop an industry there. What that may mean is further distortions because they are encouraging these players with a different agenda than in most markets. In the US, although there has been a lot of talk about green jobs and the stimulus package that was announced put a lot of effort in that area, not much has actually happened. We saw last week in the State of the Union address that President Obama was talking about it again, but two years have passed and not really anything significant has happened. So it may be a function of free markets that you cannot make it that easily, compared to China, which still has a government that can dictate, in some ways.

Elisa Trovato

How do you take into account of these distortions generated in the markets, when selecting stocks?

Steve Triantafilidis

If you are investing based on subsidies, in the end you need to be very careful, because they will change as governments have pressures in terms of meeting lower budget deficit targets. So clearly anything like a subsidy will be an area that they will look to reduce. If companies are only surviving because of subsidies, then clearly you should be very careful about investing in them. On the other hand, if there is not some encouragement in some way, then maybe the industry does not get off the ground either. So there is a balance there. From our perspective, we do not want to be only investing in companies that are too heavily reliant on government subsidies and balance with opportunities driven by market forces.

Joost Bergsma

Subsidies have actually worked. The cost of solar, for example, has decreased by almost 100 per cent, and that is mostly because subsidies have stimulated growth in investment volumes leading to declining manufacturing costs. At the same time, you see a significant amount of investment opportunity opening up, which is very attractive to institutional investors; all subsidies do at the infancy stage of clean energy is break the gap between what is the distorted market price for dirty fuels versus, let us say, cleaner fuels. Germany has got bang for their buck. Germany has actually been successful in creating a leading clean energy industry which employs many staff.

Lars Kalbreier

I believe subsidies work as long as they are just temporary. If a business model is built on subsidies, it will not be a positive EVA (Economic Value Added) business model.

Joost Bergsma

I agree with that and what you have seen, is as subsidies decline over time, is the system is working very well by providing a clear signal function to the market to drive down costs.

Matt Christensen

Subsidies need to be predictable. One of the new problems that comes up is: is a new mandate of a government going to shift that subsidy? Many industries have benefited from subsidies over the years, so I’m less concerned with subsidies for this sector than their predictability and thoughtfulness.

Andreas Knoerzer

If you hate subsidies you should not invest in energies, all types of energies are subsidised.

Carlos Joly

That´s so true. The US oil business is subsidised big time by the depletion allowance. So let us not pretend that subsidies only apply to alternative energy technologies. And also, let us not take too narrow a view of what we mean by a subsidy. Because, in a certain sense, the kind of national, industrial policy that China is putting forward could be thought of as a form of subsidy; and it is. Just as a highway system paid for by government money can be seen as a subsidy for the automobile industry. So to say, as Steve does ‘We only invest in investment propositions that are not subsidised’, will leave you with very little in the world to invest in.

Steve Triantafilidis

I meant more in terms of long-term dependence.