Externalities need government recognition for business

Externalities need government recognition for business

Interview with Rolando Polli, co-founder of Ambienta, Europe’s main environmental private equity fund.

Although well known in academic circles, the concept of externalities is not fully recognised and applied in the energy sector when it comes to implementing energy plans and policies. How, in your opinion, is awareness changing on this front among decision makers, and why?

Externalities are recognised if and to the extent that people and the governments they elect believe that human activity has an impact on the climate. An increase in extreme events and in pollution has recently had a significant impact on people and in turn on governments. In fact, the number of countries to have adopted a carbon tax or ETS is on the rise, even though not smoothly: China is considering a nationwide ETS that will probably be operational as soon as 2016 and Korea at the beginning of this year started up the second-largest emissions market in the world.

At a global level, I think the current adoption of ETS and carbon taxes is quite satisfying since they cover 39 countries and 23 jurisdictions (states and regions) that account for about a quarter of global greenhouse gas emissions. The impact will depend on the actions of single governments. There may be steps backwards such as in cases where newly elected Tony Abbott in Australia repealed the carbon tax and Florida Governor Rick Scott went as far as banning use of the term “climate change” in official documents. However, the trend is towards greater awareness and China’s commitment is, in my view, the main and most direct evidence.

The idea of externalities isn’t fully applied in investment decisions either. Why is this and what would be the main consequences of internalising these costs?

Economic operators act on the basis of real data and therefore will take negative externalities into consideration if and only if the government decides to put a price on emissions through a carbon tax, making carbon thus a real cost, or to limit them with an effective ETS system.

Investment decisions will be impacted in proportion to how intelligently these mechanisms are applied. If there is no carbon tax or ETS, or a totally ineffective one as happened in Europe where the ETS put too low a price on CO2 because of the excess of permits on the market, it’s clear that operators will continue to behave as if they produced no externalities.

For sure, the effect of policies aimed at reducing emissions is considerable for dirty fossil fuels like coal. In Europe, as a result of the Large Combustion Plant Directive in 2001, which set limits on SOx, NOx and particulates, almost 10% of old coal plants were closed or will be closed by the end of this year because the retrofits needed to meet the limits set by the directive have made them uneconomical.

Moreover, it’s expected that the application of the Industrial Emission Directive in 2016, which imposes even stricter cuts on emissions, will lead to about a third of total capacity being shut down because it will no longer be competitive.

The situation isn’t much different in the US where several studies have said that if the EPA manages to apply the measures contained in its Clean Power Plan at least 100 GW out of a total of 314 GW will exit the market.

Promoting the use of renewable energy sources and the gradual reduction of fossil fuels are the main means for reducing the latter’s negative externalities. What solutions would you propose to accelerate this process?

You don’t mention a very important issue: energy efficiency. In my opinion, it’s the main driver of this process and we at IG Partners make this point very clear in our “Climate Changes Business” report. For Ambienta, it’s their emblem and the main reason for the fund. There are no enemies of energy efficiency and the numbers back this up: the IEA calculated that in 2011 the effect of energy savings in the main OECD countries was greater than total oil consumption and of each individual fossil fuel!

Without the thousands of efficiency measures undertaken by governments, private individuals and companies energy consumption in advanced countries would be 60% higher than it is today.

These are astonishing numbers, to say the least. Measures like the eco-bonus in Italy that incentivise investments in energy refurbishment are for sure less controversial and more popular than the imposition of a carbon tax. I think we should find another name for it… carbon/environment price or something like that.

As a partner and co-founder of Ambienta, Europe’s main environmental private equity fund, you’ve been involved in environmentally friendly investments for years. Which ones in your opinion have turned out to be particularly promising, and why?

For a private equity investor, it’s clear that the less your investment depends on government subsidies, the lower your risks will be. In fact, one of our most successful investments was an increase in efficiency in construction sites that reduced the cost of illuminating the site with light towers. That company works in most of the world and immediately drew the interest of a major American company that then bought it. But there are many other investments that are giving satisfying results in a range of sectors: from traffic sensors to pellet stoves, from fixing foundations of offshore wind farms to designing air cooling systems for industrial plants. The most successful companies, in my view, are the ones that have relentlessly set themselves the goal of managing resources in the most efficient way possible.

Have you taken Behind Energy’s Energy Test? What was the question/answer that most “surprised” you?

Question number 4 on the number of deaths caused by pollution, which the World Health Organisation put at 7 million in 2012, one eighth of total deaths in that year. I knew that pollution had a major impact on people, but I had not realised that it bears such a high responsibility in terms of global mortality.

 

Rolando Polli

Rolando Polli

Rolando Polli, a Bocconi and Wharton graduate, has spent 28 years in Mc Kinsey (1969-97), where he managed the Italian, Spanish and Portuguese practices and opened the Geneva, Lisbon and Rome offices.  After 1997 he has invested in and managed a number of companies including Venchi, Bloomberg Investimenti, Buongiorno, IG Partners and Silicon Biosystems.
In 2007 he co-founded Ambienta, the largest Italian environmental fund, of which he is a Partner.


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