Sunday, July 10, 2011
By Kathleen Barrington
The emerging trade in carbon credits gets relatively little media attention, even though it is a rapidly growing global market worth up to $1 trillion.
Like motherhood and apple pie, carbon credits are generally seen as a good thing, because they are supposed to limit the amount of damaging greenhouse gases that a company can emit in a year.
The idea is that companies in areas like energy and cement get a free carbon credit allowance from the government.
If the company is a particularly dirty one, emitting more than its fair share, it must buy credits from other companies that pollute less.
If it uses up less than its allocation, it can sell the credits to others - its reward for being clean.
The system is known as ‘‘cap-and-trade’’.
The idea is that the polluters are forced to clean up or pay up. The ‘‘polluter pays’’ principle is dear to many environmentalists. But its appeal isn’t confined to the tofu-eaters; it’s also surprisingly popular with pinstriped bankers.
Investment bankers, in particular, like the idea that the amount of carbon that can be emitted will be continually lowered by governments.
This means that carbon credits should become scarcer over time, and that their value should therefore rise.
The cap-and-trade system has been up and running in Europe for years, but US president Barack Obama has hesitated to introduce it in the US amid fears that it could damage industry, though investment banks such as Goldman Sachs favour the legislation.
American journalist Matt Taibbi of Rolling Stone, who is a stern critic of Goldman Sachs, reckons the carbon credit market is attractive to investment banks because it is, in effect, a brand new commodities market where the main commodity to be traded is guaranteed to rise in price over time because of its scarcity value.
‘‘Well, you might say, who cares?” Taibbi wrote recently. ‘‘If cap-and-trade succeeds, won’t we all be saved from the catastrophe of global warming? Maybe. But cap-and-trade as envisioned by Goldman is really just a carbon tax structured so that private interests collect the revenues.”
The claim resonates here in Ireland, where certain private interests have been doing very nicely from our very own cap-and trade regime, though for the moment the beneficiaries appear to be mainly in industry rather than in the investment community.
It emerged last year that cement companies made an estimated €226 million windfall from surplus carbon credits as a result of the over-allocation by the government of carbon credits to the cement industry.
Among the chief beneficiaries were Irish Cement, a division of cement giant CRH, the Quinn Group, headed by businessman Sean Quinn, and Lagan Cement.
Peter Goode, a director of Goode Concrete and a vocal critic of CRH who is embroiled in a High Court dispute with the building materials firm, described the carbon credit trade in Ireland as a ‘‘scam’’, which the Irish government had bequeathed to the cement industry ‘‘as a gift from the heavily burdened taxpayers’’.
Worse still, said Goode, the measure, which was designed to encourage industry to close down inefficient plants, instead had the effect of keeping them open. ‘‘If they close the factory, the credits disappear,” he said.
Paddy Healy, a former director of concrete provider Healy Brothers, agrees. ‘‘The carbon credit system is operating the exact opposite of how it should,” he said.
This is not a uniquely Irish phenomenon. A report published last week found that the European steel and cement industry had already accumulated surplus carbon credits worth a combined €4.9 billion under the EU’s Emissions Trading Scheme.
Sandbag, a group lobbying for a public interest implementation of cap-and-trade, found that, ‘‘just as loosely-fitted seatbelts are useless in preventing injury, a cap sitting above the emissions of the majority of participants is also useless’’.
The scheme has outraged providers of more eco-friendly cement. They argue that polluting cement effectively receives a taxpayer subsidy.
The windfall gains to the cement industry have arisen partly because of the recession, with the result that demand dropped between 2007 and 2008, whereas the allocation of carbon credits during the period 2008-2012 had assumed a high-growth scenario.
But critics said the over-allocation was also a result of strong lobbying by the affected industries.
Now, the EU may once again be poised to over-allocate carbon credits to the cement sector in the next phase of the scheme.
The gains to Irish cement companies could be very large if this happens. One source estimated that the Irish cement industry stood to make a further €625 million in windfall profits over the next seven years, on top of the €226 million it has already made. The result is that the Irish taxpayer will have transferred about €850 million to the cement industry from 2008 to 2020, at a time when the government is financially stressed.
Much of this was entirely predictable, as correspondence obtained by The Sunday Business Post reveals.
As far back as 2005, Seamus Maye, head of the Quarry and Concrete Family Alliance, wrote to the Environmental Protection Agency warning that no account had been taken of the cyclical nature of the construction industry when it came to the allocation of credits.
He pointed out that the industry was then producing at unprecedented record levels.
‘‘When the inevitable fall-off in activity occurs, the cement industry and specifically CRH is set to be rewarded by cashing in on massive CO2 surpluses or ‘‘credits’’, potentially putting tens of millions of euro into the pockets of the polluters,” he wrote at the time.
Things have turned out more or less as Maye predicted. Earlier this year, the Economic and Social Research Institute noted the potentially large gains for plants covered by the scheme and called for a tax on such windfall profits in the electricity and cement markets.
Separately, the emergence of cap-and-trade schemes has given rise to a big global market in carbon credits, a market in which Ireland is seeking to play a role. Financial Services Ireland director Brendan Bruen said earlier this year that global carbon trading volumes were expected to reach $1 trillion by 2020.
The financial services industry has already successfully lobbied for changes in Irish tax legislation to allow carbon credits to be bundled up and traded as shares, in the process known as securitisation.
One effect of the amended legislation is that foreign investors will be able to take their profits from investments in carbon credits in a tax-efficient manner.
The foreign investors will, therefore, avoid paying certain taxes on profits made from investing in assets known as carbon credits - assets that were effectively a gift from European taxpayers.
You wonder if it wouldn’t have been better value for taxpayers simply to have carbon emissions taxed in a clear and transparent manner in the first place.
Monday, July 11, 2011
Tuesday, July 5, 2011
A stealthy, lucrative sleight of hand
Sunday, July 03, 2011 By Kathleen Barrington
Do you remember Bob Diamond of Barclays Bank being examined before a British parliamentary committee earlier this year?
He was being asked to explain why Barclays had paid just stg£113million (€125million) corporation tax in a year when it made £6.2 billion in profits.
It was big news on TV and in the papers.
The House of Commons cross-party select committee wanted to know how the £6.75 million-a-year boss had managed to keep Barclays’ corporation tax bill so low, at a time when its profits were so high.
It turned out that part of the answer to that question was that Barclays had racked up massive losses lending to sub-prime borrowers in the US. It was then able to offset those losses against its British corporation tax bill.
It won’t be any surprise if our own bankers repeat Diamond’s trick.
And it will be equally unsurprising if some ambitious politician seeks to hog the headlines by hauling a few of them before a Dáil committee in a few years’ time, to make them explain why they are paying so little corporation tax now that they are profitable again.
The bankers are likely to answer that part of the reason they are paying so little tax is that they are legally entitled to offset losses racked up during the financial crisis against their newly-restored profits.
That is likely to prove controversial, as the tax losses available for offsetting against future profits are absolutely enormous - as this newspaper revealed last week.
The figures released by Minister for Finance Michael Noonan showed that the 100 largest banks operating in the state, which include IFSC operations, would be able to carry forward €34 billion in unused losses and capital allowances to reduce the amount of tax they pay in the future.
Take Bank of Ireland, for example. It is headed by Richie Boucher, who has been on the board of the bank since 2006, a period in which it engaged in a reckless lending spree.
Bank of Ireland has reported heavy losses in recent years, and has survived only with the support of billions of euro from the Irish taxpayer.
But every cloud has a silver lining, and some of those losses have morphed into assets on the Bank of Ireland’s balance sheet, assets that might be attractive to a potential purchaser.
Some of those tax losses are described as deferred tax assets, an accounting term used to describe an item on a company’s balance sheet that may be used to reduce its tax bill in the future.
‘‘In accordance with applicable accounting rules, the Group has recognised deferred tax assets on losses available to relieve future profits to the extent that it is probable that such losses will be utilised,” the note stated.
That’s an asset which could prove very attractive to a future owner of the bank - especially a bank that is currently very profitable and seeking to reduce its tax bill.
True, it’s perfectly normal business practice to allow businesses to write off profits against prior losses.
However, it is one thing to allow a business to write off losses against future profits when it is the shareholders, the board and management of those businesses who picked up the tab for the losses in the first place - and quite another to allow a business to write off big losses against future profits, when it’s the taxpayer who has picked up the tab for the losses after the shareholders were wiped out.
It is the support of taxpayers that has enabled the banks to avoid liquidation and their management and employees to remain in often well-remunerated employment in circumstances where, if the rules of free market capitalism had applied, they would be out of a job.
It is doubtful whether the public would be happy to see a new, private owner substantially reducing its tax bill as a result of availing of that deferred tax asset, particularly if some of the management team that caused the original bank problem in the first place survived intact under the new owners.
The public would almost certainly view such a move as yet another example of bankers getting the better of policymakers. Certainly, the Organisation for Economic Co-Operation and Development was so concerned about this issue that it published a report on the matter two years ago.
The report pointed out that, as a result of the financial crisis, a large number of banks had sustained substantial losses. ‘‘The scale of those losses, and the potential regulatory capital, profit and cashflow benefits for banks able to convert them into cash, mean that revenue bodies must be alert to potential tax compliance risks as a result of aggressive tax planning involving losses,” it warned.
The OECD pointed out that ‘‘these large commercial losses can be regarded as the flip side of large profits made in the years prior to the crisis, with increased bank leverage combined with asset valuations which underpriced risk, producing exceptionally large returns on . . . capital.”
In short, the banks made a fortune in the good times by taking excessive risks, secure in the knowledge they wouldn’t be allowed to fail; they passed the bill to the taxpayer when times got tough; and they are likely to offset the losses they have racked up against future profits - most likely when the banks are back in private ownership.
The previous government recognised this risk to a certain degree, when it imposed certain tax loss restrictions on banks transferring loans to the National Asset Management Agency.
The measure means that, when the institutions return to profitability, a minimum of 50 per cent of their trading income will remain chargeable to tax in an accounting period, notwithstanding claims for relief for losses carried forward into that period.
It remains to be seen whether this will be enough to satisfy a public that will have been reeling from years of cutbacks and tax hikes when the banks eventually return to profitability.
But if the example of Britain is anything to go by, the banks will get their way. British chancellor George Osborne, who initially floated the idea of stopping banks offsetting their losses against tax while he was in opposition, changed his mind as soon as he got into government.
Instead, he introduced a bank levy. Shares in the banks rose on the day the levy was announced, as it was less costly than the banks had feared.
Do you remember Bob Diamond of Barclays Bank being examined before a British parliamentary committee earlier this year?
He was being asked to explain why Barclays had paid just stg£113million (€125million) corporation tax in a year when it made £6.2 billion in profits.
It was big news on TV and in the papers.
The House of Commons cross-party select committee wanted to know how the £6.75 million-a-year boss had managed to keep Barclays’ corporation tax bill so low, at a time when its profits were so high.
It turned out that part of the answer to that question was that Barclays had racked up massive losses lending to sub-prime borrowers in the US. It was then able to offset those losses against its British corporation tax bill.
It won’t be any surprise if our own bankers repeat Diamond’s trick.
And it will be equally unsurprising if some ambitious politician seeks to hog the headlines by hauling a few of them before a Dáil committee in a few years’ time, to make them explain why they are paying so little corporation tax now that they are profitable again.
The bankers are likely to answer that part of the reason they are paying so little tax is that they are legally entitled to offset losses racked up during the financial crisis against their newly-restored profits.
That is likely to prove controversial, as the tax losses available for offsetting against future profits are absolutely enormous - as this newspaper revealed last week.
The figures released by Minister for Finance Michael Noonan showed that the 100 largest banks operating in the state, which include IFSC operations, would be able to carry forward €34 billion in unused losses and capital allowances to reduce the amount of tax they pay in the future.
Take Bank of Ireland, for example. It is headed by Richie Boucher, who has been on the board of the bank since 2006, a period in which it engaged in a reckless lending spree.
Bank of Ireland has reported heavy losses in recent years, and has survived only with the support of billions of euro from the Irish taxpayer.
But every cloud has a silver lining, and some of those losses have morphed into assets on the Bank of Ireland’s balance sheet, assets that might be attractive to a potential purchaser.
Some of those tax losses are described as deferred tax assets, an accounting term used to describe an item on a company’s balance sheet that may be used to reduce its tax bill in the future.
‘‘In accordance with applicable accounting rules, the Group has recognised deferred tax assets on losses available to relieve future profits to the extent that it is probable that such losses will be utilised,” the note stated.
That’s an asset which could prove very attractive to a future owner of the bank - especially a bank that is currently very profitable and seeking to reduce its tax bill.
True, it’s perfectly normal business practice to allow businesses to write off profits against prior losses.
However, it is one thing to allow a business to write off losses against future profits when it is the shareholders, the board and management of those businesses who picked up the tab for the losses in the first place - and quite another to allow a business to write off big losses against future profits, when it’s the taxpayer who has picked up the tab for the losses after the shareholders were wiped out.
It is the support of taxpayers that has enabled the banks to avoid liquidation and their management and employees to remain in often well-remunerated employment in circumstances where, if the rules of free market capitalism had applied, they would be out of a job.
It is doubtful whether the public would be happy to see a new, private owner substantially reducing its tax bill as a result of availing of that deferred tax asset, particularly if some of the management team that caused the original bank problem in the first place survived intact under the new owners.
The public would almost certainly view such a move as yet another example of bankers getting the better of policymakers. Certainly, the Organisation for Economic Co-Operation and Development was so concerned about this issue that it published a report on the matter two years ago.
The report pointed out that, as a result of the financial crisis, a large number of banks had sustained substantial losses. ‘‘The scale of those losses, and the potential regulatory capital, profit and cashflow benefits for banks able to convert them into cash, mean that revenue bodies must be alert to potential tax compliance risks as a result of aggressive tax planning involving losses,” it warned.
The OECD pointed out that ‘‘these large commercial losses can be regarded as the flip side of large profits made in the years prior to the crisis, with increased bank leverage combined with asset valuations which underpriced risk, producing exceptionally large returns on . . . capital.”
In short, the banks made a fortune in the good times by taking excessive risks, secure in the knowledge they wouldn’t be allowed to fail; they passed the bill to the taxpayer when times got tough; and they are likely to offset the losses they have racked up against future profits - most likely when the banks are back in private ownership.
The previous government recognised this risk to a certain degree, when it imposed certain tax loss restrictions on banks transferring loans to the National Asset Management Agency.
The measure means that, when the institutions return to profitability, a minimum of 50 per cent of their trading income will remain chargeable to tax in an accounting period, notwithstanding claims for relief for losses carried forward into that period.
It remains to be seen whether this will be enough to satisfy a public that will have been reeling from years of cutbacks and tax hikes when the banks eventually return to profitability.
But if the example of Britain is anything to go by, the banks will get their way. British chancellor George Osborne, who initially floated the idea of stopping banks offsetting their losses against tax while he was in opposition, changed his mind as soon as he got into government.
Instead, he introduced a bank levy. Shares in the banks rose on the day the levy was announced, as it was less costly than the banks had feared.
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