Why the Carbon Tax?

 Ernesto Hontoria

My decision to support the Carbon Tax is not a political statement, but it heavily influences my voting decision. I support the Carbon Tax because I am convinced that it is an efficient way to include the hard to measure cost of polluting the air. In other words, polluting is not free and should be accounted for. But let me explain my thoughts from an economical perspective.

I used to work for an oil company that extracted heavy crude oil from the Orinoco belt. To extract the oil, the company goes to very pristine areas to drill wells, then extracts oil for many years. When the oil extraction is finalized, or oil wells are no longer profitable, the company closes those wells and restores the land as close as possible to its initial state. Leaving the land as you found it, is simply the right thing to do. Don’t you think so?

Normally, the directors of companies are responsible citizens that want to do the best they can to reduce the environmental damage. Of course, there are some that just look for the immediate return, and do not care for the consequences, but in my experience, in the oil industry, they are not a majority. For that reason, companies have in their books a reserve[1] for those restorations works, that they know, the company will need to do, once they finish their job. Therefore, every time an oil company clears an area to drill a new well, they start to accumulate funds in this reserve called ‘Remediation Cost’, that will hit the company economic results (their P&L) immediately.

This is the way that oil companies proceed with their oil wells, and oil fields as well, because it is visible and measurable. It is not in their best interest that people start sharing pictures of abandoned wells and oil fields, with clear damage done to the environment. It is best to restore the area, plant new trees, and leave as minimal visible disruption as possible. Environmental damages that are not visible, or measurable, are a different story, and for these it is hard to establish a ‘Remediation Cost’.

Air pollution enters into this last category of invisible and hard to measure remediation cost. Indeed, it is more difficult than just that; as it is not easy to discern who bears responsibility for this particular damage: the oil company which extracts the oil, or the consumer that burns that oil and liberates the CO₂ in the air?

The carbon tax is finally addressing the issue of putting a cost to air pollution. It is not perfect, but so far, it is the most efficient way to start tackling the problem. Without this cost being considered, the transition to cleaner sources of energy will be more difficult.

Let me give you two examples that embrace the importance of having this cost in the equation. 

In the late 1800s, the supply and transportation cost of coal to drive the industrial revolution was a concern to the French government. So much that the government decided to fund studies to develop other sources of energy. As a result of these investments, in 1869, Augustin Mouchot tested in Paris the largest solar engine built till that moment, and two years later installed and experimental solar generator at the Tours library. He compiled his research and work into a book becoming a prominent figure in the field of solar power. In 1878, Mouchot won a Gold Medal for transforming the solar heat into energy. His solar powered mechanical invention was displayed at the Universal Exhibition in Paris. However, as coal became increasingly cheaper in France, the government resolved that solar energy was uneconomical, and ended Mouchot's research funding.[2]

Of course, at that time French authorities did not know the consequences of the CO₂ emissions in the environment. But would they have got to the same conclusion if they had added the ‘Remediation Cost’ of burning coal? One way of getting an idea of the magnitude of this ‘Remediation Cost’ is calculating how much it would have costed to sequestrate all the CO₂ that was liberated to the atmosphere from those coal powered factories that flourished in France.

The second example came in 1913, this time in Egypt. An engineer named Frank Shuman built the first solar thermal power station in the world. At the time of its construction, it was a cost competitive source of energy, able to pump 6,000 gallons of water per minute from the Nile River to adjacent cotton fields[3]. The plant was dismantled or destroyed (not sure) during the First World War, and after the war finished, the substitution of the coal for cheaper oil in the 1930s completely discouraged the advancement of solar energy. Oil powered plants replaced the missed solar facility.

This time was ‘cheaper oil’, that not having in its cost structure the ‘Remediation Cost’ of restoring the CO₂ levels in our atmosphere, did not allow for an opportunity to develop a cleaner source of energy.

The carbon tax it is not a radical political idea, but an economic concept that helps to deal with a negative externality. Negative externalities occur when an individual or company does not have to pay the full cost their goods are causing to society; when the cost to society is greater than the cost consumer is paying for it. Pollution is a good example of a negative externality, and air pollution it is not different. What probably makes the carbon tax difficult to digest is to discover that we (ourselves) are the polluters. But in my mind is just a way to level the field to those who want to produce cleaner energy.

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[1] A reserve in accounting are funds that are set apart (reserved) to deal with a potential cost in the future.

[2] https://en.wikipedia.org/wiki/Augustin_Mouchot

 

[3] https://en.wikipedia.org/wiki/Frank_Shuman

How much will cost you to fuel your new car in Canada?

Versión en castellano: ¿Cómo impacta tu bolsillo el consumo de combustible del carro que eliges?

Thinking on buying a new car? Different car models have different gas consumptions. Depending on your selection you will have a lower or higher environmental footprint, but as well, some additional cost to cover or savings to pocket. The following model will compare the gas consumption of two cars of your preference and will give you an idea of how much it will cost you in one year.

This model is using data provided by Statistics Canada:

Historical Gas Prices

Car Fuel Consumption

Thinking in selling and buying a house in Ontario?

If you are planning to sell your current house to buy another one (big or smaller) in Ontario, here is a file that I created to help me to understand my negotiation ranges, and can help you to analyze the financial impact and take a better decision. 

You need to fill the yellow cells with the information from your own situation. You can save the file for yourself and play with different scenarios in order to understand the financial implications. In my case, I wanted to understand what the incremental cost of my monthly payments under different scenarios would be, and what would be a maximum price I can offer for a new property. 

Hope this file can help you, and please understand that it is not my intention to replace the advice of your mortgage analyst or financial advisor.

Investment Strategy

Ernesto Hontoria
(versión en castellano)


It had been a couple of weeks in which the dynamics of work had prevented me from having lunch with my new colleagues. Today, however, we did it again. We have lunch together and a nice conversation around Henry's investment strategy. I will explain his strategy but, although it may seem infallible, do not get too excited that my friend has found it is not lucrative so far.

Henry's strategy is to buy shares that he thinks are below their real value. For doing this, Henry follows the capital market daily and every time the price of a stock falls dramatically, he reviews the news to find out why the price has fallen so much. He looks stocks that lose more than 20% of its price in few days. From his news analysis, he determines whether the market, that is, the people who negotiate with that stock, is overreacting or acting rationally, and based on this judgment he buys or not the stock. If -in his opinion- the price of the stock has fallen more than it should, meaning that the people has overreacted to the news, he buys the stock, waits for the price to recover and then sells it again, obtaining a profit.


He had already explained us his strategy in a previous lunch’s conversation. Indeed, I asked him on that occasion, to share with me every time he finds one of those 'bargains' to look as well. He did so, and couple of weeks ago, he gave me the name of a company in the uranium business whose price had plummeted for a news that change nothing the conditions in which the company or the industry operates.


It was a company that extracts and trades with uranium in the United States, whose price on the New York stock market had fallen by more than 40%. The collapse of the price seemed related to the refusal of the government of that country to impose import tariffs on that element. Apparently, the industry’s lobby groups, which had been pushing for protections and barriers to secure the internal market, had collided with a resounding denial of the Trump administration.


Although the news did not change at all the current conditions in which the company operates (the company has to compete against the same competitors, in exactly the same conditions as always), it did affect the projections that some investors might have of its future. Certainly, the refusal of the authorities to impose new tariffs did not make the situation worse for the company, but it probably eliminated the hopes that many shareholders had for a more favorable future for their business. Henry was convinced that once investors swallow the bitter pill of their disappointment, the company's action would regain its value.


Since his argument seemed reasonable, I decided to look at the company numbers. In a matter of minutes, I completely ruled out investing in it. My reason: the company had more than four years losing money. Surely investors were betting that the US government would impose tariffs and the company would soon see the light at the end of the tunnel. Put it simple, the stock price reflects the expectations of the investors in the future of the company, not just its present conditions. The price before the crash was reflecting the investors' expectations about coming regulations favorable to the company's future, and the new price was the adjustment of those expectations.


In any case, what we discussed during lunch today was some new ideas Henry has in mind to perfect his technique. He wants now to use artificial intelligence to correlate the news in the media with the fluctuations of the stock market and allow virtual intelligence to recommend him which stocks to buy. He had made hypothetical estimates of what percentage of failures against successes could he tolerate, and how the gains of the successes would cover the losses of the failures. In his model loses are more frequent than successes. I suggested him to incorporate in his analysis the financial results of the target companies. I think that without the financial information his exercise is very similar to put artificial intelligence to guess the numbers that will come out in the lotus.


Basically, what Henry wants is to guess a future result based on past observations. So far, it has not worked either in the lottery or in the stock market, perhaps because we have not had enough computing power to analyze all the variables that could affect the results. Of course, the computing capacity is increasing rapidly, and maybe at some point it will be possible to predict human behavior quite accurately and, through it, how the capital market will react to different news. But I fear that for now Henry has no chance of incorporating all the variables in his artificial intelligence model. I did not want to discourage him, because I enjoy his lucubration about how he will become millionaire. After all it is a simple lunch conversation.