April 2011
Are you a climate change skeptic?
Or do you believe that people are changing the climate?
This is front and centre in Australia debate at the moment and every economist who ever uprooted a thousand trees to publish his [mostly] words is having a view.
However there are several questions that are not being answered, or even asked. If I were to say irrespective of whether the climate is being changed by you and me, and there was a way to have cleaner energy [say], would you do it? The answer would surely be yes.
Because the answer to the reverse of that question - irrespective of whether the climate is being changed by you and me, and there was a way to have dirtier energy, would you do it? – the answer would surely be no.
If this holds true, then skepticism is surely irrelevant.
The next step then is to price all energy components, including all its consequences such as pollution. To do this, we would include a price for water, a price for the carbon being released into the atmosphere, a price for risk of contamination from nuclear waste for example, and the price for ending the life of the power station whether it is coal, gas, or uranium.
Given our aforementioned questions and their conclusion, you could compare the numbers and see which produces cheaper and cleaner energy. By the way, it is not coal and it is not uranium run power generators.
If we agree, then putting a price on carbon is the only rationale conclusion.
Investing has similar questions and answers. There are many things that remain un-priced when we purchase investment properties or shares. These “risks” lets call them, have a value and each person should consider these when they invest in anything.
For example there is liquidity. How easy is it to sell your investment and at what cost? Shares are easy, the costs have fallen substantially – but in the middle of the GFC some stock markets were both frozen and closed. By comparison, investment housing is difficult to sell, could take a long time, and has substantial costs such as agent’s fees. These too should be considered in your investment decisions if having liquidity at hand is important to you.
Shares of course are meant to be priced by the theoretical rational hand of open markets. And if you believe that you believe anything. So there is another risk that should be priced into your investment equation, that is, asymmetric information. There is far more disclosure about and from the large companies, however a lot less is known about the small market cap companies. And that is why most conservative investors in shares tend to buy and hold the large companies. Not as much fun though.
Disclaimer: This is not advice. I am not licensed to give advice of any kind. Advice can be understood as individual advice to a person about their particular financial circumstances, or general advice about investing. So you cannot, and should not, rely on anything written here. You should only rely on advice from a licensed advisor. If this article has sparked interest please seek out a licensed advisor.