Preparing for the Carbon Tax
13/12/2011
After months of public debate and fierce opposition, the Clean Energy Future legislative package successfully passed the Australian Senate on 8 November. With obligations under the legislation anticipated to commence from 1 July 2012 we revisit some of the key impacts and opportunities businesses should consider in aligning their resources to successfully engage with the reforms.
Indirect Costs
A business has a direct liability under the carbon pricing mechanism if it is an operating entity of a facility which emits more than 25,000 tCO2-e (approximately 500 entities Australia-wide). Direct emitters will have an incentive to pass carbon costs though to customers, giving rise to indirect costs. Accordingly, indirect costs will be the primary concern for the vast majority of Australian businesses. All businesses should experience increased electricity costs (10%), gas costs (9%), rail and domestic freight and increased costs of emission intensive inputs (to the extent that these can be passed through).
Contractual impacts
Businesses should look to see if carbon costs can be passed on via supply contracts. These elements are often included under a ‘change in law’ clause, allowing for the adjustment of prices under the contract should a carbon price law be introduced after the date of the contract. Businesses should also consider the scope of such costs. Do they include administrative and operational costs under the scheme in addition to the cost of carbon units? If such indirect costs are going to be significant to your business you may also need to make appropriate disclosures to lenders against financial covenants and in your accounts.
Opportunities for government incentives and assistance
The Government intends to invest $10 billion in the Clean Energy Finance Corporation (CEFC) which is expected to commence operations in mid-2013. Its mandate includes investing in a portfolio of projects involving the commercialisation and deployment of renewable energy, energy efficiency and low emissions technologies which have passed the initial development stage but are struggling to attract private investment.
Detailed plans of the CEFC’s implementation are still some way off. However, crystal ball gazers might turn to the modelling assumptions of Melbourne-based think tank, ClimateWorks Australia, regarding CEFC spending[i]. Their assumptions include $2.5 billion to help finance cogeneration, $2.5 billion to help finance projects in developing renewable technologies that could provide zero-emissions base-load generation and $5 billion to help support renewables and clean energy in other ways: e.g. help fund grid extensions, capital intensive technologies, loan guarantees for smaller companies.
It is expected that the CEFC will operate much like the UK’s Green Investment Bank, leveraging private funding to address barriers which are constraining the flow of finance to clean technologies. Low Carbon Australia (LCA), a government funded authority, similarly uses public money to unlock private investment in energy efficiency. LCA’s investments to date will leverage $13 of private funds for every $1 of public investment to deliver substantial efficiency savings across Australia’s commercial buildings.
Other business assistance measures include targeted funds and grants available for specific industries, including:
- The Steel Transformation Plan - $300 million in additional support
- The Clean Technology Program (CTP) (focus on manufacturing)
- Capital investment in energy efficiency and emissions cuts ($800m)
- Industry low-carbon R&D ($200m)
- Efficiency in the food processing ($150m) and foundry ($50m) sectors
- Industry skills program ($32m)
- Efficiency information to small business ($40m)
- The small business asset write-off
- increased from $5,000 to $6,500 for businesses with turnover less than $2m
For further details of these initiatives and others such as the Australian Renewable Energy Agency ($3.2 billion) please see our previous article THE CARBON TAX: Engaging with Incentives for Competitive Advantage.
Energy savings opportunities
Businesses often have a view that lower emissions mean high costs, but that's not necessarily the case. An alternative to paying carbon costs based on current emissions is to lower those emissions. Companies like GE are leading the way, having reduced its greenhouse gas emissions by 24 per cent since 2005 it has saved about $US130 million ($A125.63 million) a year. In addition, its energy technology arm is generating revenues of more than $US25 billion ($A24.16 billion) a year providing customers with equipment that has lower emissions and lower operating costs. These include engines for Qantas 787 jets that are 20 per cent more fuel efficient and produce 40 per cent less emissions.
Large businesses may also wish to consider if it practicable to switch or supplement energy needs with an on-site renewable or distributed tri-generation or co-generation supply. Businesses that have already engaged with the government’s Energy Efficiencies Opportunities initiative will have conducted an energy saving program identifying projects with a four year pay-back. These kinds of opportunities should now be revisited to recalculate the savings taking into account the carbon cost.
The information provided in this article is of a general nature only. It does not take the readers specific needs or circumstances into consideration. You should assess your individual circumstances and requirements before making any financial decisions. Professional advice should always be sought in relation to these and other issues relevant to company operations.
[1] Low Carbon Growth Plan for Australia, Impact of the carbon price package; ClimateWorks Australia, August 2011.