Analysis: Assessing the commercial implications of the carbon tax

Analysis: Assessing the commercial implications of the carbon tax

"The imperative for businesses is to understand their direct and indirect exposure to carbon and to scope this"

Calculating the impact of a carbon tax is relatively easy if you are one of the 500 ‘polluters’; it is more problematic f you are one of the remaining 2 million Australian businesses.

KPMG and “The 100” (big polluters) have put together a report on the commercial implications of a price on carbon. While it's only the top 500 polluters which are likely to have a direct liability, that liability will be passed through the economy. While the debate still rages about the impacts, there are commercial implications that CFOs will be required to deal with under the new legislation; as the Carbon Tax will have implications on almost all major local and multi-national enterprises.

If it is not already obvious, it soon will be apparent that in many organisations, it will be ultimately the CFO who will carry final responsibility for the strategy to deal with the legislation and the collection and reporting of emissions data. It is likely that few businesses have a complete view of the impacts that a carbon price will have on them. There is no ready calculator available.

The “Group of 100” and KPMG have released a guide: Managing the commercial implications of a price on carbon, to help CFOs navigate their way through the key issues, challenges and opportunities presented by the legislation.

(See ARN's Analysis:Carbon Confusion)

The imperative for businesses is to understand their direct and indirect exposure to carbon and to scope this, accounting first for rising energy prices, where the carbon tax will be a new line item on a business’s energy bills. Then, as well, are the potential for costs passed through their supply chain. Importantly, business will examine the potential to pass these costs on.

The tax

CFOs will be aware that operating facilities that emit more than 25,000 tonnes of carbon dioxide per annum will pay a fixed price for emissions above the carbon cap. Under the carbon tax regime, a fixed price for emissions will be in effect for three years from July 2012 before we move to a flexible, market-based pricing mechanism from July 2015. The scheme covers direct, and what are referred to as ‘Scope 1’ emissions, capturing some 500 liable entities from 2012.

While there is no simple calculator (as yet) available to assess the broader and downstream impacts of a carbon tax, it is well accepted that by far the biggest impact of pricing carbon will be its indirect impacts on the price of many goods and services, higher electricity prices and higher supply chain costs.

Treasury has estimated that carbon pricing will initially raise electricity prices by 10 per cent, and a further 16 per cent over the next five years. The tax, fixed at $23 per tonne from July 2012, will morph into a flexible, market-based price three years later.

Supply chain impacts

As an illustration we can gain insights from the largest supply chain operator in the Australia: Toll (from its 2011 AGM) Chairman Ray Horsburgh said the carbon tax holds no fears for Toll. In short, the transport and logistics firm plans to pass any cost increases on to its customers. He said he did not expect the scheme to add to Toll's operating costs.

The trucking industry has been given a two-year exemption and will pay the tax through a 6.85 cent-per-litre discount in the fuel tax credit from July 1, 2014. A market-based emissions trading scheme h will gradually erode the fuel tax credit as the price of carbon continues to rise.

The transport and logistics industry is a high greenhouse gas emitter. Modelling released by Treasury says transport produced about 14 percent of Australia’s greenhouse gas emissions in 2010, with road transport accounting for more than 85 percent of that figure. To illustrate this Toll emitted around 533,000 tonnes of carbon dioxide in the 12 months to June 30, 2010.

The trucking industry however argued (to Senate enquiries) that trucking businesses would not be able to pass the costs of the carbon tax on to its customers.

Another sector with significant supply chain impact is the food and beverage, grocery and fresh produce processing sector. While the direct impact of the proposed scheme is likely to be small, it will indirectly increase the cost of manufacturing. The Australian Food and Grocery Council and A.T. Kearney reported that the weighted average net economic impact in 2012-13 would, would equate to a hit of 4.4 per cent of operating profits (on an EBIT basis), assuming that zero per cent of these costs are passed through to retailers.

Given the comments from Toll (which services many of the larger groups in the sector), this ‘cost’ to the P&L could be a useful guide to other business decision-makers.

Mitigating the affects of the tax

Outside of the CFO’s direct domain, it is clear that many forward-thinking companies have understood these expected cost increases, and have been implementing internal measures to reduce emissions as well as mitigating against potential cost increases across their supply chain.

The SMB sector

The introduction of the fixed carbon price has implications for all business sectors according to the KPMG report. It says "Everything from small business and domestic property through to power generation and inward investment will be influenced by this change.”

Irrespective of size and sector, how businesses manage their exposure to a carbon price, internally and in their supply chain, will become a major differentiating factor in the markets they operate in. Detailed understanding of the how the tax impact passes through from supply chain will help companies develop a strong, differentiated position in managing the impact of a carbon price.

Key questions for the CFO to consider include:

  • Is the impact of the carbon price material to your company’s future earnings?
  • What are the potential cost impact and price pass through from suppliers?
  • How much of these costs are you able to pass through?
  • How are your major procurement contracts structured and what strategies are you able to employ in negotiating with your suppliers?

Business large and small may be eligible for transitional arrangements and assistance from the Government and whether they are eligible to receive competitive grants for manufacturing and food businesses to invest in energy-efficient capital equipment and low-emission technologies; or whether they qualify for competitive grant project funding for projects in renewable energy.

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