Australia’s Carbon Price
12th July 2011 by RichardSmith
On Sunday, all five free-to-air television channels in Australia went live to Prime Minster Julia Gillard’s announcement on her Government’s proposed mechanism for pricing carbon in the Australian economy. Although the Government has a big job ahead of it to sell the legislation to the electorate – the politics are such that it is highly likely that the package will be introduced (quickly) and it will be very difficult for a future government to repeal it.
So what are the key features?
Firstly, it will start on July 1st 2012 with a fixed price of $23 per tonne rising at 2.5 per cent a year. It will then transition to an emissions trading scheme from July 1, 2015.
By effectively acting as a tax in the first phase, the government is able to redistribute the revenue (over 25 billion from approximately 500 of the biggest polluters), principally to households and key industries. Most households will be compensated in the form of tax reforms and increases in allowances, payments and benefits; some households will be over-compensated. The revenue also enables the Government to provide assistance for specific industries, investment in rural landscapes and fund renewable energy investment (a $10 billion Clean Energy Finance Corporation will be established to invest in new technology and $3.2 billion allocated to the Australian Renewable Energy Agency). The scheme is not budget neutral, costing just under $4 billion over the forward estimates.
Most trade exposed industries such as steel, aluminium, zinc, pulp and paper makers will get free permits representing 94.5 per cent of industry average carbon costs.
Agriculture is excluded, as is transport, with the exception of heavy transport to start in 2014. Agricultural abatement, through a separate piece of legislation, can be used in the fixed price phase (under certain restrictions, discussed below); international abatement is only available in the ETS phase.
So, what does this mean for business?
For the top 500 companies facing a direct carbon liability, the impact chiefly depends on whether they are trade exposed, and whether they are eligible for specific industry assistance, such as for steel, coal and food processing. Major emitters have been required to report on their emissions since 2008, so should have a good handle on their exposure; the trade exposed assistance packages are broadly in line with previous proposals, so there shouldn’t be too many surprises there either. Clearly the accuracy of the reporting becomes very important when a price is applied, or assistance provided. One would expect the Department of Climate Change and Energy Efficiency, which to date has taken a light touch on business in regard to reporting, would be looking to increase oversight of this in line with the powers already available to it under the National Greenhouse and Energy Reporting Act (such as the ability to require a business to seek an independent verification of its emissions report). So too will boards and executive management be having a closer look at their numbers.
Now that businesses have the price, they should have a fair idea of their exposure (and will be looking at how to minimse this and / or pass on the cost). Although there are opportunities to reduce their liability by sourcing abatement from the land sector (which could deliver credits for less than the fixed price) these credits will be in relatively short supply and the amount sourced can only represent 5% of an organisations total liability. Australia’s major organisations will now be starting to take a more active interest in international credits with their eye on 2015. But of course the whole point of applying a price is so organisations are incentivised to invest in efficiencies and clean technology. Many have already identified such initiatives, the price will shorten the pay-back period on these investments.
Those businesses that are not directly affected by the liability will see impacts to their bottom line through increased electricity prices. Businesses that have a good understanding of how carbon and energy flow through their organisation are the best placed to manage these impacts and secure competitive advantage. A greenhouse gas footprint should therefore be seen as an essential business tool to identify risks and opportunities. Such an assessment should include “scope 3” emissions to identify where costs are likely to be passed on by the supplier actually liable for the emission. For example, domestic aviation is included in the scheme and the airlines have already indicated that the carbon price will be passed on to their customers; and freight will be included from 2014. Virtually all products will see price increases as a result: businesses that know what services, products and materials in their supply chain carry high levels of embodied emissions are already at an advantage.