Carbon tax and your business

The “carbon tax” commences on 1 July 2012, how will it affect your business?

Putting aside views on the design of the carbon pricing mechanism and your understanding of climate science, The Clean Energy Bill 2012 or “carbon tax” as it has become known will affect businesses  across Australia.

While the carbon tax is primarily focused on large emitters, the knock-on effects are expected to impact on businesses of all sizes.

The extent to which your business will be affected and the issues you should consider will vary considerably between businesses.

Are you a large emitter?

Large emitters are businesses that have greater than 25,000 tonnes of direct emissions annually; there are approximately 500 of these businesses across Australia.

A large emitter will need to acquire Eligible Emission Units (EEUs) and surrender them over time based on actual emissions.  EEUs will initially cost $23 per tonne of emissions.  Over time, the price of EEUs will change:

  • Between 2012 and 2015 – prices will increase by fixed increments
  • Between 2015 and 2018 – prices will increase within a floating range
  • 1 July 2018 onwards – A fully flexible pricing regime will be implemented.

Over this period, the number of available EEUs will be restricted and progressively reduced.

The system is intended to produce a change in behaviour of businesses  towards activities which produce lower emissions; saving the business some or all of the cost of acquiring and surrendering EEUs.

Large emitters have been planning for the introduction of the carbon tax for some time now.  The question is: how does the carbon tax affect all of the other businesses in Australia?

The effect of carbon tax on your business

The impact of the carbon tax on other businesses will be principally cost related.  It is expected that the cost of certain inputs such as gas and electricity will increase as a result of the carbon tax. The effect that the carbon tax may have on other inputs is still unclear and may not be known for some time.

Businesses will need to identify:

  • Which inputs will see a cost increase
  • The amount by which these costs are expected to increase
  • Whether prices are able to be adjusted to take into account the changes in cost

Increased costs we can anticipate

It’s clear what the main industries that will be directly affected by the carbon tax are: electricity generation, gas, mining, steel manufacturing, some heavy transport, waste and some energy intensive manufacturing operations.

These industries will be required to purchase EEUs and pass cost increases onto their customers.

The cost of electricity will be a key focus for all businesses. Electricity generation contributes over one third of Australia’s greenhouse gas emissions.  It’s the main industry affected by the carbon tax and we have already started to see the announcement of price adjustments.

Understanding your business’ electricity usage will be important in assessing the cost impact of the carbon tax on your business.

Costs we cannot anticipate

Unfortunately, even though commencement of the carbon tax is imminent, its real impact on costs for business is not precisely understood.

For many inputs the cost impact may take time to flow through the system. For example, longer terms supply contracts which lock in prices at agreed levels may have a substantial affect for years to come.

How to prepare for the carbon tax  and keep costs at a minimum

  • Analyse and understand the relationship between your costs and your prices
  • Monitor and scrutinise increases in your costs attributed to the carbon tax
  • Look at your usage of inputs affected by the carbon tax – in very simple terms: can you be more efficient with your energy usage and minimise your exposure to price increases by consuming less?
  • Prepare to negotiate longer term supply contracts with key suppliers which incorporate a discounted price.

What should you do

As a business you need to understand how changes in the price of your inputs will

affect your margins (gross and net) and from this, what flexibility you have to adjust your prices.

When the Goods and Services Tax (GST) was introduced, businesses went through a similar process of determining how changes in the tax regime would affect the cost of the inputs into their business and the way they set their prices.  Businesses need to do a similar process now – just focused on the carbon tax impact.

Just like when GST was introduced, the ACCC will be monitoring price increases attributed to the carbon tax – so if you do increases your prices you will need to be able to demonstrate why.

For some businesses simply notifying customers of an adjustment in price may be a sufficient strategy.  In most circumstances, however, the market will resist price increases.

For the majority of businesses, there will be a competitive advantage in minimising your price increases.

The carbon tax, at its core, works on the principal that prices affect consumer behaviour and businesses will make decisions (i.e. chose to be more energy efficient) so as to gain a competitive pricing advantage in the market.  Your response to the carbon tax needs to focus on this core principle.

If you need assistance in understanding how this change will affect costs and pricing for your business, please contact your local William Buck advisor.