In brief - Advantages to businesses of new carbon regime not assured
The floating carbon price to be introduced in July 2014 may benefit businesses through reduced costs for electricity, refrigerants and fuel. However, these benefits could be offset by a volatile EU ETS carbon price and by possible government responses to reduced revenue.
Carbon price to be linked to EU Emissions Trading Scheme price
On 16 July 2013, Prime Minister Kevin Rudd announced that the government had decided to "terminate" the carbon tax. Despite the definitive language, the policy details make it clear that the price on carbon won’t get dropped altogether.
True, on 1 July 2014, the price of carbon permits will no longer be set by the Australian government at $25.40 a tonne. However, on that date, it will still "float" and be linked to the EU Emissions Trading Scheme (ETS) price, which the government expects to be about $6 a tonne.
So is this all good news for your business? Yes and no.
Benefits to business of the carbon tax changes
Reduced energy costs
A lower carbon price should mean less energy costs for business, particularly for electricity. The government’s modelling suggests that a large manufacturing business with 100 times the energy use of a typical household (about 625MW) could see the carbon component of electricity costs fall from $15,000 to $4,000 per year.
A small retail business in NSW using around 20 megawatt-hours (MWh) is predicted to save about $400 a year. If this modelling is correct, then businesses should have less input costs. They should also be on a level paying field with the other 31 countries that are linked to the EU ETS (rather than having to pay a higher tax), which should benefit competitiveness.
Reduced refrigerant costs
Many businesses use synthetic greenhouse gasses (SGGs) as refrigerants. A lower carbon price will mean a lower cost for these gases. For example, the levy cost to re-gas refrigerant systems is expected to drop by 75%. That represents a difference of about $200 for a takeaway store refrigerator, but the saving will be much higher for larger commercial systems.
Reduced fuel costs
Fuel costs (both diesel and petrol) are expected to be about 5.5c per litre less than under a fixed price regime. This could be significant for many companies that use heavy commercial vehicles. Households and light commercial vehicles, along with fuel used in agriculture, fisheries and forestry activities remain excluded from the carbon price on fuel.
Economic stimulus may boost household spending
The average household is predicted to save $380 in the cost of living. It is possible that this could increase disposable income and boost retail and associated sectors.
Dangers to business of the carbon tax changes
What if the $6 per tonne EU ETS carbon price is wrong?
Expectations of a $6 per tonne EU ETS carbon price may well be wrong. The current $6 price is due to an overallocation of permits in Europe and there are concerns that Europe will "soak up" this overallocation via structural reforms. These concerns are real.
The European Commission has already begun the process by postponing the auctioning of 900 million allowances from the years 2013-2015 and running formal stakeholder consultations since December 2012 on specific additional structural measures which would have the effect of driving the price up.
Bear in mind that only a couple of years ago, Treasury was predicting a global carbon price of between $30-$60 a tonne in 2015-16, potentially rising to over $250 a tonne in 2050. The price has previously hit a high of €32 a tonne. If the $6 per tonne estimate is too low, then so too are the costs to business for energy, fuel and SGGs.
Impact of volatile energy prices on businesses
A floating carbon price means a fluctuating carbon price and more volatile energy prices. The EU ETS carbon price has been known to drop by 50% in a week. This can lead to variability in the cost of products and services supplied to your business, as well as the costs of doing business.
There are also concerns that this will result in any instability and structural flaws in the dominant European system affecting the Australian system and Australian businesses. (Please see our earlier article Three must-know developments in carbon, energy and mining.) To avoid exposure, companies will need to devise strategies for budgeting for or otherwise managing the more uncertain costs of business.
Multiple reasons for rise in electricity prices
It is important to bear in mind that while the cost of electricity has risen by about 70% over the last four years, only 9% of that cost is attributable to the carbon price.
The majority of the increase has been due to infrastructure maintenance costs and wholesale generation/trading costs. That means that businesses expecting electricity prices to drop as a result of the announcement could find that any savings are offset by price increases due to other factors.
Implications of reduced government revenue
A lower carbon price will result in the Australian government raising less revenue, which could end up being offset by increased taxes or cuts in other areas. It wouldn’t be the first time.
What can you do in view of the new carbon regime?
Reducing risks to your business
Given the increased volatility, it is even more imperative to consider how your contractual arrangements will be affected and whether you can reduce your risks by passing on carbon costs or resisting carbon mark ups. (For more information please see our earlier articles How does the carbon tax affect your contracts? and Is your business ready for the carbon tax?)
When passing on carbon costs, the volatility will mean that businesses will need to be especially careful in estimating the permitted pass through. Failing to do so will potentially result in penalties of up to $1.1 million from the ACCC. To avoid running into trouble, read the Carbon price claims - Guide for business.
Apply for grants for environmentally friendly initiatives
Businesses can still obtain funding, finance, tax concessions and other benefits to help invest in low pollution technologies or to be more environmentally friendly. Interestingly, the return of unallocated funding ($143 million from the Carbon Farming Futures program and $162 million from the Clean Technology Program) suggests that there are opportunities that are not being taken up by business.
Take advantage of assistance to specific industry sectors
Emissions-intensive trade-exposed industries, including aluminium, steel, glass, zinc, pulp/paper, plastics and chemical manufacturing can breathe a sigh of relief. Government assistance to these sectors is proposed to continue unchanged.
Make sure your business is ready for the new deadline
The shift to an EU ETS was always planned to occur. Now it will just occur on 1 July 2014, 12 months earlier than expected. The 20% of businesses which believed that they are prepared for the new carbon regime will need to accelerate their plans to match the new deadline. The remainder need to catch up even more urgently.
Be prepared for more change in the future
The latest surveys from the Climate Institute released in July 2013 suggest that public perception is shifting in favour of carbon pricing and increased federal regulation. The European Commission is continuing to strategise increases to the EU ETS. Both domestically and internationally, one thing is certain – there are more changes to come.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2019.