1 A Price on Carbon: The Clean Energy A Guide for Queensland Business. in partnership with Power Choice Legislation.
2 CCIQ is steadfastly opposed to the introduction of a carbon price. However we are mindful that whilst the Federal Government continues to steamroll forward with this poorly designed and executed plan, that Queensland businesses should be supported with the information and tools to help them mitigate any risks and take advantage of any opportunities that may arise. Commencement of the carbon pricing scheme is fast approaching (1 July 2012) and those organisations prepared for this legislation will be best placed to deal with its impacts. To help businesses understand the operation of the clean energy legislation and carbon pricing scheme, the Chamber of Commerce and Industry Queensland (CCIQ) has developed this guide for business in partnership with Power Choice. Providing energy solutions you can trust. Power Choice, Queensland s largest energy consultant and broker is dedicated to helping business owners save time and money when it comes to electricity. As a quality certified and ethically led company our mission is to assist Queensland businesses with their energy needs; helping business owners navigate their way through the energy marketplace and lower their electricity costs. Our services include: Electricity contracts assessing suitability for large market contracts and providing forward contracting services. Energy monitoring solutions providing tailored energy monitoring solutions to suit your business needs. Personalised account management providing you with bill validation, contract transfer support, metering assistance and more. Why choose Power Choice? Obligation free tendering service, working with Australia s largest energy retailers, securing today s competitive electricity prices* for tomorrow. Onsite education and consultation. Full detailed analysis performed by qualified electrical engineers to ascertain electricity contract options and potential benefits for your business. ISO 9001:2008 Quality certified. Power Choice has helped hundreds of Queensland businesses save over $35 million^ on their energy costs, to find out how we can help your business call or visit * Power-Choice does not compare all energy providers, and cannot guarantee the lowest price. ^ Since 2009
3 How will the carbon price operate: Basics about the Clean Energy Legislation From 1 July 2012, a price on carbon will apply to certain greenhouse gas (GHG) emissions in Australia. On 1 July 2012 A liable entity is one that emits more than 25,000 tonnes of CO2-e per year. The Scheme will commence with a fixed price for the first three years (Fixed Price Period). The permit price will start at $23 and rise 2.5% each year ($24.15 in 2013; $25.40 in 2014). Liable entities will need to work out their emissions for each financial year and then surrender one permit for every tonne of emissions. Permits can be purchased from the government, sourced from the Carbon Farming Initiative (subject to a 5% limit), or be those allocated under the government assistance and transition schemes. On 1 July 2015 The scheme will move automatically into a fully flexible price under an emissions trading scheme, with the price determined by the market (Flexible Price Period), and with a minimum price of $15/tonne Liable entities, remain unchanged and will need to continue surrendering units equivalent to their emissions Units may be obtained from a variety of sources including government auctions, the Carbon Farming Initiative, eligible international units, free allocations and trading on the carbon market. Which industries and businesses will the CEL cover? The scheme covers four of the six major GHGs covered under the international Kyoto Protocol agreement carbon dioxide, methane, nitrous oxide and perfluorocarbons from aluminium production. The scheme will have broad coverage of emissions sources from its commencement encompassing: stationary energy; industrial processes, fugitive emissions (other than from decommissioned coal mines); and emissions from non-legacy waste. Direct emissions from agriculture (e.g. from livestock, manure and crop residue) are exempted from the scheme however this sector may still be impacted by indirect cost increases. The Australian Government has estimated that the carbon price will cover around 500 businesses in Australia. Most of these companies directly emit greenhouse gases, such as power stations, mines, gas suppliers, heavy industry and those involved in industrial processing, and landfill operators, and most already have reporting obligations under the NGER Act. Of the liable businesses, it is estimated that around 100 (approximately 33%) operate in Queensland. Examples of industries and companies expected to be significantly impacted: Energy generation Stanwell Corporation, Energex Mining Rio Tinto, BHP Billiton Ltd Industrial Processes OneSteel Ltd, Qld Alumina Ltd, Bluescope Steel Ltd Manufacturing iron manufacture, paper production, food manufacturers Orica Ltd, Wesfarmers Ltd, Paper Australia P/L. Waste landfill operators and waste processing and recycling facilities Transpacific Industries Group Ltd, Johns Swire and Sons P/L, Salvage P/L Business transport use of liquid fuels (Rail and Shipping) and non-transport (off-road) use of liquid fuels (through an increase to fuel excise or reduction in fuel tax credits) - Asciano Ltd, Gladstone Ports Corporation Ltd, QR National, Veolia Transport Australasia P/L Aviation (through an increase to aviation fuel excise) Qantas Airways, Virgin Blue Holdings Ltd Construction (indirectly through material and resource costs such as steel, cement, bricks, glass, and waste disposal) Boral Ltd, Lend Lease Corporation Ltd, James Hardie Austgroup P/L Industrial chemicals and fertilisers including those products which use chemicals as a base for other products including plastics and packaging materials, resins, paint and solvents, and cleaning products While agriculture is exempt in terms of direct emissions, many agriculture, growers and forestry businesses have high energy intensity due to irrigation and processing requirements and may therefore are exposed to significant cost increases How might the CEL affect you and your business? Businesses not required to pay the tax directly will be impacted mainly through price increases passed through their supply chain. Areas where prices may increase include electricity and other energy sources (including liquid and gaseous fuels) and manufactured products including steel, plastics, paper and packaging materials, chemically based products, building materials and manufactured food products. Economic modelling predicts that the average impact of the Government s carbon price will be an increase of 0.7% to inflation. In real terms, this would equate to an additional operating cost of approximately $70 per month for a business with monthly turnover of $10,000.
4 What issues does a carbon price raise for business? The impact of the introduction of a carbon price will vary from business to business. The following table presents a list of key issues all Queensland businesses should consider prior to the commencement of the Carbon Pricing Scheme in July Business Issue Business Considerations Awareness of the details of the climate change plan Liable entities have the most pressing need to understand all the aspects of the scheme so that they can determine what the potential impact may be. However as the carbon price will increase the costs of inputs, all businesses and not-for-profit organisations should consider becoming familiar with how the price will affect them. This will also help them identify price rises not consistent with the carbon pricing scheme. Modelling and forecasting the impact of a carbon price. Not every product or service will increase in price. It will only result in price increases for the goods which either produce greenhouse gases or consume electricity Liable entities have some short term certainty around the carbon price and they should therefore begin using that price to model the potential impacts on their pricing, existing assets such as plant and equipment and investment decisions. Other businesses and organisations should attempt to quantify the impact of a carbon price on their business. This may present some challenges at present as there is little information on potential price rises on business inputs. The impact of a carbon price on business will vary depending on a number of factors, including: The proportion electricity or gas makes up of a business s overheads The level of processing involved in producing a product and how much of that is done in Australia The level of transportation required to get the product to market Other significant business overheads including from waste, office supplies, manufactured food items, metals and steel, construction materials, packaging materials, and manufactured chemicals and chemically-based products. In modelling the potential impacts on sales forecasts, businesses should consider what changes to consumer behaviour the carbon price may encourage. For example, consumers may shift towards low-emissions products because such products become more cost-competitive. Businesses should also consider the impact a carbon price will have on the return that existing assets generate, such as high electricity use assets, and consider how to mitigate such impacts. These issues in particular should be discussed with your accountant and/or financial advisor. With risks there are opportunities. Businesses may find opportunities in consumers possibly shifting their preferences to lower emission products and businesses seeking technology that lowers their emissions. Pricing All businesses and organisations should factor in increasing input costs brought about by the carbon price into the variety of issues they consider when setting pricing on their products or services, such as competition and profitability. Such pricing decisions should be incorporated into current and new contracts. Those businesses and organisations who find they cannot pass on the full price impact of a carbon price will need to consider whether to accept the fall in profitability or if it is possible to reduce overheads to maintain profitability. This will also require some analysis of the level of competition in your region and industry sector In making pricing decisions all businesses will need to review long-term contracts to see if there is room within the contract to increase prices due to the carbon price. Government monitoring of prices Businesses that notify their customers about impending price increases should be very careful when attributing these to the carbon tax. The Australian Competition and Consumer Commission (ACCC) has been given the power and resources to monitor prices to ensure there is no price gouging in responses to the carbon price. This hopefully will act to restrict any business increasing prices above the actual impact of the carbon price whilst attributing it solely to the carbon price. If the ACCC discovers price gouging, the business could face significant penalties. It is therefore important that pricing decisions due to the carbon price are well documented and can stand up to external scrutiny. This again is an area where, if unsure, businesses should discuss pricing decisions with their accountant and/or financial advisor. If any business or consumer has questions about the price increases passed onto them by their suppliers then they should contact CCIQ or the ACCC to raise their concerns.
5 Investment decisions One of the aims of the government s carbon plan (the carbon price plus direct incentives) is to encourage business to invest in low emissions technology. Businesses making investment decisions, including location of such investment (Australia or elsewhere) should add the impact of a carbon price into their investment appraisal processes, remembering that while the carbon price presents challenges, it may well present many new business opportunities. For small business, the $6,500 instant asset write-off for assets purchased from 1 July 2012 may influence the timing of their investment decisions (small businesses must first work out if they qualify for this measure). For these businesses, this may be an opportune time to consider upgrades to more energy efficiency plant and equipment or production processes which could then offset any price increases associated with the carbon price and maintain the competitiveness of your business. Supply chain management Businesses may like to ask key suppliers what potential impact a carbon price may have on their prices and what they plan to do to mitigate such price impacts. Conversely, you may get the same requests from your key customers. One possible outcome of a carbon price is that over time, the emissions intensity of a business input (reflected in the cost of the input) will be one of the many issues businesses consider in choosing their suppliers. This therefore presents an opportunity to capture new customers, especially for those early movers who position and market themselves having being lowemissions/low carbon products and services. Transport Fuels (Off-road business use and heavy on-road use of Petrol, Diesel and other liquid fuels, LPG, LNG and CNG) Aviation, marine and rail fuels The actual fuel price will not change at the bowser or from you supplier. An equivalent carbon price will be applied through separate legislation to some business transport emissions, nontransport use of liquid and gaseous fuels, and synthetic GHGs. Although currently not yet included in the scheme, the government intends to include heavy on-road transport in the scheme from 1 July Fuel tax credits will not be reduced for the agriculture, forestry and fishery industries. Those businesses who currently claim fuel tax credits will be subject to reduced rates of credit return. What this means is that businesses should continue to submit their usual claims for fuel tax, but should note that the credit amount used in the calculations will be progressively reduced over the next three years. Businesses should discuss these changes with their accountants or contact the ATO. Financial reporting Small businesses will not be required to calculate or report GHGs, energy or carbon price data. The introduction of a carbon price could have a number of financial reporting consequences, for example: Asset impairment on some assets (which in turn could impact debt covenants); Whether the carbon price is a tax for the purpose of accounting standards (not yet clarified by the Australian government or ATO) Whether the government s announcement gives rise to an adjusting event as the announcement occurred after the end of the reporting period and before the authorisation of financial statements (for listed businesses) This again is an area where, if unsure, businesses should discuss pricing decisions with their accountant and/or financial advisor. Other general business issues Businesses and organisations (with or without a direct liability) will need to consider who will manage the impact of a carbon price on their business. Other considerations include: What may be the training needs of staff to help them manage aspects of the carbon price and management of emissions Who in the business will be responsible for preparing the business for the carbon price (and would outside assistance need to be sought) Businesses should review the current contracts for cost-pass through provisions and ensure new contracts are negotiated to take into account the impacts of the carbon price Where cost-pass through in prices is warranted, what business documents, resources, websites and price schedules need to be updated. Queensland businesses should take the opportunity to review their energy use and investigate opportunities for potential savings. Undertaking a formal energy audit is one way to identify how energy is being used in the business and the most promising areas to make savings
6 How much will energy prices increase? Energy prices are an important consideration, particularly as this is the primary avenue through which the carbon price will affect all businesses. For some businesses increases to the cost of energy, including electricity and gas, may be the only area where the impact of the carbon price is felt. Most sources indicate that the cost impact of the $23/tonne carbon price on electricity generation and supply will be approximately $20/ MWh in Queensland (or approximately $0.02/kWh). The actual cost passed through to users will depend on the emissions profile of the electricity supply, with those suppliers that are heavily reliant on coal likely to have higher costs than those more reliant on gas and/or renewables (Queensland s current electricity generation is fuelled by 88% black coal, 10% gas-fired, and only 2% renewables). Any carbon pricing impacts will be on top of other costs including coal resource prices and changes in electricity network and operating costs. The Queensland Competition Authority has recently made their final determination on regulated electricity prices (notified prices). Business customers, as a result of the carbon tax will experience a price increase of between 10 and 20%. The carbon price will also apply to gas, and this will usually be collected by your gas supplier. This means that the gas supplier will simply pass on the cost of the carbon tax to the gas consumer. The carbon tax of $23 per tonne of carbon emissions translates to around $1.38 / gigajoule of gas. However large users of natural gas will be able to opt-into the scheme and assume liability for their own emissions for the gas they use. Supply contracts Some existing retail electricity contracts do not factor in a cost of carbon, however some contracts may contain clauses that allow for an adjustment to be made in the event of a carbon price being introduced. Carbon adjustment clauses will typically refer to the National Electricity Market average carbon intensity and a carbon reference price to be applied to consumption. The carbon adjustment is likely to be implemented by retailers by either: Increasing the contract energy rates; or Introducing a new line item into the bill Estimating the cost Businesses that want to work out just how much the carbon tax will impact on their prices should do the following: Review the contribution of electricity and gas to your overall production costs; Check your supply contracts to see how the carbon tax will be treated; Estimate the impact of the carbon tax on your energy costs using a carbon tax calculator; If possible, verify your estimates with your energy supplier; Shop around. Ask other electricity retailer companies how their prices will be affected by the carbon tax, and query any excessive claims. You may also like to consider engaging the help of an energy broker to help you find a more competitive supplier; and Calculate how much prices will need to rise to cover these additional costs *. What assistance will be provided to industry? The Government intends to allocate around 40% of the carbon price revenue as industry assistance to businesses that are highly-exposed to international competition and will therefore be adversely affected by a carbon price. Most assistance will be delivered in the form of free permit through the Jobs and Competitiveness Plan. Emissions-intensive and large business assistance (directly impacted) Assistance will also be delivered by way of grants to help significantly exposed industries become less emission- intensive. What other businesses should note is that these assistance packages are designed to balance the immediate price spikes passed through the supply chain from these large business and/or energy intensive industries. Clean Technology Innovation Program - $800m through grants (minimum of $25,000) to energy-intensive manufacturers to support investments in energy-efficient equipment and low-emissions technologies. All businesses in the food processing, metal forging and foundry industries will be eligible for grants of more than $25,000 to encourage investment in energy-efficient equipment and low emissions technologies, processes and products. $200 million to support business investment in R&D in renewable energy, low-pollution technology and energy efficiency. The Steel Transformation Plan - $300 million to support industry to improve environmental outcomes and will be provided in addition to support provided under the Jobs and Competitiveness Plan (free permits). The Coal Sector Jobs Package will provide $1.3billion over six years to the most emission-intensive coal mines to support industry adjustment.
7 Small Business Assistance (indirectly impacted) For most small businesses, a carbon price will hopefully only result in a small increase in their operating costs. The Federal Government advises that where possible, businesses should pass on such price increases to their customers, just as they would with any other price increases.* The carbon price may also influence investment decisions, for example, making a gas oven more competitive than an electric oven for a bakery. The following programs have been targeted to assist small and medium businesses: A $40m program spread over four years will be implemented to deliver information to business and community organisations on the implications of a carbon price and steps to manage the impacts. The instant asset write-off threshold will increase from $5,000 to $6,500 from 1 July 2012 for small businesses with an aggregate turnover of less than $2m a year. The Henry Tax Review recommended the threshold be $10,000 so this is a step in the right direction. As most small businesses are unincorporated (and hence pay tax under the personal income tax system), many will benefit from the cuts to income tax. * CCIQ acknowledges that many businesses will not be able to pass on increased costs in the current economy influenced by high competition and price-sensitive consumers. CCIQ also notes that many businesses will not be eligible for any form of assistance currently announced. CCIQ is working with all levels of government to secure additional assistance for small and medium business. These are the key arguments upon which our opposition to the carbon pricing plan is based. How should you prepare for the Carbon Price? As noted above, your business may still be affected by a carbon price due to increased costs pass through, in particular, in relation to the cost of electricity, certain non-transport fuels, waste disposal and manufactured goods (where they are manufactured or value-added in Australia). This is particularly significant for industries such as agriculture, tourism, retail and business services, which have not received transitional assistance from the government, but which will nonetheless be significantly affected by the Scheme. The below checklist should help businesses be prepared for the commencement of a carbon price. Business checklist: Be prepared for the Carbon Price Businesses should ask the following 10 important questions when considering how the carbon price will affected their business: 1. Are emissions from my business covered? 2. Do facilities operated by my business emit direct emissions that exceed the 25,000 tco2-e threshold? If not currently above the threshold, could future changes such as increased production/output/business growth or reduced carbon thresholds place your business in the direct liability category (Questions 1 & 2 should not apply to over 95% of Queensland businesses)? 3. Do any of my facilities use large amounts of electricity, natural gas or other fuels which could increase my operating costs? 4. If I am purchasing goods or services, are any of my suppliers directly liable for the carbon price or in the significantly affected list of entities? 5. Have I reviewed my existing supplier contracts to see if my suppliers can pass their carbon costs onto me? 6. As a supplier of goods and services can I pass my increased costs of compliance on in the cost of the goods I produce under my existing supply contracts? Do I need to update any of my contracts or pricing lists to allow for carbon price pass-through to my customers? 7. Can I take steps to reduce emissions or reduce energy costs at my facilities? 8. Have I contacted my existing suppliers to discuss expected price increases and/or to negotiate new supply contracts to minimise risk and uncertainty of future price rises? 9. Have I considered new suppliers or reviewed the market to see if I can lower costs and get better supply terms. Have I reviewed the efficiency of my business, can I improve this in any way to capitalise on opportunities or to market 10. myself as a low carbon tax impacted business?
8 Please contact CCIQ directly, where the Policy and Advocacy Team can answer other questions you have about the carbon price. Telephone: Further Information Carbon Tax Fact Sheets This is a Federal Government produced set of fact sheets about various aspects of the proposed carbon tax Carbon Tax Calculators These can be used to estimate the increase in energy costs associated with the carbon tax: Power Choice: Institute of Public Affairs: Carbon Neutral: Clean Technology Investment Program Applications are now open for energy efficiency projects under this competitive grants scheme: Information on Electricity Retailers Compare electricity prices and standard contract offers from Queensland retailers at Energy/Electricity Brokers You may like to consider the use of an energy broker who can review your electricity usage, recommend strategies for reducing costs and help renegotiate market contracts with your retailers. Below are some useful contacts: