The carbon tax checklist

From July 1, this Sunday, the carbon tax becomes part of our economy. At least for as long as the Gillard Labor government remains in power.

Who knows exactly what the impact of the tax will be on pricing will be. The GST, set clearly at 10% of nearly everything, was quite complex to assess, as the infamous question about the price of a birthday cake to the then leader of the coalition, John Hewson, demonstrated so many years ago.

In the case of the carbon tax, it is a much harder sum. One complexity is that bits of the legislation is still changing, and the whole scheme is designed to unfold over several years, meaning that companies must keep abreast of the rules as they change. For example, the price of permits starts at $23 and increased 2.5% a year for three years. After that, it is governed by a floor and a ceiling for three years, and then goes to full trading.

The issues are different according to whether a company is directly affected, or indirectly affected. However, all companies need to determine a person who is responsible for managing the carbon tax risk, and the associated tasks in implementing it.

Independent experts have modelled two useful numbers: one is an overall expected pricing impact of 1-2%  from accounting firm, Pitcher Partners, and the other is an impact on electricity prices of an 8.9% increase from an independent pricing authority.

The companies directly affected

Only 300 companies will have to comply with the carbon tax initially, and the key is quantifying the direct and indirect liability of the carbon tax, says expert Bahador Tari, the Victoria state manager of Rare Consulting.

Not all of those 300 companies are well prepared, Tari tells LeadingCompany. “A lot of companies, such as medium sized mining, energy and manufacturing companies, have been caught off guard,” he says. “They haven’t thought through the supply chain impacts.”

Logistics company, Linfox, Australia’s eight largest private company, is readying itself for the impact of the tax in several ways, group manager for sustainability, David McInnes says.

Its energy costs are 94% fuel and 6% electricity. There is no immediate impact on fuel – it is not affected by the carbon tax for two years, until July 1, 2014.

But Linfox is still working hard to reduce its energy intensity, which it measures as tonnes of emissions per 1000 kilometres travelled by its fleet. This effort began five years ago. So far, Linfox has reduced its energy intensity by 36% . Its goal is 50% by 2015.

In terms of the impact on electricity prices, McInnes has budgeted on the official estimate of 8.9%. “That has been identified by the independent pricing authority in New South Wales,” McInnes says.

Tari suggests constantly reviewing the implementation of the tax to keep up with schedules and changes to legislation. On-road trucks for example, are not affected by the fuel tax credit system, but off-road trucks are affected, such as those crawling all over the mining sites.

Financial divisions need to ensure their systems can manage carbon credits, and decide whether to outsource buying or hedging of credits on the primary or secondary markets.

All other companies

Companies that do not need to comply face different issues, says Tari.

In particular, companies need to assess the impact, if any, on their supply chain, to decide whether any cost increases can be passed on to customers, and to determine their communications strategies about pricing if they decide to put prices up.

McInnes is closely questioning any suppliers that are increasing prices. “Rail and sea freight are affected from July 1, and we make some use of rail and sea,” he says. “The increase in those areas is between one and two per cent.”

This is the kind of price rise to expect according to the accounting firm, Pitcher Partners, which has undertaken to model the impact of the carbon tax across the economy.

Tari suggests that companies do their own calculations of what they expect the impact on their suppliers to be before they start negotiations. “Look at your suppliers and their carbon intensity and do some calculations about what it might look like,” he says.

Bring in the consultants – there are many – to help, if the task is not getting done, or is proving too difficult.

Linfox’s McInnes expects the picture to become clearer after the first quarter of the financial year, when he will review the decisions he has made, and adjust any prices or contracts in the light of the realities.