Business briefing series20 issues on the business implicationsof a carbon cost
Sustainability and Climate Change                            The Institute of Chartered Accountants inrepresents an area o...
Business briefings series20 issues on the business                                    The Clean Energy Act 2011 passed by ...
Business briefing series: 20 issues on the business implications of a carbon cost4
ContentsA new business landscape  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...
A new business landscape    The transition to a low-carbon economy has begun. The threat of climate change is now widely  ...
National Greenhouse and Energy Reporting                                             What can we do?Act (2007)            ...
Governance    An effective governance framework is central to a              Role of IT    company’s capacity to operate i...
Quantifying the impacts  The transition to a low-carbon economy presents an                                  •	 Appropriat...
Quantifying the impacts                                     (continued)     1. Compliance obligation                      ...
3. Cost pass through and point of obligation                                        There is a real opportunity for organi...
Quantifying the impacts                                            (continued)     Domestically Generated Units           ...
Technical Accounting Guidance                                                                                     7. Reduc...
Strategy risks and opportunities     Organisations will need to reassess their existing strategies through a carbon lens. ...
8. New business ventures/products                                                   10. Investors  	 How many products or ...
Strategy risks and opportunities                                (continued)     11. Government                            ...
Getting the data rightComplete, accurate and timely data is the cornerstone of                            Reportingeffecti...
Getting the data right                           (continued)     17. Systems, processes and controls                      ...
Communication19. Internal communication                                                          20. Communicating with st...
Resources and further information     Links:     ACCC, 2011,                       Carbon price claims: Guide for business...
Business briefings: 20 issues on the business implications of carbon
Business briefings: 20 issues on the business implications of carbon
Business briefings: 20 issues on the business implications of carbon
Business briefings: 20 issues on the business implications of carbon
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Business briefings: 20 issues on the business implications of carbon

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20 issues on the business implications of carbon costs - provides members with the key facts, so that they can then assess the impact on their business and incorporate the significant issues into their future planning. This will ensure their business remains competitive in a low carbon economy.

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Business briefings: 20 issues on the business implications of carbon

  1. 1. Business briefing series20 issues on the business implicationsof a carbon cost
  2. 2. Sustainability and Climate Change The Institute of Chartered Accountants inrepresents an area of significant growth and Australia (the Institute) is the professionalimportance by business and government. body representing Chartered Accountants in Australia. Our reach extends to morePwC has been working with policy than 67,000 of today’s and tomorrow’smakers and companies, helping to analyse business leaders, representing more thanissues and develop practical solutions 55,000 Chartered Accountants and 12,000for our clients. of Australia’s best accounting graduatesWith a global network of specialists and currently enrolled in our world-class Charteredan expert team in Australia, PwC is able Accountants postgraduate program.to provide a broad range of advisory, Our members work in diverse roles acrossassurance, tax and legal as well as specialist commerce and industry, academia, governmentservices that collectively guide clients and public practice throughout Australia andthrough the complexities of responding to in 109 countries around the world.the Australian carbon price mechanism.For further information, visit: We aim to lead the profession by deliveringwww.pwc.com.au/carbonprice visionary leadership projects, setting the benchmark for the highest ethical, professionalPwC firms provide industry focused and educational standards, and enhancingassurance, tax and advisory services and promoting the Chartered Accountantsto enhance value for their clients. More brand. We also represent the interests ofthan 161,000 people in 154 countries members to government, industry, academiain firms across the PwC network share and the general public by engaging ourtheir thinking, experience and solutions membership and local and international bodiesto develop fresh perspectives and on public policy, government legislation andpractical advice. regulatory issues.See pwc.com for more information. The Institute can leverage advantages for its© 2012 PwC. All rights reserved. In this members as a founding member of the Globaldocument, PwC is partnership formed in Accounting Alliance (GAA), an internationalAustralia, which is a member firm of PwC accounting coalition formed by the world’sInternational Limited, each member firm of premier accounting bodies. With a membershipwhich is a separate legal entity. of over 800,000, the GAA promotes quality professional services, shares information, and collaborates on international accounting issues. Established in 1928, the Institute is constituted by Royal Charter. For further information about the Institute, visit charteredaccountants.com.auDisclaimer:This discussion paper presents the opinions and comments of the author and not necessarily those ofthe Institute of Chartered Accountants in Australia (the Institute), PwC or its members. The contents arefor general information only. They are not intended as professional advice – for that you should consult aChartered Accountant or other suitably qualified professional. The Institute and PwC expressly disclaimsall liability for any loss or damage arising from reliance upon any information contained in this paper.All information is current as at April 2012Published May 2012Published by: The Institute of Chartered Accountants in AustraliaAddress: 33 Erskine Street, Sydney, New South Wales, 2000Business briefing series: 20 issues on the business implications of a carbon costSecond editionISBN: 978-1-921245-62-6 0112-85
  3. 3. Business briefings series20 issues on the business The Clean Energy Act 2011 passed by the Australian Parliament in November 2011, set out a path for Australia to transition to a low-carbon economy.implications of a carbon cost The introduction of a cost on carbon is set to affect businesses in many ways. This paper, originally published in March 2010, discussed what impact a proposed emissions trading scheme would have. Following the introduction of the carbon cost, effective 1 July 2012, businesses need to consider the practical implications, considering how the tax will be implemented. With this in mind 20 issues on the business implications of a carbon cost has been updated to help businesses practically apply the new carbon price mechanisms that are being put into place. The publication discusses a number of areas, painting the picture of a new business landscape, and covering: • Governance • Quantifying the impacts • Strategy, risks and opportunities • Getting the data right • Communication. This publication, co-produced with PwC, is part of the Institute’s Business Briefing Series, which is designed to provide guidance for business leaders and finance professionals across a range of areas. The rest of the series is available at charteredaccountants.com.au/businessbriefing. Craig Farrow FCA President The Institute of Chartered Accountants in AustraliaBusiness briefing series: 20 issues on the business implications of a carbon cost 3
  4. 4. Business briefing series: 20 issues on the business implications of a carbon cost4
  5. 5. ContentsA new business landscape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Quantifying the impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1. Compliance obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2. Supplier price increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3. Cost pass through and point of obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4. Government assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5. Carbon procurement and trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6. Management accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7. Reducing emissions and improving efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Strategy risks and opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 8. New business ventures/products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 9. Physical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 10. Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 11. Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 12. Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 13. Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 14. Industry/competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Getting the data right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 15. Identifying your reporting obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 16. Measurement and accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 17. Systems, processes and controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 18. Quality control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 19. Internal communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 20. Communicating with stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Resources and further information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 issues checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Contact details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Back coverBusiness briefing series: 20 issues on the business implications of a carbon cost 5
  6. 6. A new business landscape The transition to a low-carbon economy has begun. The threat of climate change is now widely acknowledged by governments and business. Strategies to manage the transition from a carbon intensive economy to a low-carbon economy are being developed and implemented. These changes, including market based mechanisms, are designed to provide price signals to incentivise new behaviours and encourage the adoption of low-carbon alternatives. On 8 November 2011 the Australian Parliament passed the Clean Energy Act 2011 and associated legislative instruments (to come into effect 1 July 2012), confirming the federal government’s intention to introduce a price on carbon. This bill forms a part of the government’s Clean Energy Future Plan (‘The Plan’) which sets out the path forward for Australia to transition to a low-carbon economy. The Plan Emissions from the agricultural sector as well as the combustion of biofuels and biomass are not covered. The Plan and the accompanying legislation establish a carbon price by way of a transition to an emissions The Plan also incorporates adjustments to certain Excise trading scheme with the aim of influencing behaviour and and Fuel Tax Credit arrangements to effectively pass on an encouraging the decarbonisation of the Australian economy. equivalent carbon price to non-road uses of transport fuels. Effective 1 July 2014, these adjustments are also expected The Plan is designed to ensure Australia meets its to apply to large on-road transport fuel users unconditional pollution reduction target of at least 5% below 2000 levels by 2020 and 80% by 2050. Meeting What are the implications for your business? this target will require abatement of at least 159 million tonnes of carbon dioxide equivalent (CO2-e) by 2020. The introduction of a carbon price will impact different business sectors in different ways. While some sectors The Plan will commence with an initial fixed price of will experience a direct cost increase by having to purchase $23 per tonne of CO2-e from 1 July 2012. This price will carbon units, others will see an increase in their cost base be adjusted in real terms by 2.5% per annum. From as permit liable entities such as electricity generators July 2015, the carbon price will transition to a fully flexible and gas retailers seek to pass on the increased cost to price under an emissions trading scheme, with the price their customers. determined by the market. Treasury analysis supporting the Plan suggests that During the flexible price period (from 1 July 2015) the upon its introduction, electricity and gas costs could be government will set a pollution ‘cap’ which will limit expected to increase by approximately 10%. Furthermore, the number of carbon units that are available, and can the introduction of the Plan is expected to result in an be adjusted over time to ensure that the government’s overall increase in inflation of approximately 0.7%. reduction targets are met. How you choose to manage this risk will dictate Liable entities how significantly your business will be impacted. The Plan has the potential to change the characteristics of Entities with facilities that have covered emissions greater your market and provide opportunities for future growth. than 25,000 tonnes CO2-e will be required to surrender carbon units. Businesses will also have the opportunity to improve efficiencies within their business. The identification and The Plan is expected to directly apply to approximately strategic development of low-carbon products and services 350 of Australia’s biggest emitters. will potentially create new markets thereby increasing Covered sectors include: shareholder value. • Stationary energy • Industrial processes • Emissions from landfills • Fugitive emissions. Business briefing series: 20 issues on the business implications of a carbon cost6
  7. 7. National Greenhouse and Energy Reporting What can we do?Act (2007) Understand the issues and modify your businessSince 2009, the National Greenhouse and Energy to incorporate the impacts of transitioning to a lowReporting (NGER) Act has required companies to report carbon economy.their greenhouse gas (GHG) emissions if they operate a Whether or not your organisation is directly liable,facility that emits over 25,000 tonnes of carbon dioxide it is important that the key risks and opportunitiesequivalent (tCO2-e) (or uses/produces 100 terra joules (TJ) of the Plan are identified and addressed.or if the consolidated organisation emits over 125,000 tCo2e(or 500 TJ). This report provides a framework and 20 key issues for chief financial officers (CFOs) to brief their respectiveThe NGER Act has enabled the government to collect boards with respect to the Plan.GHG emissions data (direct GHG emissions and energyusage/consumption and production) from large emitting The diagram below outlines the framework of key impactsand energy using/producing organisations. from the introduction of the Plan across an organisation. This report has been split into these key areas.The data will support the modelling used by the governmentto decide the cap for the carbon price mechanism.A fine of $220,000 or jail is possible for non-compliance.Reports under the NGER Act require sign-off by an Governanceorganisation’s chief executive officer. It is important tonote that for both liable and non-liable entities, the Strategy/risksNGER Act continues to place reporting obligations on Quantifying Getting the and the impact opportunities data rightorganisations emitting, producing and/or consumingcarbon over certain thresholds.Voluntary Carbon Credits and the Carbon CommunicationFarming Initiative (CFI)The Carbon Credits CFI Act 2011 establishes the legislativeframework for carbon offsets projects to create AustralianCarbon Credit Units (ACCUs) for compliance (Kyoto ACCUs)and voluntary (non-Kyoto ACCUs) carbon markets. Thegraph below illustrates where ACCU’s may be utilised: Eligible in: • Domestic compliance market (CPM) Issued with • International compliance markets compliance ACCUs (EUETS, NZETS) • Domestic voluntary market • International voluntary markets. CFI Project Eligible in: Issued with voluntary ACCUs • Domestic voluntary market (NCOS) • International voluntary markets.Source: Carbon Market Institute (2011), The Carbon Farming Initiative (CFI): An introduction to Participation, pg9.Business briefing series: 20 issues on the business implications of a carbon cost 7
  8. 8. Governance An effective governance framework is central to a Role of IT company’s capacity to operate in a changing world. The • Has the company considered the strategic role of IT board of directors and senior management must provide in compliance, risk management, understanding and effective leadership to ensure that the company’s strategy acting on climate change and carbon opportunities drives sustainable performance and mitigates risks related appropriately and providing relevant and reliable data to carbon exposures while evaluating and maximising to senior management and the board of directors? potential opportunities. The collection and reporting of carbon has historically Assurance and reporting been the premise of the operational and/or environmental • Does the company have a reporting obligation under officer. However, given that a business’ bottom line is the existing NGER Act? intrinsically linked with the carbon price, it is now • How does the company intend to report its GHG important that the internal management of carbon is and energy data, and will the data be integrated into closely scrutinised by CFOs and their respective finance either annual sustainability reports or the annual and business planning teams. financial report? In relation to carbon exposure, there are a number of • Has the company assessed the need for independent key questions that the board and senior management assurance over reported GHG and energy data? If so, is this assurance incorporated into the overall assurance should consider in reviewing their company’s corporate plan to maximise the value of the assurance received? governance frameworks. • Does the company have a plan in place to ensure that Framework and strategy it complies with Trade Practices Act requirements regarding carbon related price increases?1 • Is there an enterprise-wide, broad-based governance and risk management strategy with policies to address climate change and carbon risks? Role of the CFO • Are all of the company’s regulatory and legislative • Does the CFO understand the impact of the carbon obligations understood in relation to addressing price on the business? compliance risk and also to acting on opportunities • Does the CFO need to be involved in overseeing the presented by changes in legislation? integrity of emissions reporting, and the changes to the organisation’s financial risk profile associated with The board the management of carbon price risk? • Does the board of directors have the right knowledge and information available to it to make decisions related to climate risk and carbon exposures? • Does the board have an appropriate understanding of measures established by management to manage the financial risk exposure associated with carbon markets? Communication • How does the company explain its risk appetite and risk tolerance, both internally and to external stakeholders, in relation to climate change? • Have all material stakeholders been identified, and is there a formal strategic policy for both formal and informal interaction with them? 1. ACCC – Carbon price claims: Guide for business Business briefing series: 20 issues on the business implications of a carbon cost8
  9. 9. Quantifying the impacts The transition to a low-carbon economy presents an • Appropriately assessing the financial impacts opportunity for some organisations to unlock shareholder of a cost on carbon through a flexible, quality value. But what is that opportunity and how do you quantify assured model it accurately? ‘Business as usual’ is no longer an option • Understanding the accounting and tax implications and companies need to act to ensure the net impact of the of the relevant strategic opportunities, and ensure transition will create value for the organisation. The key that this is realistic in terms of future cash flows factors to consider in quantifying these impacts include: and other activities. • Ensuring that the data on which decisions are By understanding the factors mentioned above an made is complete, accurate and timely organisation has the opportunity to continue to drive • Understanding the implications of cost pass through increased shareholder value through the additional onto your business from suppliers and then through cost pressures provided from the Plan. The following to your customers pages identify the key impacts the Plan has on any • Understanding and maximising the government business and the key questions that CFOs should be assistance available for organisations transitioning asking teams within their business to ensure that the to the low-carbon economy organisation is both prepared to deal with the additional • Developing strategies for minimising the risks and cost and administration, as well as to proactively identify maximising the returns of carbon trading opportunities presented by the Plan. • Understanding the opportunities for internal abatement by the reduction of GHG emissions through internal investment Carbon opportunities and costs Value creating New ventures/revenue streams Abatement/reduction of permit liabilityShareholder value Reducing consumption Time Direct cost of permits Increasing cost of inputs Value destroying Competitive advantage lost/impairment Source: PricewaterhouseCoopers Business briefing series: 20 issues on the business implications of a carbon cost 9
  10. 10. Quantifying the impacts (continued) 1. Compliance obligation 2. Supplier price increases Are we directly liable under the Plan? What is the impact of the Plan on our key suppliers? Have we included the resourcing/legal compliance Have carbon clauses been added to our existing obligations within budget? procurement contracts? Is there adequate documentation prepared to Have we incorporated direct and indirect carbon cost support the position taken? implications into our mergers and acquisitions, capital expenditure and budgeting/forecasting processes? A person or organisation may be liable as: • A direct emitter for GHG emissions directly emitted Exposure is largely dependent on the legal construction of by a facility contracts. Such exposure may also result in an adjustment to permit liability, depending on the mechanism by which • A natural gas supplier for GHG emissions embodied in natural gas supplied to another person pass through is affected. Exposures can be due to: • A person that opts-in under the opt-in provisions • Increased supply cost of the Plan. • Cost reimbursement • Contractual transfer of responsibility for the supply Liability for greenhouse gases emitted from the operation of eligible emissions units of a facility is triggered where: • Indemnity against costs • The person has operational control of that facility • The integration of carbon pricing consideration into • Facility produces covered emissions credit assessments • The amount of those covered emissions exceeds a • Reporting obligations threshold or the facility is a large gas consuming facility. • Shortfall penalties. The operators of facilities that emit 25,000 tonnes or more The materiality of such exposure should not be of ‘covered’ CO2-e greenhouse gases in an eligible financial underestimated. Instead it should be calculated based on year will be liable under The Plan and will be required to discussions with suppliers so that realistic expectations of acquire permits to account for their emissions. However, potential cost increases can be factored into budgets and this obligation can be transferred between entities through other areas. the use of obligation transfer number (OTN) certificates, or liability transfer certificates (LTCs). Businesses should review existing contracts to determine if they are liable to pay additional carbon costs under their The operator of a facility that is a direct emitter may supply contracts. Where this is the case, or where they are transfer its liability to a range of other specified entities carbon permit liable, businesses also need to determine through the use of LTCs. These are in the form of whether they can pass through these costs to their corporate group and financial control transfers. customers by reviewing their existing customer contracts Natural Gas and standard terms of business. An OTN mechanism will allow for the voluntary transfer of the carbon price liability from natural gas suppliers to larger gas consuming facilities in prescribed circumstances. In general, large users of natural gas will be permitted to quote an OTN to their supplier to assume liability for their own emissions. Businesses that use natural gas as a feedstock will also be able to quote an OTN in order to avoid paying the carbon price on natural gas that does not result in emissions. The value implications associated with moving the point of liability for many organisations is significant. In transactions, assumptions around permit liability of an organisation, facility or asset should be tested. Business briefing series: 20 issues on the business implications of a carbon cost10
  11. 11. 3. Cost pass through and point of obligation There is a real opportunity for organisations of all sizes to access these incentives to support their successful Where will indirect cost increases impact our business most? transition. Business leaders need to make sure their organisations are familiar with the transitional arrangements Can we pass our liability through to our customers? offered by the government and the criteria for eligibility. Have we added carbon clauses to every sales contract? Key transitional measures: If we cannot pass on our liability, can we still • The Jobs and Competitiveness Program provides pass on the cost increase? assistance in the form of free permits for specific What is the appetite for cost increases with our activities and industries that are classified Emissions customers, and how do we know this? Intensive Trade Exposed (EITE) • The Energy Security Fund provides for assistanceOrganisations will need to consider the propensity of to eligible power generators in the form of freetheir suppliers to pass the cost of carbon down the supply permits and cash paymentschain to their business. • The Clean Technology Programs availableThere is potential for increased indirect costs in many include the:locally produced products and services. A thorough – Clean Technologies Food and Foundriesunderstanding of the current costs which may be passed Investment Program ($200m over six years)through from upstream suppliers together with the legal – Clean Technology Investment Programconstruction of sales contracts, and the willingness of ($800m over seven years)contractual counterparties to accept cost allocations, – Clean Technology Innovation Programwill determine the extent to which this new category ($200m over five years).of cost stops with your business or is passed through. • The Coal Sector Jobs Package includesTo assess the carbon value impact of pass throughs, it assistance to highly emissions intensive coalis necessary to review pass through clauses in existing mines in managing the impact of a carbon price.and future customer contracts and other commercialarrangements. 5. Carbon procurement and tradingIt is expected that the pass through of carbon costs willbe closely monitored by the Australian Competition and Do we have a carbon procurement and Consumer Commission (ACCC). The ACCC has been trading strategy?tasked to closely monitor claims made by companies in Do we plan to purchase eligible carbon units relation to the impact of the carbon price on their own price at auction or in a secondary market?increases. Companies that are looking to make specific What hedging will we undertake in relation to representations to their customers regarding the price carbon price risk?impact of the Plan should familiarise themselves with What investment and financing options have the ACCC’s Carbon Price Claims – Guide for Business. we considered or discussed?4. Government assistance Have we considered our options for carbon offsets? Do we understand all the potential assistance and Do we require an Australian Financial Services transitional arrangements offered by the government? Licence (AFSL) to trade in carbon units? Do we understand the timeframes and requirements A carbon procurement and trading strategy may be required for application for assistance? for entities exposed to a direct carbon price liability.Businesses strongly impacted by the Plan will be supportedthrough a range of assistance measures including grants,loans, tax deductions and other incentives.Business briefing series: 20 issues on the business implications of a carbon cost 11
  12. 12. Quantifying the impacts (continued) Domestically Generated Units 6. Management accounting During the fixed period the holders of freely allocated Have we incorporated the cost of carbon into permits will be able to sell them to the government as part future cash flow forecasts? of a ‘buy-back’ plan. ACCUs can be used by businesses Does our management have adequate, accurate to meet up to 5% of its carbon permit obligation during and timely carbon information to support business the fixed price period (1 July 2012 to 30 June 2015). decisions? No threshold applies to the use of ACCUs generated under the CFI during the flexible price period. Have we considered the impact of a carbon cost on asset impairment? During the flexible period, businesses will be free to Have we considered all tax implications? buy and sell carbon units they have acquired from the government. The Plan will result in a cost of carbon that may be Internationally Generated Units incorporated into the cost of supplies for operating a During the fixed price period of the Plan, liable entities will be business. The additional costs from direct liabilities or unable to use internationally generated units to meet their cost pass through will also need to be incorporated into liability. From 1 July 2015, when the flexible price period the management accounting and internal reporting commences, liable entities will be able to use international frameworks to ensure that appropriate cost forecasting units to acquit up to half of their annual liability. These include has been maintained to support business decisions. certain Certified Emission Reductions (CERs) from Clean Balance sheet, income statement and cash flow Development Mechanism projects, Removal Units (RMUs), impacts at a glance: Emissions Reduction Units from Joint Implementation projects and other units permitted by regulation. Balance sheet and income statement The procurement of units directly from eligible projects Impacts Balance Income may provide low cost options for liable entities; however sheet Statement this is balanced by an increased risk over certainty of Emission permits (asset) supply. An organisation should therefore assess its risk appetite in considering opportunities for acquiring eligible • Purchase of permits ✔ ✘ emissions units at reduced prices that offer differing • Revaluation/amortisation. ✔2 ✔2 degrees of certainty. Obligations to surrender permits (liability) In addition, organisations must take into account the carbon • Recognition of emission liability ✔ ✔ unit price floor ($15.00 in 2015-16, $16.00 in 2016-17 and • Revaluation of emission liability. ✔2 ✔2 $17.05 in 2017-18) during the flexible price period. This may reduce the potential benefit of purchasing from the Derivative financial instruments relating to emission permits (trading permits) ✔ ✔ international permit market. If the market price is below Carrying value of assets due to the price floor, a charge will be assessed on each permit ✔ ✔ changes in cash flows to make up the difference. Tax treatment ✔ ✔ It is important for organisations to note that carbon units have been defined as financial products and are regulated Cash flow as such. Therefore any organisation associated with carbon The cash flow impacts of the Plan that will need to be credits, permits and offsets must consider whether they considered and budgeted for can be categorised as: need to apply for an AFSL. Direct • Purchase of permits For permit liable organisations, the finance and treasury • Tax treatment of those permits teams will need to assist in obtaining financing to purchase • Pricing impacts. the permits as well as developing policy to hedge carbon Indirect • Increases in the cost of raw materials, pricing and scarcity risks. They will also need to assess fuel, machinery and equipment the accounting and tax implications and determine the • Electricity price impacts. appropriate methods for presenting the new transactions. 2. Revaluation of emission permit assets and liabilities may not be required during a fixed price period. Business briefing series: 20 issues on the business implications of a carbon cost12
  13. 13. Technical Accounting Guidance 7. Reducing emissions and improving efficiencyCurrently there is no specific accounting technical What are we doing to reduce GHG emissions to avoidguidance in local or overseas markets for emissions direct and indirect costs?permits. IFRIC 3, Emission Rights, was withdrawn What can we do to reduce our indirect GHG emissions?(as it causes unacceptable earnings volatility) with nocurrent replacement available. Both the International and Depending on the cost of carbon, internal abatement mayAustralian Accounting Standards Boards have had the be more cost effective than acquiring permits on the market.topic of carbon accounting on their agenda for a number The Plan establishes a price signal for GHG emissions, andof years and are currently seeking feedback from relevant so creates an incentive for lower cost abatement of GHGstakeholders to determine whether it will remain on emissions. Organisations will be able to assess the marginalthe agenda. cost of abatement against the carbon price. Where the costWhere there is no specific guidance available, organisations of abatement is above the price, there is a clear financialmust follow the general IFRS principals (including IFRIC 3) incentive not to invest in the abatement opportunity.in the interim. The accounting implications could include A marginal abatement cost curve is one method used bythe creation of assets (permits), expense of the cost of governments and organisations to understand the costemissions, liabilities (obligation to submit permits), deferred implications and priorities for proposed projects to reduceincome (government grant) and other assets/liabilities. GHG emissions. McKinsey has prepared indicative curves forDue to the lack of specific guidance, there are varied Australia (shown below) and the world. The curve identifiesand inconsistent practices which might be applied in negative and low cost abatement projects that could bethe Australian market. implemented. These projects pay for themselves quickly through the cost savings from reduced energy consumption. The carbon price could result in increased costs for services which are GHG emissions intensive, such as energy and travel. Organisations need to look at how they can use these services more efficiently to reduce their indirect GHG emissions and hence their costs.2020 GHG emissions reduction societal cost curve 1Lowest cost opportunities to reduce emissions by 249 Mt CO2e­Cost to societyA$/tCO2e200 Power Commercial retrofit energy waste reduction Cement clinker substitution by slag Gas CCS new build Other industry energy efficiency Solar PV (centralised) Industry Reduced deforestation and regrowth clearing Transport Commercial retrofit HVAC Cropland carbon sequestration Coal CCS new build150 Buildings Residential appliances and electronics Wind offshore Reforestation of marginal land Forestry Mining energy efficiency with environmental forest Degraded farmland restoration Agriculture Residential lighting Solar thermal100 Residential new builds Coal CCS new build with EOR Commercial retrofit lighting Capital improvements to existing gas plant thermal efficiency Commercial elevators and appliances 50 Commercial new builds Commercial retrofit insulation 0 Anti-methanogenic treatments Emissions reduction potential Pasture and grassland management MtCO2e per year Aluminium energy efficiency -50 Onshore wind Mining VAM oxidation (marginal locations) Reforestation of marginal land with timber Biomass co-firing plantation Active livestock feeding Coal to gas shift (increased-100 gas utilisation) Operational improvements to existing coal plant thermal efficiency Geothermal Reduced T&D losses Improved forest management-150 Petroleum and gas maintenance Biomass/biogas Cogeneration Coal to gas shift (gas new build) Commercial retrofit water heating Onshore wind (best locations)-200 Petrol car and light commercial efficiency improvement Reduced cropland soil emissions Chemicals processes and fuel shift Diesel car and light commercial efficiency improvement Strategic reforestation of non-marginal land with environmental forest Operational improvements to existing gas plant thermal efficiency-250 0 50 100 150 200 2501. Includes only opportunities required to reach emission reduction target of 249 Mtpa (25% reduction on 2000 emissions); excludes opportunities involving a significant lifestyle element or consumption decision, changes in business/activity mix, and opportunities with a high degree of speculation or technological uncertaintySource: ClimateWorks Australia, 2010Business briefing series: 20 issues on the business implications of a carbon cost 13
  14. 14. Strategy risks and opportunities Organisations will need to reassess their existing strategies through a carbon lens. The modifications will need to incorporate the impact from the changes to the economy such as the demand for existing products and services once there is a carbon price. For some organisations this may mean that certain products may no longer be profitable and other products may achieve increases in revenue through higher demand. In order to understand the impacts on strategy an organisation must understand its risks and opportunities and prioritise them. First- and second-order risks in the business landscape Competitors rganisation The O Employees Physical assets Suppliers Customers Operations Capital Reputation External stakeholders Investors, Analyst, Regulators, Communities, Pressure Groups First-order carbon risks relate to direct and Second-order carbon risks relate to indirect geophysical impacts on a business. They impacts and responses by internal and will most likely affect physical assets and external stakeholders and competitors. operational activities. These risks have the potential to impact employees, access to capital, and reputation as well as many other external factors. Source: PricewaterhouseCoopers, 2008 Business briefing series: 20 issues on the business implications of a carbon cost14
  15. 15. 8. New business ventures/products 10. Investors How many products or services do we sell that are What are our investors’ expectations regarding ‘low-carbon’ alternatives? the management of climate change risks? Is there any potential to identify ‘carbon value added’ The impact of the Plan will add costs for most organisations. product or service opportunities within our existing A direct permit liability or indirect exposure via cost pass products or services? through will result in increased costs through the supply chain. Are we considering potential new business opportunities more aligned to a low-carbon economy? The cost of the Plan has been increasingly incorporated into the equity research reports for organisations listed Are we considering the impact of a carbon price on on the Australian Securities Exchange. A recent report decisions related to mergers and acquisitions? published by Deutsche Bank highlighted the estimatedOrganisations can create shareholder value through the FY13 NPAT impact of $23/t carbon price of the carbonidentification of new low-carbon business ventures and price mechanism (CPM).products. There are many ways in which an organisation An organisation’s response to the Plan may also impactcan strategically address its exposure to the Plan. on its market reputation. Entities that are able toThrough understanding the change to a low-carbon communicate with investors on the potential risks andeconomy, and the new potential needs for low-carbon opportunities that climate changes presents for themproducts and services, many organisations will identify will be better placed in ensuring that their share pricesopportunities for new revenue streams. This may be accurately reflect this impact.through the development of new products or servicesor through the identification of new markets. It may -20.5 VBAalso be through the re-design of existing products -10.9 ORGand services to provide a low-carbon alternative. -10.8 QANOrganisations which are considering mergers or -9.3 BSLacquisitions should carefully consider the carbon -5.8 ORIassociated impacts. Access to funding is the lifeblood -4.8 BLDof mergers and acquisitions activity and the reaction -4.4 IPLof both debt and equity funders to the carbon price -4.3 CSRmechanism may also influence the valuations assigned -3.9 STOto particular businesses. -3.3 OST -1.5 WPL -1.4 CTX9. Physical -0.8 BHP What are our physical risks? -0.8 ILU What costs are associated with our physical risks? -0.8 NCM -0.6 RIOClimate change will present increasing physical risks to -0.2 LEIland, property and other business assets over the long 0 AIOterm. Rising sea levels, extreme weather events with 0 QRNgreater frequency and intensity, droughts and floods 2.5 AGKall threaten businesses. These changes may result in -24% -20 % -16 % -12% -8 % -4% 0 % 4%increased insurance costs, increased maintenancerequirements, and increased cost of resources. Source: Deutsche Bank Report, 2011These physical risks may also create opportunitiesfor businesses that provide goods or services in areassuch as engineering and physical resilience.Business briefing series: 20 issues on the business implications of a carbon cost 15
  16. 16. Strategy risks and opportunities (continued) 11. Government The reverse applies for entities involved in industries employing lower carbon footprint technologies. Such What are the expectations of the Clean Energy Regulator regarding compliance? entities may see significant revenue growth as organisations seek low-carbon alternative suppliers. Organisations will What future changes are likely to be made to need to develop strategies to ensure that potential changes the Plan and associated carbon prices? in the needs of customers have been incorporated into broader product and service design processes. Organisations will need to understand their regulatory obligations and ensure that they comply. The Clean For some businesses, training should be considered for Energy Regulator will be responsible for administering customer facing staff to ensure they are able to adequately key elements of the CPM as well as the CFI3. communicate the impacts of the CPM in a manner that is not considered misleading or deceptive as per the ACCC. The Climate Change Authority will review pollution caps, future trajectory of Australia’s pollution levels and the performance of the carbon price and will track 13. Suppliers Australia’s progress towards meeting its targets for What are our risks and opportunities relating reducing carbon pollution4. Permit liable entities will to our suppliers? need to consider the messages issued by the authority in order to understand likely scenarios regarding medium Market based emissions reduction mechanisms place a to long-term carbon prices. price on GHG emissions. Carbon will be embedded into the product physically and into the price. It will be central 12. Customers to the way companies do business with each other. What training programs have you developed for Organisations will need to understand the impact of customer facing staff on the impact of the CPM? the carbon constrained economy on the security or scarcity of supply of specific products and services. What are our risks and opportunities relating It is expected that the supply chain impact of the to customers? Plan for most organisations will be the pass through Have you considered customer pricing strategies of increased energy costs. and services for your product offerings? The Plan will raise awareness of the risks of climate 14. Industry/competition change and impact the needs of existing customers. What are our risks and opportunities relating For some companies, the impact of the carbon price to our competitors? may create product substitution opportunities or threats depending on the relative carbon intensity compared Changes in the economic environment provide to competitors. opportunities for organisations to move first. Organisations that can develop and implement their carbon strategies For example, traditional methods used in energy will be able to maximise the benefit of moving first. production, such as pulverisation coal power plants, are likely to experience lowering demand as new The carbon price will also provide a competitive advantage technology with lower GHG emissions (such as for organisations with low-carbon intensity as fewer costs integrated gasification combined cycle power plants) are incurred and therefore passed through. This will offer gain wider use (if not regulatory enforced). new marketing opportunities and enable organisations to differentiate based on both carbon intensity and cost. 3. Securing a Clean Energy Future p31. 4. Securing a Clean Energy Future p31. Business briefing series: 20 issues on the business implications of a carbon cost16
  17. 17. Getting the data rightComplete, accurate and timely data is the cornerstone of Reportingeffective business decision making. Without data that can Companies with a reporting obligation are required tobe relied upon, organisations may miss potential risks or report by 31 October each year on their emissions andopportunities. Alternatively organisations may incorrectly energy use for the preceding year ended 30 June.assess their risks and opportunities, which may result in Organisations without a compliance obligation may stillsignificant risk exposures and lost opportunities, resulting choose to voluntarily report their GHG emissions and thein a reduction of shareholder value. impact of carbon on their business to their stakeholders, including suppliers, customers and employees.15. Identifying your reporting obligation Which GHG emissions are considered to be ours for reporting purposes? What joint ventures, partnerships and business relationships does our business have? PerformanceThe first step in identifying your reporting obligations is Analysisto note those facilities over which you have operationalcontrol as defined by the NGER Act. DataOnce this is understood it is important to work out if yourorganisation is likely to exceed the following reportingthresholds that would trigger a reporting obligation underthe NGER Act: 16. Measurement and accounting• A facility exceeds 25ktCO2-e of emissions or consumes Where is our data coming from? or produces more than 100TJ of energy• The corporate group comprises facilities that in total Is our data reliable? exceed 50ktCO2-e of emissions or consume or produce What are the skills needed to prepare our data? greater than 200TJ of energy. CO2-e is the unit of measurement for GHG emissions.Each organisation should have a clear understanding of For some organisations this will be new data which hastheir GHG emissions sources, a documented methodology, not been previously collected, managed or reported.policies and processes to develop a GHG inventory and Organisations need to understand the key sources ofa documented interpretation and assessment of any emissions within their operational boundaries. From thiscompliance or reporting obligations. they will be able to identify the key sources of information being used to collect the data. The GHG emission information may come from a range of new sources such as direct measurement through meters and estimation using formulae or sampling analysis. These methods will need to be reviewed, implemented and monitored in order to determine if this data can be relied upon for regular reporting. With the new information obligations, new skills will be required for an organisation to ensure that the measurement and accounting of GHG emissions and energy is consistent with the requirements of the regulations.Business briefing series: 20 issues on the business implications of a carbon cost 17
  18. 18. Getting the data right (continued) 17. Systems, processes and controls 18. Quality control Is our team collecting the right information and do How do we document our comfort over the way they understand our record keeping requirements? the data has been collected and reported? What controls do we have in place around the Have we considered the need for independent collation and reporting of emissions data? assurance over emissions data reported? Have we linked carbon source data into our Are GHG emissions and climate change risks included existing financial systems? in our broader risk management framework? Is the quality of reported non-financial data assessed The assurance regime under the Plan means that liable by our internal audit team? companies with emissions above a certain threshold will be required to be audited annually prior to submission Are there synergies between the financial audit and carbon assurance process that can be leveraged? of their data. Systems used to collect GHG emissions source data are It is important that when dealing with significant typically immature when compared to financial systems amounts of emissions data, a robust process is in with weaker controls over the integrity of reported data. place to ensure completeness. Companies with compliance obligations under the Plan The internal audit function within businesses particularly should ensure that adequate controls are established that have direct exposure should be reviewed to ensure: prior to its commencement. Not doing so will increase the risk of both increased audit costs and qualified • Work plans are adjusted to include reviews of the risks, controls and processes associated with the audit opinions. collecting, measurement, recording and reporting A strong control environment leveraged from the financial of GHG emissions data used in CPM reporting reporting framework will ensure that GHG emissions • Staff have appropriate mix of skills to perform data being distributed can be relied upon and that errors these reviews. will be identified as they occur. The quality control mechanisms in place over the GHG emissions data are important to support information being presented. In addition to the development of systems, processes and controls, an organisation must test them regularly to assess how effective they are. This requires documentation of the framework so that the systems, processes and controls can be easily understood and tested by an independent party. Whether directly/indirectly permit liable, organisations should consider the value of obtaining independent reasonable assurance over their GHG emissions used for government reporting, even where they are below the reporting thresholds. This data is utilised by many in the capital markets who require its completeness and accuracy for decision making purposes. Business briefing series: 20 issues on the business implications of a carbon cost18
  19. 19. Communication19. Internal communication 20. Communicating with stakeholders What is our internal communications strategy What information are our external stakeholders for the Plan? asking for in relation to the Plan? Do the key teams within our organisation understand Could we broaden our reporting to better the potential impacts of the Plan? address these requests? Do we have the most up to date GHG emissions External stakeholders are continuing to request information information to report? on the potential impact of the Plan on the business with Are our internal communications and training for its current strategy and expectations. For organisations customer service staff at the desired level/standard? reporting under the NGER or those permit liable under the Plan, there will be new non-financial information availableEffective internal communication can assist in maximising to external stakeholders. The way in which an organisationcarbon and climate change opportunities and minimising incorporates this into the broader external communicationsthe risks. Communicating the business implications of strategy is critical. Inconsistent information, errors andthe Plan is critical to ensuring that these implications poorly considered responses to carbon risk will discreditare understood by the Board, management and staff. It the data and may result in reputational damage.will be employees who identify and realise the potentialopportunities and also mitigate any exposures. Cost pass GHG emissions data should be incorporated into existingthrough clauses within contracts are going to be the key external communications programs. Sharing informationarea in which the Plan may unexpectedly impact operations. about how the organisation is addressing the risksWithout a core strategy and clear communication plan associated with the transition to a low-carbon economywithin the business, new contractual arrangements may and realising the opportunities will be important for bothresult in unintended increased cost and risk exposures. value protection and enhancement.As additional guidelines are released, organisations willneed to stay up to date on the changing issues and thepotential impact on their business. The regulator will bea key source of the most up to date information available.Relevant updates should be shared with all staff.Business briefing series: 20 issues on the business implications of a carbon cost 19
  20. 20. Resources and further information Links: ACCC, 2011, Carbon price claims: Guide for business Department of Climate Change www.climatechange.gov.au The Institute of Chartered www.charteredaccountants.com.au Accountants in Australia PricewaterhouseCoopers www.pwc.com.au/publications/carbon-price/index.htm References: Carbon Disclosure Project, 2011 CDP Australia and New Zealand Report 2011, ‘A two speed business response to climate change’ Carbon Market Institute, 2011 The Carbon Farming Initiative (CFI): An introduction to Participation ClimateWorks Australia, 2010 Low Carbon Growth Plan for Australia Commonwealth of Australia, 2008 Australia’s Low Pollution Future: the economics of climate change mitigation Deutsche Bank, 2011 Australian Carbon Price PricewaterhouseCoopers, 2011 Carbon pricing: Implications for Australian businesses PricewaterhouseCoopers, 2007 Carbon Value PricewaterhouseCoopers, 2011 Digging into IFRS: Proposed carbon ‘tax’ shines a light on Aussie miners PricewaterhouseCoopers, 2008 First and second order risks in the business landscape PricewaterhouseCoopers, 2011 Responding to a Carbon Price PricewaterhouseCoopers, 2011 The Australian Government’s Climate Change Plan: What should business consider? Swisse Re, 2011 Natural catastrophes and man-made disasters in 2010: a year of devastating and costly events Business briefing series: 20 issues on the business implications of a carbon cost20

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