The Carbon Tax: impacts and outcomes

While the carbon tax came into force on July 1 its impact is still far from clear. Many companies are taking a 'wait and see' attitude, perhaps because it's very future is still sometimes called into question. But even if the Liberal Party should win the next election, dismantling the tax might well prove too complex and costly. And, in the meantime, failure to accommodate the new environment
could put businesses at risk.

Currently, only the top 500 emitting companies are being taxed directly but cost increases are sure to flow on to companies of all sizes. Manufacturers, for example, can expect any direct impact to be compounded by a rise in the price of commodities such as fuel, raw materials and transport.

"The carbon tax has created an uneven playing field in relation to our neighbouring countries and many of our trading partners, so export- or import-orientated businesses carry an even higher level of risk," says Krishan Aggarwal, Managing Director of Operational Australasia Pty Ltd.

"In every sector, the more energy efficient the business, the more competitive it will be. Manufacturers
who sit back and do nothing could find themselves facing avoidable extra costs, reduced competitiveness and shrinking profits which, in some cases, could go so far as to undermine their
long term survival."

Improving energy efficiency could help any business to mitigate the effects of the tax.

"The problem is that energy prices in Australia have been very low by global standards," continues
Aggarwal. "Also, in the past, payback on investment in energyreducing technology and systems
was sometimes as long as three to five years, so business owners were often tempted to spend their money on something with a faster rate of return. But it's now very important that they consider the longer-term consequences of the carbon tax and its potential impact on the business before making a decision."

Taking a fresh look at the supply chain

One critical consideration is the impact the carbon tax might have on the supply chain and, as a result, strategies for managing business interruptions.

"The principles of business interruption insurance haven't changed," says Chris McMichael, National Practice Leader - Energy at Aon. "Companies still need to know how an interruption would affect
the business, the financial implications and whether insurance will cover all the cost. If it won't, they need to put alternative mitigation strategies in place to plug the gaps."

While most owners and managers understand their own business very well, many have a much cloudier picture of the risks associated with their supply chain.

"You need to know the key risks you're exposed to through your suppliers and also though those who supply your suppliers," says McMichael. "And now you must also overlay all of that with consideration of how the carbon tax is affecting all of those different stakeholders and the impact this is likely to have on you."

While the tax is unlikely to affect a supplier's ability to provide goods and services it is very likely to affect costs. Any increases need to be factored into the business interruption calculations but, at
the moment, it is hard to be specific.

"For example, we don't yet know what the position would be if an organisation suffered a loss which caused them to lose revenue but, and at the same time, reduced their carbon emissions," McMichael continues. "Presuming that they had appropriate cover, they would receive an insurance payment for the loss of revenue - but could the government apply a tax to the proceeds of that claim? Logic would say that, if you have reduced your carbon emission, you can't be charged $23 a tonne for what might have been produced. But, in the past, other government taxes on revenue from energy production have not made exposures clear so you need to determine whether or not you should factor that into your business interruption insurance."

Detail is important and organisations should review their current exposures very carefully.

"Companies which don't have the capacity for an in-depth review should talk to Aon," McMichael says. "We have extensive resources and can provide support and advice.

The cost of construction

The cost of insuring a building is based on how much it would cost to rebuild - in theory, overnight - on both the first and the last days of the policy. This so-called liability calculation includes all of the estimated cost increases so that, if clients should experience a loss on the last day of the policy, they would still be adequately insured.

"Along with general increases in things like materials and labour costs we're now factoring in increases that are likely to flow on from the carbon tax," says Ashley Grant, Aon's Head of Valuation Services. "Researchers have estimated that the tax will add between 0.7 per cent and 1.5 per cent to the cost of construction, depending on factors such as whether the building is residential or commercial."

Some carbon-intense businesses or emitters are shielded from the full implications of the carbon tax - however, no-one is sure whether those who supply the construction industry will be passing on these benefits. Even if some do, the process is unlikely to be consistent. And, as shielding will be reducing from this year's 94.5 per cent at the same time as the fixed price of carbon is rising from $23 dollars per tonne to $25.50 in 2014/5, this is likely to remain a grey area for some time.

There is also no clear picture of who in the supply chain will bear the increased cost of raw materials such as steel.

"We presume that the manufacturers will pass on the costs to preserve their margins but we don't know that for sure," says Grant.

Grant's team carries out valuations for accounting and taxation purposes as well as insurance and, once again, there seem to be as many questions as answers.

"For instance, we don't know yet what will happen to the value of second hand equipment, particularly
older equipment, as companies start to replace it with more carbonfriendly technology," Grant continues. "Businesses that are holding that sort of equipment on their balance sheets may face impairment issues. It may be very hard to quantify but industry should still bear this in mind when they're doing impairment tests on their balance sheet and reviewing their asset values."

Best practice has always been for companies to review their insurance every year. For those who don't, the carbon tax could be a timely reminder.

"It's an opportune time for companies to review their sums insured and check that the amounts they're declaring are correct in the light of all of the factors that have changed, not just the carbon tax," says Grant. "We can help with that process, and we can also revisit those costs on an annual basis."

Potential benefits

When cost is top of mind it's easy to overlook the potential for positive outcomes. However, Brian Parker, Aon's Head of Risk Control & Engineering, suggests there may be an historical precedent.

"In the 1980s and 1990s, regulation relating to the environmental management of waste water increased dramatically," he says. "Companies that were discharging waste water into sewerage systems or natural waterways had to come up with innovative alternatives in order to avoid hefty fines. As a result, a micro industry emerged which developed the technology needed to treat waste water and prevent pollutants from entering our waterways."

Every state and territory now has laws to prevent pollution.

"As a result, Australian companies have had to become smarter, to look at their processes and their wastes and develop ways to avoid the risk of getting fined," Parker continues. "Through our risk engineering work we are exposed to various industries and, during the last 20 years, we have seen clients undertake major projects to develop waste water systems."

"I think the carbon tax will have the same kind of impact but, this time, businesses will be looking at their carbon-emitting processes and technologies. This should further encourage the development of microindustries to help the larger companies find ways to minimise their tax liabilities by creating cost-efficient and commercial ways to reduce carbon emissions."

 

 

For more information please contact:

Ashley Grant
Head of Valuation Services
Aon Global Risk Consulting
t: + 61 2 8623 4063
ashley.grant@aon.com

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