Quantifying business exposure through the Carbon Impact Matrix
The Carbon Impact Matrix identifies the carbon emissions related to your business, applies a range of probable carbon costs, adjusts for free permits and compensation, and summarises the impacts.
While the Matrix is itself a simple tool, understanding your carbon emissions requires more considered and time consuming analysis.
How to use the Carbon Impact Matrix
Step 1: Insert Scope 1, 2 and 3 emissions.
The starting point for calculating your carbon costs are your business' direct emissions (Scope 1 emissions), electricity emissions (Scope 2 emissions) and indirect emissions (Scope 3 emissions), which are a good proxy for the likely carbon costs that will be passed on throughout your supply chain.
Companies who report under NGER *2 or under CDP *3 will have this information readily available. Other companies will find the data in their Sustainability Reports or Greenhouse Reports.
If your business does not have any of these sources, Energetics can assist in the process of gathering and collating this information.
Step 2: Incorporate compensation or free permits
Some industries will receive free permits to compensate for the impacts of a carbon price. The government has identified categories of assistance for emissions-intensive and trade-exposed industries. The two categories are high emitters and moderate emitters determined by the amount of greenhouse gases produced for every million dollars of revenue earned, expressed as a percentage. High emitters are entitled to free permits commencing at a calculated emissions intensity of 94.5% decreasing annually, with moderate emitters receiving assistance at 66% decreasing annually.
Of course, no qualifying business will receive 66% or 94.5% compensation unless they fall on the Australian industry average. Most will receive compensation above or below these numbers. In turn the averages applied by the government's model are based on assumptions that may not be valid for your business. In depth analysis will be needed to understand the true impact.
Once your business knows the levels of compensation it is entitled to receive over time (compensation levels decline each year), the information can be incorporated into the Matrix to allow for the effective reduction in carbon cost.
Step 3: Impact on costs
The results across different carbon prices will provide insight into how significant a price on carbon will be to your business costs.
Step 4: Pass-through ability
All companies need to determine the extent to which they can pass cost increases on to customers. For some, pass through ability will be defined within contracts. Some businesses will be able to pass the cost on fully because the market will accept the resultant price rises. On the other hand, companies who sell at global prices or who compete against imports may have very limited ability to pass the cost on to their customers.
Taking the opportunity now to improve your ability to pass on carbon costs, by revising contract provisions or considering different pricing models, may be a prudent step to protect your future profits.
Step 5: Control carbon cost – internal and throughout supply chain
An evaluation of business exposure may result in a decision to reduce your carbon exposure by investing in emissions abatement projects across your operations. Another measure would be to reduce emissions for which you are indirectly responsible through the supply chain.
Such a strategy would include negotiating with suppliers on price or switching to new suppliers with lower carbon intensity.
Step 6: Impact on profits
The completed matrix shows the probable impact on your company's profits of a price on carbon.
Don't like the answer?
If you have worked through the Carbon Impact Matrix and are concerned about the effect on your business, now is the time to minimise your exposure. There are a range of actions that can be taken, such as adjusting contract provisions to ensure greater pass-through ability, re-evaluating your global mix, changing energy sources and production processes.
These actions should be part of a strategic business response.
With our extensive experience working with large emitters from a range of industry sectors, Energetics can provide assistance to help you understand the complexities and develop a strategy that manages risk and identifies opportunities.
A carbon cost is coming to your business. As with any major change, understanding and preparation is the key to business success.
*1 Emissions categories as defined under the GHG Protocol. For more information see http://www.ghgprotocol.org/about-ghgp
*2 NGER: National Energy and Greenhouse Reporting Act
*3 CDP = Carbon Disclosure Project
Written by Chris McPherson