Carbon liability planning: managing risks and generating opportunities

03 Apr 2012Archived News Climate Change Matters

Many businesses' risk management teams have developed carbon liability management plans ahead of the incoming carbon price. 

This article will discuss the range of factors that need to underpin such plans to ensure they are sufficiently rigorous to address risk management concerns at the highest levels of Board and regulatory scrutiny.

 

The business case for a comprehensive carbon liability management plan

There are a number of factors that can support a business case to develop a plan that goes beyond compliance requirements. The elements are listed below:

Flexibility in managing carbon liability

The Clean Energy Act allows for the transfer of the carbon price liability between group members of a controlling corporation via Liability Transfer Certificates (LTCs).

Also, a controlling corporation is able to transfer NGER reporting responsibilities to a division to align with carbon price liability. This is enabled through a Reporting Transfer Certificate (RTC) which transfers the obligation of assessing and reporting energy use (EEO) and greenhouse gas emissions (NGER).

Carbon liability can be transferred upwards or horizontally, while the reporting responsibility can be transferred downward from the controlling corporation to a division (for example).

Cash flow benefits

If your business currently claims a Fuel Tax Credit for liquid fuels you can consider the Opt-in provision whereby you voluntarily join the carbon scheme. The difference to your cash flow position may be considerable. Choosing to stay under the fuel tax system will result in paying the carbon tax when you pay for the fuel, however by opting-in, you can defer the acquisition and acquittal of permits until year end: 75% of permits need to be acquitted in June and the remainder by the following February.

It may be worth investigating whether you are eligible based on your contractual and governance arrangements.

Market benefits

If your business actively manages its carbon liability you can acquit that liability through domestic carbon credits. We expect that a range of credits will be accessible from accredited projects all carrying different prices.

Once the trading period commences, access is available to international credits which are currently priced significantly lower than domestic credits. Within a carbon liability management plan, you can optimise participation in permit auctions to obtain the best price. To take advantage of market benefits, you need to engage either internal or external people with appropriate market knowledge.

Cost considerations

Active carbon management incurs costs arising from administration, compliance and reporting, external auditing and managing the liability.

Structural considerations

Managing carbon liability presents organisational challenges. Some larger companies may have a trading capability to which carbon management is simply additional. Others, where there is no existing trading team or structure, should consider whether they manage the liability internally or engage external consultants.

Some of the liability management issues include:

  • forecasting certificate prices and future liabilities
  • ensuring timely market updates to understand short to medium-term market forces and associated pricing impacts
  • determination of ongoing liabilities
  • purchasing permits and credits

Compliance

Entities that elect to opt-in will need to register and report under the National Greenhouse and Energy Reporting (NGER) Act and will have the same obligations as other liable entities under the carbon pricing mechanism.

Organisations that already trigger NGER reporting thresholds will incur minimal additional administrative burden. However, those that do not already report under NGER will need to determine what resources are required in order to ensure compliance with NGER and Clean Energy requirements.

Organisational learning opportunities

As the Clean Energy Future regulations allow for 5% carbon permits to be tradeable, your business can develop management systems now in readiness for 1 July 2015.

Energetics can support your business in the development of both your carbon liability management plan and the supporting business case.

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Jody Asquith

Principal Consultant

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