Carbon Price 2012: What CFOs need to know

12 Oct 2011Archived News Climate Change Matters

For CFOs there are specific implications arising from a price on carbon for corporate profits, finance, planning, forecasting, risk management, compliance and investor relations.

CFOs need to understand the range of new costs, mitigate their impact, and discover new business opportunities. They also need to minimise carbon risk, and ensure that robust systems are in place which comply with the principles of comparability, completeness, accuracy and transparency.

To assess your business' carbon status you should focus on:

  • Cost, profit impacts and compliance issues to consider
  • Risk management
  • Business opportunities from a price on carbon

CFOs should begin the process of understanding the impact of carbon on your business as the first step towards preparing a strategic response and an adaptation plan for the new carbon world.

Cost, profit impacts and compliance issues to consider

  • Where are the direct and indirect carbon costs for your business?
  • How will carbon costs flow through and impact your supply chains?
  • How do you compare with your competitors? How "carbon competitive" are you?
  • What are you telling your investors about your exposure to carbon costs? ASX and ACCC are scrutinising statements made about carbon impacts.
  • Will the costs come off your customers’ profits, or the profits of your business, or can you mitigate through supply chain efficiencies?

Working with your supply chain to decarbonise and minimise risk

  • Can you work with your customers to help them understand the carbon intensity of your product/service?
  • How favourably do your current product/service providers compare to alternative suppliers?
  • Everyone will be increasing their prices, though to different degrees depending on the carbon intensity of operations/production.

Many companies will require contract changes, price list changes or changes to long term agreements. Suppliers and customers will require assistance and guidance through this time of change. What is your communication plan for your stakeholders? What is your plan for providing facts to the market?

Accounting for carbon - business system updates

  • Does your finance system have a 'carbon cost' line item?
  • Is a carbon cost factored into your management, budgeting and reporting systems?
  • Is it factored into expense tracking systems for management incentives and bonuses?
  • Is this referring to direct carbon costs, or the carbon cost of your overall footprint?

Incorporating a carbon cost into your accounting and IT systems could be a GST-style change for most of your systems. What is your business doing to instigate this change and ensure your systems are ready on time? 1 July 2012 is only 8 months away.

Business modelling: need to ensure accurate carbon data and energy prices

The changing market conditions: the current exchange rate, energy price escalations, compounded by the carbon price, can dramatically shift payback periods for energy efficiency and energy savings projects.

Incorporate these new energy prices into your budgets, strategies and plans. Update your Capital and Operational Expenditure assessment criteria to reflect the changing market conditions.

Risk management

Adapt and integrate risk management tools

Bring carbon into your risk management framework and tool set, and review your risk management systems and understand how carbon fits. Use the tools and techniques you have in place, however they may need to be adapted for this new asset class / expense category.

Plan, prepare, prioritise and implement key strategies early. What is your plan for sourcing the skilled people and resources you will need?

The carbon price is likely to fluctuate

  • Build your knowledge of future carbon price changes linking to international markets (from 2015 onwards)
  • Develop plans based on informed price forecasts
  • Consider international permits – understand prices, opportunities to source these.

Once trading commences from 1 July 2015, we expect to see a fluctuating carbon price. This creates real challenges for budgeting, forecasting and large projects. Carbon is not a static cost: it is a variable, volatile financial instrument.

Large users of gas or diesel: consider 'opting in' and managing your carbon costs.

For companies with large levels of gas consumption or large diesel use, there may be an ability to opt-in to the carbon price, and choose to manage your own carbon costs directly, especially where suppliers can pass the carbon cost through to your business. The issue here is that the carbon price is levied up the supply chain for gas and diesel, however the cost is passed through to customers. Your business does not have to passively accept these pass through costs. Large gas and diesel users can "opt in" and be directly liable and exercise greater control over this source of carbon cost.

There are opportunities to manage and reduce the carbon cost in these categories, even in the fixed price period and it is in the interests of your business to ensure that these opportunities are fully explored.

Business opportunities from a price on carbon

The introduction of the carbon package marks the beginning of larger, long term trend towards a low carbon economy, and this may have broad strategic implications for your business, and your sector. Reduce your carbon emissions: direct, energy-related and in your supply chain, to limit your exposure. Start including carbon pricing in investment plans now.

Current carbon credit opportunities

From the very start of the carbon price scheme on 1 July 2012, Australian carbon credits can be used to reduce carbon costs. Once trading starts three years later, a whole range of local and overseas credits may potentially provide a cheaper way to meet carbon costs. Companies should explore opportunities now and prepare a plan for utilising these credits. Some companies may even buy a portion in advance to 'spread the risk'.

Given that $1.2 billion over 6 years has been set aside for grants to support the take up of low emissions technologies and renewables, your business should consider projects that may qualify.

There are risks though: overseas carbon credit prices will vary over time and across credit types, the Australian rules may change and the perception around 'appropriate credits' may also change. This is an interesting opportunity well worth exploring but this will require knowledge, research and well-informed risk management.

Your next steps

The new carbon world will bring opportunities: for energy efficiency, renewable energy, energy savings and new markets and products. Companies should review these opportunities within the low carbon economy. There are also opportunities for further funding through Clean Energy Future Package.

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