Prepare now for the price on carbon

16 Jan 2012Archived News Climate Change Matters

While January can be a quieter month for many businesses, with less than seven months until the introduction of a carbon price there are steps that should be taken immediately to get ready. Different levels of management will have different responsibilities.

 

Understand cost impacts and take action to protect profits

All businesses need to understand direct and indirect carbon costs, how carbon costs will flow through and impact supply chains, and how they compare with competitors. Once this analysis is undertaken, businesses need to work with their supply chains to decarbonise and minimise risk.

Prices will increase across the board, although to varying degrees depending on the carbon intensity of operations and the ability of a business to pass costs through to customers. Passing the cost of carbon on is not simple and requires extensive review of contract and pricing arrangements. A business needs to consider whether the increased costs come off customers' profits, are borne by the business, or whether supply chain efficiencies can be identified which lessen the impact.

Suppliers and customers will need assistance and guidance through this time of change, and a communication plan for stakeholders is vital; as is a plan for providing facts to the market.

Update business systems

Finance systems should incorporate a 'carbon cost' line item and factor carbon into management, budgeting, forecasting and reporting systems. A business must plan now to include the carbon cost in accounting and IT systems: a task which could be a GST-style change.

Adapt and integrate risk management tools

Carbon should be incorporated into risk management frameworks and tool sets. Energetics' recommends that a business' existing risk management tools and techniques are used, however they may need to be adapted for this new asset class/ expense category.

Plan, prepare, prioritise and implement key strategies early, with particular consideration given to whether there is a need to source skilled people and resources to make the necessary changes.

Investigate opportunities

Opportunities include emissions' reduction projects through energy efficiency and renewable energy, new products or services, and the creation of markets, new customers, new sectors and carbon credits.

From 1 July 2012, Australian carbon credits can be used to reduce 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'.

However, be aware that overseas carbon credit prices will vary over time and across credit types. Also Australian rules may change and the perception around 'appropriate credits' may also change. This opportunity is worth exploring but requires knowledge, research and well-informed risk management.

Communicate to investors

With the scrutiny that the Australian Stock Exchange and ACCC are applying to statements relating to the new carbon cost, all businesses must ensure that they clearly and accurately communicate carbon impacts and management initiatives.

Functional view of preparations that need to be made: questions to ask

Business systems: what does each business unit / General Manager need to focus on?

Function Key focus areas Questions
Chief Executive Officer Strategy Who is responsible for carbon costs, carbon trading, carbon strategy and carbon pricing? Where does carbon management fit in your executive team and who is ultimately responsible?
Chief Financial Officer Costs Who is responsible for carbon costs, carbon trading, carbon strategy and carbon pricing? Where does carbon management fit in your executive team and who is ultimately responsible? Do you possess sufficient knowledge of the different types of carbon credits and what they might offer your business?How can we be confident in what we are measuring and reporting? Would a higher order methodology increase or decrease our emissions? How should we be allocating liability to different product streams? Are our methodologies sufficiently transparent and defendable under ACCC scrutiny? What does this mean in relation to our current and future supply contracts?
Operations Risks and opportunities What are the areas of greatest carbon intensity? Where are the energy savings opportunities? Have the payback periods changed for key capital projects?
Company Secretary Governance structures (policies) and compliance. Have you reviewed your risk policies to determine where carbon fits? Think about what you will need to manage carbon risks. Do you understand the reporting and compliance requirements that will come with a price on carbon?
Chief Sustainability Officer Vision, targets, goals and strategic opportunities arising from the carbon scheme. Where can you identify areas of competitive advantage?
Chief Information Officer Systems requiring a carbon "line item" Have you started to plan to update your IT, management and accounting systems?
Human Resources Carbon skills Do we have the right people? Are they equipped to handle these changes?

 

The carbon price will have cost impacts and a profit impact. It will affect a business' customers, supply chain and create shifts in competitive position. Now is the time to focus on the opportunities, and understand where innovation may be possible to achieve a competitive advantage. 

Join the conversation

Get in touch with our expertsView All

Dr Peter Holt

Associate

View Profile