Repealing the carbon tax is good news for business. Or is it?

08 Jul 2014Archived News Jonathan Jutsen Climate Change Matters

The Abbott government will repeal the carbon tax. An operating cost will be removed, which appears to be good news for business.  But what are the consequences? 

A number of domestic and global issues are converging to escalate the pressure on business to act on climate change and activities that reduce emissions, at the very time the carbon tax is being eliminated:
- Increased impacts of warming are being experienced in Australia, including substantially intensified fires.  The coming El NiƱo period is likely to result in an extended period of higher temperatures and drought which could impact business in a number of ways:  heightened public concerns about climate change, increased energy and water consumption including greater peak demand events in the electricity grid, and more bushfires.
- Public support for action on climate change is rising again after a prolonged fall in interest. Recent Lowy polling shows 45% of Australians now see global warming as a ‘serious and pressing problem’ (up 9% since 2012), and 63% of Australians say the government ‘should take a leadership role on reducing emissions’. Only 28% say ‘it should wait for an international consensus before acting’. 
- Increased action on emissions reductions in the US and China.  President Obama will invoke executive powers to require States to curb power plant CO2 emissions by 30% by 2030. The Clean Power Plan will operate effectively as an emissions trading scheme as generators are required to achieve state-based reduction targets in their emissions intensity.  The World Bank’s recent publication “State and trends of carbon pricing” also points to the likelihood of China setting up a national emissions trading scheme as part of its next five-year plan (2016-2020). Several pilot schemes have been up and running over the past 12 months 
- Investor activism is rising against carbon intensive industries. For example “Divestment Day” held in May of this year, urged investors to remove their investments away from fossil fuel industries, and this has been followed by several banks confirming they will not invest in coal assets. Such action is intended to focus financial institutions on the carbon risks associated with their investments that will negatively impact the share value of more emissions-intensive businesses.

A further, significant pressure is the escalation in electricity and particularly natural gas prices on the eastern seaboard, where commodity prices are set to double over the next couple of years, probably trending to export parity netback pricing.  These trends will significantly impact business costs despite the removal of the carbon tax.  Increasing energy prices combined with relatively poor energy efficiency are creating a competitive disadvantage for Australian businesses.     

Once carbon tax is repealed in the Senate, the centre-piece of the government’s policy to achieve the 5% carbon reduction target, Direct Action, faces an uncertain future. While maintaining for some time that he will not support Direct Action, recent comments from Clive Palmer of the Palmer United Party, whose support is critical for the passage of legislation, indicate  that PUP may back Direct Action in return for the government agreeing to vote for Mr Palmer's proposed emissions trading scheme.  As the uncertainty continues, we may see a scenario in which the government is left with no carbon policy.

So the elimination of carbon policies may not be an unmitigated blessing for businesses which have a greater challenge to deal with climate change and carbon emissions in the public policy vacuum.  Businesses that step into the gap, and aggressively cut their climate risks will improve their sustainability and develop a leadership position. 

What can business do to mitigate climate risks and become leaders?
1. Re-evaluate your business risks. Uncertainty creates a climate change “risk premium” that will impact all major investment decisions. Company boards have a fiduciary duty to address this paradigm shift, and develop a strong approach to managing the impacts of climate change.

In the near to medium term climate change will present financial and reputational risks for Australian business, as the link between climate change performance and investor confidence grows.  Companies operating in Australia, especially those with a high profile, and well recognised as being emissions intensive, need to be proactive in building a strong public stance on climate change, or risk losing investor confidence.

2. Investigate opportunities to secure funding and financing arrangements favourable to your business for emissions reduction and energy productivity projects.  Innovative companies can access alternative financing mechanisms to support projects that improve energy productivity and cost-effective embedded energy generation. Pursuing such projects will help you reduce costs immediately and decrease exposure to future government action on climate.

One option your business could consider is quarantining money budgeted to pay for the carbon tax for reinvestment in projects to reduce energy costs and carbon emissions.  Most businesses will gain a short term benefit from the elimination of the carbon tax in the next few months.  It will cut 10-15% from retail electricity and gas prices (though in the case of gas, this reduction will ultimately be more than reversed by the likely doubling in the cost of natural gas). Energetics can provide advice on a range of funding options.

3. Maintain a shadow carbon price for assessing investments.  Consider continuing to apply a carbon price to evaluate investments.  It is highly likely that a future government will reintroduce carbon pricing in line with growing international action, and it is sensible to put a value on carbon pollution internally to evaluate the economics of major projects that will be operating for 30 years.

4. Set a voluntary carbon emission reduction target.  Just five years ago, most consumer-facing businesses were setting voluntary reduction targets for cutting carbon emissions.  Some committed to become ‘carbon neutral’ to address growing customer expectations of business action to reduce emissions.  These efforts were largely eclipsed by the introduction of the carbon price, the 20% Renewable Energy Target and the ‘Clean Energy Future’ package of measures.  Increasingly consumers again support positive action on climate change, while governments have cut climate change-related programs.  It’s time for corporations to again consider setting voluntary targets and publicly report on carbon mitigation.

5. Boost your energy productivity to reduce carbon exposure, address energy price increases and achieve cost savings.  Electricity prices are high, and natural gas prices are doubling on the east coast.  The best response to maintain competitiveness is to substantially increase energy productivity (value of output per unit of energy consumed).  Many companies can increase their energy productivity by 50% within a five year period. 

It is also important to consider the challenge of natural gas price escalation and your options going forward, including the potential future use of alternative fuels or solar thermal to reduce reliance on increasingly expensive natural gas.

Now is the time to consider your potential projects and develop your business case. Energetics can assist with evaluating your options, offer independent advice and provide due diligence.    

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