Scrutiny of carbon data demands new levels of accuracy

01 Feb 2012Archived News Climate Change Matters

Carbon data, calculations and reporting are increasingly subject to scrutiny.

We know that:

  • the ASX is reviewing statements made by companies about carbon impacts, and the ACCC is alert to evidence of abuse of market power if the pass-through of carbon costs is not managed in a fair and transparent manner.
  • The Australian National Audit Office report said that in 2009-10, nearly three-quarters of major polluters' National Greenhouse and Energy Reports- on which the government will depend for calculating how much carbon tax they owe - had errors and 17 per cent had ''significant errors''.
  • Chloe Munro, whose appointment as head of the Clean Energy Regulator was announced last week, said she planned to have a close and constructive relationship with businesses that will pay the tax, but warned there would be no leniency in the first year. 

''This isn't a flash in the pan,'' Ms Munro told The Age last week. ''The carbon pricing mechanism has been talked about for a long time. There was a lot of consultation and discussion through the whole process leading up to the legislation being passed last year … I don't think there is an excuse for being entirely ignorant.''

Read more.

The most compelling need for accuracy is that carbon emissions will carry a cost from 1 July, 2012.

What should your business be doing?

With carbon emissions now carrying a cost, the emphasis for businesses with carbon exposure either through direct emissions, or, as is the case for the majority, incurred through the supply chain, is on ensuring accuracy and confidence in emissions data. For a CFO and their finance team, carbon accounting with financial rigour is a function of your business' risk management systems.

Some questions for the CFO

With increased scrutiny and bottom-line impacts, carbon management becomes an issue for CFOs and their finance teams. In our work with clients we are being asked questions such as:

  • Is our liability adequately scoped?
  • 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 defensible under ACCC scrutiny? What does this mean in relation to our current and future supply contracts?

The right boundaries - emissions as defined under NGERs are not the same as carbon costs

The National Greenhouse and Energy Reporting (NGER) data sets are the means for determining which facilities trip the thresholds for carbon tax liability. However, while many companies report carbon emissions under NGER, your carbon liability may not be the same as your NGER emissions profile. There are some important differences:

  • The Clean Energy Future legislation focuses on scope 1 emissions – primarily direct emissions from process and fugitive emissions.
  • Natural gas – large users (>25 ktCO2-e) will be obliged to take on liability for their emissions through an Obligation Transfer Number (OTN).
  • Liquid fuels including, diesel and fuel can potentially “opt-in” after 1 July 2013 (stationary fuel use, although aviation and domestic shipping is already included in the carbon scheme)
  • Transport fuel for light vehicles is excluded and heavy, on-road vehicles are expected to join from 1 July 2014.
  • Scope 2 emissions are not liable under the Clean Energy Future legislation (though subject to increased cost from the flow-through effect of carbon costs along the supply chain).

Aligning NGER with Clean Energy Future

The reporting liability under NGER lies with the controlling corporation. The carbon tax liability under the Clean Energy Future legislation rests with the facility responsible for emissions above the threshold.

The Clean Energy (Consequential Amendments) Bill 2011 sets out changes to other legislation, including the NGER Act, associated with the implementation of the Clean Energy Act.

The Bill allows for the transfer of reporting obligations for a facility from a controlling corporation to a group member that has either operational control or holds liability transfer certificates for that facility via a Reporting Transfer Certificate (RTC). Both parties (the controlling corporation and the group member) must agree and then notify the Clean Energy Regulator, of the arrangement in writing.

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

Using these mechanisms, corporations can allocate reporting and tax liabilities within their group in a way that is most appropriate to governance arrangements.

Ensuring you have the right approach

Your business needs to weigh up the value of investing in higher order methodologies to ensure accuracy, through projects such as sub metering, or monitoring and verification programs.

A business needs to consider the comparative risks of over estimating emissions which brings unnecessary carbon costs, or under estimating emissions which run the risk of non-compliance as assessed by Registered Greenhouse and Energy Auditors (RGEAs).

Some industries are required to use higher order methods, although their use will be already widespread. For others under the carbon pricing mechanism, staged increases in the accuracy of emissions estimates over time will be pursued by imposing increasing minimum methodologies for certain sources.

Supply chain considerations

The two questions for any business when managing the impact of carbon costs incurred across the supply chain are what do my customers expect, and what should I expect from my suppliers?

The ACCC has provided guidance, which essentially advises that businesses should not make claims that their prices have increased due to carbon unless they are reasonably accurate and supportable.

Systems for calculating carbon need to be reviewed

Many companies have a range of systems for calculating energy data and emissions data. Often these systems are not linked, nor do they operate from a common set of underlying data and assumptions. To date these issues have been accepted by many businesses in order to obtain reasonably accurate estimates for NGER.

However, carbon emissions are now a major expense item that needs to be independently verifiable by an external auditor. The outputs must be supported by clear detailed information and quality source data. Currently most systems are not sufficiently accurate and will need to be substantially upgraded to be ready for the carbon scheme when it comes into effect 1 July, 2012. 

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Jody Asquith

Principal Consultant

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