Carbon loading

14 Aug 2008Archived News Energetics in the News

Published: BRW - by Leon Gettler - Cheryl Bowler, Principal Consultant; Carbon Markets, Energetics Pty Ltd considers the worth of spending extra money on emissions.

 

Measuring carbon emissions will create a whole new business sector for accountants – and more work for business.

Company tax, payroll tax and fringe benefits tax. Business activity statements and returns to the Australian Securities and Investments Commission. Still not enough disclosure for business to deal with? Before too long, the two-year run-up to a national carbon emissions scheme is going to add many extra compliance costs for business.

The chief executive officer of the National Institute of Accountants, Roger Cotton, is careful to note that his members support any plan to minimise carbon emissions – as long as the burdens are shared evenly.

“We remain concerned at the overall compliance burden that existing legislation imposes on small business in the areas of company law, occupational health and safety, superannuation, taxation and financial reporting,” he says.

The reporting scheme in a federal government green paper in July builds on the National Greenhouse and Energy Reporting Act passed by the previous government last year. This requires businesses producing more than 25,000 tonnes of carbon dioxide, or producing and consuming more than 100 terajoules of energy, to report on their emissions.

The green paper takes this further. A carbon-reduction scheme means that the federal government has to know exactly which emissions need to be reduced, and that job is falling squarely on business.

As the green paper states: “No government has sufficient information to implement this comprehensively across the economy. Business and households are much better placed to know where they can reduce emissions at low cost.”

New rules will require businesses to monitor emissions and keep documentation and records using one of four methodologies: emission factors determined by the Department of Climate Change; measurements based on Australian and international standards prepared by standards organizations; those based on Australian standards; and, potentially for the greatest accuracy, direct monitoring of emissions. Companies will choose a method depending on their emissions and the costs of measurement.

To avoid double reporting, companies will submit only one emissions statement, which will also cover the NGER scheme. Companies will have to report on October 31 each year.

The government has flagged more changes. “Where practical, the National Greenhouse and Energy Reporting System will be used as the basis for monitoring, reporting and assurance of emissions under the scheme,” the green paper says. “However, in some areas, NGERS will need to be strengthened to support the special financial importance attached to emissions reported under the scheme.”

The green paper requirements pave the way for an entire new industry. Large emitters – those producing 125,000 tonnes of carbon dioxide or more – will be required to have their annual emissions reports checked by an independent third party.

Companies already active in this area include Connell Wagner, Deloitte Touche Tohmatsu, Ernst & Young, PricewaterhouseCoopers, KPMG, Energetics, DNV Certification, Sinclair Knight Merz, Protiviti, Environ Australia, Environmental Resources Management, GHD, SMEC and URS Australia. It is expected that many more, particularly accounting and engineering firms, will move into the potentially lucrative area.

Climate change consultants say the industries most affected by the green paper are electricity generators, industrial processors (such as ammonia plants, smelters, cement manufacturers or paper producers); transport operators, fuel suppliers, miners and waste water management companies because they have fugitive emissions of methane. Forestry companies can opt into the scheme if they want to create carbon permits from tree planting.

The green paper makes the point that more accurate information will deliver greater efficiencies and give companies more opportunities to reduce emissions.

“However, these benefits need to be weighed against the potential higher costs of more accurate methodologies,” it says. “There could be a case for limiting the choice of methods allowed under the scheme if the benefits to the fairness and economic efficiency of the scheme outweighed the costs of more accurate methodologies.”

The principal consultant on carbon markets at Energetics, Cheryl Bowler, says accurate measurement can be costly.

“With, for example, an open-cut coalmine, it’s potentially $1 million to install an accurate sampling system for measuring fugitive methane and you’ve got to work out whether it’d worth paying the money to put that meter in or you’re better off using a default number under method one,” she says.

“You’ve got to work out if it is worth spending that extra money to get your emissions footprint more accurate. Is it going to be higher number or a lower number than the default factor and, if it‘s going to be lower, is it going to be low enough to pay for the metering costs?”

Other issues include determining who reports in cases of joint ventures with multiple contractors and complex organizational structures, Bowler says. “It’s not necessarily easy to work out who have control over the emissions.”

The changes will also have implications for accounting and taxation. If companies are required to pay a penalty for every tonne of carbon dioxide, they can avoid paying by either buying or trading a compliance permit, sequestering greenhouse gases to reduce their net emissions, or just emitting less carbon. But they can make these decisions only after considering the after-tax cost of each method.

The wrong tax treatment could undermine the government’s broad aim of cost-effective cuts in emissions. A tax-neutral environment will reduce the chances of this happening.

To help achieve this, the green paper suggests special provisions in tax law that will allow entitles to claim a deduction for expenditure incurred in the purchase of a permit. Alternatively, if they sell a permit, they will have to include the proceeds as assessable income.

Globally, there is still uncertainty about the accounting treatment of emissions-related assets and liabilities. Global standard-setters are wrestling with the problem.

In 2004, the International Financial Reporting Interpretations Committee issued an interpretation but withdrew it the following year after companies objected to the differing treatments of emissions0-related assets and liabilities.

The IFRIC then handballed the matter to the International Accounting Standards Board and the federal government has since written to the IASB asking it to change the international standards to facilitate appropriate reporting of emissions-related assets and liabilities prior to the beginning of the scheme in 2010.

This will provide more certainty for companies and investors. But the green paper is just another step and there are plenty of gaps that need to be filled in.

4 lessons from future carbon counting

  • 1. Under the federal government’s green paper proposals, the job of measuring exactly how much carbon is being produced will fall squarely on businesses and households.
  • 2. The green paper proposals are likely to create a whole new industry in auditing and reporting large emissions, with new fields of work for accountants and consulting engineers.
  • 3. The method used to measure carbon emissions, and the physical measuring itself, could in future become important choices companies have to make.
  • 4. Global accounting standards-setters are still struggling to work out common treatments of carbon related liabilities and assets.
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