Carbon pricing and the supply chain

01 Jun 2011Archived News Energetics in the News

PUBLISHED: Ethical Investor E-zine.The impact of a cost of carbon on a business will be more than simply the direct cost increases such as energy price increases or the increased cost of other greenhouse gases.

A well carbon-pricing prepared organisation will also need to understand and plan for all of the supply chain and other indirect costs, as well as the compensation mechanisms in place for many sectors. To position a business to best advantage, it is important to understand the impacts on sensitive customers and their ability to pass-through costs - as received from suppliers and in turn, pass onto customers.

The Federal Government will announce a carbon price in July for introduction in 2012. Although it is anticipated to have a modest overall impact on the national economy with Treasury modelling implying a small decrease in GDP growth under different pricing scenarios to 2050, and modest cost impacts in most businesses, there will be variation by sector. All businesses should evaluate their impacts and where significant, establish a comprehensive, strategic response.

The range of impacts across the supply chain is one of the key insights businesses need to develop. Many large businesses have been exploring the opportunities to decarbonise the supply chain and reduce costs.

It may become more competitive to source some business inputs from an alternative supplier or location, or it may be more economical to switch to alternative products or processes. These less obvious supply chain impacts can be quite material to your business. If your suppliers or customers are heavily affected, there will be implications in turn for your business.

All contracts should be reviewed to assess the ability to pass on cost increases. Many nergy contracts have a direct pass-through clause, while for other business inputs the cost may flow through more subtly. To protect your company’s profits, you should understand who is required to absorb the full cost, and whether, across your supply chain there are opportunities to switch to alternative business
inputs with a lower carbon cost.

However, there are broader considerations beyond cost avoidance. Does the extent to which you can pass-through make your product less competitive than your opposition’s? Does the pass-through make your customers’ products uncompetitive?

Industries such as construction, building suppliers and retailers have greater opportunity to pass carbon costs through to their customers. Another interesting scenario exists for larger suppliers which have the opportunity to dictate supply costs because they are a monopoly or a duopoly.

Energy-Intensive Trade-Exposed Industries such as cement, steel, LNG and aluminium are exposed to international pricing and competition from imports may prevent any cost increases from being passed on. The Government is expected to provide compensation for these industries thereby reducing the carbon price impact.

Otherwise, any business can lower its carbon exposure through carbon abatement activities. Using a greenhouse abatement options cost curve: energy efficiency, carbon abatement, implementation of new technologies and behavioural change programs can be ranked according to their cost-effectiveness and emissions reduction potential. This demonstrates to your customers that you are managing your own carbon exposure cost effectively.

Some abatement programs may include options not previously considered, such as the emissions associated with waste. A campaign to minimise waste not only reduces a business’ carbon liability, but landfill charges which are increasing independently of a price on carbon. Overall, an organisation can become more lean and efficient.

The development of low carbon products and services, and the entry into possibly new markets, may redefine a business brand and attract new customers, who in turn seek to minimise their carbon exposure. In the example of the building sector, low carbon retrofit and design solutions will become the standard, and present new opportunities to innovate as the industry looks for building solutions, not just products.

Financial markets favour organisations that disclose their risks, have a strategic plan in place and support a management culture of transparency. This in turn will direct longer term investment decisions and support the structural change necessary to achieve the transition to a low carbon economy.

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