With many details of the Carbon Pollution Reduction Scheme firmly established, many businesses are underprepared and risking their competitive edge. Report Kath Walters
The uncertainty that dogged companies preparing for the Carbon Pollution Reduction Scheme ended with the release of a federal government white paper in November. The paper contains the crucial information companies need to model the scheme’s economic impact: an emissions reduction target set at a 5-15 per cent reduction of emissions of carbon dioxide equivalent (CO2-e) from 2000 levels by 2020; and the range of permit prices from no less than $23 to no more than $40 (see below “Still to be decided”).
The new rules will be passed by the Senate – the low emissions target and generous compensation packages ensure this. But industry groups will fight hard to push back the July 1, 2010, start date.
The government left the door open to increase the target reduction of CO2-e to 15 per cent of 2000 levels, contingent on global agreements at the United Nations Climate Change Conference in Copenhagen in December.
It is one of the government’s biggest economic reforms since the introduction of the GST, but experts are playing down the impact. “It’s like the GST,” Energetics’ principal consultant in carbon solutions, David Mitchell, says. “There will be a once-off jump [in costs] and we will all adjust.” Companies and their customers will feel less impact from the new emissions trading scheme than they do from fluctuating petrol prices or from a wage deal, he says.
The task at hand is one of complying with the new rules. The best-prepared will get the best from the scheme.
There are three issues for companies within and outside of the scheme: getting accurate data, devising strategies to manage buying and selling permits, and understanding grants and compensation.
Unfortunately, many companies have fallen at the first hurdle, failing to comply with the first wave of new rules contained in the National Greenhouse and Energy Reporting Act introduced in September 2007. Many companies have not even started collecting emissions data from July last year. On October 31 this year, companies must provide their first report of emissions from July 1, 2008, to June 2009. “We are still having people ask us: are we covered?” Mitchell says (see below “The Essentials”).
Consulting firm RepuTex advises companies to include emissions from suppliers and users of their goods and services for an accurate picture of emissions “risk”. RepuTex’s analysis of S&P/ASX 200 companies shows that direct emissions from production (scope 1) and electricity (scope 2) account for, on average, only 24 per cent of the total emissions of these companies. The supply of materials and use of goods and services makes up another 76 per cent, on average, of their emissions, analysis released in December shows.
So does it really matter? Financial services companies, for example, might decide it does, RepuTex head of carbon research, Bahador Abedi Tari, says. “Their exposure comes from their investments. If they invest in carbon-intensive assets, they might ask what [the companies they invest in] are doing to address their risks or stop funding them.”
Data pushes change. “Companies must look at the cost curve,” Tari says. “Is it cheaper to buy permits or to reduce both direct emissions and those in the supply chain? They should ask their suppliers to calculate their carbon intensity [the tonnes of emissions per million dollars of revenue] and then rank them, and source supplies from the lowest emitters.”
Cutting emissions has a secondary benefit when compared with buying permits. Those with emissions below the industry average – soon to be determined by the federal government – will have permits to sell. “Talk to the tax and financial people in the company,” Mitchell advises. “It can be sophisticated modelling.”
The CPRS is a financial instrument. Anyone can buy and sell permits. Green groups might buy permits and refuse to sell them, hoping to push the price up and bring about change faster. Hedge funds might buy permits years ahead, bank them and wait until their prices rise.
Disorganised companies might buy permits in the weeks before they are due to be submitted, when the price will be highest. Others might risk buying the day before, hoping for last-minute bargains.
Not every company will want to handle the complexities or permit trading in-house. Banks, for instance, will buy and sell on behalf of their clients for a fee.
In March, Booz & Company will run the first of a series of “war games” to give their clients experience in managing permit auctions, which the government will hold each month. It is about practicing strategic decision-making before they really have a $100 million liability,” Booz’s emissions trading specialist, Rob Fowler, says.
The government has pledged to hand back all revenue from permit sales to consumers and companies in the form of compensation to the Senate. Consumers will not get their compensation until tax time, despite having to pay 18 per cent more for electricity and 12 per cent more for gas.
Companies that release large amounts of emissions and sell to global markets will be issued with either 90 per cent or 60 per cent of their required permits free, according to their emissions intensity. This is because they may have rivals in countries that do not have an emissions trading scheme or carbon tax.
Still to be decided
1. The list of trade-exposed, emission-intensive activities that will qualify for compensation is yet to be released by the federal government.
2. The final target for emissions reduction (5-15 percent) will be decided after the United Nations Climate Change Conference in December.
3. The price of permits will fluctuate according to the market. The government has allowed companies to buy and sell permits on the international market, effectively putting a cap on the price of permits because companies need not pay a price higher than the international price, now about $28. Between the end of the reporting period on October 31 and December 15, when companies must surrender permits, the government will release an unlimited number of permits for $40, which cannot be banked or traded, effectively fixing the maximum price.
4. The average emissions intensity per industry will be determined by the government.
1. Check the obligations under the National Greenhouse and Energy Reporting Act 2007.
2. Start collecting data on direct emissions whether or not the business is affected by the NGER.
3. Determine the emissions intensity: how many tonnes of greenhouse gas does the company emit per million dollars of revenue.
4. Calculate if it is cheaper to reduce emissions or buy permits.
5. Consider outsourcing some of the permit trading functions.
Carbon Pollution Reduction Scheme at a glance.
What is CPRS?
An emissions trading scheme, also known as a cap and trade scheme.
Who decides the rules of the scheme?
The federal government has outlined the proposed CPRS rules in a white paper released in December (http://www.climatechange.gov.au). The scheme has drawn on some of the proposals of the government’s chief adviser, Professor Ross Garnaut, economic modelling by Treasury and consultations with industry. The scheme must win approval in the Senate before passing into law.
When does the CPRS take effect?
July 1, 2010
How does it work?
The government has set a cap on greenhouse gas emissions (of which there are six). This is to reduce, by 2020, emissions by between 5 per cent and 15 per cent of the national emissions measured in 2000. Australian emissions in 2000 were measured at 551.5 tonnes.
How do I find out how much greenhouse gas my company can emit?
Calculate greenhouse gas emissions using the protocols published in the National Greenhouse and Energy Reporting guidelines found on the Department of Climate Change website, http://www.climatechange.gov.au. There are many companies offering “carbon-footprinting” services.
Do all businesses have to buy permits?
No, only businesses covered by the CPRS scheme with facilities that emit more than 25,000 tonnes of carbon dioxide equivalents a year. The government estimates this will be about 1000 companies.
How do I know if I have to buy permits?
The CPRS white paper sets out clearly the types of facilities that will be covered in Chapter 6: Coverage.
Where do I buy permits?
The government will auction permits every month. Alternatively, companies can buy them on the open market. Anyone can buy or sell permits.
How much do permits cost?
There is no fixed price, the price will be determined by demand. The government has estimated that initially permits will be $23 a tonne if Australia adopts the minus 5 per cent reduction target, or $34 a tonne if the minus 15 per cent reduction target is accepted.
When must I buy them?
Permits can be bought at any time but must be surrendered by December 15 each year following submission of the NGER/CPRS report to government for the preceding financial year, due on October 31 each year.
What if I don’t buy enough?
There are various options. A company will be able to buy permits on the open market or buy some of the government’s $40 “price-cap” permits, available for a limited time each year. A company may also buy eligible Kyoto units (Certified Emissions Reductions, Emissions Reduction Units or Removal Units). Finally, a business can “borrow” some of the next year’s permits – but only a limited number.
What happens if I break the rules?
There will be a range of civil and criminal penalties for failing to surrender permits, as well as having to “make good” the following year by surrendering that year’s permits as well as those not surrendered in the previous year.
How would I be caught?
Just like tax: federal data matching and audit.
The carbon trading market: voluntary v mandatory
Make no mistake. Buying permits in the Carbon Pollution Reduction Scheme does nothing to reduce or offset the world’s greenhouse gases.
The CPRS simply provides a financial incentive for companies to cut their carbon emissions in order to minimise their costs.
Voluntary carbon credits, on the other hand, are different. Whether or not they are in the CPRS, companies can offset their emissions on a voluntary basis.
Voluntary carbon trading schemes allow companies to buy “credits” in a wide range of carbon-reduction or offset projects – ranging from planting trees to managing waste and developing alternative-energy power generators – in Australia and overseas.
There is no regulation of the market but some credits are earned from projects registered under the Kyoto Protocol or government schemes. Prices range widely from as little as $1 to as much as $60.
Carbon credits sold on the voluntary market have one big advantage over CPRS permits: they actually do something to reduce or offset greenhouse gas emissions.