SMEs Suffer in Sin of Emission

19 Nov 2009Archived News Energetics in the News

PUBLISHED: BRW Magazine by Anthony Sibillin - David Mitchell, Principal Consultant, Carbon Markets talks about the indirect impact of NGER on SMEs.

Derisory compensation for small businesses that emit carbon pollution may hit the biggest job-creating sector of the economy where it hurts most.

The federal government and opposition continue to spar over the proposed carbon pollution reduction scheme. At issues is the level of compensation for electricity generators, aluminum producers and other big emitters. Not at issue, it seems, is compensation for small businesses.

The government says this is because small businesses do not have to buy permits under the CPRS. They also spew too little carbon dioxide into the atmosphere to be included in the national greenhouse and energy reporting system. (Beginning in 2008-09, big emitters must tell the government how much carbon they released in the previous financial year.)

However, the Australian Chamber of Commerce and Industry says the minimal compensation promised to small businesses so far is an oversight that may slash the profitability of the biggest job-creating sector of the economy.

“Our concern is the direct impact of higher energy prices on the sector,” economics and industry policy director Greg Evans says. “At this stage, that’s one area that is largely uncompensated.”

This oversight being with assessing the impact of the CPRS on the nation’s 2 million small businesses. Despite employing two in three Australians not working for the government, small businesses have not been the subject of a specific impact assessment, a spokesperson for the Minister for Climate Change, Penny Wong, admits.

In June, ACCI took matters into its own hands and commissioned an advisory firm, Castalia, to assess the likely effects of the CPRS on small and medium enterprises in food processing, plastics and chemical manufacturing, machinery and equipment manufacturing that are competing with overseas companies not, for now at least, subject to carbon regulation.

An emissions-reduction target of 5 per cent below 2000 levels by 2020 will increase energy costs by 23 per cent and freight costs by 4 per cent on average across these three sectors, Castalia estimates. However, local manufacturers will not be able to pass on these increases as customers will switch to cheaper overseas suppliers unaffected by the CPRS. So, instead, profits will fall by between 1.6 per cent and 5.3 per cent.

A more ambitious target of 15-25 per cent below 2000 levels will raise energy costs (up 38 per cent) and freight costs (up to 10 per cent) even further, increasing the hit to profits to between 2.8 per cent and 10.0 per cent, Castalia says.

“If the government hops to implement a policy with minimal impact on investment and therefore minimal long-term impact on the economic performance of sectors such as manufacturing SMEs then businesses need to maintain profitability,” the firm’s report warns. “For businesses to remain profitable, they will be forced to offset carbon-cost increases with the primary mechanism available: reductions in labour costs.”

The government says SMEs will receive grants through its climate change action fund for insulation, new hot water systems and other energy-saving investments. This won’t help the thousands of small businesses that do not own their premises, the ACCI notes, and leaves SMEs excluded from other assistance measures being offered to big businesses (see table, above).

The government says SMEs will receive grants through its climate change action fund for insulation, new hot water systems and other energy-saving investments. This won’t help the thousands of small businesses that do not own their premises, the ACCI notes, and leaves SMEs excluded from other assistance measures being offered to big businesses (see table, above).

Nicholas Armstrong, business-to-business director at COzero, which sources “carbon offsets” for electricity usage, agrees the government’s CPRS compensation package is skewed in favour of big businesses. COzero’s own modeling suggests the CPRS will raise energy prices by 20 per cent by 2020 before taking into account increases due to other factors such as years of under-investment in power generation, particularly in New South Wales.

For a typical SME client, consuming 160 megawatt hours a year, this will add $5000 to an annual power bill.

“When you look at how many people the SME sector employs, there should be more focus on that sector,” Armstrong says “I don’t think there should be more [free carbon] permits allocated. I think there should be a reallocation of permits, Robin Hood-style, taken away from big business and given to small business.”

As if rising costs are not enough of a disadvantage for SMEs, competitors in other countries can make carbon-reducing investments and sell the resulting carbon offsets to big Australian emitters. Under current CPRS legislation, only forestry companies in Australia can do the same.

Already, small businesses are feeling the impact of carbon regulation through the national greenhouse and energy reporting system. While big emitters have already reported their 2008-09 emissions, climate change consultant David Mitchell says 2009-10 is the first year in which it will hit contractors. Mitchell, of Sydney-based Energetics, says any company performing a service that emits carbon at the site of NGERS-regulated customer should be recording these emissions already.

Mitchell advises SMEs, especially those involved in mowing lawns, laying roads, installing pipes and other fuel-burning activities, to approach their customers now about what they will have to report. Otherwise, they may find themselves scrambling next October to recall how much fuel they used on a job six months ago.

Mitchell urges SMEs to keep the cost of carbon regulation in perspective. “The cost of carbon is just another factor in the tapestry of business expenses.” Annual variations in interest rates, global oil prices and the value of the dollar are likely (to) be more significant.

Still, for many SMEs, any additional impost from carbon pricing may be enough to up their business over. ACCI is calling for a tax rebate to compensate SMEs for a certain percentage of the average fall in their industry’s profitability as a result of the CPRS.

Before the specifics can be hammered out, the first challenge for SMEs is to become an issue at all.

CARBON POLLUTION REDUCTION SCHEME and SMEs Measure Do SMEs qualify? Free permit allocation to business in emission-intensive trade-exposed industries No Free permit allocation to electricity users in emission-intensive trade-exposed industries No Electricity sector adjustment No Climate Change Action Fund information campaign No Climate Change Action Fund investment in energy efficiency and low-emission technologies Yes Climate Change Action Fund structural adjustment No Climate Change Action Fund coal-sector adjustment No Source: ACCI, Castalia. 

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