Grattan Institute: The Effect of Carbon Tax on Australian Businesses

Australia’s 500 biggest greenhouse gas emitters will be taxed on their carbon emissions from July 2012. Whether a company will get taxed or not, Chief Financial Officers (CFOs) in Australia and New Zealand still need to be aware of what the carbon tax and emissions trading systems involve to maintain their organisation’s competitive edge.

A speaker at the upcoming marcus evans CFO Summit 2012, on the Gold Coast, Australia, 4 - 6 March, Saul Eslake, Director, Grattan Institute, points out how Australian companies can prepare for the changes ahead.

What does the introduction of the carbon tax mean for CFOs?

Saul Eslake: If they are a CFO in one of the 500 businesses in Australia that will be liable to pay the carbon tax, there will be some requirements for organising systems, measuring carbon emissions properly and paying in a timely manner.

There will be a three-year transition period before the emissions trading system is introduced in July 2015, whereby companies will need to obtain permits to continue emitting CO2. Appropriate trading and risk management systems must be in place to manage the risks associated with what will then be an exposure to fluctuating prices.

CFOs of businesses that will not have to pay taxes or obtain permits for CO2 emissions, still need to take into account the impact that these will have on the prices of goods or services they require for their business. The good news is that the carbon tax will have less impact on the economy than the Goods and Services Tax introduced 11 years ago.

Will this make Australian companies less competitive in the region? How can they maintain their competitive edge?

Saul Eslake: The most effective way of maintaining competitiveness is by participating in the search for ways to generate or use electricity in less carbon-intensive ways. Indeed, the whole purpose of these schemes is to change businesses’ and people’s behaviour in that direction. The carbon tax can be reduced by reducing energy consumption or switching to less carbon-intensive forms of energy.

Australia is a carbon-intensive economy, with one of the highest levels of CO2 emissions per capita or per dollar of GDP among the advanced economies. Access to relatively cheap, but carbon-intensive sources of energy, has historically been one of Australia’s principal areas of comparative advantage.

Those who opposed the carbon tax pointed out to the lack of action by two of the largest emitters in the world, China and the US. China is unlikely to introduce a similar tax in the near future and it may be some time before the US embraces a market-based mechanism for reducing emissions. Although the tax and trading systems will impact the international competitiveness of many Australian firms, I do not consider this an argument for us not taking any action at all.

There are various compensatory measures for companies that are trade exposed, thus CFOs should make sure they gain access to all that they are entitled to.

What opportunities does this carbon tax present to CFOs?

Saul Eslake: There are various programmes directed towards speeding up the search for commercially viable and technologically sustainable ways of generating energy. Energy-intensive businesses are well advised to follow the developments in that space.

Do you have a final piece of advice to CFOs?

Saul Eslake: Think very carefully about the options that may be available both now and over the medium-term for reducing the carbon intensity of your business’ operations. If your company will not be taxed, there might not be a need to be on top of all the details, but nevertheless, it could be an opportunity for your company to switch to cleaner forms of energy.

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