The carbon tax is imposed directly on the top 500 carbon dioxide emitters in Australia with many companies in the resources and energy sector most heavily taxed. A large majority of the business sector is critical of the measure and there is evidence that the market generally is starting to increase prices. In some sectors businesses may close as they can no longer compete and others will look to move offshore. A recent survey by the Australian Financial Review highlighted the full range of reactions to the tax, with some company strategists demonstrating virulent opposition while others are embracing the notion of a low carbon future.
Many agree that action needs to be taken to reduce carbon emissions, but for the business owner the question remains as to how this measure will affect their business? The majority of SME’s will not be taxed directly as it only applies to the top 500 carbon dioxide emitters. Indirectly, consumers of energy, including SME’s will see rises in certain costs, particularly those related to property, transport, freight and electricity. They may also see a fall in the value of their company’s business assets, threatening debt covenants and the ongoing ability to raise capital.
How can you as a business owner prepare for the carbon price?
Monitor the cost of inputs
It is important to note that the carbon tax will affect the cost of most inputs, some more than others and measuring the impact will be difficult given there is no past history to call upon. Heavy users of electricity, transport services or businesses with high production intensity will be more highly taxed. So it will pay to review your inputs and look to negotiate on price or engage cheaper substitutes. Importantly, conduct detailed reviews of your future and existing contracts, especially longer term supplier contracts.
Review your business modelling and forecasting
Strategically it will be important to quantify and model the longer term impact of the carbon tax on your business. As discussed elsewhere, the impact of the tax will vary depending on the type of industry and the inputs used to manufacture, supply or deliver services to your customers. You will need to consider what costs, if any can be passed on in higher prices. If not you will need to implement strategies to reduce your overheads. If your business has international operations you may consider how much of your higher taxed activities will be conducted in Australia. As this is a new tax that will influence structurally the market, it is recommended that you review your business plan and operating model to assure yourself that the continued capital investment required by your business will generate the expected ROI and ensure the long term continuity and viability of your business.
Regulators of the Carbon Price
The Australian Competition and Consumer Commission watchdog will monitor the implementation of the carbon tax. The ACCC has been given the power and resources to monitor prices and to ensure no price gouging occurs as a result of the roll out of the new tax. A Carbon Price Claims Hotline has been launched by the ACCC where businesses and consumers can complain about false or misleading carbon price claims. The ACCC is also running a webinar in August for small businesses where businesses can ask questions of ACCC staff.
Understand your financial reporting requirements
The introduction of the carbon tax could also have a number of important financial reporting consequences. The most immediate to consider is the impairment of assets under the new regulations. Assessment and modelling for some assets may identify the carbon tax as having a significant negative impact on the cash flows and profitability as well the price for which these assets can be sold. As a consequence of the reduction in the value of these assets there may be an impact to the gearing ratio (assets to liabilities), which could lead to a technical breach of debt covenants and may reduce the amount that can be borrowed. Listed businesses in high emissions intensive industries have an obligation to disclose emissions data under the continuous disclosure regime and in their financial statements.
It remains to be seen what the full affect of the carbon tax will be on business and the end consumer; however with correct steps taken the negative effects of the carbon tax on your business can be managed. Many companies are approaching it as an opportunity to improve energy efficiency and productivity, and in the process reduce costs. However it is important to know that under the new laws your business will have additional costs and compliance obligations. With the raft of changes you will need to review your business strategically to assure yourself of the businesses long term viability.
If you would like more information or assistance in preparing your business for a carbon tax regime, please subscribe and we’ll send you a carbon tax fact sheet. If you would like comprehensive advice on changes to reporting standards and financial implications of the tax, please don’t hesitate to contact me directly.