Impact of Carbon Tax on SMEs

By Deane Belfield, Advisor, Sustainability & Climate Change/Carbon Management, HLB Mann Judd Consulting and Managing Director of ECO2Sys (phone 03 9606 3304)

On 1 July 2012, Australians will join many other countries in putting a price on carbon. Whether we call this a tax, a levy or simply a contribution to cover the cost of carbon pollution the name is less important. Basically it’s a pricing mechanism that puts a price tag on every tonne of carbon pollution emitted by the large polluters.

All sectors of the community will be impacted to some degree, with the lion’s share of the burden being carried by the large emitters, but if you are a SME you may wish to know “What impact will this have on my business”? 

This article provided clarification on what a carbon price means for the SME sector (which account for 47% of the nation’s jobs), what additional costs you may expect and what offset options are available as compensation.

The purpose and scope of pricing carbon

• Sharing spaceship Earth with another 7 billion people, many of whom wish to live like us and have access to the same finite resources, is rapidly leading us to a point where we are approaching if not exceeding the ‘carrying capacity’ of the planet. Our collective impact is such that our demand for clean food, clean water, clean energy, shelter, and other basics is greater that the ability of the planet to supply them to us. In economic terms this is akin to drawing down on the planet’s natural capital. By any globally accepted measure or set of national accounts this is true.

• One consequence of our insatiable level of consumption is the volume of waste and pollution generated, of which carbon dioxide is a major component, arising largely through the process of converting fossil fuel into energy to power our industrial system.

• A business as usual paradigm based on continued growth, with its accelerating appetite for resources, is unlikely to provide the type of future and quality of life that we wish for our children and their children, in a resource constrained world. It is not sustainable and sooner or later the consequences of our actions will catch up with us. Globally accepted national accounts (ecosystems balance sheet) validates this observation with hard data.

• Earlier this year the Australian Parliament passed the Clean Energy Future Plan, ushering in legislation that will see a price on carbon from July 1, just over 3 months from now.

• These 500 largest polluters emitting four of the six greenhouse gases (carbon dioxide, methane, nitrous oxide and perfluorcarbon [from aluminium sector]) will be taxed $23 on every tonne of CO2e pollution released into the atmosphere, directly or otherwise. These companies are already known and registered with the Government. Large polluters will report on their emissions and buy and surrender to the Government a carbon permit for every tonne of carbon pollution they produce.

• Carbon pollution from the following sources will be covered under a carbon price: stationary energy (e.g. power stations), waste, rail, domestic aviation, shipping, marine transport, fuels used for running diesel generators on mine sites, industrial processes, and fugitive emissions. Heavy road vehicle fuel is exempt until after July 2014.

• Whilst the Clean Energy Future Plan explicitly sets out the conditions for large emitters and households (the latter as compensation), little detail is provided for the small to medium enterprise (SME) sector. Understandably most SME’s are very unclear about the process for pricing carbon, what it is, how it works and the likely impact on their business costs and profitability and their supply chain partners.

• Questions of concern to business include “Is a carbon price a risk or an opportunity or is it both and how therefore does a SME ensure its resilience and sustainability in a carbon-constrained economy”?

 

What is the proposed carbon price and why have it?

• The proposed carbon tax at its heart is a tool to help manage the cost and consequences of carbon pollution in a manner that motivates the emitter to reduce their carbon emissions by requiring the polluter to pay for the emissions they create rather than having the community as whole pay indirectly (which is currently the case). This is an important first step toward Australia doing its part in building a clean energy economy.

• A carbon price provides incentives to reduce emissions where they are the cheapest, breaking the link between economic growth and growth in pollution.

• A two stage approach: The carbon price will be fixed for the first three years (like a tax), starting at $23 per tonne and rising at 2.5 percent per annum in real terms. From July 2015 the price will be set by the market (known as the emissions trading scheme) and will become flexible (not like a tax), at which point the price may rise or fall.

• Treasury modeling demonstrates that the cost to Australia of cutting pollution and transforming our economy to cleaner energy sources is very modest

• Whilst a carbon price is not a tax on households or small to medium business, there will be flow-on effects and it is these effects that the Government’s Clean Energy Future Plan, through a range of support, offset and other mechanisms, intends to minimize.

• SMEs will have no direct obligation under the carbon price nor will they be required to undertake any compliance activity or additional paperwork.

 

Likely impact on SME’s

• The likely impact on SMEs will depend on the level of exposure the business has to goods and services from its suppliers, be they local or international, the carbon intensive nature of their own products or services and their ability to pass on costs.

• Energy prices are expected to rise significantly in the near future due mostly to the replacement of tired assets (generation plant, wires, poles and network infrastructure), with a carbon price being modest by comparison.

• SME manufacturers in energy intensive industries are likely to feel the effect more than those that are less reliant on energy and transport or are not exposed to international trade.

• Offset mechanisms will be introduced under the Clean Energy Future Plan to compensate households and small business, albeit less is understood about the exact nature of how it will impact small to medium business.

• Measures by Government to assist SMEs adjust to a carbon price to be outlined in the next article include:

• Personal tax free threshold increase.
• Instant asset write-off.
• $40 million energy efficiency grants.
• $240 million fund to help eligible small businesses reduce energy consumption.
• Support to commercialise emerging low carbon technologies.
• Small business support lines.

• SME’s should view a carbon price as both a risk and an opportunity to their business.

 

 

The article is provided by Australianbiz. Australianbiz is a leading small business information portal maintained by practising accountants and a useful resource for their advisors. The site provides practical tax and business articles, common business templates (e.g. updated employment and consultancy agreements), a range of tax and finance calculators (including monthly financial key performance indicators and a linked monthly profit & loss budget that records GST), plus other tools to assist SME’s to better manage their business and income tax obligations. The site also provides other services for professionals including professional indemnity and office insurance quotes, practice finance, solvency management, and content websites for accounting firms.  

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