Five Key Questions for business on the Proposed Carbon Tax

Tristan Webb, National Tax Director, WHK

When the Federal Government released Securing a Clean Energy Future - the Australian Government's Climate Change Plan and details of the proposed carbon tax on 10 July, not surprisingly there were many questions from business. Anyone who has read the document will agree that while it clearly explains the policy rationale for the carbon tax, it is a little hazy when it comes to the details. Tristan looks at five key questions the Government's proposed carbon plan raises for your business.

Question 1:  Am I one of the top 500 emitters?

Under the carbon plan, the top 500 emitters will have to obtain permits from the Government and will generally pay $23 per tonne of carbon emitted in the year of introduction. This will increase in real terms by 2.5% a year until the Emissions Trading Scheme is introduced on 1 July 2015. The Government estimates that the top 50 emitters are responsible for about 75% of the carbon pollution covered by the proposed scheme. The top 50 emitters are relatively easy to identify and include some of the big power generators, zinc and aluminum producers. But how do you determine if you are one of the bottom 450 emitters on the list?

It is understood that the Government could be using information obtained under s 16 of the National Greenhouse and Energy Reporting Act 2007. Under this Act, the Department of Climate Change and Energy Efficiency maintains a register of 777 corporations and their carbon emissions. If you are worried about your business being one of the top 500 emitters, the first thing to do is to check the register. If your business name or ABN appears, you need to start planning for the possibility of paying for your emissions from 1 July 2012.

Question 2:  What are the likely indirect costs associated with the introduction of the plan?

If your business is not in the top 500 emitters, you will need to look at the cost of inputs. In particular, you will need to review price fluctuations in relation to the following costs:

•·         Direct consumption of power (including electricity and gas) in the production of goods and services

•·         Transportation involved in the production process

•·         Upgrades to plant and equipment

•·         Retrofits to make buildings more efficient in their consumption of power

•·         Whether efficiency savings in processing can be implemented or brought forward

Once the likely impact on costs has been determined, you will need to consider whether your business has the capacity to pass on these costs. This will involve an analysis of:

•·      Elasticity of demand for your business' goods and services

•·      Any long-term contracts your business has committed to and whether there is the possibility of varying these to account for the increases in the cost of production

Question 3:  What will be the effect of the tax on businesses that consume fuel for transportation?

The plan does not impose a carbon tax directly on the use of fuel; rather, the fuel tax credit system is adjusted to mimic the effects of a carbon tax. The general plan is to reduce fuel tax credits by an equivalent amount to the tax when the fuel is used for business transport and non-transport purposes.

There are specific carve-outs from this regime. Business and non-transport use of fuels in agriculture, fishing and forestry will continue to use the existing fuel tax credit system.

Question 4:  What government assistance is available for my business?

As well as the tax concessions, there are a number of government assistance initiatives allied to the introduction of the carbon price. The most significant are:

•·     Emission intensive, trade exposed industries may be eligible for the Jobs and Competitiveness Program. This essentially reduces the carbon price by up to 94.5% over time to encourage a gradual reduction in emissions

•·     Farmers can apply for grants to take action on the ground, including the testing of new carbon sequestration methodologies in the soil

•·     The Clean Technology and Investment Program and the Clean Technology Food and Foundries Investment Program provide grants to businesses to support investment in energy efficient, low technology capital equipment

•·     The Clean Technology Innovation Fund provides grants to support business investment in R&D in renewable and low emission technology

•·     Industry assistance programs for steel manufacturers, food processors, metal foundries and forgers as well as specialist grants for the coal sector

•·     Strongly affected regions will also be entitled to apply for government assistance

Question 5:  I am a small business looking for an easy way to recoup costs. Should I rely on figures given to me by my industry association?

The short answer is no. Here is why.

Assume you are a restaurateur with a small Thai restaurant in a busy urban area. You are trying to estimate the impact of the carbon price on your costs. Your main costs are rent, wages, electricity, gas and wholesale food. In the June quarter, the local council provided a notice of the increase in power costs for the 2013 year. This enables you to factor increased power costs into any calculations to increase the prices of meals you sell.

However, you are still unable to forecast the increase in the cost of food.

Treasury forecasts that the average family grocery bill will increase by about $40 a year, or about 80¢ a week under the proposed carbon price. However, the Food and Grocery Council has indicated that an average family's shopping bill could increase by $2.40 a week or 300% above Treasury's estimate. To make matters more complex, the peak vegetable growers' association, Ausveg, estimates price rises of more than 3000% above Treasury estimates.

While the work done by these organisations is important, it is essential to look at the methodology behind their calculations. Treasury, for instance, feeds the $23 carbon price into economic models that track how different entities are likely to pass the price through the economy. Critically, it assumes the full cost is passed through and nothing is absorbed along the way. As a result, it may actually overestimate price increases.