The Carbon Tax Scheme (CTS) is an indirect tax levied on users of fossil fuel and was implemented in January 2012. The Carbon Tax is based on the Economic Principle of Negative Externalities. Negative externalities are costs to the society that is created when goods and services are produced. The negative effects of these activities are shouldered by the society so payment for that cost from the parties that are liable is widely believed to be the appropriate approach for managing it. In the case of fossil fuel use, users of electricity from these sources are taxed based on the amount of Carbon Dioxide emitted into the atmosphere.
This report is submitted for the purpose of identifying how the Company, a food and beverage conglomerate operating in South East Asia and the Pacific, can prepare itself for the implementation of the CTS. In particular, it examines why the following questions are critical to the Company using literature sourced from the internet. The “readiness” questions are:
Who in the business organization will be responsible for preparing the business for the price of Carbon?
Who will be responsible for the compliance requirements of the CTS, including permits and licenses?
How will business organizations integrate the CTS into their financial systems?
How will business organizations conduct their contractual agreements and obligations with respect to the requirements of the CTS?
What human resource strategies will the business organization implement in response to the requirements of the CTS?
A set of recommendations are made to improve the level of readiness of the Company with respect to the implementation of the CTS. These recommended actions must be implemented within the first year of the CTS program, to ensure that risks are managed and that the Company is made ready for the shift from the more predicable three-year phase of the tax scheme to 2015 when the Emissions Trading Scheme, a market-based pricing approach is implemented.
Introduction
The Carbon Tax is a fee that is levied by government for the production, distribution and utilization of fossil fuel products, including oil, coal and natural gas. These products are used primarily for power generation. The Carbon Tax is calculated on the basis of the amount of carbon dioxide that is emitted to the atmosphere when these fossil fuel products are burned – essentially it taxes pollution.
The basis for the Carbon Tax is what economists call the Economic Principle of Negative Externalities. Negative externalities are costs to the society that is created when goods and services are produced. They are called negatives because they are borne by society, meaning the costs are unpaid. To put it in perspective, utilizing fossil fuels produces electricity, a requirement for running factories, homes, schools and other facilities which essentially drive the entire economy of any country. When electricity is produced and pollution is generated as a by product (pollution being carbon dioxide emissions), this is paid by society in general in terms of degradation of the environment, dangerous effects on health, etc. To mitigate this cost to society, the carbon tax implies that those that create the unnecessary costs to society be liable to pay it.
The imposition of a Carbon Tax is used by special interest sectors to promote their causes. Climate change advocates and renewable energy developers herald the implementation of the Carbon Tax (and other similar mechanisms) because it makes fossil-fuel based energy more expensive thus making renewable energy sources more attractive and the harmful effects of global climate change less abrupt.
The Carbon Tax Scheme (CTS) was launched in July 2012 and will evolve into an Emissions Trading Scheme by 2015. As a result, business is ramping up to adhere to the new regulatory requirements of the CTS. This report discusses the general business issues required for all corporations that will be affected by the implementation of the CTS. These general issues are:
Who in the business organization will be responsible for preparing the business for the price of Carbon?
Who will be responsible for the compliance requirements of the CTS, including permits and licenses?
How will business organizations integrate the CTS into their financial systems?
How will business organizations conduct their contractual agreements and obligations with respect to the requirements of the CTS?
What human resource strategies will the business organization implement in response to the requirements of the CTS?
Background
The company is an established food conglomerate operating in South East Asia. Founded in 1890 as a brewery, the company now is publicly listed as a food, beverage and packaging company. It operates more than 100 manufacturing facilities throughout South East Asia, has more than 20,000 employees and is considered as one of the pioneering corporations in the region in terms of business processes and innovations.
The company carries many brand names, operating in Hong Kong, china, Indonesia, Vietnam, Thailand, Malaysia, Laos, Australia and has global reach through major partners in Europe, the Americas and Africa.
The company’s manufacturing facilities are considerable users of energy. Because it is competing in a fast moving, low-margin industry its products are highly sensitive to price changes. Input price changes, such as the cost of electricity, will have an impact on the business by way of a change in its market share position as well as its corporate image.
This report, as directed by the company’s Chief Executive Officer, seeks to identify the business processes that must be implemented to ensure that the company responds immediately to the requirements of the recently imposed Carbon Tax Scheme. This report summarizes findings conducted on available resource materials, studies, and discussions on the economic, financial and operational impacts of the implementation of the Carbon Tax Scheme.
Aspects or Issues and Problems
The implementation of the Carbon Tax Scheme will affect business organizations differently. There are those that are directly liable to CTS while there are business organizations that will have indirect liabilities. The aspects or issues that relate to CTS are enumerated below based on their relative impact on business organizations.
A. Awareness of the requirements of the CTS
Business organizations, especially those that have high liabilities due to their direct Carbon Dioxide emissions must clearly understand the requirements of the CTS. The requirements of the CTS affect investment as well as operating decisions of the business organization, thus requiring close study and the highest possible level of consideration.
B. Forecasting the impact of the CTS
Awareness leads to the requirements of accurately forecasting the effect of the CTS on the organization. This should be examined both on a short-term basis and on a long-term basis. Business organizations must develop accurate forecasting techniques to ensure that the business organization’s viability is managed both in the short term and in the long term.
C. Carbon pricing and its effect on Product pricing
The CTS will have a direct effect on the business organization’s products on the account of input prices possibly increasing. The level and effect of input price increase affects a business organization’s commercial viability. Depending on the elasticity of the demand for these products and services, the effect on consumer purchasing capabilities and ultimately the economic resilience of a country remains to be the most critical issue regarding the implementation of the CTS.
D. Regulatory compliance and government monitoring
It is important that business organizations recognize government regulatory compliance procedures and that there will be reportorial duties attached to the implementation of the CTS. Business organization’s compliance processes should include submissions to the local government and unilateral government organizations brought together to monitor CTS implementation.
E. Investments, risks and opportunities
The implementation of the CTS was framed under the possibilities of plausible investments in low-emission type of technologies. These present investment opportunities as well as threats to business organizations. Business decisions such as capital investments are affected causing significant impact on local economies (i.e. consider investments in other locations).
F. Capital and operational budgeting
Business organizations must factor in the cost of the CTS on long-term and short-term business decisions. These decisions include operational budgeting, fund sourcing, capital use and required returns.
G. Supply chain management
Business organizations must also recognize that the CTS affect all organizations up and down the supply chain. Organizations that will comply with the CTS will require their suppliers to comply with CTS as well, thus changing the operational landscape.
H. Organizational readiness
Equally important is the consideration of a business organization’s readiness in terms of the implementation of the CTS. The aspects of a business organization that would have to be examined to evaluate the organization’s readiness to operate in compliance with the CTS are:
Financial reporting
Emissions recording and reporting
Regulatory requirements and compliance
Contractual obligations and opportunities
Human resource strategies
This last set of issues surrounding the implementation of the CTS is the focus of this report. The general business requirements of the CTS are often undermined by other relevant issues, as stated above. However, the organization’s ability to address the requirements of the CTS wholly would determine its ability both in the near term and with respect to its long-term business positioning.
Discussions (Critical Analysis)
The implementation of the Carbon Tax Scheme will change the way business organizations go about implementing their short term and long term business strategies. Despite its many benefits, the implementation of the CTS is contentious primarily because of its projected effects on the viability of business organizations and national economies. The timeline for the implementation of the CTS is truly aggressive, with the CTS being implemented in July 2012 and a “shift” into an Emissions Trade Scheme scheduled after three years.
Figure 1 How Carbon Pricing Works1
According to King (2012), the implementation elements of the CTS are as follows2:
CTS commencement July 2012
A fixed price for carbon for the first 3 years, as shown below:
Year
Price (US$) per MT Ton Emitted
Based on market response, the price of carbon dioxide emissions will be determined during a “flexible price” phase (set to be started on July 2015) through an Emissions Trading Scheme (ETS).
The implementation of the CTS will encourage clean energy investments from different sectors of society.
The fact that carbon dioxide prices are pre-determined means that business organizations can predict their financial plans with respect to the CTS with great accuracy. Governments throughout the world are providing incentives and assistance packages to business organizations to ensure that these organizations are given the opportunity to take advantage of the CTS within the three-year prescribed-price phase.
It is during this three-year phase that it is critical for business organizations to manage the effect of the CTS. Risks associated with the implementation of the CTS will intuitively be experienced during the early part of the fixed-price phase, with organizations still learning the intricacies of the CTS. This period will also be instrumental for the preparation of the business organization for the market driven emissions-trading phase. Most companies will have to examine their business evaluations of the CTS implementation, focusing on the strategic business operations as well as investment decisions. The most crucial activity thus is the re-examination of the business organization’s financial reporting approach because the economic and operating assumptions previously used would be significantly different at the onset of the CTS implementation.
Another critical business process requirement is the reporting of carbon emissions. In the United States, the Securities and Exchange Commission published a guideline that required public companies to disclose their business risks due to climate change thus making reporting of carbon dioxide emissions a critical business objective. However, according to a report by Ernst & Young LLP, the acceptability and uniformity of the technical and financial reporting of carbon emissions and risks is still outstanding. According to the study, of the 1,000 US companies interviewed on readiness on carbon dioxide emissions reporting, fewer than half have carbon dioxide strategies in place, including reporting of carbon dioxide emissions.
In terms of licensing requirements and regulatory compliance, several groups are implementing professional advisory services to enable business organizations to improve their level of readiness. Deloitte, an international professional advisory group has published a paper on understanding of the licensing requirements in Australia in response to the implementation of the CTS. The assistance provided includes filling out applications and registrations, meet on-going and critical licensing requirements and advise in meeting the demands of regulatory agencies. Price-Waterhouse-Cooper, another advisory firm also published a paper for US companies to prepare for managing carbon dioxide as a corporate asset. The paper discusses the US government’s accounting and tax policies with respect to the CTS. The volume of professional advisory services catering to the potential bigger volume of licensing requirements and regulatory compliance activities highlight the fact that the implementation of the CTS will be cumbersome and exacting, thus the need for professional assistance to prepare the business organization.
Lastly, in terms of operational planning the implementation of the CTS will impact all aspects of the supply chain of any business organization. The implementation of the new tax will pressure companies to try to retain their levels of profitability hence will try to squeeze profits from suppliers and customers. Supply chain participants will be required to comply with all the CTS requirements as well, since the overall market effect of the new tax may result in heighted competition within the industry.
The business organization’s requirements to be able to manage risks and opportunities are also amplified. Businesses must manage their internal processes, including their human resource strategies to ensure that they are able to keep their short and long term contractual obligations. Human resource strategies would include identifying the personnel in the organization that would be principally in charge of assessing, managing and controlling business activities that are due to the implementation of the new tax scheme.
The literature cited herein support the urgency of a business organization readying itself for the implementation of the new tax scheme. Specific recommendations related to the Company’s operations and business opportunities are stated in detail in the succeeding section of this report.
Recommendations
Develop the expertise in measuring carbon dioxide emissions – the company will benefit if it is capable of measuring carbon dioxide emissions with accuracy. This is to ensure that when monitoring agencies require the submission of emission records, that business activities are not put in jeopardy due to the absence of such information. The necessary skills of identified personnel should be augmented with the necessary training or expert advice should be sought if this skill set is not available within the organization. Once these are met, a re-examination of the business activities should be implemented and the business organization should determine how it could capitalize on its new carbon-emission position within the competitive marketplace.
Because the business organization will be paying for carbon emissions, it makes sense to manage its energy use. Working on energy conservation is one way of managing the effects of the new tax. If the business organization can determine how best to do this, then it would benefit from the implementation incentives of the CTS. Again, if this skills set is not available within the organization, it would be advisable for the Company to seek expert help from third party groups.
The Company must also examine the inputs to production because of the impact of these inputs to the business. Issues such as where the inputs come from, alternative sources of inputs and supply chain options must be examined. In cases such as this, the Company will benefit from its cooperation with industry associations and other institutions that promote transparency and supply chain efficiency.
Finally, the Company must determine if the Company’s prices will be enough to cover the increase in costs as a result of the implementation of the CTS. Profitability and sustainability must be examined with the same level of importance before any price changes (i.e. increase) is considered.
Implementation Plan
The specific activities that are required to prepare the Company for the implementation of the Carbon Tax Scheme are shown below. These activities must be implemented on the first year of the fixed-price phase of the CTS. After implementation of these activities, the Company would be at an improved level of readiness for the Emission Trading Scheme which will be in place by 2015.
Identify personnel that will be tasked in ensuring that the calculations of carbon dioxide emissions are accurate
Identify personnel that will be in charge of regulatory requirements and compliance
Create a steering committee within the organization that will evaluate the short term and long term impacts of the CTS with the view of filtering and revising company strategies
Provide adequate training and personnel development
Conduct an energy audit of the Company to determine where the cost savings and adjustments can be made
Conduct an examination of the supply chain and input costs
Determine the CTS readiness of supply chain participants
Conduct financial and economic analysis on the macro-level of the business organization and for each relevant activity
References
CPA Australia. 2012. Fact Sheet: Potential Business issues of the Carbon Price. Retrieved from http://www.cpaaustralia.com.au/cps/rde/xbcr/cpa-site/fact-sheet-potential-business-issues-carbon-price.pdf Retrieved on September 22, 2012
Environmental Leader.com. 2010. US Business Lag on Carbon Emission Reporting. Retrieved from http://www.environmentalleader.com/2010/02/04/u-s-businesses-lag-on-carbon-emissions-reporting/ Retrieved on September 22, 2012
Ernst & Young LLP. 2010. Carbon Market Readiness: Accounting, Compliance, Reporting and Tax Considerations under State and National Carbon Emissions Programs. Retrieved from http://www.environmentalleader.com/2010/02/04/u-s-businesses-lag-on-carbon-emissions-reporting/ Retrieved on September 22, 2012
Deloitte. 2012. AFSL Obligations: Carbon Emissions Units: Understanding the licensing requirements. Retrieved from http://www.deloitte.com/assets/Dcom-Australia/Local%20Assets/Documents/Services/Assurance%20and%20Advisory/Carbon%20reporting/Deloitte_AFSL%20Obligations_29May2012.pdf Retrieved on September 22, 2012
King, A. 2012. Preparing for Austrlia’s Carbon Tax. CEOForumGroup. Retrieved from http://www.ceoforum.com.au/article-detail.cfm?partner=rss&cid=11632&t=/Adrian-King/Preparing-for-Australias-carbon-tax Retrieved on September 22, 2012
Morrisey, K. 2012. Carbon Tax Scheme. Small Business Issues. Retrieved from http://www.bizgro.com.au/blog/cabontax-scheme-small-business-issues/ Retrieved on September 22, 2012
Price-Waterhouse-Cooper. 2012. How Your Company Can Prepare To Manage Carbon as an Asset. Retrieved from http://www.pwc.com/en_US/us/energy/assets/carbon_whitepaper.pdf Retrieved on September 22, 2012
Robins, A. 2012. Are You Carbon Tax Ready? MGI Business Solutions Worldwide. Retrieved from http://www.mgiaust-survey.com/articles/are-you-carbon-tax-ready Retrieved on September 22, 2012
The Sydney Morning Herald. 2012. How Carbon Pricing Works. Retrieved from www.smh.com.au/environment/carbon-pricing Retrieved on September 22, 2012
