Carbon tax countdown: How SMEs can get a head start

For many SMEs, the reality that Australia will have a carbon price from July 1 this year probably hasn’t quite set in. This may be partly due to a “we’ll believe it when we see it attitude” that has resulted from the seemingly endless, and endlessly farcical, political process that preceded the legislation’s passage through Parliament in November.

But now that it is written into law as part of the Clean Energy Future package, the next five months will be crucial for SMEs to start thinking about the impact a carbon tax might have on their bottom lines.

For most, any potential impact will be felt in increases to energy bills, or in price rises in key supplies like cement and steel, as costs incurred by Australia’s heaviest-emitting industries are passed down the line.

So how can you make sure you are factoring in the costs – direct or indirect – of the carbon tax to your business? And how can you keep them at a minimum, or even come out on top? Here are some tips to help.

Some basic facts about the carbon tax:

• Australia’s carbon price will start at $23 on July 1, and will increase by 2.5% per annum for three years – the period known as the “carbon tax”.
• During this “carbon tax” phase, only Australia’s 500 heaviest-emitting companies will be directly affected, as “liable entities”, and required to buy carbon permits.
• Some medium-sized manufacturing businesses, while not directly liable under the Clean Energy Act, may be obliged under the National Greenhouse and Energy Reporting Act (NGER Act) to report their energy use and carbon emissions.
• On July 1, 2015, the transitional fixed price period ends and the carbon price becomes a cap-and-trade emissions trading scheme with a floating price that will be set by the market.
• The voluntary carbon offset market will continue to run alongside the carbon pricing mechanism.

Where to start

In a report released late last year, global professional services giant KPMG warned that Australian companies “of all types and sizes and across all industry sectors will need to act decisively to manage the broad commercial implications of a price on carbon”.

According to KPMG, the first step is to ascertain the status of your business under the carbon legislation, and which of the three categories – liable entity, non-liable entity and participating entity – it falls into. While most SMEs won’t face direct liabilities, they will need to factor in the carbon emissions embedded in their supply chain, as well as the extent of their electricity usage, in order to manage changes to the business cost base arising from the carbon price.

Charlie Knaggs, a senior associate at climate and sustainability consultancy Netbalance, says a good place to start is with a carbon pass-through analysis. Knaggs says this will help analyse the business for areas of carbon intensity or “carbon hotspots” in the supply chain, thus giving them visibility of where future cost pressures will come from, and also of where the opportunities lie to make savings.

For an SME in the retail sector, carbon hotspots might include transport used to deliver goods, electricity used to run stores (in particular for refrigeration and heating and cooling), as well as refrigerant emissions, and pass-through costs from packaging and paper material.

For an SME in the services sector, carbon hotspots will be around energy usage and waste disposal.

For an SME in manufacturing, there will be multiple carbon hotspots including energy use, waste disposal and pass-through costs from key components, such as metals-based materials, that themselves are the products of carbon-intensive industries.

For construction companies, carbon hotspots would include cement use – both from pass-through costs from the carbon-intensive cement manufacturing industry and from on-site emissions, power and fuel use.

This analysis can be as high-level or simple as organisations want, says Knaggs, and need not be overly complex.

“There is plenty of information out there about what sectors are more carbon affected than others, and it can be as simple as that,” he says.

And with the volatility of energy prices, even without a carbon tax, energy budget risk analysis is another area Knaggs recommends businesses invest in.

“There is a whole range of causes behind the [recent electricity price] increases,” says Knaggs, such as networks, the carbon price and the renewable energy target.

“Businesses need to get a picture of where prices are going to be in different scenarios… and they need to consider what are the long-term projections for energy costs,” he says. This will then help them make the right decisions about how to deal with the costs, he says – whether to pass them on to customers, to balance them by cutting costs and introducing efficiencies elsewhere, or to mitigate them by making changes in the supply chain.

Dr Peter Holt, principle consultant in carbon markets and strategy at Energetics, agrees that for most SMEs – particularly medium-sized businesses – managing the carbon tax will be all about managing increasing electricity usage and costs.

“Medium-sized manufacturing businesses like foundries will be impacted by this quite a lot,” says Holt, “so they will need to get a good handle on energy.”

This will mean the introduction of “energy dashboards”, as well as factoring energy use and costs into monthly reporting – a job Holt says is increasingly being taken on by CFOs and operations engineers.

Embrace efficiency

Energy efficiency is often dubbed the “low-hanging fruit” of the low-carbon economy for its quick turnaround in cutting emissions, cutting costs and raising productivity. And yet it seems that even recent pre-carbon tax power price hikes of around 20% a year have failed to motivate Australians to take it seriously.

The Australian Industry Group surveyed its members early last year and found that while some large energy users had started to invest in efficiency, more than 70% hadn’t improved their efficiency over the last five years. Seven per cent of respondents even admitted to becoming less energy efficient since 2005.

“People think of efficiency as something the energy guy does, whereas if it’s a productivity issue then it’s core business and it’s a CFO issue,” Energetics executive director Jonathan Jutsen said at an energy conference last year. He argued that business should be thinking of boosting energy productivity in the same way they look for improvements in labour productivity.

But for all its importance to the bottom line, working out where and how to make the changes is often not as difficult as it might seem.

“Most SMEs want someone to come in and do it for them,” says Energetics’ Holt. But, he says, often it’s the “really simple” energy efficiency measures – like switching to high efficiency light bulbs – that offer the best return.

According to Building Green Business, LED lamps use up to 90% less energy than conventional lamps, last for up to 25 times longer, produce up to 90% less radiant heat, contain no environmentally damaging substances, produce no flicker (an attribute some manufacturers claim has been linked to improve productivity) and are 100% recyclable and disposable.

Other small and yet dramatic changes to a business’s energy efficiency can also be made by fairly straight-forward upgrades to energy saving lighting control systems (such as sensor lighting control), insulation, heating and cooling systems and refrigeration.

And for those SMEs that are leasing their buildings, a lot of it will be about understanding what you have control over, says Holt:

• Are you going to be rewarded by efficiency improvements within the tenancy, such as with the CitySwitch program, which has been adopted by most states and territories in Australia.
• Are you signed to a “green lease”, that incorporates ecologically sustainable development principles that ensure the ongoing use and operation of the building minimises environmental impacts?

Waste will also come into focus as a rising cost pressure for SMEs, says Holt, with increases to charges at the gate of refuse depots as well as through increased methane emissions. This will mean more SMEs will need to adopt improved recycling and waste diversion programs to cut costs.

Tap into assistance programs

All these energy efficiency and low-carbon makeovers don’t come for free, of course, so SMEs will also need to familiarise themselves with the range of grants, loans, rebates, tax deductions and other government incentives available to them as part of the Government’s Clean Energy Future package, not to mention the various state-based initiatives and incentives available too.

For example, businesses that use up to $20,000 in electricity per annum or have up to 10 employees can get a 50% rebate on an energy assessment and action plan aimed at introducing efficiency improvements in lighting, skylights, heating, ventilation, air conditioning, insulation, electric motors, air compressors, commercial refrigeration, boilers and insulation.

For SMEs with an aggregated turnover of less than $2 million a year, the instant asset write-off threshold is being increased to $6,500 for depreciable assets from the 2012-13 income year – a measure aimed at assisting small business to invest in new equipment to increase efficiency and productivity.

According to Energy Matters, the manufacturing sector will be able to tap into the $800 million Clean Technology Investment Program, which will provide grants to support investments in energy-efficient capital equipment and low-pollution technologies.

The food and manufacturing sectors, meanwhile, can apply for grants under the Clean Technology Food and Foundries Investment Program; a competitive merit-based $200 million initiative to help businesses to invest in improved energy and/or carbon efficiency for production processes and products.

Energy Matters also points to the Federal Government’s Solar Credits scheme as something small businesses can take advantage of. “For just a few thousand dollars, even an entry-level rooftop solar panel array can slash power bills by a significant amount,” says the website, adding that the Solar Credits rebate will also be further reduced from July 1 this year.

SMEs in Sydney and Perth who become signatories to the Australia-wide tenant energy efficiency program CitySwitch Green Office program (and who complete a baseline NABERS Energy rating assessment within three months of joining) can apply for a rebate up to $1,000. The program also offers businesses assistance in documenting their energy baseline, and offers a range of free resources to assist with energy efficiency measures, including toolkits, case studies and regular information sessions with sustainable business leaders.

Think outside the square on energy

Managing rising power prices is not just about efficiency. According to Energetics’ Jutsen, businesses should be looking beyond the “low-hanging fruit” to whole new approaches to energy delivery. And as Holt points out, now is a great time to do so, with rising power prices, the impending carbon price, and the improvement in the exchange rate for imported technologies combining to reduce the payback period of electricity savings projects from five-to-six years, to two-to-three years.

Jutsen recommends solutions based on decentralised energy technology, such as cogeneration, which can be used at small scale, right down to installing a fuel cell at an individual building.

Imagine having a refrigerator-sized, silent device that can generate power and hot water 24 hours a day at over 80% efficiency, with 75% lower greenhouse gas emissions than buying electricity from the central grid, he said recently on Climate Spectator.

Jutsen also expects biogas-to-energy projects to become popular energy delivery choices in the food processing industry, with the double impact of rising power prices as well as increasing charges for organic waste disposal.

And for businesses suited to solar PV, SunWiz consulting managing director Warwick Johnston says it can go beyond minimising carbon tax-related overheads to actually turning a profit.

“The Renewable Energy Target offers financial incentives that can reduce the price of a solar power system by tens of thousands of dollars,” says Johnson.

Although they will need to act quickly, he adds: “Subsidies will be wound back a notch on July 1, 2012, right at the time the carbon price bites. The Government will also review The Renewable Energy Target this year, so now is a great time to secure a good deal, especially as PV prices are predicted to soon stabilise at their lowest level ever.”

Johnston says businesses should buy a solar PV system size commensurate with their daytime baseline power usage, as most savings are made through on-site consumption rather than export to the grid.

“A 10 kW system can generate 15,000 kWh of power annually, saving a small business on a 30c/kWh tariff $4500 in the first year. Such a system can cost as little as $30,000, meaning a 15% simple ROI is achievable,” Johnston says.