20 issues on the business implications of carbon costs - provides members with the key facts, so that they can then assess the impact on their business and incorporate the significant issues into their future planning. This will ensure their business remains competitive in a low carbon economy. http://www.charteredaccountants.com.au

1. Business briefing series
20 issues on the business implications
of a carbon cost

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All information is current as at April 2012
Published May 2012
Published by: The Institute of Chartered Accountants in Australia
Address: 33 Erskine Street, Sydney, New South Wales, 2000
Business briefing series: 20 issues on the business implications of a carbon cost
Second edition
ISBN: 978-1-921245-62-6 0112-85

3. Business briefings series
20 issues on the business The Clean Energy Act 2011 passed by the Australian Parliament in November
2011, set out a path for Australia to transition to a low-carbon economy.
implications of a carbon cost
The introduction of a cost on carbon is set to affect businesses in many ways.
This paper, originally published in March 2010, discussed what impact a
proposed emissions trading scheme would have. Following the introduction
of the carbon cost, effective 1 July 2012, businesses need to consider the
practical implications, considering how the tax will be implemented.
With this in mind 20 issues on the business implications of a carbon cost
has been updated to help businesses practically apply the new carbon price
mechanisms that are being put into place. The publication discusses a number
of areas, painting the picture of a new business landscape, and covering:
• Governance
• Quantifying the impacts
• Strategy, risks and opportunities
• Getting the data right
• Communication.
This publication, co-produced with PwC, is part of the Institute’s Business
Briefing Series, which is designed to provide guidance for business leaders
and finance professionals across a range of areas. The rest of the series is
available at charteredaccountants.com.au/businessbriefing.
Craig Farrow FCA
President
The Institute of Chartered Accountants in Australia
Business briefing series: 20 issues on the business implications of a carbon cost
3

4. Business briefing series: 20 issues on the business implications of a carbon cost
4

5. Contents
A new business landscape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Quantifying the impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1. Compliance obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2. Supplier price increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3. Cost pass through and point of obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4. Government assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5. Carbon procurement and trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6. Management accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7. Reducing emissions and improving efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Strategy risks and opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8. New business ventures/products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
9. Physical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10. Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
11. Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
12. Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
13. Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
14. Industry/competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Getting the data right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
15. Identifying your reporting obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
16. Measurement and accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
17. Systems, processes and controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
18. Quality control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
19. Internal communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
20. Communicating with stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Resources and further information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
20 issues checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Contact details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Back cover
Business briefing series: 20 issues on the business implications of a carbon cost
5

6. A new business landscape
The transition to a low-carbon economy has begun. The threat of climate change is now widely
acknowledged by governments and business. Strategies to manage the transition from a carbon intensive
economy to a low-carbon economy are being developed and implemented. These changes, including
market based mechanisms, are designed to provide price signals to incentivise new behaviours and
encourage the adoption of low-carbon alternatives.
On 8 November 2011 the Australian Parliament passed the Clean Energy Act 2011 and associated legislative
instruments (to come into effect 1 July 2012), confirming the federal government’s intention to introduce a
price on carbon. This bill forms a part of the government’s Clean Energy Future Plan (‘The Plan’) which sets
out the path forward for Australia to transition to a low-carbon economy.
The Plan Emissions from the agricultural sector as well as the
combustion of biofuels and biomass are not covered.
The Plan and the accompanying legislation establish
a carbon price by way of a transition to an emissions The Plan also incorporates adjustments to certain Excise
trading scheme with the aim of influencing behaviour and and Fuel Tax Credit arrangements to effectively pass on an
encouraging the decarbonisation of the Australian economy. equivalent carbon price to non-road uses of transport fuels.
Effective 1 July 2014, these adjustments are also expected
The Plan is designed to ensure Australia meets its
to apply to large on-road transport fuel users
unconditional pollution reduction target of at least 5%
below 2000 levels by 2020 and 80% by 2050. Meeting
What are the implications for your business?
this target will require abatement of at least 159 million
tonnes of carbon dioxide equivalent (CO2-e) by 2020. The introduction of a carbon price will impact different
business sectors in different ways. While some sectors
The Plan will commence with an initial fixed price of
will experience a direct cost increase by having to purchase
$23 per tonne of CO2-e from 1 July 2012. This price will
carbon units, others will see an increase in their cost base
be adjusted in real terms by 2.5% per annum. From
as permit liable entities such as electricity generators
July 2015, the carbon price will transition to a fully flexible
and gas retailers seek to pass on the increased cost to
price under an emissions trading scheme, with the price
their customers.
determined by the market.
Treasury analysis supporting the Plan suggests that
During the flexible price period (from 1 July 2015) the
upon its introduction, electricity and gas costs could be
government will set a pollution ‘cap’ which will limit
expected to increase by approximately 10%. Furthermore,
the number of carbon units that are available, and can
the introduction of the Plan is expected to result in an
be adjusted over time to ensure that the government’s
overall increase in inflation of approximately 0.7%.
reduction targets are met.
How you choose to manage this risk will dictate
Liable entities how significantly your business will be impacted.
The Plan has the potential to change the characteristics of
Entities with facilities that have covered emissions greater
your market and provide opportunities for future growth.
than 25,000 tonnes CO2-e will be required to surrender
carbon units. Businesses will also have the opportunity to improve
efficiencies within their business. The identification and
The Plan is expected to directly apply to approximately
strategic development of low-carbon products and services
350 of Australia’s biggest emitters.
will potentially create new markets thereby increasing
Covered sectors include: shareholder value.
• Stationary energy
• Industrial processes
• Emissions from landfills
• Fugitive emissions.
Business briefing series: 20 issues on the business implications of a carbon cost
6

7. National Greenhouse and Energy Reporting What can we do?
Act (2007) Understand the issues and modify your business
Since 2009, the National Greenhouse and Energy to incorporate the impacts of transitioning to a low
Reporting (NGER) Act has required companies to report carbon economy.
their greenhouse gas (GHG) emissions if they operate a
Whether or not your organisation is directly liable,
facility that emits over 25,000 tonnes of carbon dioxide
it is important that the key risks and opportunities
equivalent (tCO2-e) (or uses/produces 100 terra joules (TJ)
of the Plan are identified and addressed.
or if the consolidated organisation emits over 125,000 tCo2e
(or 500 TJ). This report provides a framework and 20 key issues for
chief financial officers (CFOs) to brief their respective
The NGER Act has enabled the government to collect
boards with respect to the Plan.
GHG emissions data (direct GHG emissions and energy
usage/consumption and production) from large emitting The diagram below outlines the framework of key impacts
and energy using/producing organisations. from the introduction of the Plan across an organisation.
This report has been split into these key areas.
The data will support the modelling used by the government
to decide the cap for the carbon price mechanism.
A fine of $220,000 or jail is possible for non-compliance.
Reports under the NGER Act require sign-off by an
Governance
organisation’s chief executive officer. It is important to
note that for both liable and non-liable entities, the Strategy/risks
NGER Act continues to place reporting obligations on Quantifying Getting the
and
the impact opportunities data right
organisations emitting, producing and/or consuming
carbon over certain thresholds.
Voluntary Carbon Credits and the Carbon Communication
Farming Initiative (CFI)
The Carbon Credits CFI Act 2011 establishes the legislative
framework for carbon offsets projects to create Australian
Carbon Credit Units (ACCUs) for compliance (Kyoto ACCUs)
and voluntary (non-Kyoto ACCUs) carbon markets. The
graph below illustrates where ACCU’s may be utilised:
Eligible in:
• Domestic compliance market (CPM)
Issued with • International compliance markets
compliance ACCUs (EUETS, NZETS)
• Domestic voluntary market
• International voluntary markets.
CFI Project
Eligible in:
Issued with voluntary
ACCUs • Domestic voluntary market (NCOS)
• International voluntary markets.
Source: Carbon Market Institute (2011), The Carbon Farming Initiative (CFI): An introduction to Participation, pg9.
Business briefing series: 20 issues on the business implications of a carbon cost
7

8. Governance
An effective governance framework is central to a Role of IT
company’s capacity to operate in a changing world. The
• Has the company considered the strategic role of IT
board of directors and senior management must provide in compliance, risk management, understanding and
effective leadership to ensure that the company’s strategy acting on climate change and carbon opportunities
drives sustainable performance and mitigates risks related appropriately and providing relevant and reliable data
to carbon exposures while evaluating and maximising to senior management and the board of directors?
potential opportunities.
The collection and reporting of carbon has historically
Assurance and reporting
been the premise of the operational and/or environmental • Does the company have a reporting obligation under
officer. However, given that a business’ bottom line is the existing NGER Act?
intrinsically linked with the carbon price, it is now • How does the company intend to report its GHG
important that the internal management of carbon is and energy data, and will the data be integrated into
closely scrutinised by CFOs and their respective finance either annual sustainability reports or the annual
and business planning teams. financial report?
In relation to carbon exposure, there are a number of • Has the company assessed the need for independent
key questions that the board and senior management assurance over reported GHG and energy data? If so, is
this assurance incorporated into the overall assurance
should consider in reviewing their company’s corporate
plan to maximise the value of the assurance received?
governance frameworks.
• Does the company have a plan in place to ensure that
Framework and strategy it complies with Trade Practices Act requirements
regarding carbon related price increases?1
• Is there an enterprise-wide, broad-based governance
and risk management strategy with policies to address
climate change and carbon risks? Role of the CFO
• Are all of the company’s regulatory and legislative • Does the CFO understand the impact of the carbon
obligations understood in relation to addressing price on the business?
compliance risk and also to acting on opportunities • Does the CFO need to be involved in overseeing the
presented by changes in legislation? integrity of emissions reporting, and the changes to
the organisation’s financial risk profile associated with
The board the management of carbon price risk?
• Does the board of directors have the right knowledge
and information available to it to make decisions related
to climate risk and carbon exposures?
• Does the board have an appropriate understanding of
measures established by management to manage the
financial risk exposure associated with carbon markets?
Communication
• How does the company explain its risk appetite and
risk tolerance, both internally and to external
stakeholders, in relation to climate change?
• Have all material stakeholders been identified, and
is there a formal strategic policy for both formal
and informal interaction with them?
1. ACCC – Carbon price claims: Guide for business
Business briefing series: 20 issues on the business implications of a carbon cost
8

9. Quantifying the impacts
The transition to a low-carbon economy presents an • Appropriately assessing the financial impacts
opportunity for some organisations to unlock shareholder of a cost on carbon through a flexible, quality
value. But what is that opportunity and how do you quantify assured model
it accurately? ‘Business as usual’ is no longer an option • Understanding the accounting and tax implications
and companies need to act to ensure the net impact of the of the relevant strategic opportunities, and ensure
transition will create value for the organisation. The key that this is realistic in terms of future cash flows
factors to consider in quantifying these impacts include: and other activities.
• Ensuring that the data on which decisions are
By understanding the factors mentioned above an
made is complete, accurate and timely
organisation has the opportunity to continue to drive
• Understanding the implications of cost pass through increased shareholder value through the additional
onto your business from suppliers and then through cost pressures provided from the Plan. The following
to your customers
pages identify the key impacts the Plan has on any
• Understanding and maximising the government business and the key questions that CFOs should be
assistance available for organisations transitioning asking teams within their business to ensure that the
to the low-carbon economy organisation is both prepared to deal with the additional
• Developing strategies for minimising the risks and cost and administration, as well as to proactively identify
maximising the returns of carbon trading opportunities presented by the Plan.
• Understanding the opportunities for internal
abatement by the reduction of GHG emissions
through internal investment
Carbon opportunities and costs
Value creating New ventures/revenue streams
Abatement/reduction of permit liability
Shareholder value
Reducing consumption
Time
Direct cost of permits
Increasing cost of inputs
Value destroying
Competitive advantage lost/impairment
Source: PricewaterhouseCoopers
Business briefing series: 20 issues on the business implications of a carbon cost
9

10. Quantifying the impacts (continued)
1. Compliance obligation 2. Supplier price increases
Are we directly liable under the Plan? What is the impact of the Plan on our key suppliers?
Have we included the resourcing/legal compliance Have carbon clauses been added to our existing
obligations within budget? procurement contracts?
Is there adequate documentation prepared to Have we incorporated direct and indirect carbon cost
support the position taken? implications into our mergers and acquisitions, capital
expenditure and budgeting/forecasting processes?
A person or organisation may be liable as:
• A direct emitter for GHG emissions directly emitted Exposure is largely dependent on the legal construction of
by a facility contracts. Such exposure may also result in an adjustment
to permit liability, depending on the mechanism by which
• A natural gas supplier for GHG emissions embodied
in natural gas supplied to another person pass through is affected. Exposures can be due to:
• A person that opts-in under the opt-in provisions • Increased supply cost
of the Plan. • Cost reimbursement
• Contractual transfer of responsibility for the supply
Liability for greenhouse gases emitted from the operation
of eligible emissions units
of a facility is triggered where:
• Indemnity against costs
• The person has operational control of that facility
• The integration of carbon pricing consideration into
• Facility produces covered emissions
credit assessments
• The amount of those covered emissions exceeds a
• Reporting obligations
threshold or the facility is a large gas consuming facility.
• Shortfall penalties.
The operators of facilities that emit 25,000 tonnes or more
The materiality of such exposure should not be
of ‘covered’ CO2-e greenhouse gases in an eligible financial
underestimated. Instead it should be calculated based on
year will be liable under The Plan and will be required to
discussions with suppliers so that realistic expectations of
acquire permits to account for their emissions. However,
potential cost increases can be factored into budgets and
this obligation can be transferred between entities through
other areas.
the use of obligation transfer number (OTN) certificates,
or liability transfer certificates (LTCs). Businesses should review existing contracts to determine
if they are liable to pay additional carbon costs under their
The operator of a facility that is a direct emitter may
supply contracts. Where this is the case, or where they are
transfer its liability to a range of other specified entities
carbon permit liable, businesses also need to determine
through the use of LTCs. These are in the form of
whether they can pass through these costs to their
corporate group and financial control transfers.
customers by reviewing their existing customer contracts
Natural Gas and standard terms of business.
An OTN mechanism will allow for the voluntary transfer
of the carbon price liability from natural gas suppliers to
larger gas consuming facilities in prescribed circumstances.
In general, large users of natural gas will be permitted
to quote an OTN to their supplier to assume liability for
their own emissions. Businesses that use natural gas as
a feedstock will also be able to quote an OTN in order to
avoid paying the carbon price on natural gas that does
not result in emissions.
The value implications associated with moving the point of
liability for many organisations is significant. In transactions,
assumptions around permit liability of an organisation,
facility or asset should be tested.
Business briefing series: 20 issues on the business implications of a carbon cost
10

11. 3. Cost pass through and point of obligation There is a real opportunity for organisations of all sizes
to access these incentives to support their successful
Where will indirect cost increases impact our
business most? transition. Business leaders need to make sure their
organisations are familiar with the transitional arrangements
Can we pass our liability through to our customers?
offered by the government and the criteria for eligibility.
Have we added carbon clauses to every
sales contract?
Key transitional measures:
If we cannot pass on our liability, can we still • The Jobs and Competitiveness Program provides
pass on the cost increase? assistance in the form of free permits for specific
What is the appetite for cost increases with our activities and industries that are classified Emissions
customers, and how do we know this? Intensive Trade Exposed (EITE)
• The Energy Security Fund provides for assistance
Organisations will need to consider the propensity of to eligible power generators in the form of free
their suppliers to pass the cost of carbon down the supply permits and cash payments
chain to their business.
• The Clean Technology Programs available
There is potential for increased indirect costs in many include the:
locally produced products and services. A thorough – Clean Technologies Food and Foundries
understanding of the current costs which may be passed Investment Program ($200m over six years)
through from upstream suppliers together with the legal – Clean Technology Investment Program
construction of sales contracts, and the willingness of ($800m over seven years)
contractual counterparties to accept cost allocations, – Clean Technology Innovation Program
will determine the extent to which this new category ($200m over five years).
of cost stops with your business or is passed through.
• The Coal Sector Jobs Package includes
To assess the carbon value impact of pass throughs, it assistance to highly emissions intensive coal
is necessary to review pass through clauses in existing mines in managing the impact of a carbon price.
and future customer contracts and other commercial
arrangements.
5. Carbon procurement and trading
It is expected that the pass through of carbon costs will
be closely monitored by the Australian Competition and Do we have a carbon procurement and
Consumer Commission (ACCC). The ACCC has been trading strategy?
tasked to closely monitor claims made by companies in Do we plan to purchase eligible carbon units
relation to the impact of the carbon price on their own price at auction or in a secondary market?
increases. Companies that are looking to make specific
What hedging will we undertake in relation to
representations to their customers regarding the price carbon price risk?
impact of the Plan should familiarise themselves with
What investment and financing options have
the ACCC’s Carbon Price Claims – Guide for Business.
we considered or discussed?
4. Government assistance Have we considered our options for carbon offsets?
Do we understand all the potential assistance and Do we require an Australian Financial Services
transitional arrangements offered by the government? Licence (AFSL) to trade in carbon units?
Do we understand the timeframes and requirements A carbon procurement and trading strategy may be required
for application for assistance? for entities exposed to a direct carbon price liability.
Businesses strongly impacted by the Plan will be supported
through a range of assistance measures including grants,
loans, tax deductions and other incentives.
Business briefing series: 20 issues on the business implications of a carbon cost
11

12. Quantifying the impacts (continued)
Domestically Generated Units 6. Management accounting
During the fixed period the holders of freely allocated
Have we incorporated the cost of carbon into
permits will be able to sell them to the government as part future cash flow forecasts?
of a ‘buy-back’ plan. ACCUs can be used by businesses
Does our management have adequate, accurate
to meet up to 5% of its carbon permit obligation during
and timely carbon information to support business
the fixed price period (1 July 2012 to 30 June 2015).
decisions?
No threshold applies to the use of ACCUs generated
under the CFI during the flexible price period. Have we considered the impact of a carbon cost
on asset impairment?
During the flexible period, businesses will be free to
Have we considered all tax implications?
buy and sell carbon units they have acquired from
the government.
The Plan will result in a cost of carbon that may be
Internationally Generated Units incorporated into the cost of supplies for operating a
During the fixed price period of the Plan, liable entities will be business. The additional costs from direct liabilities or
unable to use internationally generated units to meet their cost pass through will also need to be incorporated into
liability. From 1 July 2015, when the flexible price period the management accounting and internal reporting
commences, liable entities will be able to use international frameworks to ensure that appropriate cost forecasting
units to acquit up to half of their annual liability. These include has been maintained to support business decisions.
certain Certified Emission Reductions (CERs) from Clean Balance sheet, income statement and cash flow
Development Mechanism projects, Removal Units (RMUs), impacts at a glance:
Emissions Reduction Units from Joint Implementation
projects and other units permitted by regulation. Balance sheet and income statement
The procurement of units directly from eligible projects Impacts
Balance Income
may provide low cost options for liable entities; however
sheet Statement
this is balanced by an increased risk over certainty of
Emission permits (asset)
supply. An organisation should therefore assess its risk
appetite in considering opportunities for acquiring eligible • Purchase of permits ✔ ✘
emissions units at reduced prices that offer differing • Revaluation/amortisation. ✔2 ✔2
degrees of certainty. Obligations to surrender permits
(liability)
In addition, organisations must take into account the carbon
• Recognition of emission liability ✔ ✔
unit price floor ($15.00 in 2015-16, $16.00 in 2016-17 and
• Revaluation of emission liability. ✔2 ✔2
$17.05 in 2017-18) during the flexible price period. This
may reduce the potential benefit of purchasing from the Derivative financial instruments relating
to emission permits (trading permits)
✔ ✔
international permit market. If the market price is below
Carrying value of assets due to
the price floor, a charge will be assessed on each permit ✔ ✔
changes in cash flows
to make up the difference.
Tax treatment ✔ ✔
It is important for organisations to note that carbon units
have been defined as financial products and are regulated Cash flow
as such. Therefore any organisation associated with carbon The cash flow impacts of the Plan that will need to be
credits, permits and offsets must consider whether they considered and budgeted for can be categorised as:
need to apply for an AFSL.
Direct • Purchase of permits
For permit liable organisations, the finance and treasury • Tax treatment of those permits
teams will need to assist in obtaining financing to purchase • Pricing impacts.
the permits as well as developing policy to hedge carbon Indirect • Increases in the cost of raw materials,
pricing and scarcity risks. They will also need to assess fuel, machinery and equipment
the accounting and tax implications and determine the • Electricity price impacts.
appropriate methods for presenting the new transactions.
2. Revaluation of emission permit assets and liabilities may not be required during a fixed price period.
Business briefing series: 20 issues on the business implications of a carbon cost
12

13. Technical Accounting Guidance 7. Reducing emissions and improving efficiency
Currently there is no specific accounting technical
What are we doing to reduce GHG emissions to avoid
guidance in local or overseas markets for emissions direct and indirect costs?
permits. IFRIC 3, Emission Rights, was withdrawn
What can we do to reduce our indirect GHG emissions?
(as it causes unacceptable earnings volatility) with no
current replacement available. Both the International and Depending on the cost of carbon, internal abatement may
Australian Accounting Standards Boards have had the be more cost effective than acquiring permits on the market.
topic of carbon accounting on their agenda for a number The Plan establishes a price signal for GHG emissions, and
of years and are currently seeking feedback from relevant so creates an incentive for lower cost abatement of GHG
stakeholders to determine whether it will remain on emissions. Organisations will be able to assess the marginal
the agenda. cost of abatement against the carbon price. Where the cost
Where there is no specific guidance available, organisations of abatement is above the price, there is a clear financial
must follow the general IFRS principals (including IFRIC 3) incentive not to invest in the abatement opportunity.
in the interim. The accounting implications could include A marginal abatement cost curve is one method used by
the creation of assets (permits), expense of the cost of governments and organisations to understand the cost
emissions, liabilities (obligation to submit permits), deferred implications and priorities for proposed projects to reduce
income (government grant) and other assets/liabilities. GHG emissions. McKinsey has prepared indicative curves for
Due to the lack of specific guidance, there are varied Australia (shown below) and the world. The curve identifies
and inconsistent practices which might be applied in negative and low cost abatement projects that could be
the Australian market. implemented. These projects pay for themselves quickly
through the cost savings from reduced energy consumption.
The carbon price could result in increased costs for services
which are GHG emissions intensive, such as energy and
travel. Organisations need to look at how they can use
these services more efficiently to reduce their indirect
GHG emissions and hence their costs.
2020 GHG emissions reduction societal cost curve
1
Lowest cost opportunities to reduce emissions by 249 Mt CO2e­
Cost to society
A$/tCO2e
200 Power
Commercial retrofit energy waste reduction Cement clinker substitution by slag Gas CCS new build
Other industry energy efficiency Solar PV (centralised)
Industry
Reduced deforestation and regrowth clearing
Transport
Commercial retrofit HVAC Cropland carbon sequestration Coal CCS new build
150 Buildings
Residential appliances and electronics Wind offshore
Reforestation of marginal land Forestry
Mining energy efficiency with environmental forest Degraded farmland restoration
Agriculture
Residential lighting Solar thermal
100 Residential new builds Coal CCS new build with EOR
Commercial retrofit lighting Capital improvements to existing
gas plant thermal efficiency
Commercial elevators and appliances
50 Commercial new builds
Commercial retrofit insulation
0
Anti-methanogenic treatments Emissions reduction potential
Pasture and grassland management MtCO2e per year
Aluminium energy efficiency
-50 Onshore wind
Mining VAM oxidation (marginal locations)
Reforestation of marginal land with timber
Biomass co-firing
plantation
Active livestock feeding Coal to gas shift (increased
-100
gas utilisation)
Operational improvements to existing coal plant
thermal efficiency Geothermal
Reduced T&D losses Improved forest management
-150 Petroleum and gas maintenance Biomass/biogas
Cogeneration
Coal to gas shift (gas new build)
Commercial retrofit water heating
Onshore wind (best locations)
-200 Petrol car and light commercial efficiency improvement
Reduced cropland soil emissions Chemicals processes and fuel shift
Diesel car and light commercial efficiency improvement Strategic reforestation of non-marginal
land with environmental forest
Operational improvements to existing gas plant thermal efficiency
-250
0 50 100 150 200 250
1. Includes only opportunities required to reach emission reduction target of 249 Mtpa (25% reduction on 2000 emissions); excludes opportunities involving a significant lifestyle element
or consumption decision, changes in business/activity mix, and opportunities with a high degree of speculation or technological uncertainty
Source: ClimateWorks Australia, 2010
Business briefing series: 20 issues on the business implications of a carbon cost
13

14. Strategy risks and opportunities
Organisations will need to reassess their existing strategies through a carbon lens. The modifications will need to
incorporate the impact from the changes to the economy such as the demand for existing products and services once
there is a carbon price. For some organisations this may mean that certain products may no longer be profitable and
other products may achieve increases in revenue through higher demand.
In order to understand the impacts on strategy an organisation must understand its risks and opportunities and
prioritise them.
First- and second-order risks in the business landscape
Competitors
rganisation
The O
Employees
Physical assets
Suppliers Customers
Operations
Capital
Reputation
External stakeholders
Investors, Analyst, Regulators,
Communities, Pressure Groups
First-order carbon risks relate to direct and Second-order carbon risks relate to indirect
geophysical impacts on a business. They impacts and responses by internal and
will most likely affect physical assets and external stakeholders and competitors.
operational activities. These risks have the potential to impact
employees, access to capital, and reputation
as well as many other external factors.
Source: PricewaterhouseCoopers, 2008
Business briefing series: 20 issues on the business implications of a carbon cost
14

15. 8. New business ventures/products 10. Investors
How many products or services do we sell that are What are our investors’ expectations regarding
‘low-carbon’ alternatives? the management of climate change risks?
Is there any potential to identify ‘carbon value added’
The impact of the Plan will add costs for most organisations.
product or service opportunities within our existing
A direct permit liability or indirect exposure via cost pass
products or services?
through will result in increased costs through the supply chain.
Are we considering potential new business
opportunities more aligned to a low-carbon economy? The cost of the Plan has been increasingly incorporated
into the equity research reports for organisations listed
Are we considering the impact of a carbon price on
on the Australian Securities Exchange. A recent report
decisions related to mergers and acquisitions?
published by Deutsche Bank highlighted the estimated
Organisations can create shareholder value through the FY13 NPAT impact of $23/t carbon price of the carbon
identification of new low-carbon business ventures and price mechanism (CPM).
products. There are many ways in which an organisation An organisation’s response to the Plan may also impact
can strategically address its exposure to the Plan. on its market reputation. Entities that are able to
Through understanding the change to a low-carbon communicate with investors on the potential risks and
economy, and the new potential needs for low-carbon opportunities that climate changes presents for them
products and services, many organisations will identify will be better placed in ensuring that their share prices
opportunities for new revenue streams. This may be accurately reflect this impact.
through the development of new products or services
or through the identification of new markets. It may -20.5 VBA
also be through the re-design of existing products -10.9 ORG
and services to provide a low-carbon alternative. -10.8 QAN
Organisations which are considering mergers or -9.3 BSL
acquisitions should carefully consider the carbon -5.8 ORI
associated impacts. Access to funding is the lifeblood -4.8 BLD
of mergers and acquisitions activity and the reaction -4.4 IPL
of both debt and equity funders to the carbon price -4.3 CSR
mechanism may also influence the valuations assigned -3.9 STO
to particular businesses. -3.3 OST
-1.5 WPL
-1.4 CTX
9. Physical
-0.8 BHP
What are our physical risks? -0.8 ILU
What costs are associated with our physical risks? -0.8 NCM
-0.6 RIO
Climate change will present increasing physical risks to -0.2 LEI
land, property and other business assets over the long 0 AIO
term. Rising sea levels, extreme weather events with 0 QRN
greater frequency and intensity, droughts and floods 2.5 AGK
all threaten businesses. These changes may result in
-24% -20 % -16 % -12% -8 % -4% 0 % 4%
increased insurance costs, increased maintenance
requirements, and increased cost of resources. Source: Deutsche Bank Report, 2011
These physical risks may also create opportunities
for businesses that provide goods or services in areas
such as engineering and physical resilience.
Business briefing series: 20 issues on the business implications of a carbon cost
15

16. Strategy risks and opportunities (continued)
11. Government The reverse applies for entities involved in industries
employing lower carbon footprint technologies. Such
What are the expectations of the Clean Energy
Regulator regarding compliance? entities may see significant revenue growth as organisations
seek low-carbon alternative suppliers. Organisations will
What future changes are likely to be made to
need to develop strategies to ensure that potential changes
the Plan and associated carbon prices?
in the needs of customers have been incorporated into
broader product and service design processes.
Organisations will need to understand their regulatory
obligations and ensure that they comply. The Clean For some businesses, training should be considered for
Energy Regulator will be responsible for administering customer facing staff to ensure they are able to adequately
key elements of the CPM as well as the CFI3. communicate the impacts of the CPM in a manner that is
not considered misleading or deceptive as per the ACCC.
The Climate Change Authority will review pollution
caps, future trajectory of Australia’s pollution levels
and the performance of the carbon price and will track
13. Suppliers
Australia’s progress towards meeting its targets for What are our risks and opportunities relating
reducing carbon pollution4. Permit liable entities will to our suppliers?
need to consider the messages issued by the authority
in order to understand likely scenarios regarding medium Market based emissions reduction mechanisms place a
to long-term carbon prices. price on GHG emissions. Carbon will be embedded into
the product physically and into the price. It will be central
12. Customers to the way companies do business with each other.
What training programs have you developed for Organisations will need to understand the impact of
customer facing staff on the impact of the CPM? the carbon constrained economy on the security or
scarcity of supply of specific products and services.
What are our risks and opportunities relating
It is expected that the supply chain impact of the
to customers?
Plan for most organisations will be the pass through
Have you considered customer pricing strategies of increased energy costs.
and services for your product offerings?
The Plan will raise awareness of the risks of climate
14. Industry/competition
change and impact the needs of existing customers. What are our risks and opportunities relating
For some companies, the impact of the carbon price to our competitors?
may create product substitution opportunities or threats
depending on the relative carbon intensity compared Changes in the economic environment provide
to competitors. opportunities for organisations to move first. Organisations
that can develop and implement their carbon strategies
For example, traditional methods used in energy will be able to maximise the benefit of moving first.
production, such as pulverisation coal power plants,
are likely to experience lowering demand as new The carbon price will also provide a competitive advantage
technology with lower GHG emissions (such as for organisations with low-carbon intensity as fewer costs
integrated gasification combined cycle power plants) are incurred and therefore passed through. This will offer
gain wider use (if not regulatory enforced). new marketing opportunities and enable organisations to
differentiate based on both carbon intensity and cost.
3. Securing a Clean Energy Future p31.
4. Securing a Clean Energy Future p31.
Business briefing series: 20 issues on the business implications of a carbon cost
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17. Getting the data right
Complete, accurate and timely data is the cornerstone of Reporting
effective business decision making. Without data that can Companies with a reporting obligation are required to
be relied upon, organisations may miss potential risks or report by 31 October each year on their emissions and
opportunities. Alternatively organisations may incorrectly energy use for the preceding year ended 30 June.
assess their risks and opportunities, which may result in
Organisations without a compliance obligation may still
significant risk exposures and lost opportunities, resulting
choose to voluntarily report their GHG emissions and the
in a reduction of shareholder value.
impact of carbon on their business to their stakeholders,
including suppliers, customers and employees.
15. Identifying your reporting obligation
Which GHG emissions are considered to be
ours for reporting purposes?
What joint ventures, partnerships and business
relationships does our business have? Performance
The first step in identifying your reporting obligations is Analysis
to note those facilities over which you have operational
control as defined by the NGER Act.
Data
Once this is understood it is important to work out if your
organisation is likely to exceed the following reporting
thresholds that would trigger a reporting obligation under
the NGER Act:
16. Measurement and accounting
• A facility exceeds 25ktCO2-e of emissions or consumes
Where is our data coming from?
or produces more than 100TJ of energy
• The corporate group comprises facilities that in total Is our data reliable?
exceed 50ktCO2-e of emissions or consume or produce What are the skills needed to prepare our data?
greater than 200TJ of energy.
CO2-e is the unit of measurement for GHG emissions.
Each organisation should have a clear understanding of For some organisations this will be new data which has
their GHG emissions sources, a documented methodology, not been previously collected, managed or reported.
policies and processes to develop a GHG inventory and
Organisations need to understand the key sources of
a documented interpretation and assessment of any
emissions within their operational boundaries. From this
compliance or reporting obligations.
they will be able to identify the key sources of information
being used to collect the data.
The GHG emission information may come from a range
of new sources such as direct measurement through
meters and estimation using formulae or sampling analysis.
These methods will need to be reviewed, implemented
and monitored in order to determine if this data can be
relied upon for regular reporting.
With the new information obligations, new skills will be
required for an organisation to ensure that the measurement
and accounting of GHG emissions and energy is consistent
with the requirements of the regulations.
Business briefing series: 20 issues on the business implications of a carbon cost
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18. Getting the data right (continued)
17. Systems, processes and controls 18. Quality control
Is our team collecting the right information and do How do we document our comfort over the way
they understand our record keeping requirements? the data has been collected and reported?
What controls do we have in place around the Have we considered the need for independent
collation and reporting of emissions data? assurance over emissions data reported?
Have we linked carbon source data into our Are GHG emissions and climate change risks included
existing financial systems? in our broader risk management framework?
Is the quality of reported non-financial data assessed
The assurance regime under the Plan means that liable
by our internal audit team?
companies with emissions above a certain threshold
will be required to be audited annually prior to submission Are there synergies between the financial audit and
carbon assurance process that can be leveraged?
of their data.
Systems used to collect GHG emissions source data are It is important that when dealing with significant
typically immature when compared to financial systems amounts of emissions data, a robust process is in
with weaker controls over the integrity of reported data. place to ensure completeness.
Companies with compliance obligations under the Plan
The internal audit function within businesses particularly
should ensure that adequate controls are established
that have direct exposure should be reviewed to ensure:
prior to its commencement. Not doing so will increase
the risk of both increased audit costs and qualified
• Work plans are adjusted to include reviews of the
risks, controls and processes associated with the
audit opinions.
collecting, measurement, recording and reporting
A strong control environment leveraged from the financial of GHG emissions data used in CPM reporting
reporting framework will ensure that GHG emissions • Staff have appropriate mix of skills to perform
data being distributed can be relied upon and that errors these reviews.
will be identified as they occur.
The quality control mechanisms in place over the GHG
emissions data are important to support information being
presented. In addition to the development of systems,
processes and controls, an organisation must test them
regularly to assess how effective they are.
This requires documentation of the framework so that the
systems, processes and controls can be easily understood
and tested by an independent party.
Whether directly/indirectly permit liable, organisations
should consider the value of obtaining independent
reasonable assurance over their GHG emissions used for
government reporting, even where they are below the
reporting thresholds.
This data is utilised by many in the capital markets
who require its completeness and accuracy for decision
making purposes.
Business briefing series: 20 issues on the business implications of a carbon cost
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19. Communication
19. Internal communication 20. Communicating with stakeholders
What is our internal communications strategy What information are our external stakeholders
for the Plan? asking for in relation to the Plan?
Do the key teams within our organisation understand Could we broaden our reporting to better
the potential impacts of the Plan? address these requests?
Do we have the most up to date GHG emissions
External stakeholders are continuing to request information
information to report?
on the potential impact of the Plan on the business with
Are our internal communications and training for its current strategy and expectations. For organisations
customer service staff at the desired level/standard?
reporting under the NGER or those permit liable under the
Plan, there will be new non-financial information available
Effective internal communication can assist in maximising
to external stakeholders. The way in which an organisation
carbon and climate change opportunities and minimising
incorporates this into the broader external communications
the risks. Communicating the business implications of
strategy is critical. Inconsistent information, errors and
the Plan is critical to ensuring that these implications
poorly considered responses to carbon risk will discredit
are understood by the Board, management and staff. It
the data and may result in reputational damage.
will be employees who identify and realise the potential
opportunities and also mitigate any exposures. Cost pass GHG emissions data should be incorporated into existing
through clauses within contracts are going to be the key external communications programs. Sharing information
area in which the Plan may unexpectedly impact operations. about how the organisation is addressing the risks
Without a core strategy and clear communication plan associated with the transition to a low-carbon economy
within the business, new contractual arrangements may and realising the opportunities will be important for both
result in unintended increased cost and risk exposures. value protection and enhancement.
As additional guidelines are released, organisations will
need to stay up to date on the changing issues and the
potential impact on their business. The regulator will be
a key source of the most up to date information available.
Relevant updates should be shared with all staff.
Business briefing series: 20 issues on the business implications of a carbon cost
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20. Resources and further information
Links:
ACCC, 2011, Carbon price claims: Guide for business
Department of Climate Change www.climatechange.gov.au
The Institute of Chartered
www.charteredaccountants.com.au
Accountants in Australia
PricewaterhouseCoopers www.pwc.com.au/publications/carbon-price/index.htm
References:
Carbon Disclosure Project, 2011 CDP Australia and New Zealand Report 2011, ‘A two speed business
response to climate change’
Carbon Market Institute, 2011 The Carbon Farming Initiative (CFI): An introduction to Participation
ClimateWorks Australia, 2010 Low Carbon Growth Plan for Australia
Commonwealth of Australia, 2008 Australia’s Low Pollution Future: the economics of climate change mitigation
Deutsche Bank, 2011 Australian Carbon Price
PricewaterhouseCoopers, 2011 Carbon pricing: Implications for Australian businesses
PricewaterhouseCoopers, 2007 Carbon Value
PricewaterhouseCoopers, 2011 Digging into IFRS: Proposed carbon ‘tax’ shines a light on Aussie miners
PricewaterhouseCoopers, 2008 First and second order risks in the business landscape
PricewaterhouseCoopers, 2011 Responding to a Carbon Price
PricewaterhouseCoopers, 2011 The Australian Government’s Climate Change Plan: What should
business consider?
Swisse Re, 2011 Natural catastrophes and man-made disasters in 2010:
a year of devastating and costly events
Business briefing series: 20 issues on the business implications of a carbon cost
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21. 20 issues checklist
Quantifying the impacts Yes No
1. Compliance • Are we directly liable under the Plan?
obligation Have we included the resourcing/legal compliance obligations within budget?
• Is there adequate documentation prepared to support the position taken?
2. Supplier price • What is the impact of the Plan on our key suppliers?
increases
• Have carbon clauses been added to our existing procurement contracts?
• Have we incorporated direct and indirect carbon cost implications into our mergers
and acquisitions, capital expenditure and budgeting/forecasting processes?
3. Cost pass through • Where will indirect cost increases impact our business most?
and point of
• Can we pass our liability through to our customers?
obligation
• Have we added carbon clauses to every sales contract?
• If we cannot pass on our liability, can we still pass on the cost increase?
• What is the appetite for cost increases with our customers, and how do we know this?
4. Government • Do we understand all the potential assistance and transitional arrangements
assistance offered by the government?
• Do we understand the timeframes and requirements for application for assistance?
5. Carbon procurement • Do we have a carbon procurement and trading strategy?
and trading
• Do we plan to purchase eligible emissions units at auction or in a secondary market?
• What hedging will we undertake in relation to carbon price risk?
• What investment and financing options have we considered or discussed?
• Have we considered our options for carbon offsets?
• Do we require an Australian Financial Services Licence (AFSL) to trade in carbon units?
6. Management • Have we incorporated the cost of carbon into future cash flow forecasts?
accounting
• Does our management have adequate, accurate and timely carbon information
to support business decisions?
• Have we considered the impact of a carbon cost on asset impairment?
• Have we considered all tax implications?
7. Reducing emissions • What are we doing to reduce GHG emissions to avoid direct and indirect costs?
and improving
efficiency • What can we do to reduce our indirect GHG emissions?
Strategy: risks and opportunities Yes No
8. New business • How many products or services do we sell that are ‘low-carbon’ alternatives?
ventures/products
• Is there any potential to identify ‘carbon value added’ product or service
opportunities within our existing products or services?
• Are we considering potential new business opportunities more aligned
to a low-carbon economy?
• Are we considering the impact of a carbon price on decisions related
to mergers and acquisitions?
9. Physical • What are our physical risks?
• What costs are associated with our physical risks?
Business briefing series: 20 issues on the business implications of a carbon cost
21