Preparing for the carbon tax

The carbon tax will soon be implemented in Australia. The effects of the price on carbon will vary from business to business and industry to industry. The key is preparation - to ease the cost burden of transition, businesses need to gear up their systems to lower pollution and achieve energy efficiency. The article below provides some tips that could help you prepare for the carbon tax.

We have all been told that the carbon tax has been designed to help restructure the economy with the aim of using less energy and lowering the amount of carbon dioxide (CO₂) generated. However, as the July 2012 deadline looms, recent surveys show that less than 50% of Australian companies are actually prepared for its introduction and this percentage is even lower if we only look at small to medium enterprises.

Without adequate preparation, the adoption of the carbon tax will become incredibly costly for businesses. How do we turn this around? First, it is important to understand what exactly the carbon tax is. Let’s explode a few myths:

It’s not a tax.

The carbon tax is not really a tax at all but a system that requires organisations to purchase permits to account for their emissions. Any business that generates greater than 25,000 tonnes of CO₂ or equivalent CO₂ greenhouse gases (eg, methane or hydrofluorocarbons) must ‘buy’ permits from the government. The cost is $26 per tonne for the CO₂ each organisation generates. The CO₂ generated from burning petroleum fuels will be levied at the ‘refinery gate’ and changes will be made to the Fuel Excise legislation to reflect this.

The government expects that the cost of these permits will be passed onto consumers and have consequently created compensation packages that will be delivered through the PAYG tax system. After two years, the permit system will be replaced by a market in which carbon credits (created through carbon reduction schemes like tree planting) can be bought and sold. In this discussion we will refer to this system as the ‘carbon tax’.

While much political capital seems to be made of the approach, the intent is to encourage the major CO₂ producers to reduce the amount of carbon dioxide they generate - and like it or not it is going to happen.

How do we prepare for the impact of carbon tax?

You could do nothing and wait for the costs of your inputs to increase and hope your competition are in the same position. Or, you could choose to adopt approaches to reduce or eliminate your various CO₂ inputs and maintain or even increase your competitive advantage.

Most companies will choose to focus on one of three key aims in their approach to preparing for the carbon tax:

1. Reduce your business’s carbon footprint
2. Reduce your usage of carbon inputs
3. Reduce costs

Assessment

Regardless of which of the above strategies your business chooses to focus on, your first step will need to be an assessment of your current carbon inputs. CO₂ or carbon inputs refer to any materials or activities such as electricity or fuel used in your business that will be impacted by the tax.

You can examine the cost of your carbon inputs by simply identifying your business inputs and then classifying them as a CO₂ input or a non CO₂ input. There are a number of organisations that can assist you in completing an assessment.

In the examination process you will also need to look into that input’s supply chain. For example, a finished product which requires a large amount of electricity to be produced will be classified as a high CO₂ input even if that input does not burn carbon itself.

Having identified the CO₂ inputs to your business, you must then assess how much of an impact these inputs have to your business and then how much it will cost you to reduce the use of these inputs.

Your strategy

Let’s first look at the ‘cost minimisation’ approach where the objective is to minimise the cost of the carbon tax. Having examined your CO₂ inputs as discussed above, isolate the items which you can reduce use of, and make a saving with no or minimal investment, and focus on those. A simple example would be to replace your existing light globes with low-energy light globes or installing a solar hot water system. The investment in reducing energy usage would easily be covered by the savings made over time.

If you choose a strategy to proactively reduce carbon inputs then opportunities exist to re-engineer your business processes so that they are consuming less energy and materials. We have all heard of the value stream where each step in a manufacturing or business process is examined and the value added assessed. ‘Green streaming’ your business process is a similar method where each step is examined for the amount of carbon inputs it consumed. Ways are then devised to redesign the process to reduce the CO₂ impact of each process step. In a manufacturing process this could result in re-laying a factory to reduce the amount of time and energy moving materials and reducing the cost of fuel used to do so. In an office it could mean using electronic payments to reduce paper and energy in printing. For a sales force it could mean using a mobile device for sales people to work with while on the road to reduce travel time and costs.

The third approach is to act in a way that not only reduces your carbon inputs but involves investment in decreasing your business’s carbon footprint. The federal and state governments have both encouraged consumers with solar panel schemes aimed to generate electricity from non-carbon polluting solar energy that goes back into the electricity grid. There are also other investments organisations can make to reduce the total amount of carbon pollution and in fact can ‘sequester’ that carbon out of the environment. Tree planting schemes are an example of this.

Let’s look at a simple example on lighting to understand how to apply these cost minimisation strategies:

Strategic approach	Reduce carbon footprint	Reduce usage	Reduce cost
Install solar panels and skylights	Yes
Install timers or motion sensors	Yes	Yes
Install low energy globes	Yes	Yes	Yes

While it could be argued that all of these strategies reduce cost and usage, the amount of capital investment required would contribute a different result for the economy.

Supporting tools and aids

As well as carbon reduction consultancy firms, there are also a number of business operations software systems that can assist your company achieve its carbon goals. For example:

Tool	Department	Abilities
Mobile sales force automation	Sales	Manage customer visits; take orders in real time at customer sites, minimising paper and administration costs as well as time and distances travelled.
Warehouse management systems	Warehousing	Warehouse organisation, route/pick planning, equipment utilisation and material movement. Reduced energy consumption of machinery.
Delivery planning systems	Distribution	Determine the most efficient route to travel, take electronic records of the delivery and make recommendations as to the loading of vehicles.
Customer and supplier portals	Sales/ marketing	Customer and supplier portals that allow customers to interact electronically, reducing time, errors and paperwork.
Manufacturing execution systems	Operations	Use lean techniques to improve the flow of materials and reduce waste in the manufacturing process.

The selection and implementation process of these supporting tools do require changes to business process and change management for the people who use these systems. It is important to keep in mind the objectives of any such project and apply the appropriate, dedicated resources.

As you can see, the strategies and steps involved in preparing for the carbon tax vary from business to business and will depend on your company’s goals and objectives. You may choose to focus on cost-cutting, reducing your carbon inputs, proactively minimising your carbon footprint or do nothing at all. Choosing to do nothing may seem the easiest path at this point; however, post 1 July, you could be gambling with your business’s future.

*Greg Mills is CEO of Cincom systems and has a background in industrial chemistry and project management in the building products industry. Cincom has a number of software tools designed to help business reduce costs and the impact of the carbon tax. Greg acknowledges the contribution of Level5Lean consulting group for its ‘green stream’ methodology that helps business reduce CO₂.