Outline
Abstract
The overview of the legislation
Future carbon liabilities.
Business and industries
Carbon pricing emission and reporting
Managing the commercial and financial impact
Organisational consequences
Implications of 2011 Act report
Regulation and financial accounting
Regulation limitations and analysis
Regulation and financial accounting
The impact of carbon emission price
Environmental regulations and net export
Discussion
Recommendations
Conclusion
Abstract
This paper assesses the economic implications of national greenhouse gas emission in relation to the free market and pro regulatory approach. On eighth November 2011, the Australian parliament passed the Clean Energy Act. The Act consisted eighteen pieces of legislation to provide a platform for the government to reduce its greenhouse emission. The Clean Energy Act was effective as of 1st July 2012. The Act provides a comprehensive plan on how to reduce emissions through carbon pricing, land management, renewable energy and energy efficiency. It is expected that the plan would cause financial impacts on the country’s industrial sector.
The overview of the legislation
The report will ensure that the concerned companies pay attention to the Clean Energy Act regarding their corporate energy consumption and production, greenhouse gas emissions and abatement actions. This regulation particularly affects companies that emit 125 kt and facilities that emit 25 kt. It has been realised that the environmental impact of the processes of production and supply chain is never measured. Therefore, the impact should be determined from up to downstream of the chain. The Clean Energy Act ensures that companies provide annual reports on their carbon emissions, electricity consumption, and production. The legislation will affect the company’s finances through operational changes and complexities as new responsibilities are introduced (Food and supply chain intelligence 2010).
Companies face the challenge of providing solutions to their environmental impacts. This is in regard to providing recommendations to mitigate the environmental footprints, as well as recommending new supply chains. This process will require recognition of each activity in the supply chain. Therefore, efficient equipment is purchased to replace the inefficient ones to minimise the energy input and output (Food and supply chain intelligence 2010).
Business and industries
Carbon pollution reduction is important in addressing the problem of climate change. More than five hundred companies are emitting greenhouse gases. These companies are required to buy a permit for every ton of emission. Carbon tax is one strategy that the government has implemented to reduce the carbon footprint for most businesses. In this case, only a few companies face direct legal obligations. The sectors affected most include the stationery industries, processing industries, and decommissioned coal mines. The agricultural and land use sectors have not been affected by the Clean Energy Act. The clean energy finance cooperation has ensured that the government finances the private sector in implementing clean energy projects. The effect of climate change will likely affect business in the future. The introduction of this legislation will protect the future economy. If actions are not implemented, then the future of business will be affected in various ways. This includes increases in insurance costs and reduction of the farm productivity. Under the scheme, the four Kyoto protocol greenhouse gases are included: carbon dioxide, methane, nitrous oxide and perflorocarbons. Synthetic greenhouse gases are also included (Australian department on climate change and energy efficiency, 2010).
Future carbon liabilities
The government introduced the carbon pricing mechanism to enhance transition towards a low carbon economy. The legislation was effective as from 1st July 2012 to 2015. The price permits are determined and set by the government in consideration of the emission reduction target. If the target is high, the level cap is low while increasing the emission cost (Interagency Working Group on Social Cost of Carbon, United States Government, 2010). This is a mandatory pro-regulatory approach that does not rely on the market information. The approach is quite effective since the atmospheric environment is “common good” that is not affected by the free market forces of demand and supply as the case of normal goods. Individuals and corporate organisation should take responsibilities of their actions. The atmospheric air has no boundary hence vulnerable to destruction from the industrial sector. Therefore, the relevant regulatory institutions should do everything to hold the relevant institutions accountable for their actions (Loris 2009).
The worrying issue is that the government and the international community have not established common standards to account for the carbon emission permits. Accounting regulation and policies should be established, as well as options regarding permits prices and liabilities. This will ensure that compensation issues are covered. Disclosure of the necessary information will build the confidence of investors and enhance sensitization of the importance of environmental conservation. The introduction of carbon pricing mechanism will require business institutions to make adjustments in financial management especially in budgeting, forecasting and risk management. Investors should understand that carbon emission reduction is their corporate responsibility and not punishment (Dagwell, wines & lambert 2007).
A fixed carbon pricing will have an effect on almost every business sector or cause substantial influence on other sectors that are not directly affected. It is estimated that the change will affect approximately five hundred businesses as below.
Industry
Estimated number
Waste disposal
190
Mining
100
Electricity generators
60
Industrial processing
60
Fossil fuel intensive sectors
50
Retailers of natural gas
40
KPMG November 2012
Manufacturing industries: manufacturing industries will be supported by a 1.2 billion dollar clean technology program to be set up to enhance energy efficiency and reduce emissions. Large gas electricity consumers and those that are affected directly by the emission reduction mechanism will access 800 million dollars funding from the same program. The government will reward $1 for every $3 invested. Food and foundry industries are expected to receive $ 200 million as a special assistant and $200 million from the competitive grants innovation program (KPMG 2012).
Coal sector: The coal sector is to be allocated $ 1.3 billion assistance to deal with the transitional impacts.
Electricity sector: The energy security fund will provide assistance on the impacts of carbon pricing and ensure energy security in Australia. The government will provide support through loans.
Grants and incentives
The legislation will ensure that different sectors are supported so that the direct and the indirect consequences are limited. Assistance can be in the form of providing free allocation permits to industries that are exposed to intensive emission trade under job and competitiveness program. The program would also provide assistance to individual entities in reducing their production’s carbon intensity. Manufacturing industries will receive assistance towards renewable energy innovation investments. The energy security fund will provide payment and electricity generator permits (Hackett, 2011).
Carbon pricing emission and reporting
An organisation carbon emission can be classified into three scopes: scope 1, scope 2, scope 3. This classification is based on the modes of emission. The modes of emission include direct burning of fuel or indirectly from the use of electricity or embodied. Each organisation will react differently towards the greenhouse emission act. The financial impact of the legislation lies in the docket of the chief financial officer. The organization is prepared to buy a permit of $23 per ton of emission based on the data collected from the system. The question will be on the fluctuation that the price of carbon will cause on the price of electricity (KPMG 2012).
Calculating and reporting carbon emission
Scope 1: this is where the emission occurs within the industrial premises boundary. These can be from the power station sources and carbon emission from burning fuel. The emissions are calculated by multiplying the fuel used by emission factors set for that fuel (KPMG 2012).
Scope 2: these are when emissions occur outside the boundary of an industry. This is calculated by multiplying the electricity consumed and the emission factors set for that electricity source. There is no obligation for an organisation on scope 2 to buy a permit, but the financial impact is experienced when the energy is passed using a generator. The carbon emission intensity varies with the energy content of the fuel used and the technology used to generate the energy. When an organisation is exposed to one generator, then it should understand the carbon energy of the generator as this helps in purchasing a cost effective generator (KPMG 2009).
Scope 3: this is when emissions occur outside the boundary of the facility as a result of the actions of the facility apart from energy consumption. This includes activities from up to downstream the production chain. The final carbon pricing cost of a company will depend on its abi8lity to negotiate with suppliers and consumers. A scope 3 emission institution covers both scope 1, scope 2, and scope 3 (KPMG 2009)
MANAGING THE COMMERCIAL AND FINANCIAL IMPACT
Profit and loss effects are likely to be experienced due to cost of permits for liable entities and the cost and the cost experienced in the whole supply chain process. Assistance from grant and the government is also likely to cause a profit and losses for eligible entities. Mitigation measures for the loss and profit impacts include:
Carbon emission reduction and abatement cost reduction
Analysis of the cost pass-through to customers
The organisation should exploit the flexible price stage to come up with lower permit cost
Asses and exploit opportunities that come with assistance and packages
In the management of balance sheets, companies should consider their ability to recover assets versus the carbon pricing cost. Carbon permit costs should be considered like trading stocks in a rolling balance method because the cost affects the taxable income hence concerned unit should be surrendered (KPMG 2012).
The carbon emission price affects individual entities through balance sheet, profit and loss, cash flow and related processes. Liable Individual entities may experience increased cost of production emanating from the cost of permits. The cost of the entire supply chain is expected to increase for individual entities due to the increased production cost. This will lead to increase inventory and sales costs. The transport and electricity costs are also expected to increase (KPMG 2012).
In a competitive market, winners and losers from carbon emission mechanism is determined by the emission metrics in relation to the company’s competition. Liable entities will try and recover the cost of permit from customers who would do the same and the trend continues up to the last buyer. This will affect a company’s competitive ability against the others (KPMG 2009).
A company can consider these responses separately or collectively in response to the emission price. The responses include:
Reduce carbon emissions metric. The marginal abatement costs and the direct or indirect emission cost would play an important role.
The organisation should assess the cost price-through in relation to the market price.
Good negotiations during the flexible price cost would lower the cost of emission permit.
The capital cost would be affected depending on the company’s response towards the carbon price.
There are some of the consequences and application areas of a cost pass-through that an organisation should have in mind. In this case, the individual that understands carbon emission reduction mechanism should be involved during the negotiation process. The cost pass-through introduction can lead to fallouts between consumers and suppliers due to lack of regulations in adjusting product prices to cover for the emission permit costs (KPMG 2012).
ORGANISATIONAL CONSEQUENCES
There are key points to note on understanding the consequences of greenhouse emission reduction through a carbon emission mechanism. Scope 1 entities with emissions higher than 25,000 tonnes at the facility level should buy emission reduction permits. Scope 1 and 2 have emissions of above 50,000 tonnes in their corporate group or emissions of above 2500 tonnes at their facility level. The two should provide an annual emissions report as provided by the national energy reporting act. Many industries and sectors can access financial support towards clean energy transition process (Deloitte 2011).
Risks
The legislation poses financial risks to organisations. Thus, the organisation should be prepared to respond to these risks. Such risks include: permit purchase risk, trade risks, non-compliance with the legislation, inaccurate data, non-responsive with increased emission costs, failure to comply with reporting regulations, unreliable data for decision making (Hackett, 2011).
Costs and profits
These risks can lead to either loss or profit to an organisation. Therefore, responses should be developed for every potential risk to avoid losses. Such responses include evaluation of the abatement cost, development of permit trade strategies and implementation of cost pass-through to customers. An organisation may cover for the losses through cost pass-through by an increasing product prices for customers. This may lead to an increase in the market commodity prices. An organisation should manage the cost of permit acquisition during the fixed price phase. In this case, it should purchase cheaper permits from entities allocated free permits. The entity can also use the approved offshore credits from the clean development mechanism to meet the 50% of the permit obligations (Deloitte 2011).
IMPLICATIONS OF 2011 ACT REPORT
It is the responsibility of every entity to monitor the continuous disclosure obligation in consideration of the potential financial impact having in mind the effects of regulations on existing and planned investments. The organisation should take into account the availability of financial assistance and compensation access, as well as the ability to pass through the increased input cost once the report is announced (Deloitte 2011).
Review of the direct cost emissions
The most effective methodologies should be implemented to ensure that the information and data used in emission cost calculations are accurate and reliable. In this case, emission impact is directly related to the emission cost thus the accurate calculation would prevent losses as a result of inaccurate financial planning (Deloitte 2011).
Accurate assessment of government support
It is important to assess the chances to access the government assistance. The details of the assistance package are important in planning. In this case, an institution can make losses if it over relies on government assistance. It is also important to find if an organisation is eligible for grants such as the clean energy development funds (Deloitte 2011).
Determination of the cost pass-through
It is necessary to know how far the cost pass-through strategy can be effective and its potential impact on profitability to an organisation. Higher estimation of the cost pass- through can lead to losses if the external factors such as the government legislation do discourage the strategy. A cost structure model associated with the cost-pass through of the energy input should be implemented to obtain accurate projections. The agreement based on contracts should be reviewed to support of carbon price reduction (Deloitte 2011).
Accounting for carbon permits and tax implications
It is unfortunate that regulations regarding accounting for carbon emissions are ignored. Therefore, organisations should review the current voluntary permits in consideration to minimising the carbon liability and carbon price permits. An organisation should acknowledge the implications of permit payment on cash flow consistent with the company tax payment (Deloitte 2011).
Development of management systems
An organisation should develop governance structures and policies systems to manage the complex activities of the carbon emission reduction. Organisations are expected to put in place these structures before the deadline to plan for buying and trading of the permits. Early preparation of each year is a cornerstone in risk and financial management (Deloitte 2011).
Carbon management strategies
It is obvious that the emission reduction strategies will affect organisations future income, especially in the energy, resources chemical and manufacturing organisations. The chief financial officers should note the formulation of financial management strategies is critical in budget planning (Deloitte 2011).
Governance and data collection process
In many organisations, the environmental officer has the responsibility to collect and process the carbon emission data. The chief finance officer should analyse the extent of data collected and approve the process. The accuracy of the collected data is key in the approval of the national greenhouse and energy reporting. The chief finance officer should understand the impact of the carbon price prior to permit purchase. In addition, he can only be confident if he was involved in the data collection process (Interagency Working Group on Social Cost of Carbon, United States Government, 2010).
REGULATION AND FINANCIAL ACCOUNTING
Pro-regulatory approach
The introduction of the greenhouse reduction requirements by the government is a pro-regulatory approach to ensure accountability. The basic duty of business institutions is to make a profit. Therefore, there is no chance that such institution would respond to international standards of operations without mandatory regulations. The pro-free market approach would consider the pro-regulatory approach as a complete market failure. The atmosphere is a “common good”, carbon reduction emission affects the indirect cash flow (Glasson, Terivel and Chadwick (2005). Therefore, business entities would consider the carbon price as a liability. Organisations and business entities should have in mind that they obtain raw materials from the environment that they should protect to ensure the future availability of the same resources. The financial impacts of the imposed regulations are mitigated by understanding and management of an institutions current emission and energy output through a range of strategies (Larke, Dean & Oliver, 2003).
It is not possible to obtain the necessary accounting information required to control the public good like the case of a normal market. This is an imperfect market that is not affected directly by the demand and supply forces. The introduction of the regulations is necessary to ensure accountability on the side of the primary producer. The entities that make are concerned with the market are not reliable for financial information (Interagency Working Group on Social Cost of Carbon, United States Government, 2010). Therefore, the regulation’s are formulated in consultation with various stakeholders so that the public interest is protected. It is believed that the pro-regulatory approach would provide standards and quality information as would be used by institutions like banks and financial analysts. The set regulations do not affect the industrial business since the governments are always sensitive towards the business concern and thus compromise while setting the standards (Larke, Dean & Oliver, 2003).
An organization’s compliance with the regulations results in profit making. The compliance expenses eventually return to the private resulting into environmental efficiency and productive efficiency hence a strong economic performance. Organisations may protest against the scope of the economic cost of environmental regulations as compared to the taxes, wages, benefits and interest rate. High compliance cost may cause some companies to relocate to less costly areas (Meyer, n.d.).
The impact of carbon emission price
The introduction of the carbon pollution reduction scheme by the Australian government was a step towards implementation of the Kyoto protocol. The introduction of the new tax increased the cost of business to emitters. The cost of permits flows in the supply chain up to the last consumer. The scheme initiates a market based pricing between carbon producers, emission technologies and renewable energy. The scheme also introduced a regulation that requires companies to meet certain criteria in their emission, electricity and production annually for every year ending 31st June (Loris 2009).
The chief financial officers of the affected organizations are then faced with responsibilities in new duties and financial complexities. The carbon price reduction scheme will affect organizations. However, it is clear that other sectors associated with the affected organizations will as well be affected. Accounting regulation causes economic and social impacts to an organization. The economic costs occur in the process of preparing the report. The financial reporting regulations will also affect the stakeholders in that financial information would be available to the interested parties against their wish. The affected companies would incur costs in relation to the regulatory provisions. The information eventually becomes public documents. As a political process, the regulatory bodies have to consider the relevant parties and entities (Loris 2009).
Environmental regulations and net export
Studies in the U.S. show that changes in environmental regulation significantly affect net exports. The study was conducted on the manufacturing industries indicating that stricter regulations reduce the net exports. The effect on the chemical industries net exports was found to be much higher. In this case, the chemical industries have more environmental regulations than most industries due to the operational risks it poses to the environment (Maitra, 2007).
It is believed that a less developed economy can grow into a developed one by opening up the economy. The increase in the international trade as a result of an open economy can lead to various environmental consequences. Developed countries have more strict environmental regulations than the developing ones. Therefore, firms prefer trading with the less developed countries while this would encourage environmental pollution. Policies should invest in research and development programs so that the compliance cost is reduced through adoption of new technologies (Dagwell, Wines & Lambert, 2007).
Regulation limitations and analysis
Incomplete treatment of non-catastrophic emissions
It is assumed that the climate change effects would be widespread and heterogeneous. There is uncertainty about the exact extent of damage due to the complex nature of the climate change process, the economic situation of the world and the inability inaccurate forecast for technological changes. For instance, the effect of the carbon dioxide on the marine wildlife is not quantified monitored and can cause adverse effects in the future (Maitra, 2007).
Incomplete treatment of catastrophic emissions
There have been several catastrophic effects of greenhouse emissions, and one extreme example is the melting of the Antarctic west sheet. Glasson, Terivel and Chadwick (2005) suggested that more bigger catastrophic damages would be experienced in the future such that the calculation of the willingness to pay the mitigation cost is infinite. Samuelson and Nordhaus (2010) responded that the scenario is not applicable on most uncertain scenarios.
Discussion
Companies and business organizations benefit a country through economic development and social benefits. As companies operate as full legal institutions, rights and responsibilities should be observed through power and political influence. The set regulations should protect every department that associate with the company since some company activities cause undesirable social consequences. Individuals are expected under the law to act responsibly in order not to harm others. Thus, companies should also act responsibly through their management and set legal requirements. They freely exploit the available natural resources and contributes to the well-being of the society. In the last fifty years, several Australian organisations have collapsed leading to the disastrous impacts to the society and the economy, as well as leading to the collapse of the related sectors (Dagwell, wines & lambert 2007). An example is the 2011 collapse of the H1H insurance company.
Companies have imposed laws by the state laws to control their operations as it owes the state its existence, (a concession theory of a company). The laws are important in operation management, as well as in the financial records and the financial reporting as obliged by the state (Gerrard & Foster 2008).
Recommendations
The world resource institute developed the protocol in partnership with the world business council to ensure sustainable development. Governments and organizations should understand the greenhouse protocol science, which is used worldwide in international accounting.
The organization should obtain relevant and sufficient information concerning greenhouse gas reduction a mission in the development of sound technologies to ensure equitable development.
Organisations should embrace the world business council for sustainable development as a platform to acquire information about innovative ways of addressing global warming.
Companies should take advantage and explore reports and surveys from professional service provider firms in response to introduced regulations.
Conclusion
Organizations and firms have free access to the natural resources. Thus they should protect these resources to ensure sustainable development. With the current trend of the environmental degradation, the introduction of new regulations such as the carbon emission regulations are inevitable. Organisations should develop frameworks to guide them in understanding ways to address the emission reduction challenges. They should also take advantage of grants and government assistance to reduce the losses incurred in response to the greenhouse gas emission reduction.
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