Monday, August 8, 2011

Carbon Tax - Design Elements and Business Preparations

The carbon tax has just been recently introduced by the Australian government. This means that in order to transform Australia into a “clean energy” economy, there will now be the pricing of carbon dioxide and other “greenhouse gas emissions”.

Though it is yet to be introduced and approved by both Houses of the Parliament, it is expected to be implemented by July 1, 2012.

Design elements of the carbon price mechanism:
  • It is expected to be started on July 1, 2012.

  • Fixed carbon price for the first three years will be $23, $24.15, and $25.40, respectively.

  • By July 1, 2015, a flexible price phase will be introduced. By then, the price of carbon will be determined by an Emission Trading Scheme (ETS) wherein a transitional cap and floor are applied.

  • The revenue coming from the sale of carbon permits will be utilized for encouraging lean energy activities and easing burden of transition costs.

  • Different sectors will be given assistance through direct and indirect mechanisms.

Furthermore, the following points are important:

- A fixed price will be imposed on carbon tax for the first three years and then flexible prices will follow on the 4th and succeeding years.
- The fixed price is designed to introduce more and flexible prices from 2015 onwards.

What does it mean for business?

It is expected that risks will be numerous in the first year as businesses will still be aiming to learn and understand the system. With these risks, thorough planning and early action will be needed to maximize the opportunities brought about by carbon pricing.

The main effect of the carbon pricing is the increase in cost of electricity and other energy sources. This will need businesses to learn how to identify and manage the strategic, operational, financial, and reporting issues. The requirements are as follows:
  • Understanding of the issues

  • Assessment of the effects of carbon pricing

  • Management of carbon liability

  • leverage of the opportunities including assistance and transitional arrangements

  • robust governance structures

  • strong data integrity, accurate reporting and credible disclosure processes.

There will be a need to examine the financial reporting implications of the climate change plans. It is the potential effect on asset impairment testing that is the most important reporting issue.

The financial report will have to state if the carbon price could potentially impair the value of assets. There should also be statements of the assumptions made and the identified nature of key uncertainties.

Australian businesses are going to be directly affected by these climate change plans. The best thing to do while the preparations are being made by the government, these Australian businesses should also be preparing themselves for the changes that will be brought about by carbon tax.

Source: Preparing for Australia's Carbon Tax - CEO Forum Group »

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