The Kyoto Club
Australia recently signed the Kyoto Protocol in an effort to boost our green credentials. But meeting the requirements could cost your business millions. John Downes looks at what the agreement means for small to medium sized companies and how to take advantage
UNDER the new Labor government, Australia has finally joined the Kyoto club. But what does ratification mean for Australia, and particularly, how will it impact on small to medium sized business?
Firstly, it’s worth explaining what Kyoto is. The Kyoto Protocol is an agreement that requires developed countries to reduce their greenhouse gas emissions to specified targets against 1990 levels over the next five years. For those countries that have ratified, such as Australia, the agreement is binding. Importantly, developing countries such as China and India are encouraged to reduce greenhouse gas emissions, but the agreement is not binding. This is the driving premise behind the US (and the previous Australian government) for not
ratifying Kyoto.
The initial Kyoto Protocol agreement for the period 2008-2012 was always intended as a first step in reducing emissions in developed countries that historically were responsible for the majority of greenhouse gases emitted. A further international agreement beyond 2012 is currently being negotiated.
So how will it all work? The Kyoto Protocol specifies the mechanisms for emissionsreductions - emissions trading scheme, clean development mechanism and joint implementation. The protocol also broadly specifies the rules of these mechanisms, under which countries are then able to achieve their emissions reductions targets.
What will it introduce?
The Australian government will introduce a “cap and trade” emissions trading scheme, where greenhouse gas emissions are capped nationally, and a market is established in order to trade carbon permits. This market will be like any other market, except that those firms, who are covered (liable) under the scheme, must make sure that at the end of each compliance period, their emissions output from production activities are offset by the quantity of carbon permits held. This is where the market comes into play, and firms can enter the market to buy or sell permits as needed to balance their actual emissions output. In aggregate, all firms together should have lower emissions output than historically, pending on the emissions cap set.
The Australian Greenhouse Office (AGO) will manage the National Greenhouse Gas & Energy Reporting Act, which obliges companies that produce above a specified emission threshold to register with the AGO, maintain records, and participate in auditing and compliance. Most of the reporting is easily managed through the AGO’s online system and many small businesses won’t be required to register until 2009.
How will Kyoto impact your business?
The most important point for business to
note is that Australia’s participation in the Kyoto Protocol establishes a
price on carbon emissions in Australia. In general, this means it will now be
more costly for commodities that are carbon intensive. Critically, those
businesses directly impacted and required to participate in an emissions
trading scheme is currently being determined by the Commonwealth Government
through the scheme design process. This means, the rules of the scheme are not
yet finalised, and impacts to particular businesses and industries are not yet
fully known. However, coal based energy generation is the largest source of
carbon emissions in Australia, so is a key area of consideration under
the scheme.
The most likely short-term impacts on small and medium-sized businesses could be:
• Increased costs for energy: Higher energy bills will challenge almost every business, but will particularly affect businesses operating in energy-intensive industries.
• Increased competitiveness of imports: Imports from developing countries, and countries that haven’t ratified Kyoto, will have a cost advantage. Initially, local industries will likely suffer as carbon prices impact margins and consumer prices.
• Increased sustainable production and business requirements: some requirements, such as energy efficiency targets, already exist under various States, but the Federal Government is yet to release it’s full climate change policy position and other sustainability activities that could impact businesses
Will businesses have to comply?
Failure to comply with the Act exposes business and CEO’s to fines, and civil or criminal penalties. Authorised officers will have the power to enter any premises during business hours to determine if the Act’s provisions have been complied with.
How can businesses benefit from Kyoto?
Like many legislative changes, businesses which adapt fastest will be at an advantage; so you must be quick to react. A transparent price for carbon will allow businesses to more accurately forecast their investment decisions to help drive longer-term development. With pressure to reduce emissions, business investment into low-carbon technologies will become more feasible. Widespread R&D into these technologies will help create a national competitive advantage, and a new export industry. The short-term gains that the U.S, China, and India may enjoy will likely be returned to innovative Australian companies.
What should you do to prepare your business?
A brief Kyoto adaption plan should include the following measures:
Follow the law: Conduct a greenhouse
emissions audit and register with the AGO in order to comply with reporting
requirements. Establish what role your business will have once the emissions
trading scheme rules are determined prior to it’s commencement
in 2010.
Decrease energy costs: As energy prices are likely to rise, investigate ways to reduce energy consumption in order to minimise costs at every opportunity.
Invest in innovation: Investments in cleaner production and operational processes that reduce total emissions will help create competitive advantage. By reducing wastage, increasing efficiency, and spurring innovation, Australian firms can leverage the Kyoto mechanisms to enhance international competitiveness and work together towards lowering Australia’s carbon emissions.
John Downes is the partner leading the Deloitte Growth Solutions Consulting practice. He has over 20 years of experience in strategy and operations improvement.
