Business briefings: 20 issues on the business implications of carbon

20 issues on the business implications of a carbon cost

Business briefing series

Disclaimer:This discussion paper presents the opinions and comments of the author and not necessarily those of the Institute of Chartered Accountants in Australia (the Institute), PwC or its members. The contents are for general information only. They are not intended as professional advice – for that you should consult a Chartered Accountant or other suitably qualified professional. The Institute and PwC expressly disclaims all liability for any loss or damage arising from reliance upon any information contained in this paper.

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

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Sustainability and Climate Change represents an area of significant growth and importance by business and government.

PwC has been working with policy makers and companies, helping to analyse issues and develop practical solutions for our clients.

With a global network of specialists and an expert team in Australia, PwC is able to provide a broad range of advisory, assurance, tax and legal as well as specialist services that collectively guide clients through the complexities of responding to the Australian carbon price mechanism.

For further information, visit: www.pwc.com.au/carbonprice

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Business briefing series: 20 issues on the business implications of a carbon cost3

Business briefings seriesThe 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.

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

20 issues on the business implications of a carbon cost

http://www.charteredaccountants.com.au/businessbriefing

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


ContentsA 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


The Plan

The Plan and the accompanying legislation establish a carbon price by way of a transition to an emissions trading scheme with the aim of influencing behaviour and encouraging the decarbonisation of the Australian economy.

The Plan is designed to ensure Australia meets its unconditional pollution reduction target of at least 5% below 2000 levels by 2020 and 80% by 2050. Meeting this target will require abatement of at least 159 million tonnes of carbon dioxide equivalent (CO2-e) by 2020.

The Plan will commence with an initial fixed price of $23 per tonne of CO2-e from 1 July 2012. This price will be adjusted in real terms by 2.5% per annum. From July 2015, the carbon price will transition to a fully flexible price under an emissions trading scheme, with the price determined by the market.

During the flexible price period (from 1 July 2015) the government will set a pollution ‘cap’ which will limit the number of carbon units that are available, and can be adjusted over time to ensure that the government’s reduction targets are met.

Liable entities

Entities with facilities that have covered emissions greater than 25,000 tonnes CO2-e will be required to surrender carbon units.

The Plan is expected to directly apply to approximately 350 of Australia’s biggest emitters.

Covered sectors include:

• Stationary energy

• Industrial processes

• Emissions from landfills

• Fugitive emissions.

Emissions from the agricultural sector as well as the combustion of biofuels and biomass are not covered.

The Plan also incorporates adjustments to certain Excise and Fuel Tax Credit arrangements to effectively pass on an equivalent carbon price to non-road uses of transport fuels. Effective 1 July 2014, these adjustments are also expected to apply to large on-road transport fuel users

What are the implications for your business?

The introduction of a carbon price will impact different business sectors in different ways. While some sectors will experience a direct cost increase by having to purchase carbon units, others will see an increase in their cost base as permit liable entities such as electricity generators and gas retailers seek to pass on the increased cost to their customers.

Treasury analysis supporting the Plan suggests that upon its introduction, electricity and gas costs could be expected to increase by approximately 10%. Furthermore, the introduction of the Plan is expected to result in an overall increase in inflation of approximately 0.7%.

How you choose to manage this risk will dictate how significantly your business will be impacted. The Plan has the potential to change the characteristics of your market and provide opportunities for future growth.

Businesses will also have the opportunity to improve efficiencies within their business. The identification and strategic development of low-carbon products and services will potentially create new markets thereby increasing shareholder value.

A new business landscapeThe 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.


National Greenhouse and Energy Reporting Act (2007)

Since 2009, the National Greenhouse and Energy Reporting (NGER) Act has required companies to report their greenhouse gas (GHG) emissions if they operate a facility that emits over 25,000 tonnes of carbon dioxide equivalent (tCO2-e) (or uses/produces 100 terra joules (TJ) or if the consolidated organisation emits over 125,000 tCo2e (or 500 TJ).

The NGER Act has enabled the government to collect GHG emissions data (direct GHG emissions and energy usage/consumption and production) from large emitting and energy using/producing organisations.

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 organisation’s chief executive officer. It is important to note that for both liable and non-liable entities, the NGER Act continues to place reporting obligations on organisations emitting, producing and/or consuming carbon over certain thresholds.

Voluntary Carbon Credits and the Carbon 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:

What can we do?

Understand the issues and modify your business to incorporate the impacts of transitioning to a low carbon economy.

Whether or not your organisation is directly liable, it is important that the key risks and opportunities of the Plan are identified and addressed.

This report provides a framework and 20 key issues for chief financial officers (CFOs) to brief their respective boards with respect to the Plan.

The diagram below outlines the framework of key impacts from the introduction of the Plan across an organisation. This report has been split into these key areas.

Communication

Governance

Quantifying the impact

Strategy/risks and

opportunities

Getting the data right

CFI Project

Issued with compliance ACCUs

Issued with voluntary ACCUs

Eligible in:• Domesticcompliancemarket(CPM)

• Internationalcompliancemarkets(EUETS,NZETS)

• Domesticvoluntarymarket

• Internationalvoluntarymarkets.

Eligible in:• Domesticvoluntarymarket(NCOS)

• Internationalvoluntarymarkets.

Source: Carbon Market Institute (2011), The Carbon Farming Initiative (CFI): An introduction to Participation, pg9.


GovernanceAn effective governance framework is central to a company’s capacity to operate in a changing world. The board of directors and senior management must provide effective leadership to ensure that the company’s strategy drives sustainable performance and mitigates risks related to carbon exposures while evaluating and maximising potential opportunities.

The collection and reporting of carbon has historically been the premise of the operational and/or environmental officer. However, given that a business’ bottom line is intrinsically linked with the carbon price, it is now important that the internal management of carbon is closely scrutinised by CFOs and their respective finance and business planning teams.

In relation to carbon exposure, there are a number of key questions that the board and senior management should consider in reviewing their company’s corporate governance frameworks.

Framework and strategy

• Is there an enterprise-wide, broad-based governance and risk management strategy with policies to address climate change and carbon risks?

• Are all of the company’s regulatory and legislative obligations understood in relation to addressing compliance risk and also to acting on opportunities presented by changes in legislation?

The board

• 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?

Role of IT

• Has the company considered the strategic role of IT in compliance, risk management, understanding and acting on climate change and carbon opportunities appropriately and providing relevant and reliable data to senior management and the board of directors?

Assurance and reporting

• Does the company have a reporting obligation under the existing NGER Act?

• How does the company intend to report its GHG and energy data, and will the data be integrated into either annual sustainability reports or the annual financial report?

• Has the company assessed the need for independent assurance over reported GHG and energy data? If so, is this assurance incorporated into the overall assurance plan to maximise the value of the assurance received?

• Does the company have a plan in place to ensure that it complies with Trade Practices Act requirements regarding carbon related price increases?1

Role of the CFO

• Does the CFO understand the impact of the carbon price on the business?

• Does the CFO need to be involved in overseeing the integrity of emissions reporting, and the changes to the organisation’s financial risk profile associated with the management of carbon price risk?

1. ACCC – Carbon price claims: Guide for business


Quantifying the impactsThe transition to a low-carbon economy presents an opportunity for some organisations to unlock shareholder value. But what is that opportunity and how do you quantify it accurately? ‘Business as usual’ is no longer an option and companies need to act to ensure the net impact of the transition will create value for the organisation. The key factors to consider in quantifying these impacts include:

• Ensuring that the data on which decisions are made is complete, accurate and timely

• Understanding the implications of cost pass through onto your business from suppliers and then through to your customers

• Understanding and maximising the government assistance available for organisations transitioning to the low-carbon economy

• Developing strategies for minimising the risks and maximising the returns of carbon trading

• Understanding the opportunities for internal abatement by the reduction of GHG emissions through internal investment

• Appropriately assessing the financial impacts of a cost on carbon through a flexible, quality assured model

• Understanding the accounting and tax implications of the relevant strategic opportunities, and ensure that this is realistic in terms of future cash flows and other activities.

By understanding the factors mentioned above an organisation has the opportunity to continue to drive increased shareholder value through the additional cost pressures provided from the Plan. The following pages identify the key impacts the Plan has on any business and the key questions that CFOs should be asking teams within their business to ensure that the organisation is both prepared to deal with the additional cost and administration, as well as to proactively identify opportunities presented by the Plan.

Carbon opportunities and costs

New ventures/revenue streams

Abatement/reduction of permit liability

Reducing consumption

Direct cost of permits

Increasing cost of inputs

Competitive advantage lost/impairment

Sh

areh

old

er v

alu

e

Time

Value creating

Value destroying

Source: PricewaterhouseCoopers


Quantifying the impacts (continued)

1. Compliance obligation

ArewedirectlyliableunderthePlan?

Haveweincludedtheresourcing/legalcomplianceobligationswithinbudget?

Isthereadequatedocumentationpreparedtosupportthepositiontaken?

A person or organisation may be liable as:

• A direct emitter for GHG emissions directly emitted by a facility

• A natural gas supplier for GHG emissions embodied in natural gas supplied to another person

• A person that opts-in under the opt-in provisions of the Plan.

Liability for greenhouse gases emitted from the operation of a facility is triggered where:

• The person has operational control of that facility

• Facility produces covered emissions

• The amount of those covered emissions exceeds a threshold or the facility is a large gas consuming facility.

The operators of facilities that emit 25,000 tonnes or more of ‘covered’ CO2-e greenhouse gases in an eligible financial year will be liable under The Plan and will be required to acquire permits to account for their emissions. However, this obligation can be transferred between entities through the use of obligation transfer number (OTN) certificates, or liability transfer certificates (LTCs).

The operator of a facility that is a direct emitter may transfer its liability to a range of other specified entities through the use of LTCs. These are in the form of corporate group and financial control transfers.

Natural GasAn 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.

2. Supplier price increases

WhatistheimpactofthePlanonourkeysuppliers?

Havecarbonclausesbeenaddedtoourexistingprocurementcontracts?

Haveweincorporateddirectandindirectcarboncostimplicationsintoourmergersandacquisitions,capitalexpenditureandbudgeting/forecastingprocesses?

Exposure is largely dependent on the legal construction of contracts. Such exposure may also result in an adjustment to permit liability, depending on the mechanism by which pass through is affected. Exposures can be due to:

• Increased supply cost

• Cost reimbursement

• Contractual transfer of responsibility for the supply of eligible emissions units

• Indemnity against costs

• The integration of carbon pricing consideration into credit assessments

• Reporting obligations

• Shortfall penalties.

The materiality of such exposure should not be underestimated. Instead it should be calculated based on discussions with suppliers so that realistic expectations of potential cost increases can be factored into budgets and other areas.

Businesses should review existing contracts to determine if they are liable to pay additional carbon costs under their supply contracts. Where this is the case, or where they are carbon permit liable, businesses also need to determine whether they can pass through these costs to their customers by reviewing their existing customer contracts and standard terms of business.


3. Cost pass through and point of obligation

Wherewillindirectcostincreasesimpactourbusinessmost?

Canwepassourliabilitythroughtoourcustomers?

Haveweaddedcarbonclausestoeverysalescontract?

Ifwecannotpassonourliability,canwestillpassonthecostincrease?

Whatistheappetiteforcostincreaseswithourcustomers,andhowdoweknowthis?

Organisations will need to consider the propensity of their suppliers to pass the cost of carbon down the supply chain to their business.

There is potential for increased indirect costs in many locally produced products and services. A thorough understanding of the current costs which may be passed through from upstream suppliers together with the legal construction of sales contracts, and the willingness of contractual counterparties to accept cost allocations, will determine the extent to which this new category of cost stops with your business or is passed through.

To assess the carbon value impact of pass throughs, it is necessary to review pass through clauses in existing and future customer contracts and other commercial arrangements.

It is expected that the pass through of carbon costs will be closely monitored by the Australian Competition and Consumer Commission (ACCC). The ACCC has been tasked to closely monitor claims made by companies in relation to the impact of the carbon price on their own price increases. Companies that are looking to make specific representations to their customers regarding the price impact of the Plan should familiarise themselves with the ACCC’s Carbon Price Claims – Guide for Business.

4. Government assistance

Doweunderstandallthepotentialassistanceandtransitionalarrangementsofferedbythegovernment?

Doweunderstandthetimeframesandrequirementsforapplicationforassistance?

Businesses strongly impacted by the Plan will be supported through a range of assistance measures including grants, loans, tax deductions and other incentives.

There is a real opportunity for organisations of all sizes to access these incentives to support their successful transition. Business leaders need to make sure their organisations are familiar with the transitional arrangements offered by the government and the criteria for eligibility.

Key transitional measures:• The Jobs and Competitiveness Program provides

assistance in the form of free permits for specific activities and industries that are classified Emissions Intensive Trade Exposed (EITE)

• The Energy Security Fund provides for assistance to eligible power generators in the form of free permits and cash payments

• The Clean Technology Programs available include the:

– Clean Technologies Food and Foundries Investment Program ($200m over six years)

– Clean Technology Investment Program ($800m over seven years)

– Clean Technology Innovation Program ($200m over five years).

• The Coal Sector Jobs Package includes assistance to highly emissions intensive coal mines in managing the impact of a carbon price.

5. Carbon procurement and trading

Dowehaveacarbonprocurementandtradingstrategy?

Doweplantopurchaseeligiblecarbonunitsatauctionorinasecondarymarket?

Whathedgingwillweundertakeinrelationtocarbonpricerisk?

Whatinvestmentandfinancingoptionshaveweconsideredordiscussed?

Haveweconsideredouroptionsforcarbonoffsets?

DowerequireanAustralianFinancialServicesLicence(AFSL)totradeincarbonunits?

A carbon procurement and trading strategy may be required for entities exposed to a direct carbon price liability.


Quantifying the impacts (continued)

Domestically Generated UnitsDuring the fixed period the holders of freely allocated permits will be able to sell them to the government as part of a ‘buy-back’ plan. ACCUs can be used by businesses to meet up to 5% of its carbon permit obligation during the fixed price period (1 July 2012 to 30 June 2015). No threshold applies to the use of ACCUs generated under the CFI during the flexible price period.

During the flexible period, businesses will be free to buy and sell carbon units they have acquired from the government.

Internationally Generated UnitsDuring the fixed price period of the Plan, liable entities will be unable to use internationally generated units to meet their liability. From 1 July 2015, when the flexible price period commences, liable entities will be able to use international units to acquit up to half of their annual liability. These include certain Certified Emission Reductions (CERs) from Clean Development Mechanism projects, Removal Units (RMUs), Emissions Reduction Units from Joint Implementation projects and other units permitted by regulation.

The procurement of units directly from eligible projects may provide low cost options for liable entities; however this is balanced by an increased risk over certainty of supply. An organisation should therefore assess its risk appetite in considering opportunities for acquiring eligible emissions units at reduced prices that offer differing degrees of certainty.

In addition, organisations must take into account the carbon unit price floor ($15.00 in 2015-16, $16.00 in 2016-17 and $17.05 in 2017-18) during the flexible price period. This may reduce the potential benefit of purchasing from the international permit market. If the market price is below the price floor, a charge will be assessed on each permit to make up the difference.

It is important for organisations to note that carbon units have been defined as financial products and are regulated as such. Therefore any organisation associated with carbon credits, permits and offsets must consider whether they need to apply for an AFSL.

For permit liable organisations, the finance and treasury teams will need to assist in obtaining financing to purchase the permits as well as developing policy to hedge carbon pricing and scarcity risks. They will also need to assess the accounting and tax implications and determine the appropriate methods for presenting the new transactions.

6. Management accounting

Haveweincorporatedthecostofcarbonintofuturecashflowforecasts?

Doesourmanagementhaveadequate,accurateandtimelycarboninformationtosupportbusinessdecisions?

Haveweconsideredtheimpactofacarboncostonassetimpairment?

Haveweconsideredalltaximplications?

The Plan will result in a cost of carbon that may be incorporated into the cost of supplies for operating a business. The additional costs from direct liabilities or cost pass through will also need to be incorporated into the management accounting and internal reporting frameworks to ensure that appropriate cost forecasting has been maintained to support business decisions.

Balance sheet, income statement and cash flow impacts at a glance:

Balance sheet and income statementImpacts

Balancesheet

IncomeStatement

Emission permits (asset)

• Purchase of permits ✔ ✘

• Revaluation/amortisation. ✔ 2 ✔ 2

Obligations to surrender permits (liability)

• Recognition of emission liability ✔ ✔

• Revaluation of emission liability. ✔ 2 ✔ 2

Derivative financial instruments relating to emission permits (trading permits) ✔ ✔

Carrying value of assets due to changes in cash flows ✔ ✔

Tax treatment ✔ ✔

Cash flow The cash flow impacts of the Plan that will need to be considered and budgeted for can be categorised as:

Direct • Purchase of permits• Tax treatment of those permits• Pricing impacts.

Indirect • Increases in the cost of raw materials, fuel, machinery and equipment

• Electricity price impacts.

2. Revaluation of emission permit assets and liabilities may not be required during a fixed price period.


Technical Accounting GuidanceCurrently there is no specific accounting technical guidance in local or overseas markets for emissions permits. IFRIC 3, Emission Rights, was withdrawn (as it causes unacceptable earnings volatility) with no current replacement available. Both the International and Australian Accounting Standards Boards have had the topic of carbon accounting on their agenda for a number of years and are currently seeking feedback from relevant stakeholders to determine whether it will remain on the agenda.

Where there is no specific guidance available, organisations must follow the general IFRS principals (including IFRIC 3) in the interim. The accounting implications could include the creation of assets (permits), expense of the cost of emissions, liabilities (obligation to submit permits), deferred income (government grant) and other assets/liabilities. Due to the lack of specific guidance, there are varied and inconsistent practices which might be applied in the Australian market.

7. Reducing emissions and improving efficiency

WhatarewedoingtoreduceGHGemissionstoavoiddirectandindirectcosts?

WhatcanwedotoreduceourindirectGHGemissions?

Depending on the cost of carbon, internal abatement may be more cost effective than acquiring permits on the market. The Plan establishes a price signal for GHG emissions, and so creates an incentive for lower cost abatement of GHG emissions. Organisations will be able to assess the marginal cost of abatement against the carbon price. Where the cost of abatement is above the price, there is a clear financial incentive not to invest in the abatement opportunity.

A marginal abatement cost curve is one method used by governments and organisations to understand the cost implications and priorities for proposed projects to reduce GHG emissions. McKinsey has prepared indicative curves for Australia (shown below) and the world. The curve identifies negative and low cost abatement projects that could be 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.

Source: ClimateWorks Australia, 2010

2020 GHG emissions reduction societal cost curveLowestcostopportunitiestoreduceemissionsby249MtCO2e1

Commercial retrofit energy waste reduction

Petroleum and gas maintenance

Pasture and grassland management

Residential appliances and electronics

Commercial retrofit HVAC

10050 1500 200 250

Active livestock feeding

Gas CCS new build

Solar PV (centralised)

Chemicals processes and fuel shift

Anti-methanogenic treatments

Wind offshore

Other industry energy efficiency

Commercial new builds

Commercial retrofit lighting

Residential lighting

Reforestation of marginal land with timber plantation

Mining VAM oxidation

Cement clinker substitution by slag

Coal to gas shift (increased gas utilisation)

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

Residential new builds

Mining energy efficiency

Diesel car and light commercial efficiency improvement

Aluminium energy efficiency

Reforestation of marginal land with environmental forest

Commercial elevators and appliances

Petrol car and light commercial efficiency improvement

Reduced cropland soil emissions

Commercial retrofit insulation

Cogeneration

Operational improvements to existing coal plant thermal efficiency

Reduced T&D losses

Cropland carbon sequestration

Degraded farmland restoration

Coal CCS new build with EOR

Capital improvements to existing gas plant thermal efficiency

Solar thermal

Biomass/biogas

Biomass co-firing

Onshore wind (marginal locations)

Improved forest management

Geothermal

Coal to gas shift (gas new build)

Onshore wind (best locations)

Strategic reforestation of non-marginal land with environmental forest

Reduced deforestation and regrowth clearing

Commercial retrofit water heating

Operational improvements to existing gas plant thermal efficiency

Coal CCS new build

Emissions reduction potentialMtCO2e per year

IndustryPower

TransportBuildingsForestryAgriculture

Cost to society A$/tCO2e

-50

-250

-200

-150

-100

50

200

150

100

0


Strategy risks and opportunitiesOrganisations 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

First-order carbon risks relate to direct and geophysical impacts on a business. They will most likely affect physical assets and operational activities.

Second-order carbon risks relate to indirect impacts and responses by internal and external stakeholders and competitors. These risks have the potential to impact employees, access to capital, and reputation as well as many other external factors.

Source: PricewaterhouseCoopers, 2008

Employees

Physical assets

Operations

Capital

Reputation

CustomersSuppliers

External stakeholdersInvestors, Analyst, Regulators, Communities, Pressure Groups

Competitors

The Organisation


8. New business ventures/products

Howmanyproductsorservicesdowesellthatare‘low-carbon’alternatives?

Isthereanypotentialtoidentify‘carbonvalueadded’productorserviceopportunitieswithinourexistingproductsorservices?

Areweconsideringpotentialnewbusinessopportunitiesmorealignedtoalow-carboneconomy?

Areweconsideringtheimpactofacarbonpriceondecisionsrelatedtomergersandacquisitions?

Organisations can create shareholder value through the identification of new low-carbon business ventures and products. There are many ways in which an organisation can strategically address its exposure to the Plan.

Through understanding the change to a low-carbon economy, and the new potential needs for low-carbon products and services, many organisations will identify opportunities for new revenue streams. This may be through the development of new products or services or through the identification of new markets. It may also be through the re-design of existing products and services to provide a low-carbon alternative.

Organisations which are considering mergers or acquisitions should carefully consider the carbon associated impacts. Access to funding is the lifeblood of mergers and acquisitions activity and the reaction of both debt and equity funders to the carbon price mechanism may also influence the valuations assigned to particular businesses.

9. Physical

Whatareourphysicalrisks?

Whatcostsareassociatedwithourphysicalrisks?

Climate change will present increasing physical risks to land, property and other business assets over the long term. Rising sea levels, extreme weather events with greater frequency and intensity, droughts and floods all threaten businesses. These changes may result in increased insurance costs, increased maintenance requirements, and increased cost of resources.

These physical risks may also create opportunities for businesses that provide goods or services in areas such as engineering and physical resilience.

10. Investors

Whatareourinvestors’expectationsregardingthemanagementofclimatechangerisks?

The impact of the Plan will add costs for most organisations. A direct permit liability or indirect exposure via cost pass through will result in increased costs through the supply chain.

The cost of the Plan has been increasingly incorporated into the equity research reports for organisations listed on the Australian Securities Exchange. A recent report published by Deutsche Bank highlighted the estimated FY13 NPAT impact of $23/t carbon price of the carbon price mechanism (CPM).

An organisation’s response to the Plan may also impact on its market reputation. Entities that are able to communicate with investors on the potential risks and opportunities that climate changes presents for them will be better placed in ensuring that their share prices accurately reflect this impact.

-24% -20% -16% -12% -8% -4% 0% 4%

VBA

ORG

QAN

BSL

ORI

BLD

IPL

CSR

STO

OST

WPL

CTX

BHP

ILU

NCM

RIO

LEI

AIO

QRN

AGK

-20.5

-10.9

-10.8

-9.3

-5.8

-4.8

-4.4

-4.3

-3.9

-3.3

-1.5

-1.4

-0.8

-0.8

-0.8

-0.6

-0.2

0

0

2.5

Source: Deutsche Bank Report, 2011


Strategy risks and opportunities (continued)

11. Government

WhataretheexpectationsoftheCleanEnergyRegulatorregardingcompliance?

WhatfuturechangesarelikelytobemadetothePlanandassociatedcarbonprices?

Organisations will need to understand their regulatory obligations and ensure that they comply. The Clean Energy Regulator will be responsible for administering key elements of the CPM as well as the CFI3.

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 Australia’s progress towards meeting its targets for reducing carbon pollution4. Permit liable entities will need to consider the messages issued by the authority in order to understand likely scenarios regarding medium to long-term carbon prices.

12. Customers

WhattrainingprogramshaveyoudevelopedforcustomerfacingstaffontheimpactoftheCPM?

Whatareourrisksandopportunitiesrelatingtocustomers?

Haveyouconsideredcustomerpricingstrategiesandservicesforyourproductofferings?

The Plan will raise awareness of the risks of climate change and impact the needs of existing customers. For some companies, the impact of the carbon price may create product substitution opportunities or threats depending on the relative carbon intensity compared to competitors.

For example, traditional methods used in energy production, such as pulverisation coal power plants, are likely to experience lowering demand as new technology with lower GHG emissions (such as integrated gasification combined cycle power plants) gain wider use (if not regulatory enforced).

The reverse applies for entities involved in industries employing lower carbon footprint technologies. Such entities may see significant revenue growth as organisations seek low-carbon alternative suppliers. Organisations will need to develop strategies to ensure that potential changes in the needs of customers have been incorporated into broader product and service design processes.

For some businesses, training should be considered for customer facing staff to ensure they are able to adequately communicate the impacts of the CPM in a manner that is not considered misleading or deceptive as per the ACCC.

13. Suppliers

Whatareourrisksandopportunitiesrelatingtooursuppliers?

Market based emissions reduction mechanisms place a price on GHG emissions. Carbon will be embedded into the product physically and into the price. It will be central to the way companies do business with each other.

Organisations will need to understand the impact of the carbon constrained economy on the security or scarcity of supply of specific products and services. It is expected that the supply chain impact of the Plan for most organisations will be the pass through of increased energy costs.

14. Industry/competition

Whatareourrisksandopportunitiesrelatingtoourcompetitors?

Changes in the economic environment provide opportunities for organisations to move first. Organisations that can develop and implement their carbon strategies will be able to maximise the benefit of moving first.

The carbon price will also provide a competitive advantage for organisations with low-carbon intensity as fewer costs are incurred and therefore passed through. This will offer 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.


Getting the data rightComplete, accurate and timely data is the cornerstone of effective business decision making. Without data that can be relied upon, organisations may miss potential risks or opportunities. Alternatively organisations may incorrectly assess their risks and opportunities, which may result in significant risk exposures and lost opportunities, resulting in a reduction of shareholder value.

15. Identifying your reporting obligation

WhichGHGemissionsareconsideredtobeoursforreportingpurposes?

Whatjointventures,partnershipsandbusinessrelationshipsdoesourbusinesshave?

The first step in identifying your reporting obligations is to note those facilities over which you have operational control as defined by the NGER Act.

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:

• A facility exceeds 25ktCO2-e of emissions or consumes or produces more than 100TJ of energy

• The corporate group comprises facilities that in total exceed 50ktCO2-e of emissions or consume or produce greater than 200TJ of energy.

Each organisation should have a clear understanding of their GHG emissions sources, a documented methodology, policies and processes to develop a GHG inventory and a documented interpretation and assessment of any compliance or reporting obligations.

ReportingCompanies with a reporting obligation are required to report by 31 October each year on their emissions and energy use for the preceding year ended 30 June.

Organisations without a compliance obligation may still choose to voluntarily report their GHG emissions and the impact of carbon on their business to their stakeholders, including suppliers, customers and employees.

16. Measurement and accounting

Whereisourdatacomingfrom?

Isourdatareliable?

Whataretheskillsneededtoprepareourdata?

CO2-e is the unit of measurement for GHG emissions. For some organisations this will be new data which has not been previously collected, managed or reported.

Organisations need to understand the key sources of emissions within their operational boundaries. From this 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.

Performance

Analysis

Data


Getting the data right (continued)

17. Systems, processes and controls

Isourteamcollectingtherightinformationanddotheyunderstandourrecordkeepingrequirements?

Whatcontrolsdowehaveinplacearoundthecollationandreportingofemissionsdata?

Havewelinkedcarbonsourcedataintoourexistingfinancialsystems?

The assurance regime under the Plan means that liable companies with emissions above a certain threshold will be required to be audited annually prior to submission of their data.

Systems used to collect GHG emissions source data are typically immature when compared to financial systems with weaker controls over the integrity of reported data. Companies with compliance obligations under the Plan should ensure that adequate controls are established prior to its commencement. Not doing so will increase the risk of both increased audit costs and qualified audit opinions.

A strong control environment leveraged from the financial reporting framework will ensure that GHG emissions data being distributed can be relied upon and that errors will be identified as they occur.

18. Quality control

Howdowedocumentourcomfortoverthewaythedatahasbeencollectedandreported?

Haveweconsideredtheneedforindependentassuranceoveremissionsdatareported?

AreGHGemissionsandclimatechangerisksincludedinourbroaderriskmanagementframework?

Isthequalityofreportednon-financialdataassessedbyourinternalauditteam?

Aretheresynergiesbetweenthefinancialauditandcarbonassuranceprocessthatcanbeleveraged?

It is important that when dealing with significant amounts of emissions data, a robust process is in place to ensure completeness.

The internal audit function within businesses particularly that have direct exposure should be reviewed to ensure:

• Work plans are adjusted to include reviews of the risks, controls and processes associated with the collecting, measurement, recording and reporting of GHG emissions data used in CPM reporting

• Staff have appropriate mix of skills to perform these reviews.

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.


Communication19. Internal communication

WhatisourinternalcommunicationsstrategyforthePlan?

DothekeyteamswithinourorganisationunderstandthepotentialimpactsofthePlan?

DowehavethemostuptodateGHGemissionsinformationtoreport?

Areourinternalcommunicationsandtrainingforcustomerservicestaffatthedesiredlevel/standard?

Effective internal communication can assist in maximising carbon and climate change opportunities and minimising the risks. Communicating the business implications of the Plan is critical to ensuring that these implications are understood by the Board, management and staff. It will be employees who identify and realise the potential opportunities and also mitigate any exposures. Cost pass through clauses within contracts are going to be the key area in which the Plan may unexpectedly impact operations. Without a core strategy and clear communication plan within the business, new contractual arrangements may result in unintended increased cost and risk exposures.

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.

20. Communicating with stakeholders

WhatinformationareourexternalstakeholdersaskingforinrelationtothePlan?

Couldwebroadenourreportingtobetteraddresstheserequests?

External stakeholders are continuing to request information on the potential impact of the Plan on the business with its current strategy and expectations. For organisations reporting under the NGER or those permit liable under the Plan, there will be new non-financial information available to external stakeholders. The way in which an organisation incorporates this into the broader external communications strategy is critical. Inconsistent information, errors and poorly considered responses to carbon risk will discredit the data and may result in reputational damage.

GHG emissions data should be incorporated into existing external communications programs. Sharing information about how the organisation is addressing the risks associated with the transition to a low-carbon economy and realising the opportunities will be important for both value protection and enhancement.


Resources and further informationLinks:

ACCC, 2011, Carbon price claims: Guide for business

Department of Climate Change www.climatechange.gov.au

The Institute of Chartered Accountants in Australia

www.charteredaccountants.com.au

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

www.climatechange.gov.au


www.pwc.com.au/publications/carbon-price/index.htm


20 issues checklistQuantifying the impacts Yes No

1. Compliance obligation

• Are we directly liable under the Plan? Have we included the resourcing/legal compliance obligations within budget?

• Is there adequate documentation prepared to support the position taken?

2. Supplier price increases

• What is the impact of the Plan on our key suppliers?

• 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 and point of obligation

• Where will indirect cost increases impact our business most?

• Can we pass our liability through to our customers?

• 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 assistance

• Do we understand all the potential assistance and transitional arrangements offered by the government?

• Do we understand the timeframes and requirements for application for assistance?

5. Carbon procurement and trading

• Do we have a carbon procurement and trading strategy?

• 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 accounting

• Have we incorporated the cost of carbon into future cash flow forecasts?

• 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 and improving efficiency

• What are we doing to reduce GHG emissions to avoid direct and indirect costs?

• What can we do to reduce our indirect GHG emissions?

Strategy: risks and opportunities Yes No

8. New business ventures/products

• How many products or services do we sell that are ‘low-carbon’ alternatives?

• 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?


Strategy: risks and opportunities (continued) Yes No

10. Investors • What are our investors’ expectations regarding the management of climate change risks?

11. Government • What are the expectations of the Clean Energy Regulator regarding compliance?

• What future changes are likely to be made to the Plan and associated carbon prices?

12. Customers • What training programs have you developed for customer facing staff on the impact of the CPM?

• What are our risks and opportunities relating to customers?

• Have you considered customer pricing strategies and services for your product offerings?

13. Suppliers • What are our risks and opportunities relating to our suppliers?

14. Industry/competition • What are our risks and opportunities relating to our competitors?

Getting the data right Yes No

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?

16. Measurement and accounting

• Where is our data coming from?

• Is our data reliable?

• What are the skills needed to prepare our data?

17. Systems, processes and controls

• Is our team collecting the right information and do they understand our record keeping requirements?

• What controls do we have in place around the collation and reporting of emissions data?

• Have we linked carbon source data into our existing financial systems?

18. Quality control • How do we document our comfort over the way the data has been collected and reported?

• Have we considered the need for independent assurance over emissions data reported?

• Are GHG emissions and climate change risks included in our broader risk management framework?

• Is the quality of reported non-financial data assessed by our internal audit team?

• Are there synergies between the financial audit and carbon assurance process that can be leveraged?

Communication Yes No

19. Internal communication

• What is our internal communications strategy for the Plan?

• Do the key teams within our organisation understand the potential impacts of the Plan?

• Do we have the most up to date GHG emissions information to report?

• Are our internal communications and training for customer service staff at the desired level/standard?

20. Communicating with stakeholders

• What information are our external stakeholders asking for in relation to the Plan?

• Could we broaden our reporting to better address these requests?

Top 20 issues (continued)


GlossaryAbatement: Refers to a reduction in the degree or intensity of greenhouse gas emissions. A project or activity that reduces or otherwise prevents emissions of greenhouse gases from entering into the atmosphere.

Allocation: This term generally refers to the allocation of emissions permits or allowances among greenhouse gas emitters to establish an emission trading market. The division of permits/allowances can be done through free allocations and permit auctioning.

Allowances: This term generally refers to a government issued instrument giving the bearer the right to emit a fixed amount of greenhouse gas emissions into the atmosphere (tonnes of CO2-e). Also see permits.

Australian Carbon Credit Units (ACCUs): ACCUs are the emissions units that have been issued under the CFI for verified emissions reductions from CFI-approved projects.

Business As Usual Scenario (BAU): An estimate of the future pattern of greenhouse gas emissions, which assumes that there will be no major changes in attitudes and priorities of governments, business and the community. The term BAU is often used in conjunction with the term additionality.

Carbon dioxide equivalent (CO2-e): A standard measure that takes account of the global warming potential of different greenhouse gases and expresses the cumulative effect in a common unit, relative to carbon dioxide.

Carbon Farming Initiative (CFI): The CFI is a voluntary program that allows farmers and land managers to earn carbon credits by storing carbon or reducing greenhouse gas emissions on the land. These credits can then be sold to people and businesses wishing to offset their emissions.

Carbon Footprint: A company’s carbon footprint is generally referred to as a measure of the impact its activities have on the environment in terms of the amount of greenhouse gases produced, measured in units of carbon dioxide equivalent. It is also known as a GHG inventory.

Carbon Intensity: CO2-e emissions per unit of economic output (such as tonnes of CO2-e per dollar of GDP).

Clean Development Mechanism (CDM): One of the three Kyoto mechanisms, the CDM aims to promote sustainable development in developing countries as well as to help Annex I Parties achieve compliance with their QELRCs. It allows Annex I countries to invest in emission–saving projects in developing countries and gain credit for the savings achieved through the generation of CERs that they can use to contribute to compliance with part of their QELRCs. The CERs will be added to Annex I Parties’ assigned amounts.

Certified Emissions Reduction (CER): A Kyoto Protocol unit equal to 1 metric tonne of CO2-e. CERs are issued for emission reductions from CDM project activities. Two special types of CERs called temporary certified emission reduction (tCERs) and long-term certified emission reductions (ICERs) are issued for emission removals from afforestation and reforestation CDM projects.

Emissions Intensive Trade Exposed (EITE): EITE refers to companies or industries whose operations are highly emissions intensive and whose markets are trade exposed. As part of the Jobs and Competitiveness Program, companies will receive an estimated $9.2 billion in transitional assistance over the first three years of the Carbon Price Mechanism.

Fugitive emissions: Emissions that are uncontrolled and escape into the atmosphere during production processes. Common examples include emissions released as a result of mining or other extraction activities.

Greenhouse gas (GHG): A gas that contributes to the natural ‘greenhouse effect.’ Gaseous constituents of the atmosphere, both natural and anthropogenic, that absorb and emit radiation at specific wavelengths within the spectrum of infrared radiation emitted by the Earth’s surface, the atmosphere, and clouds. The Kyoto Protocol covers a basket of six GHGs produced by human activities: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). Annex I Parties’ emissions of these gases taken together are to be measured in terms of carbon dioxide equivalents (CO2-e) on the basis of the gases’ Global Warming Potentials (GWPs). An important natural GHG that is not covered by the Protocol is water vapour.

Kyoto Protocol: A protocol to the UNFCCC that includes emissions limitation or reduction commitments for ratifying countries.

Liability Transfer Certificate (LTC): An LTC is used to transfer carbon price liabilities from one entity to another. A person with operational control over a facility can transfer liability to a member of the same corporate group or a person outside the corporate group that has financial control over the facility.

Life Cycle: Refers to the consecutive and interlinked stages of a product system, from raw material acquisition or generation of natural resources to end of life, inclusive of any recycling or recovery activity.

Life Cycle Assessment (LCA): Refers to the compilation and evaluation of inputs, outputs and potential environmental impacts of a product system throughout its life cycle.

Life Cycle GHG Emissions: The sum of greenhouse gas emissions resulting from all stages of the life cycle of a product and within the specified system boundaries of the product. This includes all emissions that are released as part of the processes within the boundary of the life cycle of the product, including obtaining, creating, modifying, transporting, storing, operating, using and end of life disposal of the product.

Mitigation: In the context of climate change, a human intervention to reduce the sources or enhance the sinks of greenhouse gases. Examples include using fossil fuels more efficiently for industrial processes or electricity generation, switching to solar energy or wind power, improving the insulation of buildings, and expanding forests and other ‘sinks’ to remove greater amounts of carbon dioxide from the atmosphere.

National Greenhouse and Energy Reporting (NGER) Act 2007: An Act that establishes a national framework for Australian corporations to report greenhouse gas emissions, reductions, removals and offsets and energy consumption and production, from 1 July 2008.

Obligation Transfer Number (OTN): An OTN is used to transfer carbon price liabilities from natural gas retailers to businesses and entities that use large amounts of natural gas.

Offset: An activity that compensates all or part of the CO2-e emissions of an emitting entity, by reducing the emissions, or increasing the CO2 absorption of another entity.

Permit: Permits are often used for denoting the tradable units under the Kyoto Protocol, such as CERs. Emissions permits are treated as a commodity giving its holder the right to emit a certain quantity of GHGs. Emissions permits are designed to be tradable between countries and other legal entities.

Quantified Emission Limitation and Reduction (QELRC): The quantified commitments for GHG emissions listed in Annex B of the Kyoto Protocol. QELRCs are specified in percentages relative to 1990 emissions.

Renewable Energy: Energy derived from non-fossil energy sources that is continuously renewed by natural processes. These include wind, solar, geothermal, wave, tidal, hydropower, biomass, landfill gas, and sewage treatment plant gas, as well as technologies based on biomass.

Scope 1 Emissions: Described in the GHG Protocol as the direct greenhouse gas emissions from sources that are owned or controlled by an organisation (such as emissions resulting from on-site combustion of fossil fuels, or PFC emissions from aluminium smelting).

Scope 2 Emissions: Described in the GHG Protocol as the indirect GHG emissions from consumption of purchased electricity, heat or steam which is purchased by an organisation.

Scope 3 Emissions: Described in the GHG Protocol as the other indirect emissions, such as the extraction and production of purchased materials and fuels, transport-related activities in vehicles not owned or controlled by the reporting entity, electricity-related activities (such as Transmission and Distribution losses) not covered in Scope 2, outsourced activities, and waste disposal.

Upstream Emissions: A term used in life cycle assessment for GHG emissions associated with processes that occur in the life cycle of a product prior to the processes owned, operated or controlled by an organisation.

Voluntary Market: Voluntary markets for emissions reductions cover those buyers and sellers of Verified Emission Reductions (VERs), which seek to manage their emission exposure for non-regulatory purposes.

Contact details

The Institute of Chartered Accountants in Australia33 Erskine Street, Sydney, NSW 2000GPO Box 9985, Sydney, NSW 2001

Service 1300 137 322 Phone 02 9290 1344 Fax 02 9262 1512 Email [email protected]

charteredaccountants.com.au

Yasser El-Ansary General Manager – Leadership & Quality Phone + 61 (2) 9290 5623 Email [email protected]

PwCDarling Park Tower 2 201 Sussex Street, Sydney GPO Box 2650 DX 77 Sydney, NSW 1171

Phone +61 (2) 8266 0000 Fax +61 (2) 8266 9999

www.pwc.com.au

Liza Maimone, Partner Sustainability & Climate Change Leader Phone +61 (3) 8603 4150 Email [email protected]

John Tomac, Partner Sustainability & Climate Change Phone + 61 (2) 8266 1330 Email [email protected]

mailto:service%40charteredaccountants.com.au?subject=


mailto:%07yasser.el-ansary%40charteredaccountants.com.au?subject=

www.pwc.com.au

mailto:liza.maimone%40au.pwc.com?subject=

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Business briefings: 20 issues on the business implications of carbon

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