Plant & Equipment

How will the carbon price impact quarries?

With the carbon tax legislation before Parliament and expected to be law later this month, industry needs to consider its impact and plan for the introduction of the carbon pricing regime in a little over six months.

While most quarries are not among the country?s highest carbon emitters (ie producing over 25,000 tonnes of carbon dioxide per year), there will be consequences for participants in the extractive industries.

A goal of the legislation is to recognise the disproportionate impact it may have on emissions intensive, trade-exposed (EITE) industries. As a result, highly impacted EITE industries will be eligible for compensation of up to 94.5 per cent of the industry average carbon costs in the first year and have access to the Jobs and Competitiveness Program.

However, for most quarry operators, the biggest impact will be the increased cost of fuel, as the reduction in fuel tax credits will raise the price of diesel by over six cents.

Construction materials businesses must now manage increased costs without pricing their product out of the market and falling victim to cheaper overseas imports.

Some organisations will consider scaling back production, importing some products, altering production methods and reducing the workforce in efforts to maintain profit margins and cope with rising fuel and electricity costs.

With the construction industry likely to seek measures to reduce cost increases, the lure of cheaper overseas product may be hard to resist. Australian suppliers have product quality, service and security of supply in their favour. However, it will be important to remain competitive so operators need to consider every option when it comes to passing on the increased cost of fuel and electricity.

The first step for any aggregate operator is to determine whether and where carbon liability applies. Liability will rest with the company that has operational control of the facility. If the facility is part of a joint venture, the new legislation covers proportional sharing of liability.

When considering the ?pass-through? of costs, you should:

  • Be aware the terms of existing supply agreements may not be sufficient.
  • Review all customer contracts in place and consider whether they allow pass-through.
  • Ensure appropriate clauses are ready for inclusion in pending or new contracts.
  • Consider whether your ?change in law? clauses enable pass-through.
  • Be aware of costs that may be passed onto your business by your suppliers and review these contracts.

Should there be an identified risk to profits, it is important to consider the implications of financing early. This includes the impacts on loans and dealings with financiers and the potential exposures under funding agreements. There may be an impact on any new projects or expansions and the ability to secure new funding in affected sectors.

Gathering and reporting carbon emission and greenhouse gas and energy information will be crucial. Most organisations captured by the carbon price are already reporting under the National Greenhouse and Energy Reporting (NGERs) scheme, but with less than a year before the new regime starts, now is a good time to start reviewing your organisation?s data gathering and reporting processes.

Now is also the time to determine the financial reporting and taxation impacts on your business, whether you are liable for carbon permits or not. If there is likely to be liability, establish appropriate accounting treatments for trading carbon permits. And in all circumstances, consider the value of affected assets and the corporate tax implications as well as the impact on cash flow.

A key part of the proposed legislation is how the funds generated by the so-called ?tax? will be spent. Industry assistance is an area covered by the proposed funding arrangement. You need to consider your eligibility for government grants and compensation under a number of assistance programs.

The $9.2 billion Jobs and Competitiveness Program will provide free carbon credits to support jobs in high polluting industries with competitors in countries where those industries are not yet subject to comparable carbon constraints. The Government maintains the package will shield these business activities from the impact of a carbon price while maintaining incentives to invest in cleaner technologies. As a hard hit industry, cement manufacturing will receive the highest level of assistance.

A $1.2 billion Clean Technology Program, over and above the Jobs and Competitiveness Program, will provide support for manufacturers through grants to support research or investments in energy-efficient and low-pollution equipment, technologies and products. The Clean Technology Program requires co-contributions from industry so it will not be for everyone.

The extractive industries are already highly regulated and face increased pressure for green certifications in Europe, North America and Canada. While most of Australia?s direct competitors are from other areas not subject to these pressures and imposts at this time, in coming decades that is likely to change.

All indicators point to a carbon price of one form or another in Australia in the near future. There is now real incentive to invest in emission reduction technology and consideration may be given to what technology is available and how it could be adapted to your own operations.

In cement production, managing emissions is complex. The chemical reactions that take place during processing, as well as the direct impact of machinery and equipment, all may offer emission reduction opportunities.

It is important that all avenues for minimising exposure to carbon liability and increased costs are investigated and explored thoroughly. As always, professional advice is recommended to ensure companies are fully prepared for the new regime.

Tim Hanmore is a partner and environmental regulation
specialist at McCullough Robertson, Brisbane.

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