Carbon tax and small business

Like most businesses owners, Tony Liddy spends a lot of his time with his head down and his focus on keeping the wheels of his venture turning smoothly. Like many businesses, he’s yet to know exactly how his operations will be affected by the government’s carbon tax regime, which is set to dramatically change many business fundamentals when it takes effect on July 1, 2012.

Liddy D+D, a homewares design company that he runs with his wife Alex Liddy, offers a range of dinnerware, coffee mugs, and other homewares. Their 15 staff handle products including the Ciroa brand of tabletop products and Miniamo kids’ kitchenwares, as well as a broad range of custom designs; all are designed in Australia, manufactured in China, and shipped to retailers in 20 different countries.

With a global business footprint, the company’s operations involve carbon-heavy activities such as logistics and manufacturing. Because most of the company’s suppliers operate offshore and outside the law’s jurisdiction, direct cost increases may be relatively low – but Liddy concedes they’re likely to be a factor as the company is hit from all sides by carbon costs passed down its supply chain.

Industry groups were slamming the tax long before it was passed into law: the Australian Retailers Association, for example, has said the tax “ultimately has no environmental benefit and will mean disastrous economic impacts for Australian retailers.”

Lobbyists from mining, natural resources, and other industry representatives have been equally up in arms. But Liddy has gotten great value from his own industry group, the Australian Gift & Homewares Association (AGHA), which has been providing carbon-tax updates for small businesses too busy with day-to-day operations to maintain an intimate knowledge of the issue themselves.

“Like most small businesses, we tend to spend most of our time on what we actually do: designing products, looking after staff, looking after customers, and looking after cash flow to survive,” says Liddy. “We’ve been keeping a watchful eye on the carbon tax, but the AGHA has been very good in advising us on where the impacts are likely to be.

“Members have been worried about how the carbon tax is going to come through in terms of freight, [supply] costs, electricity costs, and so on.

These are all direct impacts that could raise the cost of running the business quite substantially – and for a small business like ours, none of this is within our control.”

Watching, waiting, counting

While they’ve heard the take-home one-liners from the histrionic political debate on the issue, many small business owners may still be unsure of exactly what was passed on November 8.

The current legislation, called the Clean Energy Bill (CEB), is an emissions trading scheme (ETS) that provides a market-based mechanism by which ‘carbon credits’ can be bought and sold.

While an ETS allows companies to maintain their current high levels of pollution by purchasing credits from more efficient operators, natural market dynamics will encourage companies to reduce emissions and sell their carbon credits to larger polluters to lower their costs. Currently, Europe, China, parts of the US, and South Korea have an ETS in place or are developing one.

The Australian version, Labor’s CEB, will not implement an ETS until 2015; until then, the scheme will function directly as a tax on the country’s 500 largest polluters. All will be measured and reported upon – as many have already done for years – and levies of $23 per tonne of carbon emissions will be paid to the government as a fixed tax.

Most of this funding will be returned to the community in the form of investments in clean-energy generation, rebates against expected increases in electricity and other prices, and other discounts that Prime Minister Julia Gillard has argued will make the net effect of the tax near to zero. Such remuneration is estimated at around $1.5 billion by the second quarter of the tax’s operation alone.

In an ideal world, a net-zero policy might not be so bad. But many businesses are concerned that, rather than being driven to cut the tax they pay by reducing their emissions, large polluters will simply pass on their carbon-tax costs across their customer base, creating a cascade effect that will leave small-business operators with higher prices on electricity, petrol (which is initially exempt in low quantities), logistics, manufacturing, and other services.

With nobody to whom they can pass on their input costs, small businesses will either have to raise their prices – and risk losing customers – or learn to bury the cost hikes in reduced margins, maintaining their pricing to stay competitive. In this way, the tax could have a significant effect even on small businesses that are far too small to be counted within the government’s 500 largest-polluters lists, simply from the supply chain effects.

Counting the cost

Liddy, for one, will be talking extensively with his suppliers to assess the real impact of the carbon tax on his operations. This is a good idea for any small business, which can not only use that information to accurately assess the change in their input costs, but it can also canvass the market to identify new suppliers. Specifically, ones that have opted to implement CEB-driven change in order to increase their competitiveness through lower costs.

Gerry Magee, senior energy emissions manager with greenhouse-gas consultancy Energy Corporate, predicts the carbon tax will hit small businesses in a number of ways. He believes that electricity bills will go up by approximately three cents per kWh. Magee is also forecasting a 130%–800% increase in the cost of carbon-rich refrigerants used in air conditioners, refrigerators, and freezers; petrol price rises for heavy vehicles of around 6c per liter, as well as increases in council rates due to the disposal of packaging, food, and other decomposable waste.

In the short term, the carbon tax will cause significant confusion, just as the passage of the CEB through the House of Representatives fuelled reports of taxi drivers trying to extract ‘carbon tax surcharges’ from incensed customers. Recognizing the potential for price gouging, the government has directed the Australian Competition and Consumer Commission (ACCC) to watch out for price rises exceeding 0.7%, which may be punishable with up to $1.1 million in fines.

Yet with just $12.8m allocated to the ACCC for enforcement, many observers question how much of a role the body will actually be able to play. Because the production of carbon is well understood and the costs easy to derive, it’s a good idea for small businesses to source information about their suppliers’ operations and does their own calculations, track cost spikes, and decide whether price rises are appropriate or not.

“A lot of small businesses will find themselves caught up in the reporting aspects,” Magee warns. “Some companies have to track the emissions on their worksites, and will have to collect that data from their contractors.”

Opportunity beckons

While the carbon tax may represent an increase in input prices for many small businesses, others will find the increased environmental emphasis it fosters to be a vindication or an impetus to improve their own operations.

Liddy, for one, has recently introduced changes such as forcing employees to turn off all computers at night, changing fluorescent lights to more environmentally sound versions, consolidating all of the operational servers into just one device, and other small initiatives.

“We’re doing all the little things that we can think of that is good for the environment,” he says, “but in the end, we have to accept the price changes and make the best of it that we can.”

Facilities-intensive businesses may find greater benefits from using the carbon tax as an impetus to upgrade equipment or revisit operations. This has been the case for Ferguson Plarre Bakehouses, a Victorian bakery franchise that has worked greenhouse-gas reduction into its corporate image for many years and has seen dramatic savings since it moved into a highly efficient new main office in 2007 and began implementing a range of carbon-reduction practices.

Before that move, Ferguson Plarre was producing its products in an old building that was not climate-controlled. Erratic temperatures and humidity levels not only make quality control and management of baked goods stock difficult but also had fostered quite inefficient environmental practices over the years.

By implementing tight climate controls throughout its entire new facility, Ferguson Plarre has cut total energy consumption by 40% despite now occupying what he refers to as an ‘Esky inside a shed’ that’s three times the size of the old building.

“If we were as inefficient here as we were in the old place, we would be spending $200,000 to $300,000 a year extra in power and gas, and that was the total cost of our environmental initiatives during the build,” Plarre says. “We had a one-year payback.”

Carbon-reduction initiatives are everywhere within the company. A sign at the front of the new bakery, for example, continually displays its electricity, gas, and water usage. In addition, efforts to re-route waste by sending old foodstuffs to a local piggery, for example, have cut landfill volumes by 90% and slashed rubbish pickup costs accordingly.

The bakery’s ovens also use ‘heat recovery tunnels’ that route hot air outside the building in summer and direct it internally to heat the building in winter. Other heat exchangers collect heat from the freezer and refrigerator motors, then use that to preheat some of the water used in the baking process.

“The first 30% of abatement in emissions is generally achieved by innovation, and thinking about how you can get your energy footprint down,” adds Plarre. “It’s nothing more than implementing lean management at an energy level.

“There are some businesses that don’t have the ease with which to innovate and change their businesses, but there’s a positive return on investment for those that think about it and do more than just paying it lip service. With the initiatives we’ve done, we think we are more than prepared for the carbon tax.”

Other companies see new opportunities not in improving their own operations, but in offering technologies that will help other companies reduce their carbon-tax footprint. Melbourne-based LogicalTech, for example, has developed new low-powered LED panels that can be joined together to produce large digital advertising displays. With no fans and low power consumption, they offer lower running costs compared to existing power-hungry display billboards across Australia and, especially, Asia.

With the carbon tax coming into play, CEO Mario Misso sees great opportunity in spruiking the technology to companies that see growing environmental awareness as a trigger to reduce their own impact.

“It’s a good thing that people are more and more conscious about what environmental footprints they deliver,” he explains. “Even if the tax does nothing else, it will get people to think about how they should be behaving and consuming in the future. It’s going to force a professional group of people to be more regimented in the way they do their business.”

Moving forward

While he sees opportunities from increased environmental awareness, Misso is waiting for more details about the carbon tax legislation in practice before he moves to make dramatic operational changes.

“Until it actually happens and we know what it’s going to look like, we can’t do anything,” he says. “There are software applications you can buy and plug into your financials to manage carbon reporting, but at this stage, we’re going to wait and see what transpires.”

The predominance of leases may limit many small businesses from directly modifying the buildings they’re in, but operational and fixtures changes can still deliver benefits. It’s also prudent to revisit service contracts for logistics operations, for example, and leasing arrangements for fleets of cars.

Malcolm Noyle, fleet strategy manager with leasing specialist FleetPartners, warns that improving the carbon footprint of a lease fleet isn’t just about replacing all cars with Toyota Priuses: hybrid cars’ energy-recycling technology works best in stop-and-start traffic, for example, so businesses with many long journeys won’t see their environmental benefits.

“The impacts of the carbon tax are going to bring about a greater focus on cost and overhead,” explains Noyle, noting that the carbon consumption of cars is well understood and calculators are readily available to simplify your impact assessments.

“One option is to change vehicles, but another is to analyze the business case for those trips. Is it necessary for Joe to drive 40km to see a client when the meeting could be done as a videoconference over Skype?”

It’s also important not to get carried away. There’s no point in spending more to reduce your carbon footprint than you’ll save in costs. “We won’t do anything that doesn’t generate a commercial return on investment,” Plarre says of his bakehouses.

“What would be the point of being an altruistic, green-loving company and not existing in five years, allowing our less energy-efficient competitors run the market?”

In the end, avoiding the carbon tax is going to be difficult, so small businesses will benefit the most if they figure out the most cost-effective way to embrace environmental initiatives, both internally and externally.

“I can’t see small businesses getting into carbon trading to offset emissions,” says Energy Corporate’s Magee. “The best advice is simply to become more efficient, reduce waste, use less energy, switch over to non-greenhouse-gas refrigerants, reduce the amount of organic waste sent to landfill, and so on. It’s the same things we’ve been doing for 20 years – it’s just that now it’s going to cost you more not to do them.”