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What impact does carbon pricing have on SMBs?

On July 1 2012, in a flurry of media coverage, the Government’s carbon pricing mechanism, established by the Clean Energy Act, commenced operation.

While the reportage varied in tone and political stance, one thing was clear: much of Australia’s industry would be affected by the new legislation.

Conceived as a way of dealing with climate change by encouraging the use of clean energy, the underlying principle of the new legislation is that ‘liable entities’ are now required to buy carbon units to offset their greenhouse gas emissions. Because the purchase is compulsory, and at a fixed price for 3 years, it is often referred to as a ‘tax’.

Prior to 1 July 2012, the price paid for a product, whose production caused the emission of greenhouse gases, did not include any compensation to the community for the burden imposed on it by that emission, or any contribution towards the cost of offsetting or reducing that emission. The fundamental objective of the Clean Energy Act is to change that situation.

Impact on SMEs
Most SMEs will not have a direct liability under the scheme. Due to the size of their operations, they will rarely—if ever – be classified as a ‘liable entity’; this being a person who carries out activities at a particular facility that cause the emission of greenhouse gases having a carbon dioxide equivalent of at least 25,000 tonnes per annum.  Overwhelmingly, liable entities will be engaged in activities such as electricity generation, manufacturing and mining, along with a few large landfill operators.

However, while SMBs are unlikely to be liable for their direct emissions, the carbon price will affect many industry sectors indirectly – especially because of the increased cost of electricity generated by burning fossil fuels (coal and gas) as well as price rises in key supplies like cement and steel, as costs incurred by Australia’s heaviest-emitting industries are passed down the line. Also, SMEs that purchase natural gas will find they are asked to pay the carbon price on that purchase. No doubt most SMEs are already experiencing some of these cost increases.

It may be useful for SMBs to gain an understanding of how they are affected by carbon pricing, in order to assess the impact on their own businesses. Liable entities are not obliged to pay now for their carbon emissions. The first payments will fall due in June 2013, when a majority payment for the 2012-13 financial year will need to be made. Following 1 July 2013, a final report and top up payment will fall due.

It is possible that some liable entities have not yet calculated the extent to which the carbon price will affect their costs and have, therefore, not taken steps to pass any significant increase to their customers – which include SMEs. This means some small businesses may not have yet felt the full impact of the increased costs. Nonetheless, it is important that SMEs factor in the carbon price into any work they undertake, including quotations for new work. It is necessary, however, to be careful not to overstate the impact of the carbon price. To do this is to risk falling foul of consumer protection laws, concerning misleading conduct. The Australian Competition and Consumer Commission (ACCC) has announced a willingness to prosecute companies making misleading claims.

What’s coming up
Other industrial sectors will come under the scope of the carbon pricing mechanism in coming years, some of which will impact on SMEs. One such is commercial transport, which will be caught by the scheme from 1 July 2014. While individual consumers won’t be hit at the petrol pump, commercial operators will be charged for their emissions. So any business relying on contractors for the transport of goods over road, rail or sea will face increased costs in this area.

The carbon pricing mechanism is complex and impossible to cover in a few hundred words. It is important that affected people learn about the operation of the legislation and plan how to cope with it. Comprehensive information is available at the government website cleanenergyfuture.gov.au . Readers may also wish to consult a legal text co-authored by me, Australian Emissions Trading Law book, available at thomsonreuters.com.au.