HG Alert: The Climate Change Waiting Game: what you should be doing now - 9 Apr 2010

Kevin Rudd and Tony Abbott might be caught up in a fascinating political battle over climate change, but for many, the substance of the debate and its affect on ordinary Australians is very much lost in translation. The climate change policy debate may be settled at the next Federal election, but many businesses, stakeholders and advisers are left wondering what it all means in the interim.

Put simply, the question posed is what, if anything, should we be doing about climate change right now?

Below are our top five recommendations for what businesses should be doing to address the issues relating to climate change.

1. Separate the hype and politics from the law and opportunities

The political gainsmanship described above is a hot topic at the moment. The ‘will they or won’t they?’ debate undoubtedly sells newspapers, but it’s important for businesses and stakeholders to look beyond the hype and ask themselves two key questions:

  • What are my current legal obligations?
  • If some form of carbon pollution reduction scheme (CPRS) comes into effect from 2011, what will this mean for my business, contracts, profits and reporting obligations?

You might be surprised to learn that a reasonable body of climate change law already exists in Australia. There are current and enforceable obligations on many businesses, for example, in the following areas:

  • Large energy users or emitters are required to record and report their energy usage to the Federal Government under the National Greenhouse and Energy Reporting Act 2007 (see this article for an outline of these requirements).
  • Sellers of residential property and any agents appointed by sellers have to give potential buyers certain information about the sustainability features of the property for sale.
  • Businesses can already ‘earn’ credits (carbon permits) in some circumstances by investing in carbon reduction projects in certain countries. These permits have a market value and are tradeable.
  • Companies have already been held liable under the Trade Practices Act 1974 for making misleading statements about their ‘green credentials’ (see this article about the potential liability).

In addition, and while not technically a requirement yet, it is becoming increasingly popular for commercial buildings to be marketed with a ‘Green Star’ or ‘NABERS’ rating, as regulated by the Green Building Council of Australia and NSW Government respectively.

While the politics of the policy debate may be interesting reading, the current relevance of the climate change debate lies in the obligations which exist and the opportunities that flow from them.

2. Understand where your business fits into the current and proposed regulation

As explained in our series of articles dealing with the structure of the proposed carbon pollution reduction scheme, the CPRS is only designed to directly cover around a thousand large Australian businesses.

The qualifying criteria for direct coverage under the scheme are based on the level of fuel or energy use or actual emissions (see this article for more details).

Clearly, those companies who fall within that direct coverage threshold will need to plan now for their reporting and permit purchase obligations. Under the current Bill, these are scheduled to commence on 1 July 2011.

However, for everybody else, the impact of the CPRS will be an indirect one. Like GST, the CPRS will be relevant to the extent that large emitters will seek to pass on the additional costs associated with the CPRS down the line to their own customers, who will in turn also seek to pass on those costs.

What this means for you now is that you should carefully review your purchase and supply arrangements to make sure, depending which side of the transaction you are on, that you are entitled to pass on additional costs to your own customers, or that you will not be forced to accept any unilateral price rises from your suppliers as a result of their own increase in costs.

It is becoming much more common for contracts to contain ‘CPRS cost pass through’ provisions to avoid any doubt on the ability to increase costs.

3. Don’t let opportunities pass you by

Despite the global financial crisis, anecdotal evidence suggests that entities with green credentials or who are specifically involved in a green industry will have the ability to access equity capital which has been specifically earmarked by fund managers for green investment.

Many struggle with early planning for the CPRS because they believe that if the legislation is not passed, their efforts will have been wasted. However, at its heart, the CPRS is designed to reduce emissions through an increase in efficiency. Businesses can therefore treat their planning for the CPRS as an exercise in cost saving - reviewing and potentially changing their business practices to reduce emissions, which will potentially reduce their fuel use and energy consumption, resulting in reduced costs.

Companies who do not plan early may miss the opportunity to reduce emissions before the legislation has commenced, which will mean they will need to purchase additional carbon permits.

As noted above, companies may be able to take advantage of opportunities now during seasonal contract negotiations to insert cost pass through provisions to protect themselves against increased costs.

4. Don’t get caught out

Although the current binding obligations under the National Greenhouse and Energy Reporting Act 2007 only require companies to report their emissions and energy use (but not pay for any emissions), some people may mistakenly believe that they can worry about full compliance with the ‘real’ requirements when and if the CPRS is passed.

However, the risk with this is that:

  • there are ‘real’ penalties under the National Greenhouse and Energy Reporting Act 2007 for non‑compliance; and
  • decisions that companies make now - for example, about how they group their ‘facilities’ and who the ‘operators’ under those facilities are - may bind them later under the CPRS, as these same concepts will continue to apply under that legislation.

Those businesses on the acquisition trail will need to be careful in acquiring new business units, even if they are not technically conducting the same business as your existing operation. The aggregated effect of these new business units with your existing operations may tip you over the threshold for compliance with the CPRS legislation.

It is critical to understand how the legislation operates, what your existing business’ emissions are or fuel usage is, and what the usage or emissions will be for the entity to be acquired.

5. Ask an expert

As always, it is better and cheaper to plan for the impact of legislation in advance, rather than play catch up once the legislation has commenced - or worse, defend an action by a regulator for a failure to comply.

It is important for companies and stakeholders to talk to experts who can advise on the impact of the current and proposed legislation from a legal point of view, and also quantify the amount of emissions made by entities and the dollar impact that the CPRS may have on entities’ input costs, and therefore, the bottom line.

If you would like to discuss any of the current or proposed legislation further, please contact HopgoodGanim’s Climate Change team.