Introduction
In the past, people were not concerned about the changes in climate. However, with the increase in global warming, a lot of emphases has been placed on protecting the environment. The impacts of climate change have caused many countries to develop policies to protect the environment. Countries have developed legislation to protect the environment. For example, on eighth November 2011, the Australian parliament passed the Clean Energy Act. The Act consisted of eighteen pieces of legislation to provide a platform for the government to reduce its greenhouse emission. The Clean Energy Act was effective as of 1st July 2012. The Act was established to provide a complete plan for the reduction of emissions. This was to be achieved by creating proper land management policies, the strategy of carbon pricing, establishing renewable energy, and creating energy efficiency. It is expected that the plan would cause financial impacts on the country’s industrial sector (Richardson, 2012).
The overview of the legislation
The report will ensure that the concerned companies pay attention to the Clean Energy Act regarding their corporate energy consumption and production, greenhouse gas emissions, and abatement actions. This regulation particularly affects companies that emit 125 kt and facilities that emit 25 kt. It has been realized that the environmental impact of the processes of production and supply chain is never measured. Therefore, the impact should be determined from up to downstream of the chain. The Clean Energy Act was established to develop yearly reports about the carbon emitted, consumption of electricity, and other aspects. The legislation will affect the company’s finances through operational changes and complexities as new responsibilities are introduced (Food and supply chain intelligence 2010).
Companies face the challenge of providing solutions to their environmental impacts. This is in regard to providing recommendations to mitigate the environmental footprints, as well as recommending new supply chains. This process will require recognition of each activity in the supply chain. Therefore, efficient equipment is purchased to replace the inefficient ones to minimize the energy input and output (Food and supply chain intelligence 2010).
Business and industries
Carbon pollution reduction is important in addressing the problem of climate change. More than five hundred companies are emitting greenhouse gases. These companies are required to buy a permit for every ton of emission. A carbon tax is one strategy that the government has implemented to reduce the carbon footprint for most businesses. In this case, only a few companies face direct legal obligations. The sectors affected most include the stationery industries, processing industries, and decommissioned coal mines. The agricultural and land-use sectors have not been affected by the Clean Energy Act. The clean energy finance cooperation has ensured that the government finances the private sector in implementing clean energy projects. The effect of climate change will likely affect business in the future. The introduction of this legislation will protect the future economy. If actions are not implemented, then the future of business will be affected in various ways. This includes increases in insurance costs and reduction of farm productivity. Under the scheme, the four Kyoto protocol greenhouse gases are included: carbon dioxide, methane, nitrous oxide, and perfluorocarbons. Synthetic greenhouse gases are also included (Australian department of climate change and energy efficiency, 2010).
Future carbon liabilities
The government introduced the carbon pricing mechanism to enhance the transition towards a low carbon economy. The legislation was effective from 1st July 2012 to 2015. The price permits are determined and set by the government in consideration of the emission reduction target. If the target is high, the level cap is low while increasing the emission cost (Interagency Working Group on Social Cost of Carbon, United States Government, 2010). This is a mandatory pro-regulatory approach that does not rely on market information. The approach is quite effective since the atmospheric environment is a “common good” that is not affected by the free market forces of demand and supply as the case of normal goods. Individuals and corporate organizations should take responsibility for their actions. The atmospheric air has no boundary hence vulnerable to destruction from the industrial sector. Therefore, the relevant regulatory institutions should do everything to hold the relevant institutions accountable for their actions (Loris 2009).
The worrying issue is that the government and the international community have not established common standards to account for the carbon emission permits. Accounting regulations and policies should be established, as well as options regarding permits prices and liabilities. This will ensure that compensation issues are covered. Disclosure of the necessary information will build the confidence of investors and enhance sensitization of the importance of environmental conservation. Investors should understand that carbon emission reduction is their corporate responsibility and not punishment (Dagwell, wines & lambert 2007).
A fixed carbon pricing will have an effect on almost every business sector or cause substantial influence on other sectors that are not directly affected. It is estimated that the change will affect approximately five hundred businesses as below.
KPMG November 2012
Manufacturing industries
The manufacturing industries will be supported by a clean technology program that is worth 1.2 billion dollars. The program will be established to improve energy efficiency and reduction of emissions. Large gas electricity consumers and those that are affected directly by the emission reduction mechanism will access 800 million dollars funding from the same program. The government will reward $1 for every $3 invested. It is expected that the food and foundry industries will get $ 200 million (KPMG 2012).
Coal sector
The coal sector is to be allocated $ 1.3 billion in assistance to deal with the transitional impacts.
Electricity sector
The energy security fund will provide assistance on the impacts of carbon pricing and ensure energy security in Australia. The government will provide support through loans.
Grants and incentives
The legislation will ensure that different sectors are supported so that the direct and the indirect consequences are limited. Assistance can be in the form of providing free allocation permits to industries that are exposed to intensive emission trade under job and competitiveness programs. The program would also provide assistance to individual entities in reducing their production’s carbon intensity. Manufacturing industries will receive assistance towards renewable energy innovation investments. The energy security fund will provide payment and electricity generator permits (Hackett, 2011).
Carbon pricing emission and reporting
An organization’s carbon emission can be classified into three scopes: scope 1, scope 2, scope 3. This classification is based on the modes of emission. The modes of emission include direct burning of fuel or indirectly from the use of electricity or embodied. Each organization will react differently towards the greenhouse emission act. The financial impact of the legislation lies in the docket of the chief financial officer. The organization is prepared to buy a permit of $23 per ton of emission based on the data collected from the system. The question will be on the fluctuation that the price of carbon will cause on the price of electricity (KPMG 2012).
Calculating and reporting carbon emission
- Scope 1: This is where the emission occurs within the boundaries of the industrial premises. These can be from the power station sources and carbon emissions from burning fuel. “The emissions are calculated by multiplying the fuel used by emission factors set for that fuel” (KPMG 2012, p.1).
- Scope 2: This happens when emissions happen out of the industry’s boundary. There is no obligation for an organization on scope 2 to buy a permit. However, using a generator causes the financial burden to be felt. The carbon emission intensity varies with the energy content of the fuel used and the technology used to generate the energy. When an organization is exposed to one generator, then it should understand the carbon energy of the generator as this helps in purchasing a cost-effective generator (KPMG 2009).
- Scope 3: This occurs when emissions are experienced out of the facility’s boundary. This occurs as a result of the actions of the facility apart from energy consumption. This includes activities within the production chain. The last carbon pricing cost that a company experience depends on the ability in negotiating with the suppliers as well as the customers. A scope 3 emission institution covers both scope 1, scope 2, and scope 3 (KPMG 2009)
Managing the Commercial and Financial Impact
Profit and loss effects are likely to be experienced due to the cost of permits for liable entities and the cost and the cost experienced in the whole supply chain process. Assistance from grants and the government is also likely to cause profit and losses for eligible entities. Mitigation measures for the loss and profit impacts include:
- Carbon emission reduction and abatement cost reduction
- Analysis of the cost pass-through to customers
- The organization should exploit the flexible price stage to come up with a lower permit cost
- Asses and exploit opportunities that come with assistance and packages
In the management of balance sheets, companies should consider their ability to recover assets versus the carbon pricing cost. Carbon permit costs should be considered like trading stocks in a rolling balance method because the cost affects the taxable income hence concerned unit should be surrendered (KPMG 2012).
The carbon emission price affects individual entities through the balance sheet, profit and loss, cash flow, and related processes. Liable individual entities may experience increased costs of production emanating from the cost of permits. The cost of the entire supply chain is expected to increase for individual entities due to the increased production cost. This will lead to increase inventory and sales costs. The transport and electricity costs are also expected to increase (KPMG 2012).
Liable entities will try and recover the cost of permits from customers who would do the same and the trend continues up to the last buyer. This will affect a company’s competitive ability against the others (KPMG 2009).
A company can consider these responses separately or collectively in response to the emission price. The responses include the following:
- Reduce carbon emissions metrics. The marginal abatement costs and the direct or indirect emission costs would play an important role.
- The organization should assess the cost price-through in relation to the market price.
- Good negotiations during the flexible price cost would lower the cost of emission permits.
- The capital cost would be affected depending on the company’s response towards the carbon price.
There are some of the consequences and application areas of a cost pass-through that an organization should have. In this case, the individual that understands the carbon emission reduction mechanism should be involved during the negotiation process. The cost pass-through introduction can lead to fallouts between consumers and suppliers due to a lack of regulations in adjusting product prices to cover the emission permit costs (KPMG 2012).
Organisational Consequences
There are key points to note on understanding the consequences of greenhouse emission reduction through a carbon emission mechanism. Scope 1 entities with emissions higher than 25,000 tonnes at the facility level should buy emission reduction permits. Scope 1 and 2 have emissions of above 50,000 tonnes in their corporate group or emissions of above 2500 tonnes at their facility level. The two should provide an annual emissions report as provided by the national energy reporting act. Many industries and sectors can access financial support towards the clean energy transition process (Deloitte 2011).
Risks
The legislation poses financial risks to organizations. Thus, the organization should be prepared to respond to these risks. Such risks include permit purchase risk, trade risks, non-compliance with the legislation, inaccurate data, non-responsive with increased emission costs, failure to comply with reporting regulations, unreliable data for decision making (Hackett, 2011).
Costs and profits
These risks can lead to either loss or profit to an organization. Therefore, responses should be developed for every potential risk to avoid losses. Such responses include evaluation of the abatement cost, development of permit trade strategies, and implementation of cost pass-through to customers. An organization may cover the losses through cost pass-through by increasing product prices for customers. This may lead to an increase in the market commodity prices. An organization should manage the cost of permit acquisition during the fixed price phase. In this case, it should purchase cheaper permits from entities allocated free permits (Deloitte 2011).
Implications of 2011 Act Report
It is the responsibility of every entity to monitor the continuous disclosure obligation while considering the potential financial impact. This is about the effects of regulations on existing and planned investments. The organization should take into account the availability of financial assistance and compensation access, as well as the ability to pass through the increased input cost once the report is announced (Deloitte 2011).
Review of the direct cost emissions
The most effective methodologies should be implemented to ensure that the information and data used in emission cost calculations are accurate and reliable. In this case, emission impact is directly related to the emission cost thus the accurate calculation would prevent losses as a result of inaccurate financial planning (Deloitte 2011).
Accurate assessment of government support
It is important to assess the chances to access government assistance. The details of the assistance package are important in planning. In this case, an institution can make losses if it over relies on government assistance. It is also important to find if an organization is eligible for grants such as the clean energy development funds (Deloitte 2011).
Determination of the cost pass-through
It is necessary to know how far the cost pass-through strategy can be effective and its potential impact on profitability to an organization. Higher estimation of the cost pass-through can lead to losses if the external factors such as the government legislation do discourage the strategy. A cost structure model associated with the cost-pass through of the energy input should be implemented to obtain accurate projections. The agreement based on contracts should be reviewed to support carbon price reduction (Deloitte 2011).
Accounting for carbon permits and tax implications
Unfortunately, regulations regarding accounting for carbon emissions are ignored. Therefore, organizations should review the current voluntary permits in consideration to minimizing the carbon liability and carbon price permits. An organization should acknowledge the implications of permit payment on cash flow consistent with the company tax payment (Deloitte 2011).
Development of management systems
An organization should develop governance structures and policies systems to manage the complex activities of carbon emission reduction. Organizations are expected to establish these structures before the deadline to plan for buying and trading of the permits. Early preparation of each year is a cornerstone in risk and financial management (Deloitte 2011).
Strategies of managing carbon
The income of a company is affected by the strategies applied to reduce the carbon emitted to the environment. This is expected to affect organizations that deal with energy, manufacturing chemicals, and other resource development organizations. The chief financial officers should note the formulation of financial management strategies is critical in budget planning (Deloitte 2011).
Governance and data collection process
In many organizations, the environmental officer has the responsibility to collect and process the carbon emission data. The chief finance officer should analyze the extent of data collected and approve the process. The accuracy of the collected data is key in the approval of the national greenhouse and energy reporting. The chief finance officer should understand the impact of the carbon price before permit purchase. In addition, he can only be confident if he was involved in the data collection process (Interagency Working Group on Social Cost of Carbon, United States Government, 2010).
Regulation and Financial Accounting
Pro-regulatory approach and a free-market approach
The introduction of the greenhouse reduction requirements by the government is a pro-regulatory approach to ensure accountability. The basic duty of business institutions is to make a profit. Therefore, there is no chance that such an institution would respond to international standards of operations without mandatory regulations. The free market approach would consider the pro-regulatory approach as a complete market failure. The atmosphere is a “common good”, carbon reduction emission affects the indirect cash flow (Glasson, Terivel, and Chadwick (2005). Therefore, business entities would consider the carbon price as a liability. Organizations and business entities should have in mind that they obtain raw materials from the environment that they should protect to ensure the future availability of the same resources. The financial impacts of the imposed regulations are mitigated by understanding and management of an institution’s current emission and energy output through a range of strategies (Larke, Dean & Oliver, 2003).
It is not possible to obtain the necessary accounting information required to control the public good like the case of a normal market. This is an imperfect market that is not affected directly by the demand and supply forces. The introduction of the regulations is necessary to ensure accountability on the side of the primary producer. The entities that make are concerned with the market are not reliable for financial information (Interagency Working Group on Social Cost of Carbon, United States Government, 2010). Therefore, the regulations are formulated in consultation with various stakeholders so that the public interest is protected. It is believed that the pro-regulatory approach would provide standards and quality information as would be used by institutions like banks and financial analysts. The set regulations do not affect the industrial business since the governments are always sensitive towards the business concern and thus compromise while setting the standards (Larke, Dean & Oliver, 2003).
An organization’s compliance with the regulations results in profit-making. The compliance expenses eventually return to the private resulting in environmental efficiency and productive efficiency hence a strong economic performance. Organizations may protest against the scope of the economic cost of environmental regulations as compared to the taxes, wages, benefits, and interest rate. High compliance costs may cause some companies to relocate to other areas (Meyer, n.d.).
The impact of a carbon emission price
The introduction of the carbon pollution reduction scheme by the Australian government was a step towards the implementation of the Kyoto protocol. The introduction of the new tax increased the cost of business to emitters. The cost of permits flows in the supply chain up to the last consumer. The regulation was introduced in the scheme so that companies can fulfill certain criteria (Loris 2009).
The chief financial officers of the affected organizations are then faced with responsibilities in new duties and financial complexities. The carbon price reduction scheme will affect organizations. However, it is clear that other sectors associated with the affected organizations will as well be affected. Accounting regulation causes economic and social impacts on an organization. The economic costs occur in the process of preparing the report. The financial reporting regulations will also affect the stakeholders in that financial information would be available to the interested parties against their wishes. The affected companies would incur costs about the regulatory provisions. The information eventually becomes public documents. As a political process, the regulatory bodies have to consider the relevant parties and entities (Loris 2009).
Environmental regulations and net export
Studies in the U.S. show that changes in environmental regulation significantly affect net exports. The study was conducted on the manufacturing industries indicating that stricter regulations reduce the net exports. The effect on the chemical industry’s net exports was found to be much higher. In this case, the chemical industries have more environmental regulations than most industries due to the operational risks it poses to the environment (Maitra, 2007).
It is believed that a less developed economy can grow into a developed one by opening up the economy. The increase in international trade as a result of an open economy can lead to various environmental consequences. Developed countries have more strict environmental regulations than developing ones. Therefore, firms prefer trading with the less developed countries while this would encourage environmental pollution. Policies should invest in research and development programs so that the compliance cost is reduced through the adoption of new technologies (Dagwell, Wines & Lambert, 2007).
Analysis of the regulation limitations
Incomplete treatment of non-catastrophic emissions
There is an assumption that the impact of the changes in climate is expected to be extensive and varied. There is uncertainty about the exact extent of damage due to the complex nature of the climate change process, the economic situation of the world, and the inability of the inaccurate forecast for technological changes. For instance, the effect of carbon dioxide on marine wildlife is not quantified monitored and can cause adverse effects in the future (Maitra, 2007).
Incomplete treatment of catastrophic emissions
There have been several catastrophic effects of greenhouse emissions, and one extreme example is the melting of the Antarctic west sheet. Glasson, Terivel, and Chadwick (2005) suggested that bigger catastrophic damages would be experienced in the future such that the calculation of the willingness to pay the mitigation cost is infinite. Samuelson and Nordhaus (2010) responded that the scenario is not applicable to most uncertain scenarios.
Discussion
Perspectives of Government
Companies and business organizations benefit a country through economic development and social benefits. As companies operate as full legal institutions, rights and responsibilities should be observed through the power and political influence. The set regulations should protect every department of the company since some company activities cause undesirable social consequences. Individuals are expected under the law to act responsibly in order not to harm others. Thus, companies should also act responsibly through their management and set legal requirements.
Perspectives of Society
The companies exploit the available natural resources and contribute to the well-being of society. In the last fifty years, several Australian organizations have collapsed leading to disastrous impacts on the society and the economy, as well as leading to the collapse of the related sectors (Dagwell, wines & lambert 2007). An example is the 2011 collapse of the H1H insurance company.
Perspectives of Corporations
Companies have imposed laws by the state laws to control their operations as it owes the state its existence, (a concession theory of a company). The laws are important in operation management, as well as in the financial records and the financial reporting as obliged by the state (Gerrard & Foster 2008).
Conclusion
Organizations and firms have free access to natural resources. Thus, they should protect these resources to ensure sustainable development. With the current trend of environmental degradation, the introduction of new regulations such as the carbon emission regulations is inevitable. Organisations should develop frameworks to guide them in understanding ways to address the emission reduction challenges. They should also take advantage of grants and government assistance to reduce the losses incurred in response to the greenhouse gas emission reduction. Governments and organizations should understand the greenhouse protocol science, which is used worldwide in international accounting. The organization should obtain relevant and sufficient information concerning greenhouse gas reduction a mission in the development of sound technologies to ensure equitable development. Organisations should embrace the world business council for sustainable development as a platform to acquire information about innovative ways of addressing global warming. Companies should take advantage and explore reports and surveys from professional service provider firms in response to introduced regulations.
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