How is your Australian Transport business preparing for its Carbon Price?

Transport companies have fewer options than Australia’s Top 500 energy users to improve their environmental performance under the Clean Energy Future laws. The new tax kicks off in four months and our fuel costs will rise across the board. When permit trading begins in 2015, contrary to the common belief that only the 500 highest greenhouse gas emitters pay a direct carbon price, another 165,000 transport businesses will also be paying an explicit carbon price. And transporters will find reducing emissions much harder and more costly than will the “big polluters”.

So what are you doing about it?

How a Carbon Price on Transport Works

The carbon price on transport fuels will be charged through the existing fuel tax credit mechanism, hitting all heavy freight transporters except trucking from July 2012. Once trucking is brought into the system in July 2014 every Transport & Logistics (T&L) company in Australia which operates heavy equipment will pay carbon tax. According to the Chartered Institute of Logistics & Transport Association there are 165,000 T&L businesses in Australia.

The roughly 7 cents per litre “effective” carbon price on transport fuel will be levied by adjusting existing fuel tax credits (or Diesel Fuel Rebates, which ever you prefer) applied to each transport mode unequally and with variations amongst fuel types and timing of application. This will disadvantage some transport modes and some alternative fuels, some which offer the greatest greenhouse gas emissions savings.

Yes, it’s simple. There’s no new tax; they simply change the rate of tax paid under the existing system. But is its simplicity also a barrier to innovation?

What are our Options?

There’s two ways a transport company can manage its carbon price exposure:

  1. Increase energy efficiency (fuel efficiency)
  2. Switch to lower carbon fuels

Biodiesel, like Ethanol, won’t have a carbon price applied to it. Yet Biodiesel’s lower energy content means more fuel is needed to produce the same energy output as mineral diesel. You got it, this means higher fuel consumption.

Fuel Costs Rise

Most transport operators are Price-Takers with little ability to pass on the extra costs to their customers, be they retailers, manufacturers or larger transport companies. These Carbon-Conscious freight buyers are increasingly insisting on low carbon transport partners in order to contain their supply chain emissions and can manage fuel cost risk in contracts which protect them against future carbon cost pass-throughs. In this situation, a carbon price becomes just another increased cost for T&L companies to absorb into their already slim margins. Of course, no transport company can absorb increases in fuel, its most significant cost. This can turn a Low Margin operation into a No Margin disaster, with an “Out of Business” sign soon to be hung on the front door.

The Clean Energy Future legislation will achieve its aim of raising cost of high polluting activities such as moving freight. Yet complementary laws are needed to help rather than hinder transporters. In road transport, for instance, the legal regime will work against emission reductions because:

–          Engine design mandates favour low carbon technologies which actually increase fuel consumption

–          Local and State regulations restrict higher productivity vehicles (such as B-Doubles and B-Triples) from carrying more freight with less fuel

–          No carbon price differential for fuel used for old or new (cleaner) engines provides no reason to take old vehicles out of service

The higher the fuel tax, the higher the cost of abatement. Reducing fuel tax credits raises the cost of emissions abatement. So while industry laggards risk losing market share to more fuel efficient competitors, they may retain a cost advantage by extending the life of older vehicles which are cheaper to run and with no carbon penalty.

Fewer Abatement Opportunities

Improving energy efficiency and switching to lower carbon emitting power sources are two of the best opportunities to improve environmental performance for any Australian business under the Clean Energy Futures laws, but the regulations restrict opportunities for the T&L industry. Big electricity users will have the flexibility to achieve environmental goals in the most cost-effective manner by being able to purchase domestic and international carbon permits and offsets when they are cheaper than the cost of emission reductions in their own operations.  Such economic efficiency is a fundamental design principle of any emissions trading scheme, allowing participants to optimally use all cheap emissions abatement options to lower marginal compliance costs throughout the economy and make it easier to achieve reduction targets. Transport fuel users won’t have this flexibility.

What to Do?

Clearly T&L companies have fewer options or incentives to innovate under the Clean Energy Future system than the top 500 electricity users do. The “effective” carbon price on transport fuels disadvantages those next 165,000 businesses below the top 500 emitters, and may instead be a somewhat “ineffective” carbon price where increased fuel costs are incurred for small environmental gains.

What do you think?

It’s only a matter of time until carbon pricing hits us all in Australian Transport.