How will Freight Transport Customers Treat the Carbon Tax?

Australia’s carbon tax starts in 3 months time, and customers of freight transport services should have decided by now whether they will accept carbon-related price increases from their transport providers.

What signals are you sending or receiving in the marketplace?

Accept or Reject

Freight customers’ decisions will depend on the price sensitivity of their product, existing margins and profitability targets, and their assessment of transport providers’ ability to absorb these costs while maintaining service levels. Will it be a ‘black and white’ choice or are there shades of grey?

Firstly, shippers can play hard ball and reject any carbon cost pass-through. But what then will become of transporters who can’t absorb the new tax burden? It’s the small & medium-sized firms that will go to the wall first.

Alternatively, shippers may accept pass-through of the full carbon tax cost. Yet where is the incentive for transport companies to minimise their carbon use if the tax costs are directly recoverable from clients? Perhaps a discounted pass-through will allow equitable sharing of the carbon cost.

How Big a Cost?

Both the size of the cost and its relative impact on customers’ end product pricing further influences the decision. There’s two carbon cost penalties to consider:

  1. refiners’ direct permit costs are estimated to increase fuel prices by up to 1 cent per litre
  2. the 6+ cents per litre effective carbon price for rail/sea/air transport companies in July 2012 and trucking in July 2014

Assuming fuel represents one-third of total transport costs in a rise and fall contract mechanism and the retail diesel price is $1.50 cents per litre,  the 1 cent refining cost increase results increases transport prices by about 0.3%, while the 6+ cents per litre effective carbon price will raise transport prices by under 2%.

For some customers a 2% freight increase may be a small cost to absorb when considering the immediate sustainability of their transport service levels. For others the 2% freight cost rise may significantly affect their own competitive advantage. Regardless, relative market power will determine negotiation outcomes.

Of course, this is just one of the estimates being floated 3 months out. After the furore created by its announcement, a 2% carbon tax impact sounds too low, especially when some predict a doubling of transport costs. Its impact will vary by transport task, the proportionate weighting that fuel has in the total costs of each service and how well both fuel and carbon are managed by players in each supply chain. Herein lies a third approach to the “Accept or Reject” decision for shippers.

A Third Way – Collaborate!

Rather than a win-lose position of “Yes” or “No” perhaps “Yes…with Conditions” will allow freight customers to reduce their carbon cost exposure while retaining sustainable service levels. Sharing responsibility for improving fuel and carbon efficiency may be the win-win answer both shippers and transporters need to thrive in the new carbon economy. It will take leadership and innovative partnering, and it won’t be easy.

A lot of trust and an equitable “risk and reward” sharing of cost savings will be needed for transport operators to open their books. Transport is a notoriously competitive market where ultra-low margins mean that any small benefits operators achieve through better fuel management are prized cost-competitive advantages which transport firms will fight to protect. Trade secrets won’t be given away for nothing.

Yet only joint action can realise many of the energy- and carbon-efficiency improvements necessary to better manage carbon risks, whether they be process changes affecting multiple stakeholders or adopting new technologies. Transporters can’t do it alone.

Collaborative problem solving will be the best way to improve carbon and energy profiles along all supply chains in Australia’s new carbon economy. It starts July 1st.

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