The Elephant Not in the Room

There was a renewed feeling of optimism at this week’s Emission Reduction Summit in Melbourne, with the COP21 Paris agreement providing a platform of global commitment and inspiration for the “Who’s Who of Climate Change Action” in attendance. Yet as we dined on delicious carbon neutral seafood washed down with carbon neutral fine wine, my thoughts turned to the elephant that wasn’t in the room.3rd Australian Emissions Reduction Summit.png

Transport recently surpassed electricity as the largest energy user in Australia, its emissions growing faster than any other sector. Freight will progressively exceed passenger transport energy use as Australia’s freight task grows faster than the economy, expecting to double the 2010 freight task by 2030 and triple by 2050.

Transport is notoriously difficult to decarbonise. Overwhelmingly and increasingly dependent on imported fossil fuels as local oil production drops and refineries close, the low oil price has the biofuels industry on its knees. Gas remains pre-commercial for long-haul trucking, rail and deep sea shipping, with no application to aviation. Our truck and bus fleet is one of the oldest in the OECD, with the average truck 14 years old and the average train locomotive more than 21 years old. Road consumes three quarters of transport energy yet we have no energy efficiency standards for cars or trucks, let alone trains, ships or aircraft.

Unsurprisingly, Transport has some of the largest and most cost-effective opportunities for improving energy productivity across all sectors of the economy.

Aside from the major airlines and a single rail operator, the rest of this vast, diverse sector was notably absent from the Summit conversation. No car or truck makers, no trucking companies, no fuel companies, no public transport agencies and no industry associations.

It’s little wonder there’s only a handful transport projects accessing the Emissions Reduction Fund and Clean Energy Finance Corporation incentives. Understanding the rules and jargon is like learning a foreign language, and it’s all risk with little reward, so the transport sector is just not engaged with the carbon reduction community, despite the financial support it offers.

Nevertheless, energy costs remain a significant and volatile input cost that is often the difference between winning and losing for most transport companies. So how can we better address this elephant of a sectoral opportunity that will be key to achieving net zero emissions?

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What does a COP21 goal of net zero emissions mean for Freight Transport?

Business leaders are calling for a goal of net zero emissions to be set at the UN Climate Change Conference COP21 in Paris this week. With 7% of global emissions coming from international freight transport, and growth in globalisation expected to increase such emissions nearly fourfold by 2050, the response from the logistics industry will be fundamental to meeting that goal. Yet for Freight Transport to achieve zero carbon, a key constraint is having good information all supply chain players can trust.

The Volkswagen saga shows how gaps in emission measurement standards or their application can shatter our faith in claims regarding emissions or fuel performance. Transport operators make a variety of statements about their environmental credentials, but how can freight buyers compare options with confidence?

A new non-profit, the Smart Freight Centre, is leading a collaboration of the world’s biggest shippers and transport companies to create a transparent, universal method of calculating logistics emissions along supply chains so people can make better decisions on how to move freight in the greenest way.

Data Drives Emissions Down

Transporters act in various ways to reduce energy use and emissions intensity across all logistics sectors to save money, reduce risk and meet growing customer demands for green transport services.

Good information is crucial for transporters to understand the real costs and benefits of potential emissions savings opportunities. It can be difficult to isolate gains produced by a single initiative given the amount of variables that affect fuel economy. Uncertainty about the environmental performance of alternative fuels and engine technologies is compounded by the lack of reliable case study information on their effectiveness for each transport mode. The integrity of external information sources relies on what exactly was measured, how and by who, and how the data applies to a specific task, the equipment configurations and local conditions.

In response, a growing number of collaborative groups are assessing technologies and practices that enable low carbon transport and share information on what works and what doesn’t.

Measuring the Whole Supply Chain

At a broader level we must consider a supply chain’s end-to-end profile. Measuring emissions from a train, truck, plane or ship is one thing, but allocating shares of those emissions to each freight item carried gets complicated across all legs of multi-modal freight movements criss-crossing the globe.

Online retail is creating exponential growth in single-item deliveries direct to homes and workplaces from worldwide sources. Growing consumer demand takes priority over the efficiencies of traditional logistics models, where bulk shipments via distribution centres to retail stores provide economies of scale for more energy- and emissions-efficient freight. Light commercial vans are the fastest growing traffic category in many countries, yet vans are second only to aircraft in energy consumed per tonne kilometre and generate over four times more CO2 per tonne-km than the average 44 tonne truck. This restructuring of supply chains affects the environmental footprint differently across geographies and logistics sectors.

Increasingly, freight buyers need to better understand the sources of logistics emissions along their supply chains, where freight can account for 25% or more of a product’s lifecycle emissions.

One Common Standard

The Smart Freight Centre hosts a collaboration of business and associated stakeholders creating a global framework for logistics emissions accounting. In 2014 they established the Global Logistics Emissions Council (GLEC) to develop a universal and transparent way of calculating logistics emissions across global multi-modal supply chains so that shippers and logistics providers can include carbon footprints in business decisions, alongside costs, time and reliability when selecting modes, routes and carriers.

GLEC will harmonise existing methods and address gaps to devise an assurance standard in freight logistics emissions that enables more accurate and reliable benchmarking and realistic emission reduction strategies. Its’ framework builds on:

To better understand how it will operate for both shippers and logistics service providers in real world supply chains, a series of case studies is underway to gauge the practical availability of data and how it can be used to optimise low carbon freight movements. By simplifying a complex business with a common standard everyone can use to compare green logistics options, people can confidently use good information to reduce both environmental impact and cost.

Towards Zero Carbon Transport

Achieving net zero transport emissions requires using less fuel in tonne-kilometre terms (a key energy productivity metric) and using the cleanest fuels that suit particular freight tasks. The unavoidable residual emissions can then be neutralised by purchasing carbon offsets based on precise and trustworthy emissions measurement.

As global freight emissions rise, a harmonised method for emissions accounting becomes increasingly necessary. Supply chain players large and small must have good emissions information to maintain competitiveness and prepare for the complexity of a carbon-constrained world.

Consultation workshops in the USA, Latin America, Europe and Asia are inviting public comment on the GLEC Framework, so download it to learn more. If you think about how this tool can improve your freight decision-making, you can help develop a logistics emissions methodology that assists Freight Transport to realise the net zero emissions goal.

Think the emissions scandal is all about Volkswagen? Think again.

The Volkswagen emission scandal is rocking the corporate world and it’s just the beginning. The CEO is gone, the workforce shamed and Germany’s flagship industry is a national embarrassment. But if you think it’s all about Volkswagen, think again, because it seems the system has been open to gaming by vehicle manufacturers for years.

Dodgy Test Regime

A new article from the The International Council on Clean Transportation (ICCT) exposes systemic flaws in the European vehicle testing regime. Poor regulatory oversight allows vehicle manufacturers to exploit tolerances in vehicle test procedures with impunity. By showing better fuel consumption and emissions ratings, the market rewards them as consumers vote with their wallets to save fuel costs and reduce environmental impacts. It results in a perverse incentive for manufacturers to spend as much of their efforts perfecting the test as they do improving efficiency of the vehicle itself.

Vehicles are tested in laboratories and on special test tracks to assess their various performance characteristics, including fuel consumption and CO2 emissions, to show the vehicle meets legislated minimum performance standards and support marketing claims. Volkswagen vehicles are now found to be compliant under test conditions but not in ordinary use, with software installed to let the vehicle pass the test yet operate in service with much higher emissions.

Clearly illegal and unethical, Volkswagen is deservedly copping the brunt right now, but the scandal reveals a culture among vehicle manufacturers who can potentially ‘game’ a system that has holes in it so great you could drive a B-Double truck through, completely legally of course. The integrity of all European vehicle fuel consumption and emissions claims are now in doubt because benchmarks can be set on test tracks with downhill slopes with favourable cambers to improve performance and specially-prepared tyres hardened in an oven beforehand to provide the least rolling resistance during the test. Hardly real-world driving conditions. You can’t blame manufacturers for using the most economical drivers, tuning vehicles to suit a track of their choosing and any other methods to give the best test score, because the score influences sales. The point is, however, vehicles cannot repeat these high standards when used by you and me on public roads.

We don’t accept wind-assisted track and field times for world athletics records because it’s a not a true measure of human capability. Likewise, we shouldn’t accept these vehicle performance figures.

The ICCT found the gap between test figures and real-world in service performance is ‘ever-growing’ – from 10% in 2002, to 35% in 2014 and is on track to be 49% by 2020. What confidence can the public – private consumers and businesses alike – have in a score that could be 50% out?

Implications for Australia

Australians are vehicle technology takers, relying on the standards of Europe, USA and Japan to drive fuel and emissions efficiency improvements. Without our own minimum fuel efficiency standards we become a dumping ground for the world’s noncompliant vehicles. With Canada, China, Brazil and Mexico implementing their own minimum fuel efficiency standards, this gap is growing too. As an island continent there’s no secondary market for used vehicles, so the impacts of inferior fuel and emissions performance of “hand-me-down” technology will be felt in Australia for years.

Data is the key constraint in this aspect of the road vehicle industry. People rely on the integrity of performance claims in sales brochures, and expect the protection of regulatory oversight. Buyers of passenger cars can check the Green Vehicle Guide to compare vehicles, yet the ICCT suggests green vehicle ratings are based on desktop review of now dubious test calculations.

Trucking companies already have difficulty believing the fuel efficiency claims of manufacturers because Australian conditions are so different to the test tracks of Europe and America, so large transporters invest in their own R&D by testing trucks themselves before purchase because they know the value of getting their fuel figures right before committing to substantial investments with huge running costs over a truck’s life driven by fuel usage and volatile fuel prices.

Small and medium transport companies may not have the resources or skills to test new vehicles properly before buying. There’s no green vehicle guide for heavy vehicles. The closest offering is the NSW government’s Green Trucks Partnership which brings together vehicle users and manufacturers to test various fuel saving technologies in real-life Australian applications with independent reporting on benefits achieved against claims made by technology proponents. The information is shared in case studies on the Green Trucks website.

Australia needs its own standards

Transport is the second largest user of energy in the Australian economy after electricity and is growing faster. Introducing minimum fuel efficiency standards is one of the easiest, cheapest and most effective ways we can save energy costs, reduce carbon and air pollution emissions, and improve fuel security. Australia must take charge of its destiny and develop its own minimum fuel efficiency standards for light and heavy road vehicles. We can learn from Europe’s woes and stringently test vehicles prior to service then follow the USA’s lead and actually test each vehicle type once in service to validate real world performance. Regulation without enforcement provides only a false sense of security and blind faith in marketing claims which, as Volkswagen has shown, fail under scrutiny.

Carbon Neutral Transport

Australia has its first carbon neutral trucking company! Congratulations to Transforce Bulk Haulage in Dubbo who achieved this feat by saving fuel to reduce their carbon footprint then buying carbon credits to offset the remaining emissions.

So what’s stopping other transport firms from going carbon neutral?

Market Incentives & Barriers

Any emissions reductions need to be profitable to motivate action. According to Carbon War Room, heavy trucking can achieve huge emissions reductions using simple technologies with proven savings that are available today. Yet there are three formidable market barriers to get over:

  • access to capital for high upfront costs;
  • good information operators can trust;
  • principal-agent split incentive problem, where in a fragmented industry often those with incentive to save fuel don’t have the cash or the control. This can occur where prime movers and trailers have different owners, where fleets are leased, where freight companies hire sub-contractors, and where customers contract dedicated trucking services with operators paying for fuel.

Shipping also has cost-effective measures to reduce emissions available now. A DNV report points to 16 technical and 8 operational measures, as well as adopting alternative fuels such as biodiesel and LNG. Similar market barriers apply for Shipping as for Trucking. For both transport modes, shippers appear to be at the heart of environmental improvements, for freight owners are more likely to have the power as well as the appetite to pursue environmental improvements above basic regulatory compliance.

Cleaner fuels

There is no single solution to finding a cheap clean diesel alternative. Emissions regulations and oil price volatility will encourage the switch from diesel to a mix of cleaner fuels that need increasingly costly and complex equipment.

For the maritime industry the viability of LNG and biofuels has a longer time horizon than for Trucking, which has its challenges to overcome. As it is, Shipping will struggle with the low sulphur fuel mandate in 2015 due to insufficient refining capacity to make the cleaner grade. Biofuel refining capacity is far below what the shipping industry would need to make the switch.

Information Sharing

Sharing better information on fuel- and carbon-efficiency opportunities will help break down barriers, especially when this improves transparency at an organisational or even a vehicle level. Here are some current initiatives:

  • The Green Freight Europe program addresses the information barrier in Trucking through collaborative learning, reporting and comparative benchmarking
  • Carbon War Room has a shipping efficiency website which rates 60,000 existing ships on their specific fuel efficiency performance, enabling benchmarking against like vessels.
  • Three major shippers are choosing only to charter the most fuel efficient ships available in a demonstration to ship owners that the market will reward investments in sustainable fleets. Such environmental leadership is supported by a vessel fuel efficiency ratings system that uses reliable data from a respected technical specialist.

Measuring emissions to improve the bottom line, reduce risk and discover competitive advantage is a developing science. The ‘art’ of good information sharing may lie in real-time data by company – or by vessel, vehicle or aircraft – so that full supply chain awareness of Carbon Efficiency and Carbon Productivity become the mantra throughout all transport modes.

Accessing Funds to Invest

Trusting good information is important but the key to widespread adoption of fuel efficient technologies and clean fuels is funding the up-front costs.

How can we better link those with cash and the desire to save environmental resources, with those who want to save money but have little capital to invest in improvements? Carbon pricing on Transport helps the business case to finance fuel efficiency improvements, and incorporating carbon offsets helps even more, as Transforce Bulk Haulage has shown.

One maritime proposal wants a new bunker levy to contribute to an international fund so that ship emissions above set reduction targets can be offset by purchasing carbon credits. But who wants another fuel levy that may only be passed along the supply chain anyway?

New developments in California may point the way for Road Transport. Clean Mobility Centres embrace alternative fuels and enable drivers to offset the carbon emissions from their fuel purchases at the pump. Offset dollars go to the Carbon Fund Foundation to directly fund clean air projects.

What if we could offset Transport’s greenhouse gas emissions at the point of sale for all goods and services? Just like booking an airline seat where you choose to pay a little extra to offset your share of the flight’s emissions, imagine if you could offset the transport emissions of any delivery or purchase?

Imagine creating a clear transactional link between the consumer or organisation at the end of a supply chain and the transport operator needing funds to invest in fuel saving measures with economic as well as environmental benefits. It might work like this:

  • consumer chooses to offset the transport component of the emission profile of any goods purchase by paying a bit extra
  • that offset spend goes to a Transport-specific carbon finance fund
  • the fund is accessed by transport operators to finance precisely measured emission reduction projects with real financial paybacks
  • a strong transparent measurement methodology where integrity of data is key underpins emission reduction valuations for the consumer (investor) and transport operator
  • web, mobile and social media technologies enable ‘one click carbon offsetting’ as well as ‘real-time climate friendliness’ tracking of personal emissions savings to inform consumers

Yes – It’s Possible

Transport operators need better access to capital so they can make fuel- and carbon-saving investments, and operators, their customers and ultimately consumers must be able to have faith in the integrity of the emissions savings. Challenging, yes, but the unleashing of such incredible capital liquidity through ‘one click carbon offsetting at point of sale’ may generate huge Transport footprint reductions.

Look at what Transforce has achieved with its fleet of 11 trucks in regional NSW through fuel savings measures that save them money, supplemented with carbon offsets to neutralise their footprint. Yet it’s a question of immense scale to ask:

How can this approach be expanded throughout the mosaic of Australian supply chains?

How can Freight Buyers minimise carbon tax in their supply chains?

Moving freight around Australia will soon attract carbon tax.  You can reduce this new cost in 2 ways:

  1. Use less fuel
  2. Use cleaner fuel

While they control fuel use, transporters need their customers’ help to manage carbon liability. Moving the discussion past who carries the carbon tax burden, the question now becomes: How can Freight Buyers minimise carbon tax in their supply chains?

Carbon Tax = More Fuel Tax

Carbon tax on Transport will be applied through the fuel tax system. Fuel tax is a consumption tax, and fuel tax credits are needed to ensure that fuel tax is not burdened on transport businesses, but rather the final consumer. This is consistent with Australia’s tax system more broadly, where consumption taxes are intended to apply to final consumption rather than business inputs.

If transporters pass on carbon tax (that is, reduced fuel tax credits), Freight Buyers wear the cost; and if carbon tax is not passed on, their transport partners may become unviable. So, as a consumption tax based on Freight Buyers’ demand for transport services, carbon pricing gives Australian shippers a clear incentive to make their supply chain buddies improve fuel efficiency and switch to cleaner fuels.

How Transporters improve Fuel Efficiency & Switch Fuels

Using Less Fuel requires efficient equipment and efficient operations. The Australian government’s Energy Efficiency Exchange reviews a wide range of fuel saving measures for rail, road and air transport. If you total the high side of the energy savings estimates, you’d think that 50% fuel savings or more are there for the taking. But it’s never that simple. The success of each measure depends on its operational setting and many only deliver long term results if adopted systematically. For instance, vehicle eco-driving improvements which promise 10% fuel savings need all drivers to have specific training in expected behaviours, backed up by regular refresher training and constant performance management to always maximise fuel savings.

When it comes to Cleaner Fuels, so-called ‘drop-in’ fuels such as ethanol, biodiesel and renewable diesel are the easiest to introduce because they can use existing fuel delivery infrastructure (with some adaptations). And these Biofuels offer great opportunities for immediate reductions in carbon tax due to their zero rating for carbon emissions under the Clean Energy Future laws. Gaseous fuels like LNG and CNG, however, need capital investment in new engine technologies as well as dispensing equipment and infrastructure to create a reliable and extensive supply network.

Ultimately, Transport firms who thrive under carbon pricing will be those using a myriad of actions that lead to lower carbon and energy use.

How Freight Buyers can help

Freight Buyers across the retail, resources, construction, manufacturing, energy and agriculture sectors increasingly insist on low carbon transport. The next step is to think of carbon tax as a shared liability with joint commercial incentives to improve productivity and fuel efficiency. They can help their transport partners by measuring, co-investing and even “opting-in” to manage carbon in their supply chains:

1. Measure

At minimum, an accurate picture of baseline energy use and greenhouse gas emissions is needed. Partnerships can collect,  analyse and verify such data to develop emission reduction plans. Supply chain carbon profiling is the starting point to reduce risk and gain competitive advantage in a low carbon economy.

2. Co-invest

When Freight Buyers invest time and money in fuel use projects, more knowledge and resources can earn a bigger bang for everyone’s buck:

  • Operational changes can boost productivity dividends from investments Transporters have already made. Changing operating hours so delivery vehicles can avoid peak commuter traffic is one. Another is making greater use of High Productivity Vehicles such as B-Double trucks through local road permit applications as well as site works expanding physical access and storage capacity at load and delivery points to allow ordering in larger load sizes.
  • Commercially, Buyers can specify low emission and fuel efficient technologies in their tenders and contracts. Paying a freight price premium supported by contract commitments allows transporters to secure finance and recover the higher capital costs of advanced emissions technology. Large Freight Buyers can even boost their transport partners’ negotiating power with technology suppliers through joint procurement contracts to reduce unit prices.
  • Capital investment can overcome barriers to adopting new technology which the carbon price – by itself – is unlikely to impact. Supporting R&D trials of latest technologies in local conditions will improve joint understanding. This may require funding which shares risks and puts some ‘skin in the game’ with all stakeholders sharing the rewards. LNG and Biofuels, for example, need to be conveniently available. Large freight users could install LNG or biodiesel refuelling stations at their Distribution Centres, which are hubs for regional & interstate linehaul and urban delivery vehicles. This would complement the emerging LNG and Biofuels distributor networks to speed-up trucking industry adoption of cleaner fuels.

3. Opt-In

What if large Freight Buyers could “Opt-in” to emissions trading so they could directly manage their transport carbon liability?  Freight contracts that pass-on carbon property rights would allow Freight Buyers to manage the carbon tax liability for all the transport services they consume, opening up international linkages and domestic offsets on greater economies of scale than only the largest transport firms could contemplate. It may help achieve the economic goal of any emissions pricing regime: To achieve targeted environmental improvements at the lowest marginal cost to society.

Collaborate to Win!

Intelligence on carbon and energy use within supply chains will improve decision-making and is the first step on the path to gaining competitive advantage in a low carbon world. Shared understanding of carbon and energy reveals business opportunities and manages risks. “Without conducting the study,” says one company MD who has done just that, “I have no doubt we would have targeted projects in areas with less potential for both environmental and financial return.”

Cross functional teams of Freight Buyers, transport operators and other stakeholders can develop more powerful business cases for reducing carbon use. Such teams challenge conventional wisdom by asking:

Are we doing everything right to minimise fuel and carbon use, everyday, on every truck, train, ship and plane?

There is no silver bullet; a portfolio of initiatives is needed. It takes more work to be energy-efficient. Efficient operation requires experimentation. And many measures will only deliver consistent, long-term results if businesses adopt them systematically.

Freight Buyers who want their transport providers to do it all alone will miss out on the substantial opportunities that arise from supply chain co-operation.  In the new low carbon economy, the opportunity cost of not collaborating is competitive disadvantage. Stay tuned!

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.

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.