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.