Few business and public sector organisations are prepared for the rigorous reporting and audit requirements that will apply when carbon pricing starts on 1 July.
The new tax will also bite into profits by adding to already rising power prices and supply chain costs, and toughen competition for our energy intensive and trade exposed industries.
Carbon pricing therefore brings new urgency to a fundamental challenge facing all organisations – how to better track and manage the way they acquire, use and account for carbon based energy sources such as electricity, oil and gas.
The crux of this challenge is how best to capture audit-grade carbon related data and to analyse it in ways that inform short and longer decision making on issues such as energy contracts and tariffs, energy efficiency investments and taxation issues.
For big electricity users like those in manufacturing, healthcare, education and commercial property carbon pricing demands a new ability to track real-time power use and to respond quickly, now that new patterns of climate extremes and variability are here to stay.
Compliance and carbon price readiness
From 1 July 293 organisations will pay $23 a tonne for direct carbon emissions and greenhouse gases exceeding 25,000 tonnes annually. This represents a new disclosure issue for these entities’ financial reports requiring robust and auditable systems and processes. This legislation also has tax implications for the acquisition and surrendering of carbon permits.
Many of these carbon tax-affected organisations have had several years’ experience reporting their energy consumption and carbon emissions under the federal government’s Energy Efficiency Opportunities (EEO) legislation and National Greenhouse and Energy Reporting Systems (NGERS) legislation.
Despite this, many have failed their reporting requirements, casting doubt on their preparedness for the imminent carbon tax. For example, last year the Australian Financial Review reported that nearly two-thirds of Australia’s biggest energy users risked failing the federal government’s energy efficiency reporting and audit rules.
Each year more than 220 corporations report to the Department of Resources, Energy and Tourism’s Energy Efficiency Opportunities program on how they plan to reduce their energy bills. Under the EEO law corporations are required to keep records of business activities for seven years so their emission reports can be independently audited. Companies face audits and fines of up to $233,000, plus further penalties for failing to meet reporting requirements.
In March the Australian National Audit Office reported that in 2009-10, three-quarters of major polluters' self-assessments for NGERS reporting had errors and 17 per cent had ''significant errors''. The NGERS Act requires an accuracy level of at least 95 per cent, with fines for non-compliance of up to $220,000.
Organisations that are obliged to report emissions and pay the new carbon tax are just the tip of the iceberg. All organisations will feel the indirect impact of a carbon tax in the form of higher electricity and supply chain costs – carbon pricing is expected to raise the price of electricity by around 10 per cent from 1 July.
However, among firms that will be indirectly affected by carbon pricing, only 10 per cent have conducted such modelling on their business costs, according to a survey of 131 senior Australian business executives.
By contrast the great majority (85 per cent) of firms directly paying the tax – the big greenhouse gas emitters – have a carbon-reduction strategy in place, with a further six per cent in the process of developing one.
The ‘Australian Low-Carbon Readiness Barometer’ survey by the Economist Intelligence Unit reported that 41 per cent of firms with more than 10,000 employees have assessed the impact of different carbon prices on their business operations. This compares with just 23 per cent of smaller firms with 10,000 or fewer employees.
One third of larger firms say they have a carbon reduction plan in place compared to just 15 per cent of smaller firms.
Business case for better data capture and analysis
Carbon pricing therefore brings new urgency to a fundamental challenge facing Australian organisations – securing audit-grade energy and carbon related data that can be rapidly analysed to inform decisions about issues such as energy contract and tariffs, energy efficiency investments and taxation issues.
Until recently, few organisations had the need or capacity to capture and report carbon related data with accuracy and assurance. For the most part, organisations have seen fit to report their energy and carbon emissions in their annual corporate responsibility report.
These reports were rarely subjected to financial grade auditing and there was no business driver to ensure their accuracy and completeness.
Rising energy prices, and more recent compliance reporting requirements (EEO and NGERS) during the run up to the carbon tax, have seen a keener interest in energy and carbon by senior executives like CFOs and company boards.
A host of domestic and international factors are driving up the price of fossil based forms of energy – oil, gas and electricity – with global energy demand projected to rise by more than 50 per cent by 2035.
As a result, higher energy prices are pushing up energy costs as a percentage of business profits. Energy costs in some cases can account for up to 80 per cent or more of a commercial or industrial company’s non-labour operating and maintenance budget, with the remaining 20 per cent going into asset management expenses. If any of that 80 per cent cost pays for wasted energy, it weakens its financial strength and profitability.
In the past, energy price volatility wasn’t a first-order issue for many businesses because of historically low fuel and electricity prices.
This is no longer the case. With increasing executive ownership of energy issues – especially among CFOs – many firms view energy costs as a potential threat to their financial success.
There is a host of actions that businesses can take to effect immediate and ongoing energy saving benefits, and many that boast short-term payback periods. However, the appropriate targeting of energy-saving programs requires an enterprise-wide view of energy, including the ability to capture, track and report its consumption and costs at a granular level. Even large organisations are struggling with these tasks – especially those that have multiple building assets spread across many locations and geographies.
The problem is simple to define: the required data isn’t held in a single system of record that permits timely analysis and reporting.
This creates a host of risk, delay, performance and governance issues but most significantly it means organisations can’t track or control energy costs that may be eroding their revenue and profitability.
They simply don’t have the visibility to see where energy is being consumed in poor performing buildings, plant and equipment. Their data systems don’t have real-time data capture capability so they can’t respond quickly to changes in their operations or to climatic events to optimise their energy performance.
They also lack the ability to forecast future energy use - and their related emissions – using scenario forecasting tools – a task that is growing in importance as firms look to plan and adjust future energy contracts, energy tariffs and carbon permits when Australia moves to a floating carbon price from mid 2015.
Significantly, organisations that have no insight into their current and future energy consumption cannot establish a solid business case for operational or capital expenditure investments, such as smart lighting upgrades or major capital expenditure rollouts like a fleet of carbon neutral electric vehicles.
Still, many organisations continue to get by with a business-as-usual approach to energy and carbon data management. They continue to rely on a patchwork of spreadsheets and siloed information systems that few in the organisation can use or comprehend.
The are many reasons for this – energy data isn’t a priority because profits are up; the company has already adopted an expensive software solution that doesn’t do the job but is determined to make the best of it; there’s no business case to prove the value of energy management software and until there is, CFOs aren’t listening.
However, leading corporates like Microsoft, GE, Citi Group, Commonwealth Bank and Deloitte are saving time, effort and money by applying the lessons of business sustainability and the use of enterprise data management systems to better measure and manage their energy and carbon performance.
Meanwhile others are fast realising that it’s time to move beyond a compliance-reporting mindset to energy, emissions and sustainability reporting. The annual reporting of energy, carbon water and other environmental metrics to stakeholders is a post-hoc activity that bears little-to-no relationship to the fundamentals that drive day to day operational performance and the cost of doing business.
For big electricity users like those in manufacturing, healthcare, education and commercial property carbon pricing demands a new ability to track real-time power use and to respond quickly, now that new patterns of climate extremes and variability are here to stay. Thousands of firms around the nation are now tracking energy use in near real time through internet-connected smart meters that provide a continuous data feed of assets and equipment.
Major supermarkets chains are using smart meters to micro-manage the temperatures and performance of chillers and coolers, while large commercial property managers use energy feeds from their building management systems to automatically adjust heating, air conditioning and ventilation systems.
In May, Microsoft Corporation announced that from 1 July it would impose an internal carbon price and become carbon neutral next financial year.
The announcement means that the responsibility for improving energy efficiency, reducing carbon emissions and increasing the use of renewable energy will become the responsibility of every business unit and operation in a company has a presence in 110 countries, while creating a financial incentive to do so.
The incentive is a “carbon fee chargeback model” to be administered by the company’s CFO, which levies a fee for carbon emissions to the business groups responsible for incurring them. The fees will be used to build an investment fund with which Microsoft will purchase renewable energy and offsets. The company intends that those purchases will enable it to reduce net emissions and achieve its planned carbon-neutral status.
A month earlier, Microsoft had announced that it was moving away from spreadsheets and adopting cloud based enterprise software to capture, track, manage and report its global environmental performance.
It was a watershed moment. As one writer put it:
“Microsoft’s decision to invest in supported, enterprise software instead of using spreadsheets dramatically and decisively ends the debate about whether spreadsheets are sufficient for tracking sustainability data for large companies.
“If the world-leading developer of spreadsheets and portal software decides that spreadsheets don’t make sense for tracking and reporting sustainability data, then the argument is over.”
David Solsky is CEO and Co-founder of CarbonSystems.
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