by Tony Rose
The National Greenhouse and Energy Act requires certain businesses to report on their energy use, production, and greenhouse gas emissions. Property groups will be affected by many aspects of the legislation — particularly as contractor and joint venture GHG emissions need to be considered as well as the corporation’s own. Here is a brief guide to the NGER Act, how it will affect property groups, and some of the opportunities to be seized.
Australia ratified the Kyoto Protocol in March 2008. Signatories to the protocol have agreed to reduce their GHG emissions, commencing July 2011. The first two years of the scheme (2011 and 2012) are essentially a trial/trade-in period, with the scheme starting full operation in 2013. The targets set are for reductions in GHG emissions of 25 per cent below year 2000 levels by 2020 and 60 per cent below year 2000 levels by 2050. The 25 per cent reduction target is a little flexible, depending on the outcome of the United Nations Climate Change Conference in Copenhagen in December.
To achieve its reduction targets, the Australian Government has put in place an emissions trading scheme. In an ETS, businesses that produce a lot of GHGs have to pay for the right to emit those GHGs. In Australia this legislation is comprised of two tiers of law, the NGER Act, and the Carbon Pollution Reduction Scheme. These tiers are not optional, and are not related to whether you believe in climate change or not; they are laws, and need to be treated as such.
The first tier is reporting, the NGER Act, whereby entities have to report their emissions, energy use and production, allowing the Government to measure Australia’s GHG emissions, and to identify major GHG emitters. The NGER Act is law today, and applies for the year ended 30 June 2009 and subsequent years. There may be 5000 or more businesses that will need to report under the NGER Act.
The second tier is the payment system, the CPRS, in which entities that emit over set limits have to buy permits to emit. It is expected that only about 1000 businesses will have to buy pollution licences under the CPRS.
The intention of the ETS is to significantly increase the price of energy, and in doing so to shift behaviour towards using less energy and producing fewer GHGs. A simple illustration of the way in which business will change is the cost of aluminium, which may double over time. Business will be forced to change processes, and develop and use new and different technology, energy sources and materials to remain competitive. In doing so, emissions will be reduced.
The introduction of the ETS has been described by both sides of Parliament as the biggest single change to the Australian economy since World War II. Energy prices, electricity, fuel and many materials (concrete, steel, aluminium and others) will increase substantially in price, and the way in which business is conducted will therefore change radically.
NGER Act registration and reporting
Reporting is critical, as it provides the necessary data to determine how many permits to emit GHGs will be issued and who will be compensated. The NGER Act was passed into law by the Howard Government. Companies exceeding the thresholds were required to register by 31 August 2009 and must report by 31 October 2009.
There are two thresholds, one for controlling corporations and the other for facilities. Outside of certain industries, a facility is as an activity, or series of activities, performed at a single site where the activities fall within one industry sector.
Failure to register or report can lead to substantial penalties; up to $220,000 for each offence, with additional penalties of $11,000 per day.
Assessing whether a corporation needs to register under the NGER involves an initial review to determine which facilities must report, and whether the corporation as a whole is above the corporate limits.
The controlling corporation is required to report the emissions from all its relevant facilities. Facility emissions will include 100 per cent of the emissions of certain contractors, subcontractors and joint ventures. The definitions of controlling corporations and facilities are key issues. The NGER Act is unconcerned with the identity of the party carrying out the activity; rather it is where the activity is performed, and who controls the site where it is performed, that is relevant.
Of particular interest to property companies is the consideration of contractors and joint ventures. Contractor and joint venture emissions need to be considered as well as the corporation’s own. This requires an assessment of which activities at facilities are included, and working out how to gather the requisite information. For example, instructions and worksheets may need to be developed and issued to contractors to explain what information must be provided. The instructions must give contractors guidance on gathering the required information.
Having registered, a more detailed analysis of facilities, emissions and energy at the level of detail required under the NGER Act is required by the end of October. The information produced must be transparent (documented and verifiable); comparable (using defined and standard methodologies); complete, and accurate. Basically, it must be auditable.
Assessment and management of impacts
The objective is to be placed in the best possible position to deal with not only the compliance requirements of the NGER Act, but also to be well-prepared and plan for the impacts of the introduction of the CPRS on your business, giving you an advantage over other less well-prepared competitors. The best way to achieve this is to:
· Identify the major risks and opportunities arising from the NGER Act and the CPRS; a scoping exercise covering all areas of your business.
· Specify the changes required to maximise opportunities and prioritise actions based on the impact analysis.
· Take actions.
· Monitor and feedback as implementation occurs.
The first step is to carry out a risk and opportunity scoping exercise, coming up with an analysis of the impacts of the NGER ACT and the CPRS on your business.
Material risks and opportunities identified should be built into the business planning and development process. There are a number of ways to achieve this. One is a review of business processes; another is facilitated, risk and opportunity assessment workshops and education, etc.
Particular risks for property companies include:
· Increasing energy, aluminium, concrete, steel and other materials prices, and waste disposal costs.
· Profit and loss, balance sheet and cash flow, funding, working capital, bank covenants, etc.
· Lessees may require higher green-rated buildings or they may not lease them. For example, the Government has said it requires at least 5-star green-rated tenancies.
· Head contractors who report under the NGER Act will require subcontractors to give information.
· Customer and supplier contract implications.
· Investor relations issues.
The key point is that whatever assessment process is chosen, it should cover all business areas. And having identified risks and opportunities, it is necessary to consider the impacts, and then prioritise the actions required, and implement the required changes.
The implementation of the changes is carried out once the impact assessment phase is complete and actions have been prioritised and planned.
Developing new energy sources, technologies, materials and processes present businesses with significant opportunities and can give them the leading edge on their competitors. Those businesses that prepare well and actively seek opportunities will be the envy of those who lag behind.
Tony Rose is partner, audit & assurance, PKF