Effects of Carbon Tax on Small Businesses in Australia - Research Paper Example

? EFFECTS OF CARBON TAX ON SMALL BUSINESSES IN AUSTRALIA JULY 10, APRIL 27, Executive Summary Carbon Tax was launched in Australia in July 2012, it was one of the recommendations in a report from a review of the effects of climate change to the world economy.This was done in order to implement an emission trading scheme in Australia. The scheme required that companies generating up to 25,000 tons of carbon dioxide equivalent per year were required to purchase emission permits. However, the carbon taxes have impacted severely on local production businesses as they have been forced to absorb all costs occurring due to the tax and this makes it difficult for them to compete globally. The scheme has also been targeted by some larger businesses who want to profiteer from it. Some of the problems are lack of proper frameworks on how costs can be passed to other players in the supply chain, lack of proper competition policies, and poor monitoring of prices by the government. Though the Australian government argued that the effect of this tax was going to be moderate manufacturers were not comfortable with it arguing that it was going to cause loss of jobs and closure of businesses. Therefore, the government needs to re-evaluate the scheme, identify faults, and establish solutions that should be captured in policy, complete with a monitoring process. Introduction Carbon Tax in Australia refers to a carbon pricing scheme that was launched by the Government in July, 2012, as part of wider efforts that are aimed at taming global warming. The scheme requires businesses that emit emissions amounting to 25,000 tonnes of carbon dioxide equivalent to buy emission permits (Williams, 2011). Though every business in Australia faces the effects of carbon tax in one way or another, chances are that small business are paying a higher price. This paper will investigate on the effects of carbon tax on small businesses by describing the following: the origins of carbon tax in Australia, the issues faced by small businesses in trying to comply with the requirement to purchase carbon emission permits; a critical analysis of the issues identified; recommendations on how the issues can be addressed; and an implementation plan. Background Global warming and other forms of climate change are issues that continue to draw unrivalled attention across the globe. Science has achieved a lot in describing factors that contribute to climate change, and has shown a clear picture of how this will affects lives today and in the coming decades (Smith, 2001). A number of natural and man-made factors have been found to play role in the continued rise of average temperatures in the earth’s atmosphere and oceans (Smith, 2001). In fact there is a consensus in the scientific circles that human factors are largely to blame for climate change. Of great concern is the continued emission of carbon dioxide and other greenhouse gases. At a global annual output of 27 billion tonnes, carbon dioxide is by far the most emitted greenhouse gas, and mainly comes from combustion of fossil fuels. A review of the effects of climate change on the world economy was first released in 2006 to the British government (Lewis & Cornish, 2012). The report recommended a number of measures such as carbon taxes to effectively compensate for market failure due to climate change. In December 2006, the Australian government established a task force on Emissions and Trading. The task force was chaired by Peter Shergold and was supposed to advice on how and emission trading scheme (ETS) could be implemented in Australia (Tennant, 2013). After the release of the final report, the Howard government committed itself to put in place an ETS within a six-year time frame. In the year 2010, after initial hesitations, Gillard government agreed to put in place a fixed carbon price that would commence on 1st July 2012, and later transition to a “flexible price cap-and- trade ETS” on 1st July 2015 (Kerin, 2012). Consequently, companies that produce 25,000 tonnes of carbon dioxide equivalent were required to track their emissions and purchase permits based on their emissions. Therefore, as expected, this has had impacts on businesses through the trickle-down-effect. Key issues faced by small businesses in regard to Carbon Tax The effects of Carbon Tax on Australian small businesses are many and varied, and may depend on the following factors: the level at which a business indulges into energy intensive products and services; the level at which a business relies on energy intensive supplies; and the ability of the business to pass the carbon tax costs to others in the supply chain (Queensland Government , 2013). A national survey conducted by News Limited established some interesting effects. Of the 186 small firms included in the study, 50% of them reported experiencing hikes in power bills and others supplies as a direct result of carbon related taxes (Lewis & Cornish, 2012). Only 33% of them were able to effectively pass the cost to their customers. With the prevailing economic conditions, up to 92% percent disliked the scheme. Close to 66% of the businesses surveyed, including cafes, shoe stores, bookshops, automotive outlets and other retailers stated that they had absorbed the tax with a negative impact on their profits (Lewis & Cornish, 2012). The study covered 10 electorates in Queensland, ACT, Victoria, NSW, and South Australia. Some of the key findings in the various regions included the following: In South Australia, more than 50% of businesses reported on experiencing the effects of carbon tax. Up to 85% of the businesses strongly believed that the costs would go much higher. In South Australia, only 10% of all businesses had managed to pass costs on consumers. In NSW, only 43% of businesses reported to have experienced the impacts of carbon tax. However, some businesses reported a very significant rise in costs, with one reporting a rise of close to $200,000 a year (Lewis & Cornish, 2012). Businesses in other areas did not have exact figures of the effects but expected the costs to rise in the coming months. Even though The Treasury confirmed that the effect carbon tax on the cost of energy should be negligible (about 0.2 percent to overall cost of business), small businesses report that the cost of supplies have increased substantially. It is feared that whole sellers might be using the carbon tax as an excuse to push prices up. According to Adrian Sykes, owner of a business that deals in vehicle cleaning products on the central coast, the wholesale cost of his supplies had gone up by up to 5% (Lewis & Cornish, 2012). The tax is also likely affect all sectors of the economy and, therefore, impact on inflation and interest rates. This will negatively impact on the Australian market and small businesses are particularly vulnerable to such effects (Williams, 2011). Unfair competition from big retailers is one factor that complicates matters for small businesses in Australia. A poor competition policy, coupled with the dominance of few landlords makes it hard for retailers to pass the carbon tax (Lewis & Cornish, 2012). In summary, the inability for small businesses to pass increased costs related to carbon taxes has impacted negatively on their profits. Some small business owners have considered closing down their businesses. Critical analysis of the problem By limiting carbon taxes to businesses that generate 25,000 tonnes of carbon equivalent, the company was trying to limit the burden to large companies and, therefore, shield small businesses from the effects. However, the strategy seems to have largely failed as the big businesses are passing the cost to small businesses, which are ill-positioned to deal with the high costs. The Government did not foresee the ripple effect that has resulted from implementing the program (Kerin, 2012). A number of factors could be responsible for the failure of the strategy. First, the government did not provide a clear guideline on whether the carbon tax should be passed on to others or should be factored in the company’s expenditure. In addition, the government estimated that impact of carbon tax on businesses would be negligible, at around 0.02 percent, however this has not been the case. If the government estimates are correct then it implies that there are other aspects that have come into play following the implementation of the carbon tax (Jaques, 2012). There are a number of salient features that might be making small businesses to be particularly vulnerable. One of them is the lack of a comprehensive competition policy to cushion small businesses from the conducts of their more established counterparts. As shown above, suppliers have increased the cost of their products leaving small businesses with the burden of passing the cost consumers (Craig, 2012; Hugo, 2006). Another issue lies in the lack of a proper framework to guide on how businesses should share the cost resulting from carbon tax. The government has not done much to help small businesses pass the cost. Most are doing it their own way – a few have succeeded (about 10%) while others are on the brink of collapsing for absorbing all the costs of carbon tax. Recommendations From our analysis it is evident that small businesses suffer the most as a result of the new carbon tax. Considering their securities and revenues still need to be nurtured, it is important to remove all hindrances that may stop or slow their growth. Several measures can be undertaken to reduce the high costs experienced by small businesses as a result of carbon taxes. Such measures include the following: Establishing proper competition policies – It is clear that several big businesses have increased prices by much higher margins to profiteer from the situation. According to government estimates, the impact was supposed to be around 0.02 percent, however, in some cases prices of supplies have increased by close to 10%. Therefore, the government should establish a proper competition policy that will effectively check rampant price hikes. This should include an effective price monitoring process. Cushion small businesses from the ripple effects – The federal government can formulate policies that will ensure that businesses at different levels share all costs arising from carbon tax on equal basis. This will save small businesses from absorbing all the costs or passing the entire cost to consumers (Lewis & Cornish, 2012). Creating a clear plan to implement the scheme - The government should provide clear communication on whether carbon costs should factored in the expenditure of the targeted companies or should be passed on to other businesses in the supply chain. This should include rebates for small traders who have in the past taken much of the heat (Lewis & Cornish, 2012). Implementation plan In order to implement effective measures that will ensure fairness for every business owner, the Government should start by re-evaluating the program, identifying defects, and formulating measures to counter them. Therefore, a task force should be set up to get the facts on how the program is impacting on businesses at different levels (Koukoulas, 2013). Having identified the various weaknesses, strategies should be established to address the issue, and this should be captured various policy frameworks. If this does not work then the entire program should be scrapped as it has largely failed. References Craig, J. (2012). Still going strong. Australian business Journal , 4 (2), 32-40. Hugo, G. (2006). Globalization And Changes In Australian International Migration. Journal of Population Research , 23 (2), 107-134. Jaques, S. (2012). Current issues and challenges facing Australian Directors and Boards. Direction 2012 , 23 (3). Kerin, L. (2012). Watchdog warns of carbon tax cons. Retrieved from ABC News : http://www.abc.net.au/news/2012-05-11/customers-warned-about-carbon-price-cost-hikes/4005218 Koukoulas, S. (2013). The top 10 big issues for 2013. Business Spectator . Lewis, S., & Cornish, L. (2012, November 29). Carbon pain unfair to small businesses . Retrieved from News.com.au: http://www.news.com.au/business/your-business/carbon-pain-registers-for-businesses/story-fn9evb64-1226453653623 Queensland Government . (2013). Business and Industry Portal . 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