Australia now has a price on carbon emissions.
While some people expect the carbon price to be removed after the next federal election, the reality is that the coalition will find it very difficult to reverse the legislation and it will probably take a few years to do anyway.
Now, fruit growers need to come to terms with the carbon price and figure out how to minimise the negative impacts. In this article, I will give a brief summary of how it works, what its effects are likely to be, are how you might be able to minimise any negative effects.
What is it?
The carbon price is the key component of the Commonwealth Government’s Clean Energy Future policy.
The Emissions Trading Scheme (ETS) that forms the basis of the carbon price is based on a cap-and-trade model.
While it is commonly referred to as a ‘carbon tax’, it is really a charge on greenhouse gas pollution. The same policy approach has been adopted in many other countries (e.g. the European Union, New Zealand and South Korea) because it is believed to provide the cheapest and most flexible method to reduce emissions while sustaining economic growth.
Greenhouse gases
The carbon price targets emissions of greenhouse gases from industrial activities.
Carbon dioxide (CO2 ) is only one of the greenhouse gases (GHG) addressed by the carbon price scheme. Other common GHGs include methane (CH4) and nitrous oxide (N2O).
While there are multiple greenhouse gases, the term ‘carbon’ is conventionally used as shorthand for ‘greenhouse gas’ within the context of climate change policies.
Each GHG has a different global warming potential (GWP) which describes the strength of its effect on atmospheric temperatures compared to CO2. The effect is expressed in units called carbon dioxide equivalents (CO2-e).
How does it work?
Each year a limit or cap is set on the allowable level of emissions. Businesses included in the scheme will have to purchase permits for each tonne of CO2-e they emit.
The carbon price mechanism only directly involves energy generation, industrial processes, waste, fugitive emissions (mining) and some transport areas.
Businesses within these sectors that emit more than 25,000 tonnes of carbon per year will be required to take part in the emissions trading scheme.
It is expected that about 250 businesses will be required to buy and sell permits in 2012-13.
Agriculture is not included in the scheme and no agricultural businesses are required to pay a direct carbon price by purchasing permits.
The scheme will start out with a three year period with a fixed price and no cap. This temporary fixed price period is designed to provide an easy transition to carbon pricing and is also why the scheme is mistakenly called a tax.
Each tonne of CO2-e emitted will cost $23 in the first year, rising at 5 per cent (2.5 per cent price increase and 2.5 per cent inflation) per year.
At the end of the fixed price phase, the scheme will transition to a conventional flexible price emissions trading scheme where the cap on emissions will determine the supply of permits while the market will determine demand and price.
The Government will set the emissions caps on the advice of an independent Climate Change Authority. Caps will be set several years in advance to provide a degree of predictability and certainty to business.
Assistance for horticultural producers
The Clean Energy Future package includes a number of compensation packages and assistance measures.
While most of these are directed towards households or to those industries directly affected by the carbon price, a few may be of assistance to some horticultural businesses:
- An increase in the instant asset write-off threshold to $6500 to increase the capacity of small businesses to invest in new equipment or technology
- A support package for communities and regions strongly affected by the carbon price
- Support for research and development of low emission practices and technologies that can be applied on farms
- A number of programs to encourage energy efficiency by supporting investment or providing information on minimising energy costs
- The Carbon Farming Initiative, an agricultural offset scheme.
Impacts of the carbon price for fruit and vegetable growers
While no farm businesses are required to pay a direct carbon price by purchasing permits in the emissions trading scheme, the carbon price will cause the price of many important farm inputs to increase.
It is possible to estimate the effect of the carbon price on most farm inputs based on the energy intensity of the product. For example, the starting price of $23 per tonne of carbon dioxide equivalent is expected to result in the following cost increases (see Table 1).
Impacts on farm profit
Growcom recently completed an analysis of the impacts of the carbon price on fruit and vegetable growers (funded by Horticulture Australia Limited). This project included economic modelling of six case study farms to examine how the carbon price will flow through the supply chain and affect profitability.
This analysis found that the carbon price will increase input costs of these farms by between about $5000 and $42,000 per year, which equates to between 0.3 and 0.8 per cent of gross farm income.
Given the typically low profit margins of most fruit and vegetable farms, these cost increases represent a significant reduction in farm profits.
As expected, the biggest impact on fruit and vegetable farms will result from the increased cost of electricity (about 10 per cent). Of course, electricity prices will actually increase by considerably more than that because of other factors in addition to the carbon price.
As a result, the best opportunity to reduce the impact of the carbon price will be through improvements in on-farm energy efficiency.
There are many measures that can be used to increase energy efficiency and lower the overall electricity needs. Simple measures, such as minimising unnecessary consumption and waste, can save money.
More complex measures such as improving the efficiency of refrigeration or irrigation systems, may require significant effort and capital investment.
Other steps revolve around changing or refining processes. Can you minimise the time produce stays on farm post-harvest, minimising the refrigeration required? Can you reduce the amount of on-farm processing? Can you streamline processes to minimise running time?
And of course, on-farm renewable energy systems can reduce consumption of grid electricity and you may be able to sell excess power back to the grid.
While you’re tackling on-farm efficiency and cost reductions, Growcom will continue to argue for the government to provide more effective compensation and assistance to combat the cost increases.
For information and contact details, see the July 2012 Tree Fruit.
