12 Jul 2011

Preparing for carbon price disclosures

Geoff Hoffman and Brendan Bateman talk to BRR Media about how the carbon tax will affect companies' continuous disclosure obligations.


Preparing for carbon price disclosures
David Bushby, BRR Media
Geoff Hoffman, Partner, Clayton Utz
Brendan Bateman, Partner, Clayton Utz

David Bushby
We're speaking with Geoff Hoffman who's a partner in the Corporate Advisory and M&A Group at Clayton Utz in Sydney. Joining him is Brendan Bateman who's a partner in the Climate and Sustainability Group, also in Sydney. Gents thanks for joining us and welcome to BRR.

Brendan, Prime Minister Gillard looks set to top television ratings this Sunday as she announces the Government's long-awaited carbon pricing package, but we're seeing a lot of the detail emerge already. Can you give us a quick wrap of what's expected, including of course the all-important price.

Brendan Bateman
What is going to be announced appears to be some type of package which includes a carbon price. There are other elements that are likely to be announced including renewable elements as well. There will be a carbon price mechanism.

Now the object of the carbon price mechanism is to introduce a price relating to the emission of carbon into the economy. That can be done any number of ways and it's expected that the Government will announce it will be done through an emissions trading scheme. That emissions trading scheme however will have a transitional period of three years, and during that transitional period there will be fixed price permits.

As you said the price for the permits is all important, because that ultimately is what filters through to the economy and sends the price signal to try and drive investment and purchasing decisions away from energy intensive goods and services.

At the moment we're looking at a price somewhere between $20 and $26. Professor Ross Garnaut has suggested that a price to achieve our abatement target by 2020 needs to be about $26, at least in the initial stage. Recent press reports suggest it might be around $23 which is where Treasury modelling was a couple of years ago.

So certainly that's where we're looking in terms of price. Other aspects and detail associated with how the price will operate will obviously be revealed on Sunday and that will have implications obviously for liability, exposures and things of that nature.

David Bushby
And if we can just turn to some of the impacts disclosure obligations, Geoff, if I can bring you in here, how can this impact on company disclosure obligations?

Geoff Hoffman
Well I think for companies in a number of sectors it's going to have a potentially material shift in their cost of doing business. So for those companies that are listed on the ASX this could give rise to an obligation to make announcements to the market to ensure that their shares are trading on what we call a fully informed basis.

The basic test is whether the impact of the scheme on the company is information which a reasonable person would expect to have a material effect on the price or value of the company's securities.

When we're talking about something like this, this scheme which will have an impact on underlying cost structures, you then have consider what impact that will have on the overall earnings of the company. The rule of the thumb is anything between 10 and 15% or more could be material.

So what we're saying is that if there's a change in the entities or the company's previously released financial forecasts or any market consensus forecast in excess of 10 or 15%, that may be considered to be material and it should be announced. And it should be announced as soon as the company becomes aware of the information.

David Bushby
Well Brendan bringing you in here, given there's a lot of this stuff that's already being leaked, so would a lot of this be priced into the market already or will Sunday's announcement really trigger some disclosure on earnings?

Brendan Bateman
Look I expect that there has already been factored in quite a bit. There's been certainly a lot of analysis by some financial institutions such as Citibank regarding exposures of particular Australian companies to a carbon price, and what that price will be.

That having been said, specific details associated with things such as compensatory measures, whether or not there's going to be a free allocation of permits to emissions intensive and trade exposed sectors, and what the quantum of those permits will be and how they're going to be distributed, may well have material impacts on how those companies operate and their cost structures.

Also important to bear in mind is that it's not just the direct cost that a company might have to purchase permits in order to be able to meet its obligations under the scheme. It also has impacts on asset values in terms of the valuation of a particular asset, but it also has indirect implications. The objective of this scheme is to issue the carbon price into the economy, not just on direct emitters but also on all aspects of the economy, so that prices get passed through the scheme.

Consequently through supply chains, businesses, will be paying higher prices for those goods and services which are more carbon-intensive. So there will be exposures not just for the direct liable entities but also for other sectors of the economy.

David Bushby

And just finally Geoff there are a lot of moving parts to all of this. So how can a company properly inform the market?

Geoff Hoffman
Look I think this probably throws back to a comment you made earlier about there's been a lot of commentary in the market already and a lot of analysis done.

I think perhaps before Sunday a lot of that has been in the realm of merely supposition and really hasn't been sufficiently definite to warrant formal disclosure on the part of companies. But I think the question is whether after Sunday the scheme still falls within that realm of supposition and speculation.

In terms of that level of uncertainty everyone expects that Sunday will remove that level of uncertainty because whilst what's being announced on Sunday isn't actually law, it's the result of multi-party consultation which we all assume will become law within a fairly short period of time.

So that uncertainty's been removed but you're still left with uncertainty about the economic impact on the economy. There are a lot of moving parts, there's price, there's exemptions and what activities are going to be caught. There's what compensation is available.

Then you need to analyse the impact of that on both the cost of inputs into the business and then what the impact is going to be in terms of your ability to earn money in your output market.

So I suppose what companies need to do is to think, well, just because there's no precedent for a significant regulatory intervention of this kind which has such a broad impact on the earnings of a large numbers of companies doesn't mean that, at least for some companies where the earnings impact is going to be material, they don't have to do the analysis and make disclosure.

David Bushby
Well it's certainly going to be a busy time for many, many businesses and analysis and commentators on Sunday night and through next week. We'll leave it there for now, thanks again for your time, Geoff and Brendan.

That was Geoff Hoffman and Brendan Bateman, Partners at Clayton Utz in Sydney. Listeners if you have any questions for either of our speakers today please Geoff on[email protected] or Brendan at [email protected]

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