In January 2017, Alberta joins B.C., Ontario and Quebec’s efforts to reduce carbon emissions with the introduction of its carbon levy (tax). In addition, the Canadian government recently announced a national carbon price starting in 2018 at $10 per tonne, increasing annually to $50 by 2022.
As Canada moves towards a common policy over the next few years, the implications for Canadian businesses will be felt as companies adjust to the costs associated with their carbon footprint. Knowing the role your business plays in reducing its carbon footprint, and understanding the cost implications early on, will make the transition to the carbon levy easier.
Understand your carbon footprint
In order to decide how to best offset costs associated with the carbon levy, it is important to understand how the levy works in your jurisdiction(s):
- What is your role in tracking?
- What are the exemptions?
- What are the fines if you are found to be non-compliant?
It’s also important for you to learn the policies in the jurisdictions of your customers and suppliers, which could impact the cost of doing business with them. You will also want to know the amount of greenhouse gas and types of carbon you consume – natural gas, diesel, gasoline, etc. Ensure you include all points of consumption including:
- Heating and cooling
- Manufacturing processes
- Supply chain
We recommend you check your specific jurisdiction to ensure you capture all relevant information in your calculations. This information will provide you with baseline data, which will assist you in determining if offsets are necessary or what your incremental costs if you have a carbon levy (tax). By clearly understanding your current and anticipated carbon consumption, you can make proactive decisions today rather than costly adjustments down the road.
Pass the costs along
You may want to consider counteracting the levy by passing higher costs through to your customers. This is particularly desirable if your suppliers have raised costs to you. However, this can impact long-standing relationships and you will need to review your customer agreements to see if you have the ability to change pricing and, if so, what notice periods are required.
Review your current supply chain
Find savings by altering your supply chain with alternatives from jurisdictions with a different regulatory environment, or that operate with a smaller carbon footprint. This might be a short-term solution as carbon levies are being initiated in more places. Also review your leased facilities – increased efficiencies in the operation and maintenance of these properties can reduce your expenses. Will your landlord make the necessary investments in the property to help manage costs?
Modify your operations
Instead of shuffling costs around, could you create efficiencies in your operation that will decrease your carbon footprint? Consider changing your current processes, adjusting the types of carbon consumption, or purchasing more efficient equipment. Some of these might be quick fixes, but could also require larger capital investments and more time to implement – and keep in mind the higher costs proposed by the federal government for 2021 and 2022. As part of the improvements to your operations, you could also make upgrades to your building or buy your building if the landlord is not willing to make necessary improvements to the property.
Strengthen your access to capital
An increase in costs may negatively impact your cash flow, and thus the value of your business – potentially reducing your ability to access capital and service your existing debt obligations. Access to capital is critical for your business to grow and withstand challenging times. A good financial partner will provide guidance and can help you position your business for success during times of change, and assist you with crucial capital investments and operational changes.