Impacts of the Carbon Tax on the Australian Construction Industry - Case Study Example

Australian carbon tax Australian carbon tax Name: Course: Institution: Lecturer: Date: Table of Contents Table of Contents 2 1.0 Introduction 2 1.1 Australian property and construction industry overview 3 2.0 Impacts of the carbon tax on the Australian Construction Industry 4 3.0 Recommendations 6 3.1 What should tenants and landlords consider? 6 3.2 What should developers and builders consider? 6 3.3 What should supply companies consider? 7 4.0 Conclusion 7 References 9 1.0 Introduction The Master Builders Australia recent survey revealed that a massive 88% of the 526 surveyed builders and contractors in the engineering, residential and commercial construction industry believed that the newly introduced carbon tax would significantly hurt their businesses over the next one year. The CEO of the Masters Builders Australia stated it is quite unfortunate that the legislation came at the critical time when the industry is facing deteriorating business conditions. The industry has been experiencing an overwhelming task of dealing with upcoming host of contingencies. For instance, supply chain costs have overly increased over the past two years which has prompted construction companies to develop strategies of recovering them in existing and new building contracts. With increasing cost of living, homebuyers are exercising greater caution in their buying decision. Additionally, the expected negative effect of the carbon tax has exerted fear among homebuyers which is reflected in their delay to buy. Harnisch (2012) takes note of the government’s concern over the impeding danger of the carbon tax towards the construction industry when he states that “The Federal government has tried to assure the building and construction industry that the carbon tax will have little to no impact”. Nevertheless, this is at odds with the industries current trend. The negative impacts of the carbon tax are tremendously being felt which is further accelerating the industry nervousness. The purpose of this report is to highlight some of the most prominent impacts of the carbon tax on the Australian property and construction industry. It will further propose recommendations that players in the industry can follow to alleviate the impacts of the carbon tax. 1.1 Australian property and construction industry overview According to the Australian Bureau of statistics, the Australian construction industry is the fourth largest contributor to the national GDP accounting for about 7% of the economy and over 9% of the employment. Although the company has experienced exponential growth over the years, there was notable decline in operating profits since 2008 which was attributed to new private capital expenditure (AEI, 2010). As of July 1, 2012, the government chose to simultaneously introduce three very significant tax changes that will directly affect the construction industry: The carbon tax Mining tax Compulsory reporting of subcontracting arrangements to the ATO Apparently, these unfolded at a time when the government had pulled its support towards the construction industry in a number of ways including elimination of the free home insulation scheme and discontinuation of the School Building and Renovation program. 2.0 Impacts of the carbon tax on the Australian Construction Industry The Daily Wire publication maintains that the price of a commodity does not always take into account the impact of production processes towards the environment. For instance, iron ore used to produce iron sheets was probably sourced from the highest polluting mine in the world or the track used to transport it to the hardware shop could have cause significant air pollution or the electricity used to manufacture it could have been produced from the dirtiest coal mine in the world. even with these inherent factors it is quite difficult to account for these damages to the final product. However, introduction of price on carbon will change this equation (Parr, 2012). According to MacDougall (1999), carbon pricing will require construction companies to factor the additional costs of carbon impact to the environment into jobs that will run past or after July 1, 2012 (ACG, 2011). This is a complex situation for many builders as costs vary considerably with the location of the building, its size and the materials used. Currently, there are no specific mechanisms to calculate carbon price and builders are relying on estimates when quoting to clients. This is however, risky as overestimates could attract severe penalties in accordance to the Australian Competition and Consumer Commission (ACCC). Zhu et al (2010) states that there are several costs that are expected to increase during the construction phase following introduction of the carbon tax. First, electricity prices will increase as coal-fired power stations will be required to pay extra taxes to cover the emissions generated during production of electricity. Second, the industrial processes sector will also increase the prices of products associated with emission-intensive processes such as steel, glasses, aluminium, cement and bricks. Third, building owners and operators will also be affected by increasing costs of waste disposal as landfill owners will impose extra cost incurred when acquiring permits for covering the greenhouse gas emissions. Fourth, buildings that generate their own electricity might fall under the stationary energy areas to the extent that this generation might result to emission of greenhouse gases especially where trigeneration and co-generation or other forms of generators have been installed. These increases in prices will force the property and construction industry, as consumers to the above discussed expenditures, to demand for carbon efficient or greener raw materials; those associated with low carbon emissions, in an effort to reduce their operating costs. Consequently, tenants will desire buildings that are constructed and maintained with materials that expend least carbon emission. Conversely, buildings that do not adhere to standard of low energy efficiency will suffer rejection from tenants (Boyd, 2011). If the price signals from the emissions are implemented and are fully supported by the government, then rent in energy efficient buildings is expected to rise in response to increasing demand for energy efficient houses by tenants. This elevated demand is likely to be propelled by tenants demand to pay higher for buildings will least environmental impact. This will in turn drive investments in greener buildings as well as greener equipments, operating standards and building materials. Construction companies in Australia have stated their intention to increase prices in order to cover the cost of the tax. Brickworks for instance has stated a 6% price increment. 3.0 Recommendations 3.1 What should tenants and landlords consider? The greatest concern for landlords and tenants will be the increasing cost of running buildings including electricity and gas consumption for air conditioning, ventilation, heating, lighting, machinery waste disposal and other electrical appliances. The extent to which the landlord and the tenant will be liable to increasing cost of energy will be determined by the leasing arrangement. Gross leases protect the tenant and limit the landlord from passing unnecessary costs to the tenant. In that respect, the landlord should ensure that there is enough margin to absorb rising costs and that the rent can be re-negotiated at the event of increasing costs of green energy (GBCA, 2002). 3.2 What should developers and builders consider? Developers and builders should have similar considerations as the landlords and tenants. They should check contracts to ensure that obligations and rights are clear under the new law. Additionally, they should ensure that they have the right to pass on rising costs; they are in a position to increase their prices depending on the prevailing costs of operation. Clauses that allow for renegotiation and reopening of pricing should be introduced in contracts. For instance, schedule of rate contracts, those with set rates for particular work, could be difficult to adjust even when the prices of materials have been hiked. Similarly, lump sum contracts are difficult to alter except when they have included a ‘change in law’ or ‘carbon’ clause. Costs plus contract is therefore, the recommendable form of contract in such a case. In this kind of contract, the principle pays the builder’s costs in addition to a margin. This way, the builder is able to pass on any increase in cost (Lye, 2009). 3.3 What should supply companies consider? The carbon tax provides the supply side with a range of opportunities to innovate and produce products and services for the construction industry that will produce less waste, consume less energy and be greener. It will therefore, save both money and the environment as it will be cheaper to run. Since most of the expected changes in the building and construction industry will stem from the need to adapt rising costs associated with emission-intensive products, the industry should invest and develop more in energy-efficient initiatives that are directed towards combating the rising cost of traditional energy sources like coal. Besides that, the industry could benefit from engaging in complementary initiatives established by the government such as Tax Breaks for Green Building programs. In addition, the industry will have to consider the nature of upcoming arrangements and existing contracts in order to balance out the risk of rising costs (Humphrey & CIS, 2007). 4.0 Conclusion Evidently, the building and construction industry has been hard hit by the newly passed Carbon Tax. Without a concrete method of apportioning the carbon cost on the overall job, builders are forced to make estimates that put them under the risk of legal liability. Being consumers of carbon-intensive products such as electricity and building materials such as cement, aluminium, bricks and glass, the construction industry will increase its prices to cover the increasing costs of these materials. Gradually, it will demand for greener construction materials which means that greener houses will rapidly increase and this subsequently increase the demand for greener houses among tenants. Landlords are advised to introduce margins on top of the mainstream rents charges to cover for any increases in operations costs in the course of leasing. Builder and developers on the other hand should ensure that they enter into genuine contracts and preferably ‘costs and contract’ type of contracts where the developer includes a margin to cover unexpected cost increases. In order to reduce the rising costs of carbon incentive products and processes, the building and construction industry should focus on more energy-efficient initiatives. References (ACG), T. A. (2011). The Carbon price mechanism and the property sector. Melborne: Report to the Council of Australia. (AEI), A. E. (2010). Feature article: A statistical overview of the construction industry. Retrieved September 4, 2012, from http://www.abs.gov.au: http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/1350.0Feature+Article1Oct+2010 (GBCA), G. B. (2002). Putting a price on pollution: What it means for Australia's property and construction industry. Retrieved September 4, 2012, from www.gbca.org.au: http://www.gbca.org.au/uploads/203/3787/Carbon%20Paper_LR.pdf Boyd, C. (2011). Carbon Tax- what it means for property. Retrieved September 4, 2012, from http://news.domain.com.au: http://news.domain.com.au/domain/green/blogs/talking-property/carbon-tax--what-it-means-for-property-20110531-1fdrk.html Harnisch, W. (2012). Builders fear negative impact. Journal of the master builders . Humphrey, J., & (CIS), C. f. (2007). Exploring the carbon tax for Australia. St Leonards: Center for Independ studies(Australia). Lye, L. (2009). critical issues in environmental taxation. v. 7. Oxford: Oxford University press. MacDougall, R. (1999). Short-Run effects of a carbon tax. Clayton: General paper No. G-100. Parr, A. (2012). The real cost of carbon pricing. Retrieved September 4, 2012, from http://www.australianconstructionfocus.com.au: http://www.australianconstructionfocus.com.au/index.php/2012/07/07/the-real-cost-of-carbon-pricing/ Zhu, X., Lu, Y., & Cui, Q. (2010). Efficiency and Equity implications of the carbon tax in the contsruction industry. Engineering Project Organizations Conference. South Lake Tahoe. Read More