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BUMKT 6942

International Business

UNIVERSITY OF BALLARAT
BUMKT6942 INTERNATIONAL BUSINESS

SUBMITTED TO

LECTURER Terry Xue

PREPARED BY NIKHIL DILIPBHAI DHRUV- 30094935

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TABLE OF CONTENTS Executive Summary3 Introduction ....................................................................................................................... 4 Impact on Strategies of the firms located in Australia ......5 Carbon Management Strategies....5 Minimization of Energy Cost.....6 Reduction of Internal Cost of Production......6 Innovation of Production Techniques and Products......6 Implications of Carbon Tax7 Negative Implications..7 o Loss of international market..7 o Cost of Production8 o Relocation of Production activities.8 o Unemployment of the people...9 o Upsurge in Reliance on Imports....9 Positive Implications10 o Implementation of Energy Efficient Appliances......10 o Reduction of Dependence on fossil fuel.11 o Carbon Tax is a Social Cost11 Conclusion .. 12 References .......................13

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Executive Summary: We are living in a technology oriented world where earth has become a global village. Today we are doing business at global level. Carrying on the business has certain implication. This implication involves emission of gases which impacts global environment. To reduce the implication, government has introduced CARBON TAX. In this piece of paper, I have undergone changes in strategies of the firms in Australia as a result of the introduction of Carbon Tax. It involves Carbon Strategic Management, Minimization of Energy Cost and so forth. In addition, I have undergone positive and negative implications of carbon tax on Australian firms and economy. Moreover, this paper supports its views with the help of journal articles, textbook and recent news resources. Finally, at the end, it will be crystal clear that negative implications of carbon tax are more than positive implications.

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Introduction: Changing climate is damaging Australias environment and way of living. Globe is warming up due to high level of carbon pollution damaging environment and economy. This creates a threat for the firms and industries doing business in Australia. Yesterdays fiction is todays reality. Consequently, the Australian government has introduced the pricing of carbon by introducing a carbon tax from July 1st 2012. The aim is to develop the policy to a marketbased Emissions trading scheme in three to five years time from its introduction .The initial payment for the tax is fixed at a price of $23 per tonne of CO2 equivalent (Siriwardana, Meng & McNeill,2011).This initiative will help the Australias emissions to be reduced to large extent . The tax is likely to have an economy-wide impact affecting Australias GDP, industrial structure and trade.

The introduction of carbon tax is hard to believe. Many commentators are of the view that introduction of the carbon tax is having a superior impact on the strategies of the firms. With the introduction of this tax, the firms have changed their way of moving ahead. It has made them to change their strategies .Moreover; people who advocate change in strategies is important due to carbon tax also believe that it has potentially implications for the international and domestic competitiveness of firms in relative terms. In my opinion, strategies of the firms have been changed and it has more negative implications on the firms than positive one. Moreover, to support my view, changes in strategic moves and advantages and disadvantages of carbon tax have been discussed.

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Impact on Strategies of the firms located in Australia: Businesses do not operate their business in isolation. It needs to react to what is happening outside .i.e. external environment. External factors are the factors which are not under the control of the business. These external factors include legal, social, political, technological and so forth. The legal systems used by the countries have dramatic impact on business (Mahoney, Trigg, Griffin & Putsay, 2001).Australian Businesses have accepted the fact that newly introduced carbon tax is long lasting. Consequently, they have reacted to it and have brought tremendous changes in the strategies of their firms. Businesses are already on the move. Business has started preparing for the transition to a low carbon economy .The changes in the strategies are as follows:

Carbon Management Strategies:

Carbon Management Strategies have been implemented in management reporting and investment decision-making process with stringent implementation of carbon tax. Companies have started benchmarking on the basis of carbon performance (Bode & Horstink, 2012).Moreover; stakeholders are interested in acquainting themselves with environmental performance .This is done to know how much tax is paid by the company on poor environmental performance. For instance, in financial reporting, most of the corporate organisations annual report includes environmental statement to let stakeholders know that operations are carried out in the best way to protect the global environment and to show their environmental performance.

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Minimization of Energy Cost: The firms have undertaken abatement efforts for use of energy. As a result this will reduce their energy cost. At the end, ultimately saves carbon tax. Till date the organisations were using inexpensive techniques for reducing this emission. However, with the introduction of carbon tax, they will attempt more radical abatement efforts (Bode & Horstink,2012).

Reduction of Internal Cost of Production: Till date the firms did not paid attention to external cost and were carrying on their operational activity. They put their best efforts to reduce the internal cost and to maximise their profit. But with the introduction of this tax, the firms are becoming environmental friendly and trying to put more control on internal cost as it compensates the external cost of carbon tax.

Innovation of Production Techniques and Products:

The introduction of the carbon tax has proved the world to be carbon constrained and the strategies maker have accepted the fact that world wants to be free from greenhouse gases. As a result, they have started planning the business model with low carbon economy. Many companies will have an opportunity to develop new services, products and investments that are appropriate for a carbon-constrained world. As companies and populations are forced to adapt to the physical impact of global warming, there will be innovation in the methods of production. They will bring the change in business model to sustain in low carbon economy(Bode & Horstink,2012).

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Implications of Carbon Tax : We must acknowledge the fact that carbon tax has not been implemented worldwide. It has been introduced by some countries of the world. Hence, its introduction in Australia has created positive and negative effects. To begin with, competitiveness of the firms in Australia has been terribly disturbed both at international level and domestic level. There are certain negative and positive effects on the implementation of carbon tax which are as follows:

Negative Implications: Newly introduced carbon tax has many negative implications which make it unfavourable for the Australian Economy.

Loss of international market: As we know that certain countries have not step ahead with protection of global world, they have not introduced the carbon tax. As a result, they carry on production activities without paying carbon tax. This will lead their production to be cheaper than the production of countries paying carbon tax. Hence, this will put the international competiveness of the Australian exporter in a big trouble. .Australian exports will be negatively affected (Looi, Hong & Muthukumara,2010) . For instance, for mining companies, electricity consumption accounted for about 5% of a companys total operating cost five years ago. With an increase of 25% a year since, this cost increased to about 12% and, in the future, this is expected to rise to between 15% and 20% of the operational costs. Hence, with the introduction of carbon tax, it increases the operational cost due rise in the electricity prices (Odendaal, 2011).Hence, their cost of production will be more than mining companies in a country without carbon tax.

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This will create disadvantageous situation and will take away their competitive edge for international competition

Cost of Production: As we know that carbon tax is an additional payment towards the legal compliance. Moreover, the manufactures buying the raw materials will be paying the carbon tax on their inputs .Hence, such tax will form a part of the cost of production. Thus, at the end of the day such cost will be passed on to the consumers. As a result, prices of the goods will be increased. This will affect the purchasing power of the people .However; government has decided to recompense the family with certain threshold income which is counter action to subsidise the effect of inflation. (Williamson, 2012)

Relocation of Production Activities : Due to introduction of the carbon tax, many organisations have decided to move their production activity offshore. This will help them to save money on carbon tax and to keep their production cost at minimum level. In this way, they will try to gain the competitive advantage (Baranzini, Goldemberg & Stefan Speck ,2000). This sounds to be relocating the entire production facilities from Australia to any other country which is free from carbon tax. This step is to get away with carbon tax and to remain the competitive at both domestic and international market. We can find many companies started closing down their factories as soon as they came to know the introduction of carbon tax (King, 2012). However, this is not possible for the industries which rely on the natural resources of Australia. For example, coal mining industries cannot carry on their mining activities as they are highly dependent on coal mines of Australia.

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Unemployment of the people: Australia has been enjoying a fairly low unemployment rate in recent years and the introduction of carbon tax argue will be an additional tax burden on the economy which would result in employment losses in many sectors. It is true that the trade exposed sectors are likely to contract more relative to non-trading sectors in response to the carbon tax and substantial employment losses may occur in those sectors (Siriwardana, Meng & McNeill,2011).The reason for this is firms initiation to relocate the operational activity from onshore to offshore. It will impact the Australian economy tremendously. However, the tax collected will be invested in non-carbon intensive industries which will create jobs.

Upsurge in Reliance on Imports: As we can see that carbon tax is not implemented worldwide, it has created the panic for the domestic industries of the country in which it has been implemented. As many manufactures of Australia have decided to stop the production activities and start the importing of the finished product from the economies where carbon tax is not levied. They believe that it is better to import the product rather than carrying on the production activities as it is being to be cost effective. Consequently, this results an increase in imports of the nation. In addition, people will prefer to buy the imported products as it being cheaper than domestic products. This will disrupt the market for the domestic products and they will not be able to withstand the competition from the imported products as they are free from the carbon tax.

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Positive Implications: In the short run, carbon tax may be regarded as burden on the society as well on the economy of the country. In long run, I believe that it will create positive results.

Implementation of Energy Efficient Appliances: To begin with, the manufactures of the goods will always try to be competitive. To be competitive, they will try to reduce the cost. To reduce the cost, they need to reduce the carbon tax payment. As a result, the companies will carry on the research on developing the energy efficient machinery which produces less greenhouse gas emissions .This is not considered by the companies to be dead investment but a productive investment .Consequently, they will try to install the energy efficient appliances which produces least emissions. Mexico is the 15th largest emitter in the world of greenhouse gases .Thus, introducing energy efficient appliances is advantageous (Boyd &Ibarraran,2002).We can significantly mark that in Mexico, most of the industries are using high efficiency burner in production activities so that emissions can be reduced (Sheinbaum & Masera,2000).In long run ,using such kind of energy efficient machines, manufactures will advantage themselves with least cost of production and will gain competitive advantage. Reduction of Dependence on fossil fuel: The carbon tax is reducing dependence of the manufactures on fossil fuels in long run. As we all know that it is not possible for us to stop using the fossil fuel. Every production activities are carried on with the usage of fossil fuels which are depleting and contributing the increase of the greenhouse gases. When payment is involved for emitting carbon, the producers will try to reduce the emissions and will implement environment friendly technique.

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Consequently, many electricity generating company are switching to renewable source of energy for generation of electricity like windmills.

Carbon Tax is a Social Cost:

Social Cost is an external cost of damaging the environment by the emissions of greenhouse gases in environment .In a particular case of electricity producers use more or less carbon intensive technologies and then sell the electricity generated to consumers. When they produced more and more electricity, there is an external cost which cannot be measured accurately. Such unmeasurable cost is a social cost. Till now, such social cost was bear by the residents of the economy before the introduction of carbon tax(Clarke,2011). But with the introduction of carbon tax; such cost will be beared by the manufactures. Hence, it will impact the competitiveness of the firm as higher the social cost, higher the tax. Consequently, manufactures will make an attempt to reduce the social cost and will advantage the society as a whole.

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Conclusion: From the above discussion on carbon tax and its impact on strategies of firms and its positive and negative effects, I conclude that it is a complex issue with no clear answer. Coin has both the sides and carbon tax is not an exception. We noticed that the firms have accepted to larger extent that carbon tax is a long life story and it is good to adapt it by bringing change in strategies. Moreover, advantages and disadvantages of the carbon tax have been used to understand its impact on the firm at national level and international level. To summarise, I agree that Carbon Tax has more negative effects than positive effects for the firms in Australia as we can see that carbon tax is not free from defects. Policy makers need to be well aware about the probable effects of environmental policies such as carbon tax.

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References: Baranzini.A., Goldemberg.J.& Speck.S.,2000, A future for carbon taxes, Ecological Economics, Volume, P. 395412. Retrieved from: http://www.sciencedirect.com.ezproxy.ballarat.edu.au/science/article/pii/S092180099900122 6 Bode. J. & Horstink.M.,2012, How do companies do business in a carbon constrained world? Investment decisions and bottom line, Ernst & Young. Retrieved from: http://www.ey.com/Publication/vwLUAssets/How_do_companies_do_business_in_a_carbon -constrained_world/$FILE/EY_Economics_of_Carbon_Singles.pdf Boyd.R. &Ibarraran.M.,2002, Costs of compliance with the Kyoto Protocol: a developing country perspective, Energy Economics,Volume 24, Issue 1, January 2002, pp.2139. Retrieved from: http://www.sciencedirect.com.ezproxy.ballarat.edu.au/science/article/pii/S014098830100080 9 Clarke.H.,2011,Some Basic Economics of Carbon Taxes, Australian Economic Review; Jun2011, Vol. 44 Issue 2, p123-136.Retrieved from: http://web.ebscohost.com.ezproxy.ballarat.edu.au/ehost/detail?sid=60f85f08-7c7a-46bb91f2ea254c24b02b%40sessionmgr111&vid=3&hid=108&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ %3d%3d#db=buh&AN=60910761 King.M., 2012, The carbon tax explained, Big Pond. Retrieved from: http://www.bigpondmoney.com.au/the-carbon-tax-at-a-glance Looi.K.,Hong.M.& Muthukumar.M.,2010,The Effects of Domestic Climate Change Measures on International Competitiveness, World Economy; Jun2010, Vol. 33 Issue 6, p820-829. Retrieved from: http://web.ebscohost.com.ezproxy.ballarat.edu.au/ehost/detail?sid=954f4e57-ca1a-4611b2b885681c9c1e22%40sessionmgr112&vid=1&hid=108&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ %3d%3d#db=buh&AN=51126980 Mahoney.D.,Trigg.M.,Griffin. & Putsay.M.,2001,International Business A managerial perspective (2nd ed),Pearson Education Australia, Frenchs Forest, NSW.

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Odendaal.N.,2011,Carbon tax will have a huge impact on mining operations, Mining Weekly Online, Creamer Media Pty Ltd, Australia. Retrieved from: http://www.miningweekly.com/article/carbon-tax-will-impact-the-mining-sector-2011-12-09 Sheinbaum.C., & Masera.O.,2000, MITIGATING CARBON EMISSIONS WHILE ADVANCING NATIONAL DEVELOPMENT PRIORITIES: THE CASE OF MEXICO,CLIMATIC CHANGE,Volume 47, Number 3 ,pp.259-282. Retrieved from: http://www.springerlink.com.ezproxy.ballarat.edu.au/content/rg626p09105668p3/ Siriwardana.M., Meng.S. & McNeill.J.,2011, The Impact of a Carbon Tax on the Australian Economy: Results from a CGE Model, School of Business, Economics and Public Policy Faculty of the Professions, University of New England, Armidale. Retrieved from: http://www.une.edu.au/business-school/working-papers/economics/econwp11-2.pdf Williamson.B.,2012,The Carbon Tax cometh: Will you be compensated? ,ABC. Retrieved from: http://www.abc.net.au/local/stories/2012/05/16/3503909.htm

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