As the implementation date for the Carbon Tax passed us by, lost in a sea of asylum seekers and gay marriage, some of us were able to learn a little about carbon pricing and its effects on the construction industry.

Very few, if any, businesses within the property and construction industry are likely to be classified as large emitters. However, the price on carbon will flow through the economy to increase the prices of goods and services that produce emissions, both directly and indirectly. On the supply side, there will be simple increases in costs. On the demand side, there is likely to be reduced investment activity until mitigation techniques are understood and the full price impact of the carbon tax can be measured. It is very much the long term adjustment implications of the carbon price that will be a major concern for the construction industry.

It is estimated that the Australia property sector is indirectly responsible for around 24 percent of Australia’s total greenhouse gas emissions. It is impossible to imagine that the prices paid by this sector for crucial inputs including energy and materials will not rise as suppliers who are large emitters raise their prices to recoup the costs increases they face due to the Carbon Tax.

Different projects – whether residential or commercial – have different mixes of inputs, and will face different cost increases. As an example, the costs to operate a commercial building are expected to increase by around 1.8% on average. For a 25,000 square metre commercial building in Brisbane, costs are expected to rise by $61,961 or $2.48 per square metre.

Below is a list of predicted price increases relevant to the building industry – as you can see those items with high embodied energy like bricks, concrete, steel and aluminium are impacted most;

–     Labour       6.8%
–     Aluminium  4.1%
–     Energy       4.0%
–     Bricks        3.2%
–     Concrete    3.0%
–     Carpet       2.6%
–     Timber      1.5%
–     Paint         1.1%
–     Steel         1.0%
–     Glass        0.9%

Whilst uncertainty exists surrounding the extent of exact price rises, these increases will presumably be passed on to developers and/or clients, developers are somewhat at risk in the interim. The best advice would be to capture the effects of carbon price in their fixed priced tenders and/or flag possible increase in prices of materials. Unfortunately those that have already been locked into long term contracts may have to wear the impact unless they can pass costs onto the client.

The magnitude of the demand side effect for the industry depends on how investment demands respond to the carbon price. Whilst there is a role for the Government to play in minimising exposure of the sector through clarifying enforcement and shielding measures; to do so completely, would require an honest representation of how they see the Carbon Tax impacting our economy….a political minefield that they probably don’t want or need to cross.

Businesses in the construction and property sector need to consider a range of factors in assessing their impacts and have a good understanding of both their direct and indirect emissions profiles. The precise impact for each business will be dependent on factors such as its emissions profile, the effect of Government assistance programs and both up and down stream ability to pass impacts on through the supply chain. Building owners and property managers who successfully increase their energy efficiency and adopt cost effective green technologies are likely to be the most successful in the transition to a Carbon Pricing system.

The economy is not static – over time the economy will adjust and policy settings will change. Absorption of the tax will mean higher costs and lower profits, whilst adaptation will take time and investment; something that is unlikely to happen in the short term. But, as more economies internationally introduce similar pricing mechanisms, Australian industries will be able to compete without shielding, a move that will only further increase the likelihood of assistance levels being reduced.

In short, if as intended, the carbon price starts to take account of the environmental costs of carbon intensive materials like concrete, steel, bricks and aluminium as well as the transport of materials, we can expect to see low-carbon product alternatives gain in cost-competitiveness sooner rather than later.

If you’re wondering what the impact of the carbon price is on the individual, visit  www.yourcarbonprice.com.au/to try out the online calculator.

Information sourced through the Property Council of Australia – courtesty of Allen Consulting Group.