Climate Change and its Effect on the Economy and Corporate Organizations Background of the Firm - Essay Example

CLIMATE CHANGE AND ITS EFFECT ON THE ECONOMY AND CORPORATE ORGANIZATIONS Client Insert Name Client Insert Institution Client Insert Due Date Climate Change and its Effect on the Economy and Corporate Organizations Background of the Firm Climate change is a reality that is very critical to the global economy given the effects that it causes directly to livelihoods and even to resources and investments. It is a topic that a lot has been documented both in print and electronic media about what effects it causes and the obligations that governments around the world have placed on themselves to try and mitigate these challenges (Pinkse & Kolk 2009). This project focuses on the Australian government and the interventions that are in place to fight and mitigate effects of climate change and in particular, the project will focus on the economic effects this causes based on the business performance of Wesfamers Australia Pty Ltd. In order to achieve the self-imposed targets towards curtailing global warming and climate change effects, the Australian government has established different legislations and policies aimed at propagating its initiative towards the globally set standards (Lovins 2014). In this regard, there are two policy frameworks discussed in this project paper and how they influence the economy and business operations within the country. These policies are Carbon Tax Policy and Direct Plan Policy among others. Infrastructurally as has been provided in the foregoing discussion, Wesfarmers still remains the largest private employer in Australia, with more than 200,000 employees across the country. This is well reflected in the profit margins that the company accrued during its vibrant business operation days such as in 2006 fiscal year when it reported a $1.05 billion net profit emanating from a gross operational budget of &8.9 billion in the same year (Thompson 2014). In order to increase its market share and dominance, the company has grown its popularity and profits through acquisitions and mergers which have helped it expand its industry operations and development significantly. For instance, in 2007 during the second quarter, the company purchased the Coles Group for a record price of $22 billion and this became the most successful and largest takeover in the history of Australia (Thompson 2014). Wesfarmers Australia Ltd has over time grown to increase its market share and this has come with a level of diversification and monopolizing of the market. According to Lovins (2014), the company now has many divisions arising from its extensive mergers, acquisitions and business expansion strategies it has recently instituted through its operations and strategies. The following are the key divisions run under the auspice of Wesfarmers Australia Ltd: Coles Division – this division of the company is a nationalistic chain business running supermarkets, liquor store, convenient stores and fuel retailers within the country. According to records, Coles division in 2013 operated 756 supermarkets, over 800 liquor stores, 636 fuel stations and over 90 hotels around the country employing over 100 000 personnel (Thompson 2014). Home and Office Supplies Business Division – in this division runs home improvement products working with homes and commercial businesses around the country. It provides home products through its retailer chain businesses having 210 warehouses, over 60 small flat stores, 36 trade centers, and over 150 office work stores among other businesses employing over 30000 personnel (Thompson 2014). Chemicals, Energy and Fertilizers Business Division – this division referred to as, WesCEF (Wesfarmers Chemicals, Energy and Fertilizers) deals with the business of related production and selling of merchandise in these three areas (Thompson 2014). It has both ammonium nitrate and ammonia production chain businesses in Western Australia and LPG and LNG distribution channels across the whole country employing over 1500 personnel (Thompson 2014). Direct Impact of Climate Change on Wesfamers Australia Pty Ltd Operations and Australia Wesfarmers Australia Ltd is one of Australia's largest public companies and one of Australia's largest retailers. Founded on 27th June 1914 as Westralian Farmers’ Co-operative, the company was originally focused on providing services and agricultural merchandise to Western Australian rural community. The company is headquartered are in Perth, Western Australia. It is the largest private company in Australia employing over 200 000 personnel all over the country and this is reflective also in its profit margins which were announced as being $1.05 billion as of 2006 (Thompson 2014). Its operational budget at the time stood at $8.9 billion and this was the takeover that involved Coles Group (Thompson 2014). The Australian country has established different policies to combat the different challenges associated with climate change one of which is the Carbon Tax Policy introduced by the government on 1st July 2012 lasting for two years before it was repealed in July 2014 (Lovins 2014). According to the policy, organizations and entities emitting more than 25000 tonnes of carbon dioxide equivalent of Greenhouse Gases (GHG) per year require to obtain special permits from government with the exception of those entities within the agricultural and transport sector (Australian Academy of Science 2014). This led to over 185 organizations in 2013 to enlist for payment of the Carbon tax which were either purchased or issued after compliance as an incentive to the industrialization initiatives of the country. This policy being part of the Clean Energy Plan package sought to reduce GHG emissions in Australia by at least 5% below 2000 levels by the year 2020 and below 80% below 2000 levels by the year 2050 (Australian Academy of Science 2014). This ambitious initiative also encouraged largest GHG emitters in Australia to invest in sustainable energy and encourage energy efficiency practices and the policy priced a permit for one tone of carbon emitted at $23 for in the 2013 fiscal year (Department of the Environment 2013). Its impact on the reduction of carbon emissions in the country has been clear and observable where sectors in which the policy was implemented reduced their emission levels by 1.0% (Department of the Environment 2013). Another climate change policy established by the government is the Direct Plan Policy which seeks to cut GHG emission pollution by 5% by 2020 and this is directly linked to what is referred to as the Emissions Reduction Fund (ERF). Under this program, the government gives incentives to companies and organizations willing to voluntarily cut their pollution levels and those that do so for the lowest amount, are given government money as incentive and compensation from the ERF (Stern 2014). Stern (2014) says about this plan, that “In essence, rather than making the polluter pay, it relies on the taxpayer funding the polluter so they will cut their greenhouse pollution, but against levels established in their worst-polluting years” (Stern 2014, p. 37). Value of Output for Wesfarmers Australia Ltd Following the extensive business chains that the company engages in, it has been able to grow its revenue streams extensively being able to manage its resources and facilities flawlessly. Owing to this great market dominance, Wesfarmers Australia Ltd’s revenue from continuing operations is $60181 million and its earnings before tax and amortization from its operations stands at $3972 million (Thompson 2014). Following its business operation in the last fiscal year, the company had a net profit after tax of $2689 million and its earnings per share was $234.6 cents and shareholder’s equity was $25987 million (Thompson 2014). Comparison of the Carbon Tax and the Direct Plan Policies According to policy analysts, Direct Plan Policy taken by the government has been considered passive in comparison with the position taken by Carbon Tax policy which is considered proactive. This means that they are quite different in their approach to dealing with the challenge of climate change and these differences make them unique to each other (Lovins 2008). For instance, ERF of the Direct Plan policy in its current form does not provide an effective and complete GHG pollution strategy that can realize notable changes within the country. This is because it rallies on the voluntary participation of industry players rather than proactively initiating systems and legislations that obligate industry players to engage in positive contribution and innovations towards curtailing climate change challengers. In this regard, the Direct Action Plan policy in the words of Pinkse & Kolk (2015), “has absurdities bordering on low ambitions only serving to lock in policy uncertainties” (Pinkse & Kolk 2015, p. 101). The DAP policy indicates that, “specific provision will be made for new project that will play an integral role in Australia’s economic development” (Stern 2014, p. 35). Owing to this provision, there is the risk that the Australian government could run into the problem of creating major polluting projects when it is already spending a lot of money to address current pollution problems already existent in the family (Pinkse & Kolk 2015). An excerpt from Stern’s article says the following regarding this current Australian policy on cutting down on effects of climate change: The inadequate and short-term thinking behind the DAP, along with its inability to deliver appropriate abatement, ensure that Australian business will continue to hedge against uncertainty, driving up the cost of doing business in Australia. The scheme provides no incentives to other businesses to reduce pollution; indeed, the structure of the system has the perverse impact of incentivising companies to maintain high levels of pollution in order that they can obtain pollution reduction funding in future grant rounds (Stern 2014, p. 32). Forecasted Climate Impacts Occasioned by these two Policies on Wesfarmers Australia Ltd There are different impacts that these policies directly have on the industry within which Wesfarmers Australia Ltd operates in. For instance, in the Chemicals, Energy and Fertilizers division, “the benefit from a full-year of expanded ammonium nitrate capacity is expected to be offset by a planned shutdown of the ammonia plant, a full-year of increased gas input costs and the loss of carbon abatement income” (Pinkse & Kolk 2015, p. 104). The provisions of the policy to provide incentives for corporate volunteering to cut down on their emissions in exchange for industrial financial support is very timely for Wesfarmers Australia Ltd. Being a large company, little initiatives in its industrial production lines could mean little to the company materially in infrastructural development but in terms of incentives from government through the DAP policy, it would be significant and profitable (Department of Climate Change 2014). On the other hand, when the government obligates industry players within the production and manufacturing industry to ensure cutting down on their respective GHG emissions as a matter of law and policy as provided for in the Carbon Tax Policy, this has significant impact on the profit margins of the company. This is so because the company was required to reinvent its production and manufacturing systems so as to ensure that they are well accustomed to and aligned to the regulation. This comes with financial ramifications that could be significantly impact the company on its financial books (Department of Climate Change 2014). Opportunities/Threats for Wesfarmers Ltd Under Climate Change and Policies From the way the government has changed from Carbon Tax Policy to the less conventional and less accepted DAP Policy, Wesfarmers Ltd stands a number chances to benefit from the new policy as regards its business operations. There are a number of opportunities that if well placed in the market, the company can exploit and hence expand its operations. For instance, in order to benefit most from the DAP policy, Wesfarmers Ltd should strive to use new technology to find new sources of renewable energy in the running of its WesCEF business. When the company is able to establish good interventions in this area, it would be better placed to claim even greater incentives from the ERF that can further develop the company’s business (Pinkse & Kolk 2009). Despite these opportunities, Wesfarmers Ltd should also be alive to the fact that there are also threats that are associated with these two policies. The most notable threat is that relating to the necessity of increased costs that may be required in order to keep up with the required carbon emission limits as provided for by these policies. In addition to this, additional costs required in compliance with the carbon tax and all the related permits also have a significant financial implication to the family and this is a considerable threat to the family. Adoption Strategies for Wesfarmers Ltd to comply with the Established Policies In order to be in compliance with these policies, Wesfarmers Ltd needs to make some adjustments to its operations as suggested below: 1. Finding alternative sources of energy for its WesCEF business line – Given that this business leans on natural non-renewable sources of energy such as coal, oil, and gas, Wesfarmers Ltd needs to rethink its model of operation so as to be compliant with both the Carbon Tax Policy and the DAP Policy 2. Market share diversification – this could be achieved through partnering with organizations whose business operations are optimized based on the two policies so as to make Wesfarmers Ltd’s transition to comply with the law 3. Investment in pro-policy resources – the company should also adopt investment policies that allow its reliance on non-renewable energy for its operations to reduce Bibliography Australian Academy of Science. 2014. Climate change: Questions and Answers. [Online] Available: http://www.science.org.au/reports/climatechange2010.pdf. Business and Global Climate Change’, vol. 3, no. 5, pp. 91-106. Department of Climate Change. 2014. "Starting Emissions Trading on 1 July 2014 Policy Summary". Australian Government. [Online] Available http://www.climatechange.gov.au/sites/climatechange/files/files/reducing-carbon/carbon- pricing-policy/cef-policy-summary-moving-ets. Department of the Environment. 2013. ‘Climate change impacts in Australia”. 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