Carbon Taxes' Unpredictable Impact on Competitiveness

While the US Government is working on the fine print of a new carbon regulatory system, one thing is clear: we are all going to face a new tax. It's important that business leaders avoid the mistake of thinking this will be a new burden assessed on just a few, like the chemical industry and power utilities. Carbon is ubiquitous — part of every industry, and indeed, every human activity — from pharmaceuticals to farming to family field trips. This tax is inescapable, yet where and how hard it will hit is very hard to predict.

It's unpredictable because of the astonishing variation in both how the rules on upstream businesses will work their way to yours, and in the timing and amount of the tax itself. As of this writing, for example, there are a number of allowances in the Waxman-Markey bill so that electric utilities and other high carbon intensity industries won't have to buy pollution permits in the early years of a new cap and trade system. With a complicated policy patchwork to figure out, the application of this new system will feel quite random — especially to consumers, and to those suppliers who are part of long, complex industry value chains.

In fact, the impact may vary — quite a lot — between you and your competitors in the same industry. The particulars of your technology relative to competitors, the specific suppliers you use — all may make your costs higher or lower than rivals. This makes it essential that you view this new carbon economy not as a set of regulations you need to follow, but as an opportunity to separate yourself from those who don't understand the implications of the new rules as well as you do.

This is about competitiveness, not compliance. Understanding the implications is a strategic imperative. And because the changes are going to be big, the time is now to develop your strategic intent and prepare for a new operational playbook.

Consider the following hypothetical. Starting tomorrow, the government will impose a new set of fees on everything in your company that contains blue. The more blue something is, the higher the fees. Other colors don't require fees. The choices companies made to use blue based on materials, production processes, geographic locations (proximity to blue sources) are now all subject to reevaluation because of the cost of the new government fees.

Some firms' original value proposition has little to do with blue — one makes cobalt-shaded containers, another, robin's egg-blue clothes, still another, indigo-toned cars — but now they find themselves facing the imperative to reevaluate everything they do and how they do it. Is it essential to keep their current systems in place? Are there alternatives? What are competitors doing? As every company asks these and other questions, executives at two firms facing similar options in the same industry may reach very different conclusions.

Let's agree that the rationale for reducing carbon is critically important. But let's also acknowledge the effects on business will produce outcomes that feel arbitrary and unfair.

There are big changes ahead. It will take a while for the new carbon rules to go into effect, and for businesses as well as regulators to figure out their full implications. But the impacts are large enough so that you should use this grace period to assess how the carbon tax will influence your strategy. If you take too long to move, you may get buried.

Article by : Bob Lurie