The Carbon Tax and the Residential Building Industry

Carbon Tax Legislation Passed

The Clean Energy Act 2011 was passed by parliament on 8 November 2011 without amendment, meaning the Carbon Tax will now become law in Australia.

The tax will commence on 1 July 2012 at a rate of $23 per tonne of carbon or equivalent (CO2-e), and will be paid by the entities that emit more than 25,000 tonnes of carbon or non-carbon pollution expressed as carbon equivalent (CO2-e).

Builders will not pay the tax directly, however, the industry will still be significantly affected by the tax, through increased costs of materials and energy, which are expected to flow through to the price of homes.

Industry Concerns About the Tax

In the lead up to the passage of the Carbon Tax, HIA has advocated strongly against it on the basis of the negative impacts on the housing sector and limited environmental gains that it can achieve in isolation.

Independent economic modeling conducted by the Centre for International Economics has found that new housing already incurs a taxation burden of well over 40 per cent of its purchase price. As more taxes are placed on the residential building sector, it is Australian families who are invariably disadvantaged. HIA has estimated that the Carbon Tax will add $35 per month to the repayments on an average new home mortgage and $10,000 over the term of the loan.

Additional research conducted for HIA also shows a reduction in housing construction due to the higher costs imposed by the tax in excess of 16,800 homes, which will add to the existing undersupply of housing in Australia.

Yet despite this, new home buyers will actually be unclear as to how the tax relates to the carbon footprint of the building materials and products they select in their new homes, limiting their ability to change behaviour due to price signals from the tax.

Despite these concerns, now that the tax will commence in mid-2012, HIA is determined to assist members who will now be navigating it’s complexities.

Factoring in the Cost of the Carbon Tax

The Carbon Tax will induce uncertainty in the industry, as home builders face the additional challenge of factoring in the impact of the tax as they quote on work or enter into residential building contracts that span over the implementation date.

As more information has become available concerning the details of the tax, HIA has provided analysis as to the potential impact of the tax on the construction of a new home.

Depending on the extent to which cost increases are passed on through the production, manufacturing and fabrication phases and the extent of product substitution and offshore procurement, HIA estimates that the cost increase for an average new house due to the Carbon Tax will be in the range of 0.8% up to 1.7%.

The size of the increase will also depend on the style, size and design of the home, the material specifications and inclusions and site conditions.

The Carbon Tax and Renovation Projects

Similarly to new housing, the cost of inputs in renovation projects is also anticipated to increase due to the Carbon Tax, and will be subject to comparable parameters when considering how to apply these increases.

Price Adjustment Clauses in Building Contracts

Whether a builder can pass increases in materials costs on to the consumer will depend on a number of factors such as the date a contract was signed or whether any clauses in it will accommodate such an increase.

In most states HIA contacts provide for increases related to the imposition of a tax where it takes affect after the contract was signed. A further option that builders may consider is to include a special condition into contracts, which anticipate possible increases in material costs due to the Carbon Tax.

There are a number of limitations with both options, and builders quoting higher prices due to the Carbon tax will be required to demonstrate how the carbon tax actually resulted in the increase.

A member information sheet has been provided for builders who wish to investigate these options further.

The Role of the ACCC

When factoring in the cost of the Carbon Tax on new projects, builders need to be aware that the Australian Competition and Consumer Commission (ACCC) will be monitoring price increases related to the Carbon Tax.

This means that any claims made concerning the Carbon Tax will need to be reasonable and verifiable if required, and as such, the ACCC has developed guidance materials to assist businesses in understanding their responsibilities concerning the tax.

In general, if businesses make a claim about the Carbon Tax and price increases, they need to ensure that it is accurate, does not mislead consumers, is based in reasonable grounds and can be verified – which could include evidence such as invoices from suppliers or modelling undertaken by industry groups such as HIA.

Builders are not constrained from increasing their prices in accordance with the normal variations in the cost of inputs or the prevailing market conditions. However, where a business makes claims concerning the Carbon Tax and its relationship with an increase in prices that cannot be substantiated, then they risk being in breach of the ACCC guidelines. 

Australian Trade & Industry Alliance

Together with a number of associations from other industries, HIA has undertaken a targeted national campaign against the Carbon Tax.

We have combined under the umbrella of the Australian Trade and Industry Alliance, which has conducted an advertising campaign to provide Australians with the facts regarding the Carbon Tax and its impact on Australia’s exporters, businesses and consumers.

Through our advertising and online resources, the Alliance has released details to demonstrate how it is not only the most expensive Carbon Tax in the world, but also despite the economic pain it represents no climate change gain.  

Alliance members believe the Carbon Tax is the wrong climate change policy for Australia. We are all concerned that the tax will reduce business competitiveness, slow economic and employment growth and increase prices while failing to materially cut global emissions.

The Alliance holds the view that Australia should align its approach with that of other nations and ensure that the carbon pricing scheme does not compromise the competitiveness of Australia’s local, export and import competing industries.

However, the parlous state of global the economic environment and the lack of consensus amongst the largest emitting nations on a future approach to climate change, has given Alliance members cause for pessimism as to whether a global agreement will be reached.

These fears now appear to be confirmed, with Climate Change Minister Greg Combet recently acknowledging that the Australian government ‘do not expect there to be a new global agreement emerging from the Durban (UN Climate Change) conference’ in late 2011.

This leaves Australian industry with the prospect of a carbon price and scheme that is well out of step with trading partners and competitors.