Why the carbon tax will reduce total cost of risk

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Claims by the Coalition and an Australian insurer last week, who told its brokers that the carbon tax will increase insurance premiums, have been rubbished by an industry expert.

Last week Zurich issued a note which said 95% of all machinery breakdown insurance risks involved air-conditioning and refrigeration plants. Under the carbon price the cost of refrigerant gas would rise significantly at the wholesale level, including R404A gas, which would increase by $75 a kilogram – this would equate to a cost of $18,750 of carbon tax alone for an average supermarket that was restocking the gas.

“Due to these significant increases, we recommend brokers review the adequacy of sums insured with clients and, as with the Zurich Engineering product, ensure their current coverage automatically includes the costs associated with the loss of refrigerant gases,” said the Zurich note.

"This is yet another unpleasant surprise for industry already struggling under difficult economic conditions," added opposition industry spokeswoman Sophie Mirabella.

However, such claims are misleading said Tim Edwards, Australian Refrigeration Association President, who said while machinery breakdown insurance premiums may face some rise in the short-term in response to the high replacement costs of hydrofluorocarbons (HFC) refrigerants, this is only expected to be a short-term transitional impact.

Along with the commencement of the carbon price on 1 July, a carbon equivalent levy took effect on imports of hydrofluorocarbons (HFC), refrigerant gases that are powerful greenhouse gases.

The HFC Levy is intended to increase the costs of HFC refrigerants: as much as two or three times pre-July 2012 cost, depending on the Global Warming Potential (GWP) of particular species of HFC, plus supply chain margins. Price rises announced by wholesalers for a number of other reasons in addition to the HFC levy have seen even larger than anticipated increases in refrigerant costs.

“HFC refrigerant price changes arising from the HFC levy can be expected to result in better maintenance practices,” said Edwards.

“Better maintenance will reduce refrigerant leakage and catastrophic losses and avoid the cost of refrigerant replacement. Better maintenance will also improve the energy efficiency of refrigeration equipment.

“In time the insurance risk will ameliorate. At the same time greater use of natural refrigerants will further reduce the operator’s and the insurance industry's exposure to large cost impacts imposed by the levy.”

Edwards said for the last five years or more the major supermarket retailers and many independents have been taking steps to use carbon dioxide cascade refrigeration systems or self contained hydrocarbon freezer cabinets in all their new stores.

“This has been done both to address the high leakage rates in conventional systems and to avoid the high refrigerant replacement cost of leakage, and also in anticipation of carbon pricing on HFC refrigerants,” said Edwards.

“All other users of refrigerants now have a significant incentive to follow their lead, and to invest in natural refrigerant systems which avoid exposure to the HFC levy.

“International evidence is this regard is available from Denmark and Norway. Their HFC taxes raised the price of HFCs significantly, which stimulated improved maintenance practices, reduced leaks, and encouraged the development and application of natural refrigerants.”

Edwards said it is well understood by large end-users and the Government that refrigerant gas leakage rates can be reduced and the policy intent of the HFC levy is to encourage industry to take greater care with HFC refrigerants.

“There is every chance that improvements will occur over time in maintenance practices, and greater care will be taken by equipment owners to ensure contractors are doing everything possible to protect their now more valuable refrigerant assets,” added Edwards.

More stories:

Major insurer says ‘carbon tax will lift premiums’

Is the carbon tax simply a cost to business to reduce risk?

The carbon tax: insurance against climate change?

  • David Mortimer on 8/08/2012 2:50:54 PM

    Mr Edwards is dreaming.

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