With the Australian Government’s carbon scheme poised to be passed by Parliament this week, we look at some of the key steps that Australian businesses should be taking ahead of the scheme commencement on 1 July 2012.

Carbon compliance

Virtually every Australian business will be affected by the carbon scheme.  Approximately 500 businesses will be directly covered by the scheme and will be required to purchase and surrender carbon permits in relation to their carbon emissions.  For the most part this will be linked to direct (or scope 1) emissions, for example from fossil fuel combustion for power generation or from industrial processes.  However, direct liability will also arise in relation to off-road fuel use and the supply of natural gas.

In addition, most businesses will experience the carbon scheme indirectly, in the form of higher input costs, for example electricity costs or supplies of emissions intensive products.  The impact will depend on a range of factors including market dynamics and terms and conditions in legacy contracts.

In each case, careful monitoring of carbon emissions will be crucial, both in ascertaining the carbon risk and negotiating with suppliers and customers.

Supply chain management

The carbon scheme will cause many Australian businesses to dust off their legacy contracts to check whether carbon costs can be passed through by way of increased prices.  Many of these contracts, particularly older ones, will not contain detailed carbon pass-through clauses.

At the same time, businesses entering into new contracts will be looking to deal with carbon costs, either by way of carbon-inclusive pricing or specific carbon pass-through clauses.  Unfortunately, the complexity of the carbon scheme means that there is not a single “off the shelf” carbon pass-through clause. Each contract will need to be carefully considered in its own context, for example to take account of direct permit costs, possible compensation and other price adjustments such as CPI escalation.


For many businesses, the key issue in the carbon scheme is managing the compensation process to ensure the business receives its full entitlement for compensation.  These businesses fall into two main categories.

First, businesses engaged in emissions intensive, trade exposed sectors may be entitled to receive free permits each year to offset a portion of their carbon liability.  These applications for compensation will need to be prepared, reviewed and submitted ahead of 1 July 2012, and will require close cooperation between technical, commercial and legal experts.

Similarly, a number of businesses in the coal fired electricity sector will be entitled to compensation.  However, this will be a fixed pool of permits and cash, to be allocated on a “once and for all” basis before 1 July 2012.

In each case, the applications should be framed to maximise potential rights to seek judicial review of an adverse decision.


For many businesses, it will be important to consider disclosure obligations, which can arise in a number of ways, including:

  • ASX continuous disclosure rules, which require companies to disclose price sensitive information immediately;
  • businesses holding Australian Financial Services Licences (“AFSL”) are required to notify ASIC of material changes and circumstances (for example impairment of assets);
  • financing covenants may require borrowers to disclose to their lenders the impact of adverse changes such as the carbon scheme; and
  • the preparation and auditing of financial statements will need to take into account the impact of the carbon scheme on both profit and loss and asset valuations.

Australian Financial Services Licences

With carbon units to be regulated as financial products, businesses that engage in active trading of carbon units or associated derivatives will need to vary their AFSL to include carbon units.  In addition many carbon businesses will be caught by the AFSL regime for the first time.

Depending on the exemptions to follow in the regulations, it is likely that businesses buying carbon units solely for compliance purposes will be exempt from the AFSL requirements.  However, the terms of the regulations, and the nature of the trading activities, will need to be carefully monitored.


Companies considering new transactions need to carefully model the potential impact of the carbon scheme.  These could arise in a range of transactions, including initial public offerings, mergers and acquisitions (including both divestments and acquisitions) and major refinancing or new financing.