The Government has issued regulations setting out the criteria and procedure for certain fuel users to ‘opt-in’ to the carbon pricing mechanism from 1 July 2013 .
The opt-in scheme allows certain businesses that are currently paying a carbon price through the fuel tax regime to instead elect to pay by acquiring and surrendering units under the carbon pricing mechanism. If your business acquires, manufactures or imports liquid petroleum fuel and is eligible, the cash-flow benefits, flexibility and potentially lower compliance costs of opting-in to the carbon pricing mechanism may be attractive.
In this article, we summarise the eligibility requirements and procedure for opting-in to the carbon pricing mechanism and comment on the pros and cons of doing so. If you are not familiar with the carbon pricing mechanism, you may like to read our general summary first.
Who is entitled to opt-in?
A business will be entitled to opt-in to the carbon pricing mechanism if it:
- may apply to be a designated opt-in person;
- is likely to pass the eligibility test;
- passes the threshold test;
- makes an application in an approved form to the Clean Energy Regulator (CER); and
- the CER issues a declaration that the business is taken to be a designated opt-in person.
We have set out more detail on each of these requirements below.
Also, it is important to note that the scheme only applies to liquid petroleum fuel, which is defined to include petrol, diesel, aviation fuel, and blends of fuel.
Who may apply to be a designated opt-in person?
The CER will only consider applications from persons who meet the following criteria:
- the applicant must not be an individual;
- the applicant must not be a foreign person;
- if the application relates to a GST group, the applicant must be the representative member of the GST group;
- if the application relates to a GST joint venture, the applicant must be the joint venture operator of the GST joint venture; and
- if the application relates to the acquisition, manufacture or import of fuel by the applicant, it was entitled to a fuel tax credit in relation to that fuel or was a member of a GST group entitled to a fuel tax credit.
In general, a business would pass the eligibility test if it is entitled to receive fuel tax credits for an amount of liquid petroleum fuel it acquires, manufactures or imports.
For GST groups and GST joint ventures, a business would pass the eligibility test if it is a member of the group or joint venture at the start of the financial year, the group or joint venture is entitled to receive the fuel tax credit, and the fuel is acquired, manufactured or imported by a member of the group or joint venture (as at the start of the financial year).
A business must pass one of the following two threshold tests –
It is or will be a liable entity under the carbon pricing mechanism in any event
This test will be satisfied where the business had an entry on the Liable Entity Public Information Database at the relevant time.
Alternatively, this test will be satisfied where the business is likely to have operational control over a facility or be a participant in a designated joint venture, or holds a liability transfer certificate for a facility, in circumstances where a relevant threshold triggering liability under the Clean Energy Act 2011 (Cth) is likely to be met.
It uses more than a specified quantity of fuel
This test will be satisfied if the business, the GST group or the GST joint venture (as applicable) used an amount of eligible threshold fuel that embodies potential greenhouse gas emissions of 25,000 tCO2-e or more in either of the past two financial years.
Eligible threshold fuel is fuel that would otherwise be subject to a carbon price. This excludes fuel used in the agriculture, fishing or forestry industries, or used for heavy on-road transport (at least until 2014).
Alternatively, this test will be satisfied if the business can establish that it, the GST group or the GST joint venture is likely to meet or exceed the 25,000 tCO2-e threshold in the relevant financial year.
An application to be a designated opt-in person must be made on or before 31 March of the financial year beforethe financial year in which the declaration is to have effect.
Applications must include information to confirm that the business is entitled to apply and meets the eligibility and threshold tests.
The application form will be placed on the CER’s website early in 2013.
Declaration that the business is taken to be a designated opt-in person
If a business satisfies all of the relevant criteria, the CER must declare that it is taken to be a designated opt-in person.
Although the CER is required to take all reasonable steps to ensure that a decision on an application is made within 90 days, applicants should be aware that this timeframe will be extended if the CER requests further information. Therefore, applications should be lodged sooner rather than later to ensure that the declaration is made before the beginning of the next financial year.
Whilst a declaration has effect, the designated opt-in person will no longer pay the carbon price through reductions in its fuel tax credits but rather will be a liable entity under the carbon pricing mechanism. This means that it will be required to acquire and surrender an eligible emissions unit for each tonne of CO2-e embodied in the ‘opt-in amount’ of liquid petroleum fuel that it (or its GST group/joint venture) acquires, manufactures or imports.
The declaration remains in effect until the business voluntarily opts-out, the CER removes it from the scheme, or the declaration is varied by the CER. A business may be removed from the scheme if it doesn’t comply with its obligations under the scheme or it no longer satisfies the relevant tests (eg the threshold test).
If, after a declaration has been made, a designated opt-in person decides to use part or all of its ‘opt-in’ fuel in a way that would not have attracted a carbon price under the fuel tax regime, it may reduce its liability under the carbon pricing mechanism accordingly.
Designated opt-in persons must provide a report to the CER by 14 July of each financial year (except for the first year). Interestingly, the report does not need to include information confirming that the person will continue to pass the threshold test. Presumably, the CER will monitor that itself based on the business’s reporting under the carbon pricing mechanism and will take action to remove a business from the scheme if it is not satisfied that it will continue to pass the threshold.
The pros and cons of opting-in
Businesses that are already (or will be) required to participate in carbon trading schemes in Australia and other jurisdictions are most likely to be interested in opting-in. As these businesses are likely to have or be developing the know-how and resources dedicated to carbon trading, it is likely to be more efficient for them to manage all of their carbon liabilities under the carbon pricing mechanism.
Another key benefit is flexibility. Opting-in will open the door to a wide variety of compliance options (eg international and domestic offsets) particularly during the flexible price period, potentially lowering compliance costs.
There are also potential cash-flow benefits. Rather than effectively paying the carbon price at the time of receipt of fuel tax credits, liable entities have until 15 February of the following financial year to surrender eligible emissions units (except during the first three years of the carbon pricing mechanism when an interim surrender is required by 15 June of the relevant financial year).
The main disadvantages are the potential risks and administrative costs associated with opting-in. Successful management of carbon liabilities through market trading will require in-house expertise and/or the use of professional advisors and service providers. Also, a designated opt-in person has additional reporting obligations.
Further, businesses that derive a benefit from ‘passing on’ fuel tax credits through contractual arrangements should review whether they would achieve a better financial outcome by receiving full fuel tax credits and opting-in to the carbon pricing mechanism.
With applications due by 31 March 2013, businesses that acquire, manufacture and/or import liquid petroleum fuel have a relatively short period of time to assess their eligibility to opt-in to the carbon pricing scheme and the potential pros and cons of doing so.
The threshold question is whether opting-in to the carbon pricing mechanism is something that the business would be interested in exploring. If so, the next step is to gather information on the amount of liquid petroleum fuel that it acquires, manufactures and/or imports, check eligibility and determine whether the relevant tests would be met. The pros and cons of opting-in to the carbon pricing mechanism should then be assessed in more detail in light of the specific business context.