Building owners in Australia need to be aware of five key considerations emerging from the Clean Energy draft legislative package (“Clean Energy Bill”) released by the Government.
Who is liable under the scheme?
Entities who have operational control of a facility that emits carbon above a specified threshold will be liable.
- Facility - liability is typically imposed on direct emissions from “facilities”. This concept reflects the position under the National Greenhouse and Energy Reporting Scheme (NGERS).
- Operational control - the entity with “operational control” (this concept also follows NGERS concepts) of a facility will have scheme liability. However, in a departure from the NGERS framework, liability remains with the entity with operational control of the facility (and does not fall to the top Australian holding company in the group, as it does under the NGERS framework).
- Threshold - only facilities with emissions above 25,000 tonnes of Carbon dioxide or equivalent (CO2-e) will be liable. Most office buildings will not reach this threshold. Also, in most cases there are no group aggregation thresholds under the Clean Energy Bill. For example, a corporation with two facilities emitting 20,000 tonnes of CO2-e each will not attract liability under the scheme.
Risks for building owners
Direct exposure for building owners is unlikely, particularly in light of there being no aggregation of emissions from separate facilities in most cases.
The main exposure for building owners is likely to be through increased costs, particularly through increases in the following:
- electricity and energy supply costs;
- costs of services generally (eg cleaning costs, maintenance costs), with an estimated one-off 0.7% CPI spike in 2012-13; and
- construction costs for new buildings.
Opportunities for building owners
Building owners can capitalise on the market changes brought about by the scheme by investigating the following strategies:
- Investment strategies - review existing strategies and previously marginal energy efficiency projects and focus on new technological opportunities.
- Strengthen relationships - build on existing tenant and supplier relationships.
Impact on outgoings recoveries from tenants
Legislative assistance to enable building owners to pass through increased costs to tenants is unlikely.
Despite buildings not easily falling within the scheme, now is a good time to ensure leases enable recovery of any increased costs through outgoings recovery clauses. As the scheme is not strictly a “tax” building owners should not assume that any increased costs will be automatically recoverable.
Under existing leases, increased costs recovery is likely to be determined on an individual basis, depending on the particular provisions of the lease.
New leases should allow for increased costs recovery by:
- deeming carbon permit (called an “Eligible Emissions Unit” under the Clean Energy Bill) costs and the costs of any abatement activities undertaken by building owners as recoverable outgoings (as it is arguable these costs are a capital or non-recurring expense);
- properly drafted outgoings recovery clauses;
- appropriate market rent and CPI reviews.
Building owners should anticipate that thresholds may reduce over time (and group aggregation principles may change) and so building owners may subsequently be directly liable under the scheme.
Existing long term fixed price contracts should be reviewed to determine if any increased costs incurred due to the scheme may be recouped. If not, these contracts may need renegotiation. No legislative assistance is expected.
These key considerations are relevant as at the date of the release of the Clean Energy Bill. The draft legislation may change and we will revisit these issues after the bill has passed through Parliament, which the Government has committed to achieving by 30 November 2011.