In what must rank as a near-record time from media statement to draft legislation, the Australian Government this week released draft bills to accelerate its policy of floating the carbon price. This follows its announcements earlier this month that the current carbon scheme would shift from the current fixed price regime to a floating price on 1 July 2014, one year earlier than planned. While mechanical in parts, the draft legislation includes the first written confirmation on a number of important policy elements

Will the amendments come into law?

With the next Australian election looking increasingly likely to interrupt the Parliamentary timetable, the fate of these amendments (and the current carbon scheme) appears largely dependent on the election outcome. Even if the Government is returned at the next election, the amendments are unlikely to be passed until late 2013.

What does it mean for business?

By bringing forward the start of emissions trading, the proposed amendments allow Australian businesses to access the international carbon markets, which should reduce the carbon cost for 2014/15.

Carbon markets

  • Carbon cap: The Government has asked the independent Climate Change Authority to accelerate its recommendation of Australia's overall carbon cap, ahead of 1 July 2014. Given the complexity of this task, compressing an 18-month process into 6 will be challenging and presumably the recommendation is unlikely to be ready until Q1 2014
  • Price ceiling: The start date for the transitional price ceiling will be brought forward to July 2014 and the ceiling will operate for four years instead of three.
  • Early auctions: Up to 40 million carbon units for the first floating vintage (2014/15) can be auctioned in 2013/14. Presumably these will be auctioned in Q1 2014 or, more likely, in Q2 2014.
  • Limits on Kyoto units: Liable parties will only be able to utilise Kyoto units for 6.25% of their carbon liability in 2014/15. After that, the Kyoto cap will revert to the previously published figure of 12.5%. The 50% general cap on international units is unchanged.

Carbon compensation

  • Coal-fired power sector: In a move only loosely connected with moving to a floating price period, free permit compensation for the coal-fired power sector has been cut, from around 160 million free permits over four years, to around 120 million free permits over three years. The final allocation will occur in 2015/16.
  • EITE: The Government has deferred any decisions about changes to compensation for emissions-intensive, trade exposed entities. In theory accelerating the floating price period should not affect the need for compensation. But if the power sector decisions are any precedent, this is not assured.

Submissions to Government

The Government has invited interested parties to make submissions on the draft legislation by 15 August 2013, which may end up being the middle of the election campaign. Details of the proposals and how to make a submission are available here.

What can you be doing now to prepare?

Although the future of the draft legislation is not entirely certain, corporates with significant carbon exposure should start looking at whether they are adequately protected in key contracts for a move to a flexible price period and, preparing carbon procurement strategies in anticipation of auctions. This may include:

  • reviewing carbon pass through and change in law clauses;
  • contingency planning for auctions and trading in Q1 2014, this may include seeking internal mandates, and developing potential procurement and auction strategies;
  • considering carbon trading and importation approaches; and
  • developing hedging and risk management strategies in this volatile period of change.