In brief

The government has released its carbon pricing details and has the numbers to pass the necessary legislation through parliament.

The carbon price will be fixed in the first three years, starting at $23/t on 1 July 2012, and will then be set by the market from 1 July 2015 under an emissions trading scheme (ETS) with a ‘price floor’ ($15) and ‘price ceiling’ ($20 above the expected international price at 1 July 2015) to apply in the first three years of the ETS.

Key issues for the mining industry

  1. Emissions-intensive, trade-exposed (EITE) assistance for mining is limited. The proposal is largely the same as for the previous CPRS
  2. Coal mine assistance is limited, again it is largely the same as for the previous CPRS.
  3. There are limitations on the use of international permits.
  4. International competitiveness issues.
  5. Mining companies will pay an ‘effective’ carbon price on fuel, for transport and non-transport purposes (including diesel power generation).
  6. The liable entity will be the entity with operational control of a facility, not the controlling corporation of that operator. The liable entity can transfer its liability in certain circumstances. 
  7. Joint venture participants will have flexibility to determine the way to treat liability. Liability can either be held by the operator or by the joint venture participants in proportion to their interests.
  8. The carbon price is proposed to be introduced at the same time as the Minerals Resource Rent Tax (MRRT).

What happens next?

Draft legislation will be released on 31 July 2011, with the opportunity to comment. The government will introduce the legislation in to parliament later in 2011, probably September/October. The carbon price will commence on 1 July 2012.

What should the mining industry do now?

  1. Review the impacts on your business and how your contracts deal with it. Your contracts are crucial for how carbon prices are passed through to you by your suppliers and how you can pass them onto your customers. 
  2. Ensure that greenhouse and energy information gathering and reporting is optimal.
  3. Ensure that disclosure obligations are met. Consider what you need to tell the market and your stakeholders about how you will be impacted. 
  4. Consider the implications for your financing. 
  5. Consider the use of offsets to reduce your financial exposure to the carbon price.
  6. Investigate options to reduce emissions and to improve efficiency.
  7. Identify whether government funding is available.
  8. Consider the industrial relations issues if staff will be affected.
  9. Review operational approvals in respect of carbon issues.
  10. Consider lobbying.

Freehills will hold seminars focusing on what you should do now. We will send you details of these seminars shortly.

Key issues for the mining industry

The carbon price details outlined are similar to recent announcements, industry expectations and the Carbon Pollution Reduction Scheme proposed in 2010 (CPRS).

This article focuses on the key issues for the mining industry. For a more detailed summary of the carbon price details, click on our article ‘Carbon price: what do we do now?’1 which addresses matters including the price, emissions reduction target, renewable energy initiatives and land sector measures.

A copy of the government’s carbon price proposal can be found at its Clean Energy Future website.2

Emissions-intensive, trade-exposed (EITE) assistance is limited

As expected, the proposed EITE assistance is limited, largely in line with the CPRS proposal and less than industry had sought. Key CPRS details will be applied, including the same assistance levels (with the ‘global recession buffer’, thresholds and annual decline). Activity assessments and definitions already undertaken remain valid.

A total of $9.2 billion will be committed over the ‘forward estimates’ (2011/12 to 2014/2015) at the following rates:

  • 94.5% for high EITE activities.
  • 66% for moderate EITE activities.

This assistance will reduce by 1.3%pa.

Under these arrangements only some mineral refining activities would receive EITE assistance. Many mining activities are likely to receive no EITE assistance, for example hematite iron ore. Whether gold and magnetite iron ore would receive assistance is still to be concluded. Coal mines would not receive EITE assistance, instead they would be eligible for the coal mine specific assistance considered below.

The Productivity Commission will review the program in 2014–15 and thereafter at regular intervals. Free permit allocations are guaranteed for the first five years, with at least three years notice of any changes.

Coal mine assistance is limited

The coal industry, already in the cross-hairs for the proposed MRRT will be heavily affected with the assistance proposed for coal mines similar to that proposed under the CPRS and less than industry had sought. Due to the variability in coal mine emissions profiles the government has proposed not to give coal mines EITE assistance, but instead to give assistance targeted to the most ‘gassy’ mines.

The government has proposed the following assistance programs:

Click here to view the table.

These programs have not yet been approved by the Greens and the key independents. They will be funded from revenue generated outside the regime announced on 10 July 2011. The government will make available the Coal Sector Jobs Package by a general budget allocation (to which the Greens and the key Independents have previously committed) rather than by legislation. The Greens have stated they will not necessarily oppose these matters, but have not yet had sufficient time to assess the detail and may support them.

Offsets and international linking

There will be limitations on the number of offset credits that can be used, especially international credits. Liable entities will be able to surrender offset credits as follows:

  1. Fixed price period:
    1. Carbon Farming Initiative (CFI) Kyoto-compliant credits – up to 5% of a liable entity’s obligation.
    2. International units – not permitted.
  2. ETS period:
    1. CFI Kyoto-compliant credits – unlimited.
    2. Accepted international units – up to 50% of a liable entity’s obligation until 2020, then reviewed.

See our earlier article for more information on the CFI3.

This means offset credits are an option for mining companies to manage their carbon price liability. However, it also means a significant restriction on the ability to use international permits, which are likely to be more cost effective (especially where companies operating in Australia also have international operations that could qualify for credits).

International competitiveness

Various industry groups including the Minerals Council of Australia and the Australian Coal Association have been vocal in their opposition to the carbon price proposal. In particular, they claim that the proposed industry assistance measures are insufficient in the absence of a global agreement or the imposition of equivalent costs by Australia’s key competitors. There have been arguments for either full or significantly increased EITE assistance and the full exemption of coal mine fugitive emissions. The limitation on international permits is also of concern.

The government has proposed various other industry assistance packages which may be available to the mining industry, including a $1.2 billion Clean Technology Program.

Mining will pay a transport fuel carbon price

The mining industry will pay an ‘effective’ carbon price on transport fuel, by way of a reduction in the fuel tax credit equivalent to the carbon price (approximately 6-7c/L diesel). The level of the reduction will be reviewed regularly in line with the carbon price to ensure an ‘effective’ carbon price is paid. This will include transport fuel used for both transport and non-transport purposes (including diesel power generation).

The government also intends to reduce the fuel tax credit for heavy on-road transport, but only from 2014–15 rather than from the commencement of the carbon price in 2012–13. This has not yet been agreed to by the Greens and key independents and the government will need to secure support for its passage.

Rail, domestic aviation and domestic marine transport will also be subject to an ‘effective’ carbon price. Aviation fuels do not receive fuel tax credits, so the domestic aviation fuel excise will be increased by an amount equivalent to the carbon price. We would expect domestic aviation carriers, including those servicing the fly-in/fly-work workforces, to pass these costs directly onto consumers.

Rail and domestic marine transport receive a fuel tax credit, which will be reduced equivalent to the carbon price. International aviation and shipping will not pay a carbon price.

By contrast, agriculture, forestry and fishery off-road fuel use will not have a fuel tax credit reduction.

Households and on-road business use of light vehicles (<4.5t) currently pay the full rate of excise and receive no fuel credit. That position will not be affected under the carbon price, no additional price will be imposed, they will continue to pay the full rate of fuel excise.

Biofuels will not pay a carbon price.

Liable entities and joint ventures

The government has proposed that liability would rest with the entity with operational control of a facility, rather than its controlling corporation. This is a key change from the CPRS.

The operator of a facility will be able to apply for a liability transfer certificate to transfer liability to:

  • Another member of its corporate group.
  • A person outside of its corporate group that has financial control over the facility.
  • Unincorporated joint venture participants in proportion to their interest in the facility where the facility is operated for the unincorporated joint venture.

If a facility is operated by an unincorporated joint venture and no one person has operational control over the facility, the emissions liability will be allocated between the joint venture participants in proportion to their interest in the facility.

These joint venture provisions are also key changes from the CPRS. They will provide flexibility for joint venture participants to determine the way to treat the emissions liability.

Mining tax update

In addition to the carbon price proposal, the government continues to progress the Minerals Resource Rent Tax (MRRT).

The MRRT will also commence on 1 July 2012 and apply to iron ore and coal mining projects. A first exposure draft bill and explanatory memorandum were released on 10 June 2011 and are available on the Department of Treasury and Finance website.4 The deadline for submissions is 14 July 2011.

The exposure draft contains the structure and core provisions of the legislation, but also indicates a number of further parts are still being drafted. A second exposure draft will be released for comment by interested parties later in the year. The legislation is expected to be introduced into parliament in late 2011.

What does it mean?

In our previous mining carbon update5 we considered the following example of the potential annual emissions and costs of a regional medium sized open pit mine, using excavators and trucks for mining, with associated processing. We have included in the table our initial understanding of the treatment of these emissions under the government’s announced details.

Click here to view the table.

The following table shows the annual cost based on the total emissions, at a $23/t CO2e carbon price, and with no, 66% or 94.5% EITE assistance.

Click here to view the table.

The example shows it is reasonable to assume that the exposure for mining companies could be substantial and potentially material.

This treatment would need to be confirmed under the final legislation and applicable contracts. In particular is a simplified application of the EITE assistance percentages.

What happens next?

The government will release draft legislation on 31 July 2011, with the opportunity to comment.

The government will introduce the legislation into parliament later in 2011, probably in September/October. The government intends the carbon price to commence on 1 July 2012.

With the following exceptions, the announced details are all agreed to by the government, the Greens and key Independents Rob Oakeshott and Tony Windsor. The exceptions are the:

  • treatment of heavy on-road transport
  • Coal Sector Jobs Package and Coal Mining Abatement Technology Support Package, and 
  • Steel Transformation Plan.

Independent Andrew Wilkie has also given his support, giving the government the numbers to pass the necessary legislation through both houses of parliament.

What should the mining industry do now?

The carbon price details raise a number of legal issues which we recommend that Australian mining companies carefully consider. The key issues for mining companies to focus on are as follows:

  1. Review the impacts on your business and how your contracts deal with them. Your contracts are crucial for how carbon prices are passed through to you by your suppliers and how you can pass them onto your customers. We have assisted many clients with these issues and have observed a great variety of approaches to carbon-cost pass-through. In particular, we have observed divergent treatment of the pass-through of direct and indirect carbon costs. Also, we have reviewed a number of contracts where the issue of carbon-cost pass-through has not been considered at all or in a suboptimal manner. We recommend a thorough review of all such contracts against the announced carbon price details.
  2. Ensure that greenhouse and energy information gathering and reporting is optimal. Because liability under the regime announced on 10 July 2011 will be determined under the National Greenhouse and Energy Reporting System, it is essential to ensure that the necessary information is gathered and completed appropriately and thoroughly. In particular, it is important to ensure that contracts properly identify and allocate reporting responsibilities and responsibilities for gathering and providing information. The new joint venture proposals should be considered.
  3. Ensure that disclosure obligations are met. Consider what you need to tell the market and your stakeholders about how your business will be impacted. If the regime announced on 10 July 2011 indicates an impact on any of your businesses which has not previously been acknowledged to the market, then the disclosure requirements should be carefully considered. 
  4. Consider the implications for financing. Consider the impacts on your loans and how should you deal with your financiers. 
  5. Consider the use of offsets to reduce your financial exposure to the carbon price. The acceptability of offset credits means that they are an option for liable entities to manage their carbon price liability. They may be a key way to diversify and hedge carbon price liability. The CFI may provide the opportunity for trial preparation prior to the carbon price commencing. 
  6. Investigate options to reduce emissions and improve efficiency. The carbon price will motivate and reward businesses that reduce emissions and improve efficiency. We can assist with your financing and contract requirements for these initiatives.
  7. Identify whether government funding is available. As mentioned, the government has proposed a number of funding measures to assist business with the carbon price impacts. Mining companies may be able to access this funding, especially for energy efficiency, renewable energy, clean technology and land based measures.
  8. Review operational approvals in respect of carbon issues. If you are undergoing project approval processes, or seeking the grant of necessary operational licences, then any carbon offset proposals or negotiations should be reviewed. Previously granted operational approvals should also be reviewed and amendments could be requested. In our view, once a carbon price is legislated then this should be the primary driver of emissions reduction and efficiency improvement decisions, not approval requirements.
  9. Consider the industrial relations issues if staff will be affected.
  10. Consider lobbying. Many businesses are already looking to influence the government and other key players on the final design of the carbon price as well as the MRRT. A key opportunity will be to comment on the draft carbon price legislation when it is released.