With the commencement of the Carbon Price Mechanism (CPM) on 1 July 2012 now less than two months away, the KWM carbon team looks at a number of critical issues to be considered by liable entities and carbon traders.   

Are you liable?

While it may seem obvious, a number of businesses may not fully understand the scope of their liability.  Beyond obvious emission sources, careful consideration should be given to other potential sources of liability.  For example, is there a joint venture arrangement which might include liability for emissions?  Are there tolling or sub-contracting arrangements which may shift the point of liability to another entity?

Preparing for pass-through

Most Australian businesses will experience the CPM indirectly in the form of higher input costs; for example electricity costs or supplies of emissions intensive products.  The first carbon invoices will start arriving soon and early consideration of pass-through issues is likely to benefit both purchasers and suppliers.

Notification of a mandatory designated joint venture

If you are a participant in an unincorporated joint venture and it is not clear who has operational control of a facility (a mandatory designated joint venture) you must notify the Regulator by 31 July 2012.  The notification or application must be accompanied by an application for a participating percentage determination.  Joint venture notification and application forms will be available from the Regulator in mid-May 2012.

Consider whether the entity eligible to apply for free carbon units under the Jobs and Competitiveness Program is the appropriate entity in the corporate group

Under the regulations, the ‘eligible person’ (ie to receive compensation) is the entity with operational control over the facility on 30 June of the previous financial year.  Compensation recipients should consider whether this ‘eligible person’ will be the appropriate group entity going forward.  If an alternative entity would be more appropriate, a transfer to another entity must be completed before 30 June 2012.  This transfer could be effected using the Liability Transfer Certificate or Declared Designated Joint Venture mechanisms.  Application forms for both methods will be available from the Regulator in mid-May 2012.

Do you have obligations under financial services laws? 

If you will have anything to do with eligible international emissions units, Australian carbon credit units (ACCUs) and carbon units (together, Units), you may need to comply with obligations under the Corporations Act, the ASIC Act and the Anti-Money Laundering and Counter-Terrorism Financing Act.  In particular, you should consider whether you will require an Australian financial services (AFS) licence under the Corporations Act to carry on your activity in the carbon market.  Entities that have not yet obtained the AFS licence they need to carry on financial services in relation to Units may be able to carry on these activities under the transitional AFS licensing registration regime which applies from 1 July until 31 December 2012.  The transitional AFS licensing registration regime does not apply in relation to derivatives over or foreign exchange contracts for Units.  All entities carrying on financial services business in respect of the carbon market will need to obtain an AFS licence by 31 December 2012 to continue the activity in 2013 (unless an exemption applies).

Carbon compliance

Company officers can face civil penalties under the CPM for failing to take reasonable steps to prevent a contravention of the scheme.  Liable entities would be well placed to defend such claims by showing established compliance programs and strategies to manage carbon liability.  Implementing these measures early is likely to assist in ensuring compliance, and the availability of the defence, following scheme commencement.