In our previous Alert, we canvassed the repeal of Labor’s Carbon Pricing Mechanism (“CPM”), which was a key plank of the Coalition’s previous election campaign. This article examines the Coalition Government’s alternative carbon policy, “Direct Action”, and some of its likely impacts on Australian businesses.

What is Direct Action?

At the broadest level, Direct Action is framed around the Emissions Reduction Fund (“ERF”). The ERF would be used by the government to purchase carbon abatement via a “reverse auction” system. Hon Greg Hunt, in his recent role as Shadow Minister for Climate Action, Environment and Heritage, called the mechanism a “carbon buyback” – similar to the existing buy-back structure in the water market.

The key elements of Direct Action include both a carrot and stick approach, as outlined below.

The Carrot - Abatement Auctions

The Coalition proposes to invite businesses, through an auction process, to tender for projects that will reduce carbon dioxide emissions. The scheme will use the existing National Greenhouse Energy Reporting (“NGER”) scheme as the key reporting system for carbon emissions.

Direct Action will also retain the existing Carbon Farming Initiative (“CFI”). This will enable abatement action to be accredited through a similar process to the existing framework; however the CFI will be expanded to include a wider range of emissions reduction methodologies, such as energy efficiency activities.

Abatement methodologies will be approved by the Clean Energy Regulator, (which is the existing regulator under the CPM).

The Stick – Penalties For Failing The “Business As Usual” Test

Penalties will be imposed on businesses whose level of carbon intensity is higher than their “business as usual”, or “baseline” levels. The Coalition has not yet provided detail on how a business’s baseline will be determined. Carbon intensity may be calculated by reference to the amount of carbon pollution per unit of output or per value of output. It is unclear whether a baseline would be set, for example, on the basis of an industry sector, a business or even an individual facility.

Detail on the measure of penalties is also yet to be released. The Coalition has indicated that penalties will be calculated on a sliding scale “at levels commensurate with the size of the business and the extent to which they exceed their ‘business as usual’ levels”.

Businesses continuing to operate at “business as usual” levels of carbon intensity will not be penalised.

Renewable Energy Target

Separately the Coalition has indicated that it remains committed to the Renewable Energy Target (“RET”) of 20% by 2020. However, the RET is scheduled for review in 2014, which may allow the government to make changes to the existing scheme.

What impact will Direct Action have on business?

Impact on Emissions-Intensive Business

Under the existing CPM, there are approximately 350 “liable entities” – the largest emitters of greenhouse gas – who would be most directly affected under Direct Action.

Emissions-intensive industries will also need to consider whether they wish to invest in emissions abatement and offset projects. Such projects will require businesses to develop new compliance systems, and to understand the nature of any ongoing compliance costs.

Impact On Supply Chain

Many businesses have established complex contractual arrangements under the CPM, which will need to be reviewed under Direct Action. The following issues may arise in relation to many of these contracts:

  • Is the carbon price already incorporated into the contract price? If so, does the contract contain a mechanism for unwinding this price?
  • Does the contract contain a change of law clause which covers the repeal of the CPM?
  • Who should be liable to pay any penalties imposed under Direct Action? Does the contract enable these to be passed through?
  • Who should be entitled to receive the benefit of any abatement credits?
  • Who bears the risk that project credit will not flow?
  • Are there carbon credit purchase agreements? Will any existing credit be transferred to the new system?

Risk Of Penalties

Businesses should also consider their potential exposure to penalties under the “business as usual” system. While it might seem that very few businesses would be affected by penalties under the scheme, the lived experience may be different. For example, data from the Bureau of Resources and Energy economics indicates that overall falls in energy intensity mask increases in the mining sector, as expanded exploration and deeper/lower grade mines increase energy usage demands.

Impact on offset projects

Offset project developers may wish to take advantage of opportunities offered by the abatement auctions. However, the demand for carbon abatement faces uncertainty under Direct Action, as this demand is likely to come largely from the government. The Coalition has capped its ERF commitment at $3.2 billion, and has indicated that this amount will not be increased even if this means that the scheme fails to meet its target of a 5% reduction in greenhouse emissions by 2020.

The Return of the Voluntary Market?

Not only will carbon emitters no longer face a federal carbon price, they are also free of the plethora of state-based carbon schemes that were repealed to make way for the federal scheme.

Companies relatively free of regulatory constraints may feel an intensification of public pressure to run a “low carbon” business. We may see higher uptake of voluntary carbon reduction schemes such as the National Carbon Offset Standard in place of mandatory requirements.