In brief

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

Key details

  • The carbon price: The price will be fixed for the first three years, starting at $23/t on 1 July 2012, and after 1 July 2015, the price will be set by the market under an emissions trading scheme (ETS). A ‘price floor’ ($15) and ‘price ceiling’ ($20 above the expected international price at 1 July 2015) will apply in the first three years of the ETS.
  • Reduction target: At least 5% by 2020 and 80% by 2050. 
  • Coverage: Power stations, waste, industrial processes, fugitive emissions, natural gas retailers and some transport fuels (under changes to the fuel tax regime).
  • Liable entities: 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. 
  • Joint ventures: 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.
  • Offsets: During the fixed price period, a limited amount of Carbon Farming Initiative (CFI) credits can be surrendered by liable entities (5% of total liability), but no international units. During the ETS period, an unlimited number of CFI credits, and a limited number of accepted international units (50% of total liability), can be surrendered.
  • Emissions-intensive, trade-exposed assistance: At the same levels as proposed by the 2010 CPRS. 
  • Coal power assistance: $5.5 billion over six years, a tender process to close 2000MW of coal-fired power, and short term loans.
  • Other business assistance: $1.3 billion for coal mines, $300m for the steel industry, and other assistance.
  • Renewable energy: Significant new funding programs and arrangements including $10 billion Clean Energy Finance Corporation and $3.2 billion Australian Renewable Energy Agency. 
  • Land based measures: $1.7 billion to support agricultural carbon and biodiversity programs.  

What happens next?

Draft legislation will be released 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 carbon price will commence on 1 July 2012.

What should we do now?

  • 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. 
  • Ensure that greenhouse and energy information gathering and reporting is optimal.
  • Ensure that disclosure obligations are met. Consider what you need to tell the market and your stakeholders about how you will be impacted. 
  • Consider any regulatory restrictions and plan for economic and access regulator discussion.
  • Consider the implications for your financing. 
  • Consider the use of offsets to reduce your financial exposure to the carbon price.
  • Investigate options to reduce emissions and to improve efficiency.
  • Identify whether government funding is available.
  • Make sure marketing is not misleading or deceptive.
  • Review operational approvals in respect of carbon issues.
  • Consider the industrial relations issues if staff will be affected.
  • Consider lobbying.

Freehills will provide further industry specific summaries (see our Mining summary1) and will hold seminars focusing on what you should do now. We will send you details of these seminars shortly.

Introduction

This article provides further detail on:

  • how the carbon price will work
  • carbon price assistance that will be made available
  • renewable energy and clean technology initiatives
  • land sector measures
  • what happens next, and
  • our recommendations for what you should do now.

The government has provided details of its carbon price proposal at its Clean Energy Future website.2 

How will the carbon price work?

What is the price?

Fixed price

The carbon price will be fixed in the first three financial years from 1 July 2012 at:

  • $23 per tonne of carbon dioxide equivalent (CO2e) in 2012–13
  • $24.15/t in 2013–14, and 
  • $25.40/t in 2014–15.

These increases are approximately 5% per annum, being a 2.5% real term rise assuming 2.5%pa inflation.

Permits can be purchased from the government at the fixed price in whatever number is required.

Flexible price/ETS

The carbon price will be set by the market from 1 July 2015 under a ‘cap and trade’ emissions trading scheme (ETS). The total number of permits released will align with the emissions reduction target (see below). Some permits will be auctioned by the government, some will be allocated free as part of the proposed industry assistance packages, and some offset credits can be used (see below).

During the first three years of the ETS there will be:

  • a price ‘floor’ of $15 in 2015-16, and
  • a price ‘ceiling’, to be set by 31 May 2014 at $20 above the expected international carbon price at 1 July 2015.

Both the ‘floor’ and the ‘ceiling’ will increase each year (at 4% and 5% in real terms respectively) before being reviewed in 2017.

Emissions reduction target

The emissions reduction targets, against year 2000 emission levels, are:

  • ‘at least’ 5% by 2020. The 2010 CPRS had some flexibility, but the likely target was 5% by 2020. The 10 July 2011 announcement suggests that greater cuts may be possible under the new carbon price proposal, and
  • 80% by 2050. Previously the 2050 target was 60%. This increase is in-line with the recently announced UK 2050 target.

The caps for the first five years of the ETS (2015-2016 to 2019-20) will be set by the government by 31 May 2014. Then the caps will be extended each year so as to provide certainty for the next five years of caps.

A new independent Climate Change Authority will make recommendations to the government on a range of matters, including recommendations for the caps. The government will make the final decision, subject to parliamentary scrutiny.

Who will pay the carbon price directly?

The following entities will need to surrender permits:

  1. Entities with operational control of facilities where annual emissions exceed 25kt CO2e pa (excluding emissions from transport fuels and some synthetic greenhouse gases). The facilities and emissions covered by the carbon price will include (for example):
    1. Stationary energy (power stations).
    2. Waste (a lower threshold will apply for certain landfill facilities).
    3. Industrial processes.
    4. Fugitive emissions, for example from natural gas fields, coal mines and gas pipelines.

Placing liability with the entity which has operational control, rather than its controlling corporation, is a key change from the 2010 CPRS.

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

  1. Another member of its corporate group.
  2. A person outside of its corporate group that has financial control over the facility.
  3. 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.

  1. Natural gas retailers for the emissions embodied in fuel they supply to customers.

Restricting ‘upstream’ liability to natural gas retailers is also a key change from the 2010 CPRS which had extended liability to a range of other ‘upstream’ suppliers including ‘upstream’ suppliers of transport fuels. Transport fuels are now deal with separately (see below). These entities need to report on these emissions through the National Greenhouse and Energy Reporting System.

The following emissions are not covered by the carbon price mechanism:

  • Emissions from farming and from other land-based emissions activities (including forestry) covered by the Carbon Farming Initiative (CFI).
  • Emissions of hydrofluorocarbons and sulphur hexafluoride, which will instead face an equivalent carbon price applied through existing synthetic greenhouse gas legislation.
  • Emissions from use of transport fuels (see below).  

Transport fuels

Transport fuels will not be subject to the carbon price mechanism itself. However, amendments will be made to the fuel tax/excise/credits regime so that an equivalent carbon price will be applied under that regime to:

  • Off-road business use—other than agriculture, forestry and fishing—including transport-related and non-transport-related uses (for example, in diesel power generation). Mining will face this cost increase. 
  • Heavy on-road vehicles (>4.5t) from 2014–15. 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 shipping.
  • Non-transport gaseous fuels (LPG, LNG and CNG).

Other transport fuel use will be unaffected, including:

  • Household and light (<4.5t) on-road business use.
  • Off-road agriculture, forestry and fishing use.
  • On-road transport gaseous fuels (LPG, LNG and CNG).
  • Renewable fuels such as ethanol, biodiesel and renewable diesel.  

Carbon cost pass through

Only an estimated 500 entities will directly pay the carbon price. However, businesses will look to pass through these costs wherever they can. Consequently carbon costs will be indirectly spread through the economy. The extent to which cost pass through will be commercially allowed will depend on the contracts and any regulatory restrictions (such as utility access regimes) in place.

Carbon-cost pass-through is considered further below in terms of how you should review and seek to amend your contracts.

Offsets and international linking Liable entities will be able to surrender offset credits as follows:

  1. Fixed price period:
    1. 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 CFI.3

This means offset credits are an option for liable entities to manage their carbon price liability.

Tax

There will be a specific tax regime introduced in respect of carbon permits.  For more information, please see the Tax Brief entitled “Carbon Pricing Mechanism” on the Greenwoods & Freehills website (www.gf.com.au)4.

Assistance and new spending measures summary

As part of the 10 July 2011 announcement the government committed to a number of assistance and new spending measures. A summary of all of these measures is included at the end of this article. Key measures include:

  • ‘Emissions-intensive, trade-exposed’ (EITE) assistance at the same levels proposed under the CPRS (meaning only a limited number of activities will qualify).
  • A $1.2 billion Clean Technology Program to help improve energy efficiency in manufacturing industries and support research and development in low pollution technologies.
  • $1.37 billion funding for the coal mining sector, to compensate the high fugitive emission ‘gassy’ coal mines and help the industry implement carbon abatement technologies. 
  • $300 million funding for the steel industry.
  • $5.5 billion compensation over six years for the coal-fired electricity sector (dependent on generators adopting clean energy investment plans to reduce their emissions) and a government tender process to close around 2000 megawatts of high-polluting coal-fired power generation by 2020. The government will also provide short-term loans to generators to help finance purchases of carbon permits.
  • $10 billion Clean Energy Finance Corporation. A new independent body to drive innovation through commercial investments in clean energy, through loans, loan guarantees and equity investments.
  • $3.2 billion Australian Renewable Energy Agency. A new independent statutory body created to coordinate existing grant funding programs supporting research, development and demonstration of new renewable energy technologies. 
  • $1.7 billion to support agricultural carbon and biodiversity programs.

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
  • the Coal Sector Jobs Package and Coal Mining Abatement Technology Support Package, and 
  • the 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 we do now?

The carbon price details raise a number of legal issues which we recommend that Australian businesses carefully consider. The key issues for you 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 contracts against the announced carbon price details, especially for the supply of carbon intensive commodities such as electricity, coal and gas.
  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 any regulatory restrictions and plan for economic and access regulator discussion. For several industries the ability to pass through carbon costs will be regulated and potentially restrained by access regimes. These situations should be reviewed and discussed with the relevant economic and access regulators if appropriate. 
  5. Consider the implications for financing. If you are a borrower then you should consider the impacts on your loans and how should you deal with your financiers. If you are a financier you should consider the impacts for your customers, how will they deal with them and how you want to deal with them.
  6. 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 diversify and hedge carbon price liability. The CFI may provide the opportunity for trial preparation prior to the carbon price commencing. 
  7. 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.
  8. Identify whether government funding is available. As mentioned, the government has proposed a number of funding measures to assist business with the carbon price’s impacts. 
  9. Make sure marketing is not misleading or deceptive. Any claims that you make in respect of green or carbon marketing should be reassessed in light of the announced carbon price details.
  10. 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.
  11. Consider the industrial relations issues if staff will be affected. 
  12. Consider lobbying. Many businesses are already looking to influence the government and other key players on the final design of the carbon price. A key opportunity will be to comment on the draft legislation when it is released.

Freehills will provide further industry specific summaries (see our Mining summary5) and hold seminars focusing on what we should do now. We will send you details of these seminars shortly.

Assistance and new spending measures detail

Carbon price assistance

The government has proposed the following programs to assist with carbon price impacts:

Click here to view the table.

* The Coal Sector Jobs Package, Coal Mining Abatement Technology Support Package and Steel Transformation Plan 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 government intends to legislate for the Steel Transformation Plan, and so it will need the support of either the Greens and the key Independents or the Coalition. 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.

Renewable energy and clean technology initiatives

The government has proposed the following programs to support renewable energy and clean technologies.

Click here to view the table.

Land sector measures

The government has proposed the following land sector measures.

Click here to view the table.