In brief

What has happened?

The Australian government proposes to repeal the existing ‘Carbon Tax’ and implement a new system called ‘Direct Action’. A policy White Paper and draft legislation were recently released.

Who needs to know?

Businesses working with carbon abatement projects or with material greenhouse gas emissions exposure.

Opportunities

Your business may be able to be paid for emissions reductions, or otherwise take advantage of the system (for example aggregating and trading in units).

Things we should do now

Carbon abatement businesses should consider the White Paper and draft legislation and make submissions if any concerns.

Businesses with material greenhouse gas emissions exposure should:

  • Consider the implications for their contractual arrangements if the Carbon Tax is repealed and Direct Action implemented, and
  • Consider if they are likely to be caught by the proposed ‘safeguard’ mechanism, proposed to apply to facilities with direct emissions over 100,000 tonnes Carbon Dioxide equivalent (CO2e) per annum.

Who needs to know?

These development are relevant for businesses in Australia that:

  • Are interested to work with carbon abatement projects selling to the government, or
  • Have material greenhouse gas emissions exposure.

Draft carbon legislation and White Paper released

The Australian government proposes to repeal the existing ‘Carbon Tax’ and implement a new system called ‘Direct Action’. Direct Action will feature an ‘Emissions Reduction Fund’ (ERF) under which the Government would pay for domestic carbon ‘abatement’ (sometimes also called ‘offsets’ or ‘emissions reductions’).

On 9 May 2014 draft legislation to implement the ERF was released.1 This follows the 24 April 2014 release of an White Paper, setting final design, implementation and ongoing development of the ERF.2

How the ERF carbon abatement purchasing process will work

The ERF has three key elements:

  • Crediting carbon abatement,
  • Purchasing carbon abatement, and
  • Safeguarding carbon abatement.

Crediting

Carbon abatement will be verified and credited according to approved methods under the existing Carbon Farming Initiative (CFI) system. The CFI will be amended by the draft legislation to allow greater flexibility and for more types of carbon abatement to participate.

Carbon abatement will be recognised by the issue of Australian Carbon Credit Units (ACCUs).

Purchasing

The government will conduct auctions to purchase carbon abatement at the lowest cost. These auctions are proposed to start in the second half of 2014 and run quarterly. A benchmark price will be set for each auction, above which bids will not be considered.

The government will enter standard form contracts with successful bidders, to purchase ‘carbon abatement units’, being ACCUs or other ‘eligible carbon units’ that may be prescribed. The abatement may only be delivered and payments made in the future.

Safeguarding (major emitter baselines)

The government proposes to have a ‘safeguard’ mechanism, intended to ensure there is no significant increase in economy wide emissions.

The safeguard mechanism is not covered by the draft legislation released. Under the White Paper the safeguard mechanism is proposed to:

  • commence from 1 July 2015, with further consultation to occur and legislation will be required,
  • apply to facilities with direct emissions over 100kt CO2e pa,
  • utilise the existing National Greenhouse and Energy Reporting System (NGERS),
  • set a baseline for these facilities at the highest level of reported emissions between 2009/10 and 2013/14, with flexibility to accommodate expansions and new facilities, and
  • have flexible compliance arrangements. The government has stated that its objective is not to raise revenue.

What the draft legislation does

The draft legislation establishes a high level framework for the ERF, but leaves flexibility and further detail to be further set by delegated legislation. In particular the draft legislation provides:

  • For the Commonwealth to enter into ‘carbon abatement contracts’ following a ‘carbon abatement purchasing process’,
  • That these purchasing processes may include (but not be limited to) reverse auctions and tender processes and are intended to purchase carbon abatement at least cost,
  • For further ‘legislative rules’ which may contain additional principles and administrative mechanisms for any ‘carbon abatement purchasing process’, and
  • For extensive related amendments to the current CFI administrative regime.

Next steps

The consultation period on the draft legislation is open until Friday 23 May 2014.

The government expects to introduce the draft legislation into Parliament in the Winter Sittings (between 13 May and 17 July). The ALP and Greens control the Senate until 1 July and would likely stall or reject the ERF legislation if introduced prior to that time.

From 1 July the government will need the support of the various Senate minor parties and independents, including the Palmer United Party, to pass legislation. It looks likely the Carbon Tax repeal legislation will be passed sometime after 1 July, but the final timing is unknown. It is expected the minor parties and independents may prolong the process until possibly September 2014 or later.

It is less certain whether the ERF legislation will be passed, as a number of Senate minor parties and independents, including the Palmer United Party, have indicated support that is perhaps lukewarm at best.

Opportunities

Selling carbon abatement

Some businesses may be able to reduce emissions or otherwise abate carbon and sell the abatement, either directly to the government through the ERF or to abatement aggregators (considered below). Possible eligible carbon abatement types would include:

  • Existing CFI approved methods, including various reforestation methods and agricultural and waste emissions reductions, and
  • New methods. The government is focusing on developing the following methods as a priority:
    • Facility-level methods, for facilities such as power stations, cement and aluminium production facilities, and oil and gas extraction plants,
    • Coal mine gas capture,
    • Transport,
    • Waste,
    • Industrial energy efficiency, and
    • Building energy efficiency.

Other new methods may also be possible. In particular, further government work is being done on soil carbon.

Other dealings in carbon abatement (aggregation, trading etc.)

Some businesses may wish to aggregate and deal in carbon abatement. The White Paper discusses and provides for aggregation.

Things we should do now

Businesses interested to sell or deal in carbon abatement

Carbon abatement businesses should:

  • Consider the ERF White Paper and draft legislation and make submissions if any concerns, and
  • Start working with the government to ensure approval under the CFI if a sooner ERF participation is desired.

Businesses with material greenhouse gas emissions exposure

Businesses with material greenhouse gas emissions exposure should:

  • Consider the implications for their contractual arrangements if the Carbon Tax is repealed and the ERF implemented. This might include for power purchase, gas sale, gas transport, coal sale and related joint venture and O&M agreements. How these contracts handle the repeal will depend on the carbon cost pass through, change of law and impost provisions. A key issue is if the carbon cost pass through is ‘hard wired’ with a set pass through not dependent on there being any actual costs or the Carbon Tax legislation remaining in place, and
  • Consider if they are likely to be caught by the indicated safeguard mechanism (facility emitting over 100kt CO2e pa). If so then continue to consult with the government and prepare for the mechanism.

Major project approval implications

The change in carbon regulation, from the Carbon Tax to Direct Action, could have implications for major project environment and planning assessment and approvals. Project opponents may try to use Court actions to hamper projects, as shown by a recent Queensland example.