The Carbon Price Mechanism

Who will be liable?

Businesses liable for the Carbon Price will generally be those operating facilities with emissions of not less than 25,000 tonnes of CO2-e per year. Some emissions will be excluded, including emissions from the combustion of certain fuels, agricultural emissions, certain emissions from land and emissions from certain synthetic greenhouse gases. Special provisions apply to landfill operators, natural gas suppliers and large natural gas users.

The Australian Government expects around 500 businesses to be directly liable under the Carbon Price mechanism.

Although many will not be directly liable for the Carbon Price, as consumers of emission-intensive energy and other inputs other businesses are likely to be affected as those who are directly liable for the Carbon Price, pass on their carbon costs.

What will the price on carbon be?

The Carbon Price is imposed by requiring liable businesses to surrender eligible emissions units equivalent to their CO2-e emissions each year. The Carbon Price is the cost incurred to obtain the eligible emissions units for surrender.

The Carbon Price mechanism involves an initial fixed price on carbon, which will then transition to a flexible price, determined by an emissions trading scheme.

Fixed price period

The fixed price period will run for three years, commencing on 1 July 2012. The price of obtaining carbon units from the Regulator will initially be fixed at A$23 per tonne of CO2-e, increasing annually to A$25.40 per tonne of CO2-e for the financial year 2014-15.

Carbon units issued by the Regulator during the fixed price period cannot be traded. Limitations will apply during the fixed price period to businesses surrendering eligible emissions units other than carbon units issued by the Regulator.

Flexible price period

From 1 July 2015, the carbon price mechanism will transition to a flexible price mechanism, based on a cap-and-trade emissions trading scheme.  

The number of carbon units issued by the Regulator, whether by auction or through government assistance programs, will be capped.  

A price ceiling will apply for the first three years of the flexible price period, with the ceiling initially set at A$20 above the expected international price. There will also be a price floor applying for the first three years of the flexible price period which will initially be set at A$15, rising annually.

Unlike fixed price units, carbon units issued by the Regulator in the flexible price period will be able to be traded. Restrictions on surrendering eligible emissions units other than carbon units issued by the Regulator will be relaxed during the flexible price period.

Other Mechanisms for Imposing a Price on Carbon

Emissions from transport fuels comprising liquid petroleum fuels, liquid petroleum gas, liquid natural gas and compressed natural gas are generally excluded from the above Carbon Price mechanism.

However, an equivalent price on carbon will be applied to domestic aviation, domestic shipping, rail transport and off-road use of liquid and gaseous fuels by non-exempt industries through changes in fuel tax credits, fuel excise and customs tariffs.

These changes will apply to businesses whether or not they are directly liable for the Carbon Price. The changes will not affect fuel used by light on-road commercial vehicles, ethanol, biodiesel and renewable diesel and gaseous fuels used for on-road transport. The changes will also not affect heavy on-road vehicles immediately, although the Government has signalled its intention to apply a carbon price on heavy on-road vehicles from 1 July 2014.

Government Assistance

A range of measures designed to provide transitional assistance to support affected businesses have also been announced by the Government.

Job and Competitiveness Program

An $8.6 billion Job and Competitiveness Program will provide assistance to emissions intensive trade exposed (EITE) industries directly liable for the Carbon Price. The Program will provide assistance in the form of free carbon units.

Steel Transformation Plan

A Steel Transformation Plan is intended to encourage investment, innovation and competitiveness in the steel industry. The Plan provides for up to $300m in payments to be made to eligible corporations for eligible activities.

Coal Sector Assistance Packages

A $1.257bn Coal Sector Jobs Package provides transitional assistance to coal mines that have a high fugitive emissions intensity. This will be supported by a Coal Mining Abatement Technology Support Package which will provide a further $70m to support innovative technologies to reduce emissions from coal mines on a co-investment basis.

Coal-Fired Electricity Generation Assistance

Assistance in the form of free carbon units will be available to eligible coal fired electricity generators which have plans for investment in new electrical generation capacity with reduced emissions intensity and investment in research and development in clean energy technology.

Clean Technology Program

The Clean Technology Food and Foundries Investment Program will provide up to $200 million in assistance to the food processing, metal forgery and foundry industries. The Clean Technology Investment Program is a similar program providing up to $800 million in grant funding to manufacturing industry more generally. Assistance is not limited to directly liable businesses, although thresholds will apply and grants will only be made on variable co-investment basis.  

A further $200m is also available under the Clean Technology Innovation Program for research, development and commercialisation of clean technology products, processes and services on a 1:1 co-investment basis.

What to do to be Carbon Price ready

It is important businesses take action now to ensure they are carbon price ready.

Assess liability for the Carbon Price and become familiar with the Carbon Price obligations

While most businesses will not be directly liable for the Carbon Price, that assessment must be made.

If a business determines they will be directly liable for the Carbon Price, it is imperative they understand their Carbon Price liability and associated reporting obligations.

Review and redesign contractual arrangements

Contract management is critical for all businesses, regardless of whether they are directly liable for the Carbon Price.

An early legal review of business’ existing contracts should be undertaken to determine not only whether their suppliers can pass on the costs of the Carbon Price, but also whether they can pass on any carbon costs they incur to their own customers. Contract reviews will enable the identification of any unexpected cost outcomes which may need to be resolved by further agreement.

New contracts should generally seek to pass on costs incurred as a result of the Carbon Price whether that be the costs they incur in complying with their Carbon Price obligations or the increased energy and other costs they incur as those directly liable for the Carbon Price pass on their own carbon costs. Contracts should be drafted in a way that adequately cover carbon costs under both the fixed price period and the later emissions trading scheme.

Carbon price claims

In making any claims or other statements about the impact of carbon costs on prices, whether that be in contract negotiations or more generally, businesses need to bear in mind their obligations under the Australian Consumer Law. It is important any claims and other statements are truthful, accurate, based on reasonable grounds, can be substantiated and are not misleading.  

Determine eligibility for government assistance

Businesses should determine whether they may be eligible for government assistance.

This is particularly important in the manufacturing sector where there are a number of grant programs currently open for applications which are not dependent on a business being directly liable for the Carbon Price.

Consider continuous disclosure obligations

Companies should be mindful that the Carbon Price scheme may have a material impact on the value of their shares and, as a consequence, could trigger an ASX announcement under the company’s continuous disclosure obligations. Section 674 of the Corporations Act 2001 (Cth) and ASX listing rule 3.1 require a listed company to disclose all price sensitive information to the market. Companies that have not already done so should consider the impact of the Carbon Price on their costs, their ability to absorb those costs or pass them onto customers and the extent to which they are eligible for government assistance.