On 12 October 2011, the federal leader of the Liberal Party of Australia, Tony Abbott, made a “pledge in blood” to repeal the Clean Energy Act 2011 (Cwlth) and related legislation (“Carbon Scheme”). Twelve months later, now in power the Coalition Government has released draft legislation for the repeal of the Carbon Scheme. Coinciding with this release, the Government has also published terms of reference seeking submissions on the operation of its proposed “Emission Reduction Fund”. In this alert we highlight some of the key messages for business arising from the Government’s proposals.

No severed limbs, it’s a surgical extraction

Given the rhetoric of the Coalition prior to the election, one could have expected the new Government to eliminate the entire Carbon Scheme with immediate effect. However, this approach has not been taken.

The repeal bills, if passed, will not bring about an immediate termination of the Carbon Scheme. Rather, the scheme will continue to operate until the end of the current compliance year on 30 June 2014. This means that entities will still be required to meet their compliance obligations in respect of the current compliance year, and the Government will collect all outstanding scheme liabilities, including those due after 30 June 2014 (for example, the permit surrender in February 2015 for the 2013/14 compliance year). In addition, participants will need to comply with financial services laws until 1 July 2014 (these are outlined in our previous alert).

Notably, the Government has preserved large swathes of Carbon Scheme-related legislation, which we expect may be used as part of the Government’s “Direct Action Plan”. For example, the reporting scheme (operating under the National Greenhouse and Energy Reporting Act 2007) (Cwlth) will be amended, but retained; as will the national register for carbon and emission units. The "Carbon Farming Initiative" also survives.

Sinking, not floating

Under the existing legislation, the Carbon Scheme was due to transition to a floating price emissions trading system in July 2015. If the repeal acts pass any time in the next twelve months (as they are expected to, given the make up of the new Senate), this floating price period will never eventuate. Consequently, the international carbon markets will now become much less relevant for domestic compliance purposes.

Quick hands required

The draft legislation includes tough new measures to ensure businesses are quick to pass on any price reductions to consumers. Included as amendments to the Competition and Consumer Act 2010 (Cwlth), the ACCC will be given broad powers to take action on false or misleading claim, as well as price exploitation following the repeal.

What does this mean for business?

The Government will not make transitional arrangements to deal with specific commercial arrangements. Consistent with the approach adopted on introduction of the Carbon Scheme, any renegotiation of commercial contracts will be a matter for the parties involved.

It will be necessary for businesses to carefully consider how any pass-through arrangements deal with a potential repeal. While the draft legislation proposes a complete repeal of the Clean Energy Act 2011 (Cwlth) on 1 July 2014, there will be residual obligations that exist beyond that date (for example, surrender obligations relating to the current compliance year). The specifics of this repeal arrangement must be considered on a case-by-case basis.

The upper hand in the Upper House

As discussed in our previous alert, there remains considerable uncertainty in relation to the passage of these bills through Parliament in the short term. With the Greens and Labour holding power in the Upper House until 30 June 2014, it looks like the Government may have to wait. While they could look for a double-dissolution trigger, we think that particular scenario is unlikely at this stage.

Finally, action on Direct Action

This week, the Government published a terms of reference on the Emission Reduction Fund – the centrepiece of the "Direct Action Plan". Apart from a broad policy framework, few details have previously been released on how the Emissions Reduction Fund will operate (which we discussed in a previous alert). With little clarity on the proposed scheme, the call for submissions is broad.

In terms of timing, submissions are due on 18 November 2013. According to the terms of reference, the Government hopes to release a Green Paper in December 2013, followed by a White Paper and draft legislation by “early 2014”.

As well as the current paucity of policy specifics, it is uncertain whether the new Senate will ultimately pass the Government’s proposed Direct Action legislation. With control of the new Senate likely to be held by a group of minor parties, it will be up to the Coalition to seek their approval on the policy.

In our view, the current round of draft bills and terms of reference is just Round 1 in terms of the re-shaping of carbon policy in Australia. There is still significant uncertainty around the proposed mechanics and political fate of emissions reduction legislation.