On 8 November 2011, the Senate passed the government's
controversial Clean Energy Legislative Package
(Package).
The Package, which consists of 18 bills led by the Clean
Energy Bill 2011, seeks to implement the government's
'Securing a Clean Energy Future Plan' (CEF
Plan).
The CEF Plan seeks to secure a clean energy future through four
key activities:
- a price on carbon in the economy;
- development of renewable energy capacity;
- support for increased energy efficiency; and
- improving the condition of the Australian landscape.
Summary of key principles under the CEF Plan and Package
Carbon price
The carbon price will be fixed for the first three years at $23
per tonne of carbon dioxide equivalent (adjusted in real terms by
2.5% per annum). During this fixed price period, the carbon price
will operate like a carbon tax and permits will be sold by the
government at the fixed price in whatever quantity is required.
From 1 July 2015, the system will switch to a flexible price
mechanism. During the flexible price period, the price will be set
by the market with reference to the demand for and supply of carbon
permits. This mechanism proposes a framework for setting a cap on
greenhouse emissions by capping the number of carbon permits
available after July 2015, although this cap may be adjusted over
time to ensure that the reduction targets are met.
Emissions target reduction
Under the CEF Plan, the Australian government has committed to
reduce greenhouse gas emissions by 5% from 2000 levels by 2020 and
has increased its long term emissions reduction target to reduce
emissions by 80% (compared with 2000 levels) by 2050.
Liable entities
Around 500 of Australia's largest polluters will be liable to
buy and surrender a carbon permit for every tonne of carbon
pollution produced.
The facility threshold for carbon permit liability has been set
at 25,000 tonnes of certain Scope 1 carbon dioxide equivalent
emissions. Generally, the controlling
corporation with 'operational
control' over the facility will be the liable entity
for that facility. The operator may be able to transfer liability
for emissions from that facility to another person (eg another
member of the corporate group) by applying for a 'liability
transfer certificate'. It is expected that operators will look to
transfer liability to entities that are in the best position to
manage liability, reduce emissions and/or meet obligations.
This means that generally only those companies that are required
to report their greenhouse gas emissions and energy usage under the
National Greenhouse and Energy Reporting System
(NGERS) in 'covered sectors' will be liable to
purchase and surrender permits. Covered sectors include: stationary
energy; waste; rail; domestic aviation and shipping; industrial
processes; fugitive emissions; and from July 2014, heavy on-road
vehicles.
Allocation and surrender of
permits
The system will be based on the allocation and surrender of
carbon permits with each permit representing one tonne of
greenhouse gas emissions. This means that businesses will either
purchase or be allocated permits and will be required to surrender
a certain number of permits each year to fulfil their emissions
obligations.
Demand for permits will be established by the Climate Change
Authority, which will set the forward reduction targets (and hence
scarcity of the permits released) in a similar operational manner
to the RBA and interest rates. Caps will be announced five years in
advance, starting from 31 May 2014.
If emissions obligations are not met through the surrender of
eligible emissions permits, the liable entity will be required to
pay an emissions charge equal to 1.3 times the fixed price for
permits during the fixed price period discussed below, and double
the average price of permits for the relevant compliance year
during the flexible price period.
Purchasing permits to meet carbon
obligations
Liable entities will be able to purchase permits from the
government at the fixed price during the fixed price period
(2012-2015) to meet their emissions liability. Once purchased, the
fixed price permits will automatically be surrendered and cannot be
traded or banked for future use. Permits allocated as part of a
transitional assistance package are also not able to be banked but
can be sold back to the government at their issue price. Up to 5%
of annual emissions can be met from eligible permits purchased
under the Carbon Farming Initiative (CFI) (note:
CFI credits are bankable). This creates strong domestic demand for
CFI credits.
Once the system transitions to the flexible price period, the
government will issue permits according to a decreasing cap set by
Australian emission reduction targets. These permits can be banked
indefinitely, and there will be no limit on the amount of eligible
CFI credits that can be used to meet emission obligations.
Businesses can meet up to half of their annual liability through
the purchase of international credits.
Greenhouse gases included / excluded sectors and
treatment of transport fuels
The carbon scheme will cover four of the six Kyoto Protocol
gases. These include carbon dioxide (CO2), methane (CH4), nitrous
oxide (N2O) and perfluorocarbon (PFC) gases. Hydrofluorocarbons
(HFCs) and sulphur hexafluoride (SF6) will face an equivalent
carbon price to be applied through existing synthetic greenhouse
gas legislation.
The agricultural and land sectors will be excluded from the
carbon price, with no requirement for farmers to pay for pollution
from livestock or fertiliser use. Transport fuels will have some
exposure contingent on use.
The carbon price will be applied to transport fuels such as
those used in domestic aviation and shipping; rail transport;
off-road transport use of liquid and gaseous fuels; non-transport
use of liquid and gaseous fuels; and from 2014, heavy on-road
liquid fuel use. However the carbon price will not be applied to
fuel used by households for transport; light on-road commercial
vehicles; off-road fuel use by the agriculture, forestry and
fishing industries; gaseous fuels used for on-road transport;
ethanol, biodiesel and renewable diesel; and transport fuels when
used as lubricants and solvents.
Relationship between the CEF Plan and the NGER
Act
The NGER Act underpins the CEF Plan by providing emissions data
on which to base reporting obligations. The registering and
reporting obligations are placed on a 'controlling corporation'
(generally the corporation at the top of the corporate hierarchy
and one that satisfies the definition of 'constitutional
corporation') and are based on two thresholds; namely, facility and
corporate thresholds.
Registered corporations are required to report all greenhouse
gas emissions, energy production and energy consumption from
facilities under the operational control of the corporation or a
member of its 'Group', which may include subsidiaries, joint
ventures and partnerships. A person will have operational control
if they have authority to introduce and implement any or all of the
operating, health and safety and environmental policies for that
facility. Only one corporation can have operational control over a
facility at any time.
What should be done now?
The Package outlines a number of implications for businesses; we
recommend you consider them carefully.
The development of a carbon management plan is critical to the
ability of your business to understand its carbon footprint and
develop effective systems to safeguard against increased costs and
generate new income streams.
A properly formulated plan should enable your business to:
- understand its carbon exposure;
- reduce costs;
- use carbon to leverage and increase revenue streams; and
- develop new revenue streams.
Cornwall Stodart can assist you in developing and implementing a
carbon management plan that:
- identifies potential carbon exposure;
- reviews existing contracts to determine which costs can be
passed on to customers;
- helps you identify the key considerations in preparing carbon
costs pass through clauses in new contracts;
- investigates options to reduce costs such as capital
upgrades;
- identifies available government funding;
- ensures that greenhouse gas reporting mechanisms are
operational;
- ensures that disclosure obligations are met; and
- ensures that you do not engage in price gauging, which may
attract the attention of the ACCC.
Author: Jane O'Brien, Cornwall Stodart