Australia's Clean Energy Legislative Package: A guide for business by Emmy S

AUSTRALIA’S

CLEAN ENERGY LEGISLATIVE PACKAGE

A GUIDE FOR BUSINESS

NOVEMBER 2011

CMI is Australiaâ&#x20AC;&#x2122;s peak industry body providing leadership and information for businesses and professionals in rapidly evolving carbon markets. As a membership-based not-for-profit organisation, our aim is to assist Australian businesses in meeting the challenges and opportunities associated with the developing national and international carbon markets and thereby build capacity to grow in a low-carbon world. Established with support from the Victorian Government, our Asia-Pacific wide membership represents a broad range of professionals, organisations and industry providers for whom carbon will have a direct impact on their businesses both in terms of liabilities and potential opportunities. To find out more about becoming a member of CMI, email info@carbonmarketinstitute.org

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Australiaâ&#x20AC;&#x2122;s Clean Energy Legislative Package

Contents

CONTENTS Executive Summary

Introduction and overview

1.1 Background and history

1.2 Relationship to other Government Initiatives

1.3 Snapshot of the Scheme during the Fixed and Flexible Price Period

1.4 Targets and caps

Who and what are covered?

2.1 Introduction

2.2 Overview of covered sectors and emissions

2.3 Thresholds for facilities

2.4 Point of obligation

2.5 Treatment of natural gas

2.6 What does this mean for specific industries?

2.7 Business Checklist

Who and what are not covered?

3.1 Overview of non-covered sectors

3.2 Alternative treatment of emissions from transport fuels

3.3 Opt-in for transport fuels

3.4 What does this mean for specific industries - input costs and cost pass through?

What is my legal obligation under the law?

4.1 Determining the extent of liability

4.2 Obligations to report and surrender carbon units

4.3 Penalties for non-compliance

4.4 Preparing for the Scheme

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A guide for business

CONTENTS

Can liability be transferred?

5.1 Transferring liability

5.2 Transfer within a corporate group

5.3 Transfer to an entity with financial control

5.4 Joint venture declarations

How will liable entities meet their obligations under the Scheme?

6.1 Meeting obligations

6.2 Introduction to emission unit types

6.3 Role of carbon units

6.4 What types of carbon units can be used for compliance?

6.5 Eligible international emissions units

6.6 Carbon Farming Initiative ACCUs

6.7 Purchase of carbon units

6.8 Surrender of carbon units

Which industries are given assistance?

7.1 Overview of industry assistance

7.2 Who is eligibile for assistance?

7.3 Who is assistance provided to?

7.4 How is assistance calculated over time?

7.5 When will assistance be provided?

7.6 What can recipients of free permits do with those permits during the Fixed and Flexible Price Periods?

7.7 Assistance Reviews

Australiaâ&#x20AC;&#x2122;s Clean Energy Legislative Package

Contents

CONTENTS

Participating in the market

8.1 Operation of the market

8.2 Preconditions to participation

8.3 Price floor and price ceiling during the transitional period

8.4 International units

8.5 Treatment of carbon units as financial products

Regulatory oversight

9.1 Role of the Australian Climate Change Regulator

9.2 Role of the Climate Change Authority

9.3 Administrative review

9.4 Interactions with competition law and the role of the ACCC

10. What is still to come?

10.1 Regulations

10.2 Additional guidance for certain industry sectors

10.3 Assistance for households

10.4 Transitional support for Business

10.5 New bodies / funds

Appendix 1

Summary of carbon unit types

Appendix 2 Details regarding the Jobs and Competitiveness Program and the Coal-fired Generators Assistance Package

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A guide for business

Glossary of Terms Term

Definition

AAT

Administrative Appeals Tribunal

ACCC

Australian Competition and Consumer Commission

ACCU

Australian Carbon Credit Units issued under the CFI

AFS Licence

Australian Financial Services Licence

ARENA

Australian Renewable Energy Agency

ASIC

Australian Securities and Investment Commission

Authority

Climate Change Authority

CDM

Clean Development Mechanism under the Kyoto Protocol

CDM Registry

The international registry operated by the UNFCCC secretariat on behalf of the CDM Executive Board

CEFC

Clean Energy Finance Corporation

CERs

Certified Emission Reductions

CFI

Carbon Farming Initiative

Clean Energy Act

Clean Energy Act 2011 (Cth)

CO2-e

carbon dioxide equivalent

Corporations Act

Corporations Act 2001 (Cth)

EITE

emissions-intensive trade-exposed

ERUs

Emission Reduction Units

EU ETS

European Union Emissions Trading System

Fixed Price Period

The first three years of the Scheme commencing 1 July 2012

Flexible Price Period

The period of the Scheme commencing 1 July 2015

GHG

greenhouse gas

LGCF

large gas consuming facilities

NGERS

National Greenhouse and Energy Reporting Scheme

NZ ETS

New Zealand Emissions Trading Scheme

OTN

Obligation Transfer Number

Program

Jobs and Competitiveness Program

Registry

Australian National Registry of Emissions Units

Regulator

Clean Energy Regulator

RMUs

Removal Units

Scheme

Carbon Pricing Mechanism established under the Clean Energy Act

UNFCCC

United Nations Framework Convention on Climate Change

Australia’s Clean Energy Legislative Package

Executive summary

EXECUTIVE SUMMARY

The Carbon Price Mechanism (Scheme) and accompanying legislation establishes a carbon price by way of an emissions trading scheme similar to that in Europe and New Zealand designed to provide price signals to incentivise new behaviours and encourage the adoption and consumption of low carbon energy alternatives. The Scheme imposes obligations on industry to reduce greenhouse gas emissions through the surrender of tradeable permits and undertake projects that generate carbon credits. It is not a “carbon tax” which is simply a fixed impost on emissions.

The Key Design Elements of the Scheme »»

The Scheme will start operating on 1 July 2012.

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It is expected to directly apply to approximately 500 of the nation’s biggest polluters (called liable entities) who operate facilities that exceed an emissions threshold of 25,000 t CO2-e.

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Liable entities (which generally control the operation of facilities that pollute more than 25,000 tonnes of greenhouse gas emissions each year) will incur an obligation to purchase and surrender carbon units for each tonne of carbon pollution they emit.

Both businesses and individuals strongly impacted by the Scheme may be compensated by the Government through its assistance packages for emissions-intensive trade-exposed industries, coalfired electricity generators, the steel industry and households.

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The Scheme will transform the business landscape, creating new risks and opportunities which business leaders will need to understand and respond to. Liable entities covered by the Scheme will have new costs which will need to be strategically managed and incorporated into existing business models.

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The degree to which any particular business experiences increases in its cost structure will depend on a number of factors, in particular, the amount of energy it expends in its operations, its exposure to transportation costs and the proportion of its domestic inputs and production compared to its imports.

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A thorough understanding of the relevant implications of the legislation will enable an organisation to develop the most appropriate strategy to respond to the changes. Failing to do this may result in unexpected and undesirable impacts on the financial and market position and performance of an organisation.

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Businesses are more likely to achieve the best outcomes from a national carbon price mechanism if they have a solid understanding of the content of the Scheme and are able to easily navigate their way around the Legislative Package that underpins the Scheme. The more informed businesses are about the Scheme, the better will be their business decisions.

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This Guide is intended to educate businesses on how the Scheme operates and what it will mean for different Scheme participants.

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There is an initial three year fixed price period, where the price of carbon units issued by the Government is fixed, followed by transition to a flexible price cap and fully open emissions trading scheme which includes the use of some international offsets.

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In the flexible price period, the Government will set a “pollution cap” which will limit the number of carbon units that are available to be allocated to liable entities or for liable entities to purchase directly from the Government. Carbon units will be fully tradeable in the flexible price period. Hence, the finite supply will influence the price of carbon units and the volume of trading activity.

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Liable entities may also use certain other eligible units (e.g. from domestic or international offset projects) for compliance under the Scheme. However, limits apply to the use of these units in both the fixed and flexible period.

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Covered sectors include stationary energy, industrial processes, emissions from landfills, and fugitive emissions (generally from coal mining and natural gas extraction).

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Emissions from the agriculture and land sector as well as the combustion of biofuels and biomass are not covered. The transport sector is also not covered; however certain large fuel users will be able to opt-in.

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Businesses that do not operate facilities with emissions that exceed the threshold will not be directly liable under the Scheme but may be indirectly affected by increases to their input costs (e.g.

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electricity, gas and other products that have been produced by liable entities) as a result of the carbon costs of liable entities being passed through the supply chain.

A guide for business

The following diagram summarises the issues for businesses raised in each section of this Guide: Identifying primary liability under the Scheme Sections 2 and 3

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Need to identify any ‘facilities’ of the company as defined under NGERS

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Need to identify who has ‘operational control’ of any facilities of the company

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Need to determine the amount of covered emissions that are released by that facility. If it is greater than 25,000 tonnes of carbon equivalent emissions per year, liabilities will arise under the Scheme

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Note special treatment of natural gas, waste and transport sectors

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If not directly liable, then need to determine if have a secondary liability owing to the increases in electricity and other costs that have been passed through.

Can liability be transferred? Section 5

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Determine whether liability can be transferred within a corporate group

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Determine whether liability can be transferred to an entity with financial control of a facility

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If a joint venture exists - determine whether liability can be shared

Compliance obligations of liable entities Sections 4 and 6

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Need to assess GHG emissions from the facility to determine provisional emissions number and extent of liability

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Need to comply with reporting obligations under NGERS

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Need to determine type of carbon units that may be used for compliance

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Need to determine from where those carbon units can be sourced

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Need to comply with surrender obligations

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Need to assess whether such costs can be passed onto customers

continued on next page

Australia’s Clean Energy Legislative Package

Executive summary

Identifying whether assistance is available Section 7

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Need to assess eligibility for any assistance packages (ie free carbon units) to reduce liability for direct and indirect emissions

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Need to calculate the amount of assistance

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Need to determine what can be done with free permits received to monetise value

Participating in the market Sections 8 and 9

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Need to establish a registry account

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Need to understand administrative procedures to transfer units between registry accounts

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Need to comply with financial licensing requirements (if applicable)

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Need to be aware of, and comply with, compliance obligations

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Need to be aware of avenues for administrative review

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Need to understand how the carbon market works and opportunities to purchase carbon units or invest in carbon units

Identifying any secondary liabilities under the Scheme Sections 3 and 7

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For both companies which are covered by the ETS and those which are not, a business needs to assess to what extent the costs associated with the ETS will be passed on either directly under contracts from the initial liable entity or through an increase in the price of goods and services by adding costs incurred by those producing such goods (such as electricity, fuel, gas)

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Need to assess whether such cost pass throughs are justified and can be passed on by liable entities or to downstream customers either contractually or through market forces

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There is a need to understand whether any incentives are available for your business/industry to reduce emissions

Staying abreast Section 10

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Need to be aware of the regulations yet to be developed

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Need to be aware of potential future changes to the Scheme, for example in relation to the transport sector

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A guide for business

Introduction and overview

1.1

Background and history

1.2

Relationship to other schemes

1.3

Snapshot of the Scheme during the Fixed and Flexible Price Period

1.4

Targets and caps

1.1 Background and history (a) Rationale for a Carbon Pricing Mechanism

Australia has long been engaged in discussions to address climate change. As a hot, dry continent, Australia will be significantly affected by global warming. Temperature increases above two degrees Celsius are predicted to have profound effects upon ecosystems and water resources and increased storm surges and coastal inundation has the potential to damage infrastructure and property, with consequential costs to the economy.

Mechanism

Over the year to June 2011, Australia’s greenhouse gas inventory was approximately 546 Mt CO2-e.1 This represents approximately 1.5% of global GHG emissions. However, on a per capita basis, these emissions are very high. Without action, Australia’s emissions are projected to grow by 2% per annum.

(b) Australia in the International Context Australia was involved in the early negotiations for the United Nations Framework Convention on Climate Change (UNFCCC) in the context of the 1992 Rio Earth Summit and became one of the first countries to sign the UNFCCC. Australia signed the Kyoto Protocol on 29 April 1998 but did not ratify it until 12 December 2007. Under these international agreements, Australia is required to limit its emissions to 108% of 1990 levels during the Kyoto Protocol’s first commitment period (2008-2012) and, at Copenhagen in 2009, pledged to reduce its emissions to 5% below 2000 levels by 2020.

1. DCCEE, Quarterly Update of Australia’s National Greenhouse Gas Inventory June Quarter 2011, available at:http://www.climatechange.gov.au/~/ media/climate-change/emissions/2011-06/NGGI-June-quarter-2011-PDF.pdf

The Australian Government’s carbon pricing mechanism (Scheme) introduces an emissions trading scheme in Australia following policy debates stretching back decades. Both the Keating and early Howard Governments developed national climate change policies and a number of States and Territories have also operated their own carbon trading and energy efficiency policies for a number of years. At a national level, the former Australian Greenhouse Office (AGO) developed early proposals for a national emissions trading scheme (ETS). This was followed by the Multi-State Trading Scheme proposal which emerged in 2005 driven by a number of State Governments, and then the National Emission Trading Scheme proposed by the Howard Government in 2007. Individual State schemes range from the Greenhouse Gas Reduction Scheme in New South Wales and the Australian Capital Territory (which, when introduced in 2003, was one of the earliest greenhouse gas (GHG) emissions trading schemes in the world), to the South Australian Residential Energy Efficiency Scheme introduced in 2009.

(d) Rudd’s Attempts at Implementing a Carbon Pricing Mechanism Both the Labor Party and the Liberal-National Coalition had proposed during the 2007 Federal election campaign to implement emissions trading schemes and the Labor Party set about developing a scheme soon after taking office in November 2007. With climate change such a key election issue during the 2007 Federal election campaign, the Rudd Government moved very quickly after the election to make good on its election promises by ratifying the Kyoto Protocol at COP13 in Bali in December 2007.

Australia’s Clean Energy Legislative Package

The Rudd Government released a Green Paper on 16 July 2008,2 which set out the Government’s initial thinking on the key issues surrounding climate change. It canvassed options on the design of an emissions trading scheme and took into account the outcomes of a broad consultation and input from more than one thousand submissions. The Green Paper reflected key elements of the initial reports from the Garnaut Review, which had been released at the time. The Final Garnaut Review Report was presented to the Government on 30 September 2008. Unsurprisingly, the report argued that, of all developed countries, Australia has the most to lose from climate change inaction and the most to gain from effective global mitigation efforts. It recommended a national ETS to be implemented as early as possible with an emission reduction target of 25% from 2000 levels by 2020 and 90% by 2050. It stated that the cost to Australia’s economy of the Australian contribution proposed for reaching those targets could be as little as 0.1 - 0.2% of annual economic growth to 2020.3 The rationale for an ETS was that it would provide emission reductions and abatement at least cost to business, through the flexibility of access to domestic and international carbon markets. A further White Paper was released on 15 December 2008.4 It set out the Government’s policy in relation to two major elements of its mitigation strategy: a medium term target range for national emissions and the final design of the Carbon Pollution Reduction Scheme (CPRS). According to the White Paper, the CPRS would be the primary mechanism through which Australia would seek to meet its emissions reduction objectives. The Federal Government had initially sought to pass the CPRS Bill before the end of 2009 and to commence the CPRS in Australia on 1 July 2011. While the Government had the majority needed to ensure the passage of the legislation through the House of Representatives, it lacked a majority in the Senate and was dependent upon receiving support from the minor parties or the Opposition. On 13 August 2009, the Opposition joined with all the other non-Labor senators to vote down the CPRS in the Senate. The reason for the Opposition’s stance was that, as it was designed, the CPRS was flawed and it would unnecessarily harm Australian exports, jobs and investment and would simply lead to emissions being exported rather than reduced at the global level. However, Malcolm Turnbull argued that it was better to appear as a co-sponsor of the CPRS with Opposition changes and

2. Department of Climate Change, Carbon Pollution Reduction Scheme: Green Paper, July 2008, available from: http://www.climatechange.gov.au/ greenpaper/report/index.html. 3. The Garnaut Climate Change Review, Synopsis of Key Points http://www.garnautreview.org.au/synopsis.htm 4. Department of Climate Change, Carbon Pollution Reduction Scheme: Australia’s Low Pollution Future: White Paper, Department of Climate Change, 15 December 2008, available from: http://www.climatechange.gov.au/whitepaper/report/index.html.

Introduction and Overview

move on from the climate change debate, than to continue to be painted as climate change sceptics. Thus Turnbull sought to negotiate amendments to the legislation and, until 1 December 2009, there was tentative bipartisan support in Australia for an ETS. On 1 December 2009, Malcolm Turnbull was replaced by Tony Abbott as Opposition Leader after some Liberal MPs revolted against Mr Turnbull’s strong support for an ETS. Tony Abbott immediately abandoned the CPRS deal, dismissing it as “a great big new tax”, allowing him to secure the numbers in the Liberal party room to defeat the CPRS. The CPRS Bill was voted down in the Senate for a second time on 2 December 2009. The Greens, Independent Senator, Nick Xenophon, and Family First Senator, Steve Fielding, joined the Opposition in rejecting the Scheme (although two opposition senators crossed the floor and voted with the Government). The Greens opposed the CPRS because they believed that the CPRS was not ambitious enough, it would pay polluters to keep polluting, that the structure of the legislation would prevent the Target being increased without additional compensation being paid to EITEs and the coal industry, and that the CPRS would lead to an over-allocation of permits. The CPRS legislative package was re-introduced to Parliament in February 2010 and passed the House of Representatives on 11 February 2010, but was delayed in the Senate for a third time. On 27 April 2010, the Prime Minister announced that the Federal Government would delay the implementation of the CPRS until after the end of the first commitment period under the Kyoto Protocol (2008-2012).

(e) The Carbon Pricing Mechanism Under Julia Gillard In mid-2010, Kevin Rudd was replaced as Prime Minister by Julia Gillard who promptly called an election. The Government sought to neutralise climate change as an election issue by focussing its commitments to expand the renewable energy target, to investment in renewables and carbon capture and storage, and to incentivise energy efficiency. These comprised three of the four elements of the Government’s carbon pollution reduction strategy identified in the 2008 White Paper. The Government also focused on promoting and facilitating voluntary abatement through the development of the National Carbon Offset Standard and, in the final days of the election campaign, the Carbon Farming Initiative. Whilst the Labor Party remained of the view that an emissions trading scheme was the most effective means to reduce Australia’s emissions, Ms Gillard stated that there would be no carbon tax if Labor was elected, although did commit to further explore carbon pricing.

A guide for business

The Federal election held on 21 August 2010 was described as Australia’s second election on climate change. It resulted in a hung Parliament and negotiations that followed resulted in the Labor Party forming a minority Government on 14 September 2010 with 72 seats in the House of Representatives and the support of three Independent MPs and one Greens MP. In an agreement with the Greens, the Labor Party agreed to establish a Multi-Party Climate Change Committee (the MPCCC) comprised of experts and representatives of Labor, Greens and Independent Parliamentarians to discuss the possibility of a price on carbon. The MPCCC was tasked to consult, negotiate and report to the Cabinet on agreed options for the implementation of a carbon price in Australia, and to provide advice on, and participate in, building community consensus for action on climate change. The MPCCC was supported by further research undertaken to update the Garnaut Review, and inputs from business and NGO roundtables established by the Government. The MPCCC announced that it had reached a Clean Energy Agreement to reduce carbon pollution, provide opportunities for innovation and investment in clean technologies and reward improved land use management on 10 July 2011. This was followed by the publication of the Government’s Climate Change Plan: Securing a Clean Energy Future, which underpins the design of the Scheme. Although the Opposition remains committed to an unconditional target of reducing emissions by 5% by 2020, it has refused to embrace an ETS or a carbon tax.5 Tony Abbott ran his 2010 election campaign against the ETS on the grounds of increased cost of living and price rises for electricity. Since the election, the Liberal-National Coalition has maintained its opposition to a “go-it-alone carbon tax” (that is, without an enforceable carbon price in China, India and the US)6 and has vowed to repeal the Scheme if elected at the next election.

1.2 Relationship to other Government Initiatives Clean Energy Future Package The Government’s Clean Energy Future package is intended to create incentives to reduce pollution and to invest in clean energy through the creation of a price on carbon. In order to mitigate price impacts on vulnerable communities and businesses, assistance packages have been developed and industry assistance will also be provided to support emissions-intensive, trade exposed industries. The primary Act establishing the Scheme is the Clean Energy Act 2011 (Clean Energy Act). There are 18 other Acts that, together with the Clean Energy Act, set out:

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the overall design and administration of the Scheme;

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targets to reduce GHG emissions;

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the issuance of carbon units that allow liable entities to pollute;

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rules regarding the trading in carbon units both domestically and internationally;

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the application of an equivalent carbon price to fuel use not covered by the Scheme;

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new taxation measures;

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the provision of assistance to businesses affected by the Scheme; and

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the operation of the Australian National Registry of Emissions Units (Registry).

The operation of the Scheme relies on the National Greenhouse and Energy Reporting Scheme (NGERS), which has been operating since 2007. Under NGERS, businesses whose energy use or GHG emissions exceed mandated thresholds are required to report on these activities to the Government. The data provided is to be used as the basis for the calculation of emissions targets and caps under the Scheme.

Relationship with other Schemes The Scheme forms one of three key elements of the Government’s climate change policy package, each of which will create new carbon market opportunities for businesses.

5. http://www.theaustralian.com.au/politics/tony-abbotts-tax-free-carbon-plan/story-e6frgczf-1225806333127 6. http://www.liberal.org.au/Latest-News/2010/09/21/We-are-the-party-of-ideas.aspx

Australia’s Clean Energy Legislative Package

Introduction and Overview

Government’s Climate Change Policy

Equivalent carbon price imposed through accompanying legislation

Carbon Pricing Mechanism (Scheme)

Carbon Farming Initiative (CFI)

National Greenhouse and Energy Reporting Scheme (NGERS)

Clean Energy Finance Corporation

The Scheme is complemented by, and links to, the Carbon Farming Initiative (CFI) passed in August 2011 which establishes a domestic offset scheme for the land sector to commence on 1 January 2012. Under the CFI, project developers and landholders will be able to develop GHG emission reduction activities on land in Australia and have carbon credits and Australian Carbon Credit Units (ACCUs) issued in respect of those activities. If the methodologies used in generating units under the CFI are compliant with the Kyoto Protocol, the units will be able to be used for compliance under the Scheme. If not, they will be able to be used for voluntary compliance. These arrangements provide incentives to landholders to undertake activities that will serve multiple purposes including: reducing GHG emissions, planting carbon sinks, improving soils and biodiversity and providing a financial return to the landholder. Key to the design of the Scheme is the intention for it, coupled with the CFI, to provide greater investment certainty to the Australian business community and those wishing to invest in Australia, both in terms of covered organisations being able to assess (and manage) their carbon liabilities and also developers of off-set projects and low-emission technologies being able to take advantage of market opportunities (and assistance packages). In that context, the third of the key elements of the Government’s climate change policy package is support which the Government will

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Assistance for Clean and Renewable Energy

Australian Renewable Energy Agency

Clean Technology Program

be providing for clean and renewable energy. As part of the Clean Energy Future policy package, of which the Scheme forms a part, the Government will provide assistance, including the following:

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$10 billion for the Clean Energy Finance Corporation, which will invest in the commercialisation and deployment of renewable energy, energy efficiency and low-emission technologies, together with the transformation of existing manufacturing businesses, through commercial and concessional loans, loan guarantees and equity;

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$3.2 billion for the establishment of a new statutory renewable energy body, the Australian Renewable Energy Agency, which will support research and development, demonstration and commercialisation of renewable energy technologies, through competitive grants; and

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$1.2 billion for the Clean Technology Program, which will include matching grants for investment in clean technology innovation, including in relation to agriculture and manufacturing.

Administration of the Scheme is the responsibility of the Clean Energy Regulator (Regulator) which has the same responsibility in relation to the other major Government initiatives such as the CFI, NGERS and the Renewable Energy Target.

A guide for business

1.3 Snapshot of the Scheme during the Fixed and Flexible Price Period The Scheme involves a two stage approach: On 1 July 2012

The Scheme will commence with a price that will be fixed for the first three years (Fixed Price Period). The permit price will start at $23 and rise 2.5% each year. Liable entities will need to work out their emissions number for each financial year and then surrender units equivalent to 75% of that number by 15 June and the remainder by the following 2 February. Units purchased from the Government at the fixed price will be automatically surrendered. Units may also be sourced from the CFI (subject to a 5% limit) and from entities allocated units for free.

On 1 July 2015

The Scheme will move automatically into a fully flexible price under an emissions trading scheme, with the price determined by the market (Flexible Price Period). Liable entities will need to surrender units equivalent to their emissions number by 2 February the year following the financial year in which the emissions occurred. Units may be obtained from a variety of sources, including Government auctions, the CFI, eligible international units (subject to certain quantitative and qualitative restrictions), free allocations and trading.

The Scheme will have broad coverage of emission sources from its commencement, encompassing: stationary energy; industrial processes; fugitive emissions (other than from decommissioned coal mines); and emissions from non-legacy waste.

Agriculture and land sector emissions will not be covered and nor will emissions from the combustion of biofuels and biomass, including carbon dioxide equivalent emissions from combustion of methane from landfill facilities.

An equivalent carbon price will be applied through separate legislation to some business transport emissions, non-transport use of liquid and gaseous fuels, and synthetic GHGs, however certain large fuel users will be able to voluntarily opt-in to the Scheme.

In most sectors, 25,000 tonnes of CO2-e will be set as the threshold for determining whether a facility will be covered by the Scheme.

Australia’s Clean Energy Legislative Package

Introduction and Overview

1.4 Targets and caps (a) How does the Scheme contribute to achieving

(b) What is the role of the Climate Change

Australia’s international emission reduction

Authority in setting pollution caps?

objectives?

The Climate Change Authority (Authority) has been established as an independent body which will provide expert advice to the Government on the setting of the pollution caps, progress in meeting national targets, and the general functioning of the Scheme. When advising the Government on setting the pollution caps under the Scheme, the Authority will consider:

The Scheme is designed to ensure Australia meets its unconditional pollution reduction target of 5% below 2000 levels by 2020, which translates to 160 million tonnes of carbon abatement by 2020. The 2020 target has not been included in the legislation; however a further target that has been set to reduce Australia’s emissions by 80% below 2000 levels by 2050 (previously set at 60%) is included in the legislation. Through the setting of the pollution cap, an overall limit will be placed on the annual GHG emissions from all sources of pollution covered by the Scheme. There will be no limits on individual sectors, entities or facilities. A fixed number of carbon units will be issued by the Government each year in line with the pollution cap, some of which will be sold at auction and others allocated to businesses. Pollution caps will be reduced over time to support Australia’s international emissions reduction objectives. The Scheme includes a mechanism for pollution caps to be set five years in advance through Regulations, so that liable entities will know the number of carbon units that are available and be able to manage their compliance obligations within those limits. The following table depicts the timeline for setting pollution caps. Deadline

Pollution cap announced for financial year beginning:

31 May 2014

2015, 2016, 2017, 2018 and 2019

30 June 2016

2020

30 June 2017

2021

30 June each year onward

Pollution caps will continue annually

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Australia’s international obligations;

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Australia’s medium and long-term targets;

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Australia’s progress in achieving emission reductions;

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global action to reduce GHG emissions;

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economic and social implications associated with various levels of pollution caps;

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the extent of voluntary actions to reduce Australia’s GHG emissions;

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estimates of the number of carbon credits issued under the Scheme; and

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compliance issues arising in relation to the Scheme.

A guide for business

(c) Comparison to other countries Thirty-two countries and over ten US states already have emissions trading schemes in place. These range from comprehensive nationwide schemes (such as the European Union Emissions Trading Scheme (EU ETS)) and the New Zealand Emissions Trading Scheme (NZ ETS)) and mandatory or voluntary schemes that have been introduced at the provincial, state or city level including, most recently, the Californian Emissions Trading Scheme. In addition, a number of countries throughout the Asia-Pacific region, including China and South Korea, are in the process of designing regional and national trading schemes. The introduction of the Scheme brings Australia in line with Europe and New Zealand in setting a clear price for GHG emissions across a number of industrial sectors. Although called a carbon tax, and operating in that way during the fixed price period, the Scheme is at its heart a cap-and-trade emissions trading scheme. In many ways it is more extensive that the EU ETS, as it has wider sectoral coverage and includes the CFI, a mechanism to incentivise abatement in the forestry, land-use and agricultural sectors. This is consistent with the approach adopted in New Zealand, however New Zealand has staggered the application of the NZ ETS to certain sectors and will, in time, apply its scheme directly to agriculture. The decision of the Australian Government to require liable entities to purchase the majority of their permits from the Government (or on the market) rather than freely allocating permits to all liable entities is consistent with the NZ ETS, the US State schemes and the approach being taken by Europe for the third phase of the EU ETS which will commence in 2013. In this way, businesses that were previously allowed to pollute at no cost will have to pay for those emissions by reference to a price that seeks to internalise environmental externalities (i.e. the contribution of unabated GHG emissions to climate change).

The Scheme will indirectly link to the EU ETS and the NZ ETS through the international carbon market. That is, during the flexible price period liable entities in Australia will be able to use eligible international units created from offset projects developed under the Kyoto Protocolâ&#x20AC;&#x2122;s Clean Development Mechanism. These units are also eligible for use in the EU ETS and NZ ETS. Therefore, an Australian company could buy international units from a European liable entity that has excess international units and vice versa, and savvy market participants may be able to take advantage of price differences for units under the different schemes. In time, the Scheme may link directly to other existing and emerging trading schemes through the express recognition of compliance units from those schemes. However, this will be subject to the Australian Government being comfortable that the linked scheme has sufficient levels of environmental and market integrity.

Who and what are covered?

2.1

Introduction

2.2

Overview of covered sectors and emissions

2.3

Thresholds for facilities

2.4

Point of obligation

2.5

Treatment of natural gas

2.6

What does this mean for specific industries?

2.7

A Business Checklist

2.1 Introduction The Scheme is not designed to directly cover all businesses. Instead it covers 60% of Australiaâ&#x20AC;&#x2122;s emissions, excludes agriculture and transport fuels and will impose an obligation on around 500 entities who operate facilities which emit GHGs in excess of 25,0000 tonnes of CO2-e per year and certain waste facilities emitting more than 10,000 tonnes of CO2-e per year. These thresholds have been selected to strike a balance between capturing those large polluters that contribute most to Australiaâ&#x20AC;&#x2122;s GHG emissions, and the time, effort and cost of administering the Scheme for both the Government and smaller businesses. Other businesses may be indirectly affected by the Scheme as the carbon price flows through the Australian economy. However, the extent of exposure to a carbon price will depend upon matters such as the energy or carbon intensity of the particular business (i.e. whether it uses large amounts of electricity, natural gas, fuels or goods produced by entities covered by the Scheme).

A guide for business

Electricity generation Mining Industrial processes Main sectors affected by a carbon price

Manufacturing Waste Transport incl. aviation* Construction

The way in which each of these industries will be affected is set out at section 2.6 below. For any business that operates in Australia and emits GHGs, the Scheme presents a new compliance regime that builds on other areas of environmental control, such as pollution licences. The first question a company must ask is whether it will be covered by the Scheme.

Is a business covered by the Scheme?

Does a facility emit emissions?

Do the emissions exceed the threshold?

Does an exception apply?

Can the liability be shared / transferred?

Australia’s Clean Energy Legislative Package

2.2 Overview of covered sectors and emissions All facilities that emit GHGs above the threshold as a result of particular activities will be covered by the Scheme unless expressly exempted. Exempted sectors are set out in section 3 of this Guide. The Scheme targets emissions from the operation of “facilities” which are activities or series of activities that emit GHGs into the atmosphere within Australia.7 Emissions that satisfy this definition are called scope 1 emissions.8 As noted above, the Scheme is expected to directly apply to approximately 500 of Australia’s biggest polluters. Of the 500 businesses:

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around 60 are primarily involved in electricity generation;

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around 100 are primarily involved in coal or other mining;

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around 40 are natural gas retailers;

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around 60 are primarily involved in industrial processes (cement, chemicals and metal processing);

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around 50 operate in a range of other fossil fuel intensive sectors; and

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the remaining 190 operate in the waste disposal sector.

Who and what are covered?

2.3 Thresholds for facilities Only facilities that release over 25,000 tonnes of CO2-e a year will be liable under the Scheme. Emissions from transport fuels and some synthetic GHGs are excluded from the calculation of a facility’s emissions.

Facility

An activity, or series of activities (including ancillary activities) that involves the production of GHG emissions, the production of energy or the consumption of energy and that forms a single undertaking or enterprise that meets the requirements of the regulations.10

The Scheme applies a lower threshold for certain landfill facilities (see section 2.6(e) below). Facilities that consume large volumes of natural gas (again more than 25,000t CO2-e) will also be covered, however the liability to report on these emissions may sit with a person other than the operator of the facility (e.g. the natural gas supplier). This is explained in further detail in sections 2.4 and 2.5 below.

The Scheme covers four of the six GHGs counted under the Kyoto Protocol - carbon dioxide, methane, nitrous oxide and perfluorocarbons from aluminium production. The remaining GHGs counted under the Kyoto Protocol (hydrofluorocarbons and sulphur hexafluoride) as well as other perfluorocarbon emissions will face an equivalent carbon price through alternative legislation.

7. Section 30(1) of the Clean Energy Act 8. More information on emission scopes can be found at World Resources Institute and World Business Council for Sustainable Development, The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard, http://www.ghgprotocol.org/files/ghgp/public/ghg-protocol-revised.pdf.

9. Section 9 National Greenhouse and Energy Reporting Act 2007.

A guide for business

2.4 Point of obligation Companies involved in more complex arrangements may face difficulties in immediately determining who has liability under the Scheme. For the most part, the entity liable will be the corporation or person with â&#x20AC;&#x153;operational controlâ&#x20AC;? over that facility in a financial year.

Operational Control

A corporation or person has operational control over a facility if it has the authority to introduce and implement operational, environmental and health and safety policies for the facility or is declared by the Regulator to have operational control of the facility.11

(a) Facility owner vs operator / contractor In most circumstances it will be the owner of a facility that has operational control of the facility and, therefore, liability under the Scheme. However, in some instances, the owner might contract out certain activities that are part of the operation of the facility to third parties. Where this is the case, to determine liability it is necessary to evaluate the operational contracts to determine if the activities of the contractor fall within the boundary of the facility, and if so, whether ultimate control of the facility rests with the owner or the contractor. If a contractor / third party operator has operational control of a facility, it will need to comply with the reporting obligations under NGERS and meet the facilityâ&#x20AC;&#x2122;s liability under the Scheme unless it enters into a liability transfer arrangement with the owner of the facility (see section 5 below). The contractor is likely to seek to recover its costs of compliance from the facility owner as an operational cost. The ability to pass through these costs will vary from facility to facility and will depend upon the terms of each contract.

10. Under s. 55 of the National Greenhouse and Energy Reporting Act 2007.

Case study: Third party contractors A mining company appoints a contract miner to undertake mining activity at its coal mine in the Hunter Valley. Whilst the mining company directs the contractor as to the scale of the mining operations and sells the coal produced, the contractor provides equipment, employees and determines the manner in which the mining is carried out. In these circumstances, it may be the case that the contractor, rather than the mining company, has operational control of the facility. In such cases it is also important for the mining contractor to see whether or not, in its contract to operate the mine, it is permitted to pass through the costs of compliance as part of its contracting fee.

Australiaâ&#x20AC;&#x2122;s Clean Energy Legislative Package

(b) Joint ventures In many industries, such as mining and construction, facilities are owned by a number of corporations through joint venture arrangements. Under the legislation, a joint venture is an unincorporated enterprise carried on through a medium other than a partnership. Joint venture arrangements are usually governed by a joint venture agreement between the participants which specifies each participantâ&#x20AC;&#x2122;s contribution to the operational costs of the facility, share of the output and share of any liabilities. With many joint venture agreements, the rights, obligations and liabilities of the participants are several, rather than joint and several. This means that each participant is only liable in proportion to its individual share. The operational control test applies equally to joint ventures. In many instances, one of the joint venture participants will also be the operator of the facility. For example, in the mining industry, often the Australian joint venture partner will be the operator of the mine and other (often international) joint venture participants will only contribute financially to the costs of operations. There may be circumstances where no one joint venture participant will have operational control. If no person is registered as having operational control under NGERS, the Regulator may make a declaration that a particular joint venture participant has operational control. Similarly, for the purposes of attributing liability under the Scheme, if the joint venture participant with operational control does not want to accept full liability to comply with the Scheme, the joint venture participants can apply for a declaration of each participantâ&#x20AC;&#x2122;s percentage share (see section 6 below). This enables liability to be shared between joint venture participants according to their share in the joint venture.

Who and what are covered?

A guide for business

2.5 Treatment of natural gas The point of obligation under the Scheme is treated differently for the natural gas sector. Liability for the supply of natural gas distributed through a supply pipeline is placed on the supplier11 unless such liability is held by “large gas consuming facilities”12 (LGCFs) or an Obligation Transfer Number (OTN) is quoted.13 The OTN mechanism has been designed to allow facilities that consume natural gas to take responsibility for those emissions directly and include them when determining their emissions number, rather than having to pay a natural gas supplier an increased amount to cover the supplier’s carbon costs. LGCFs are those facilities that have, in a financial year after 1 July 2010, combusted natural gas with a CO2-e of 25,000 tonnes or more (unless another amount is prescribed in the regulations).14 LGCFs must quote an OTN to the natural gas supplier if they receive natural gas from a supplier during an eligible financial year for use in the operation of a large gas consuming facility where the natural gas is withdrawn from a natural gas supply pipeline in Australia for the purposes of the use. The legislation provides for a mechanism to avoid double counting of liability in situations where a facility purchases natural gas by an entity other than the facility operator, by ensuring that where an OTN is quoted for natural gas, the liable entity that quotes the OTN has ultimate liability.15

11. Section 33 of the Clean Energy Act 12. Section 20 of the Clean Energy Act 13. Section 35 of the Clean Energy Act 14. Section 55A of the Clean Energy Act 15. Section 35 of the Clean Energy Act

Case study: Obligation Transfer Numbers A small steel manufacturing company, Steel Rods Co., is operated by Steel Pty Limited, which receives natural gas for use at the facility from Natural Gas Co. Natural gas emissions from Steel Rods Co. have never been over 25,000 tonnes of CO2-e in previous financial years. Therefore, Steel Rods Co. is not a large gas consuming facility and does not have to quote an OTN. In 2012-2013, covered emissions from the operation of Steel Pty Limited comprise:

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10,000 tonnes of CO2-e from the use of natural gas; and

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20,000 tonnes of CO2-e from other sources.

Steel Rods Co. has total covered emissions of 30,000 tonnes of CO2-e. Since the facility is over the direct emitters threshold, Steel Rods Co. is liable for emissions from the operation of the facility in 2012-2013. Since Steel Rods Co. did not quote an OTN for natural gas used at the manufacturing facility, it has a total liability of 20,000 tonnes of CO2-e and Natural Gas Co will remain liable for the 10,000 tonnes of CO2-e from the use of natural gas.

Australia’s Clean Energy Legislative Package

Who and what are covered?

2.6 What does this mean for specific industries? As noted above, the main sectors covered by the Scheme are energy generation, mining, industrial processes (e.g. steel manufacturing, aluminium smelting), manufacturing, waste and construction. Below we highlight some of the key considerations for each of these sectors as well as transport and aviation.

The range of different emissions intensities is demonstrated in the below table: Technologies

Fuel type

Estimated emissions-intensity (tonnes of CO2-e generated per megawatt)

Subcritical

Brown coal

0.9.1 - 1.376

Subcritical

Black coal

0.808 - 1.069

Supercritical (air cooled)

Brown coal

0.93

Supercritical (water cooled)

Brown coal

0.99

Supercritical (air cooled)

Black coal

0.88

Supercritical (water cooled)

Black coal

0.84

Oxy combustion

Black

0.093

Combined Cycle Gas Turbines

Natural Gas

0.37

Open Cycle Gas Turbines

Natural Gas

0.62

(a) Energy generation Power stations utilise significant amounts of fossil fuels to generate electricity. The electricity sector alone contributes approximately 35% of Australia’s GHG emissions.16 Many of the power stations that provide base load power for Australia are coal-fired, although increasingly natural gas, which generates less emissions, is being used to provide both peaking capacity as well as some base load capacity. The key driver of the Scheme’s impact on the energy sector in Australia is the encouragement, through a market-based scheme, of the movement over time to lower carbon emitting power generation and the increase in the efficiency of the use of electricity. The primary liability for a power station under the legislation relates to the generation of emissions from the combustion of the coal or gas. The extent of liability will be a function of the amount of fuel combusted and the emissions intensity of the fuel source, as well as power plant design. By way of example, natural gas has a lower emissions intensity than coal, and different types of coal also have different emissions intensities.

*Source: Australian Government Department of Resources, Energy and Tourism, “A Cleaner Future for Power Stations: Interdepartmental Task Group Discussion Paper”, <http://www.ret.gov.au/energy/sustainbility_and_climate _change/domestic_climate_ change/cfps/Pages/a-cleaner-future-for-power-stations.aspx> at page 6.

Some coal-fired electricity generators will be eligible for assistance in the form of an allocation of free permits (see section 7 below). The Government will also seek to initiate a tender process to negotiate the closure of approximately 2000 MW of some of Australia’s most emissions-intensive generation capacity (particularly coal-fired power generation) by 2020. Where a power station is run on natural gas, that facility may quote an OTN to natural gas suppliers in order to pass on liability, as described in section 2.5 in above.

16. DCCEE, Quarterly Update of Australia’s National Greenhouse Gas Inventory June Quarter 2011, available at:http://www.climatechange.gov.au/~/ media/climate-change/emissions/2011-06/NGGI-June-quarter-2011-PDF.pdf

A guide for business

Case study An energy production company, Energy Pty Limited, operates a facility that emits 2,500,000 tonnes of CO2-e from the combustion of coal and 100,000 tonnes of CO2-e from burning natural gas. The total covered emissions from Energy Pty Limited are 2,600,000 tonnes of CO2-e, which is well in excess of the 25,000 tonnes of CO2-e threshold. Therefore, Energy Pty Limited is a liable entity under the Scheme and must buy carbon units for all its emissions. The company may manage its initial liability and future liabilities under the Scheme in a number of ways:

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the company could purchase the entire liability amount from the Regulator - the company will have to purchase 2,600,000 permits;

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the company could implement energy efficiency measures that incur an initial up-front cost but reduce the emissions - for example, energy efficiency measures that reduce emissions by 40,000 tonnes of CO2-e per annum; and/or

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the company could buy permits generated in relation to projects under the CFI - for example 500,000 units purchased at $17 per unit at a cost of $8,500,000 thereby reducing the obligation to purchase permits from the Regulator further.

Examples of energy generation businesses caught under the Scheme

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Macquarie Generation

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Delta Electricity

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Great Energy Alliance Corporation Pty Ltd

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International Power (Australia) Holdings Pty Ltd

(b) Mining The Scheme will have an impact on the mining industry, both through the requirement that mines purchase permits for GHG emissions, and indirectly through increases in electricity and fuel costs and potentially increased costs for planned project development and expansion. Of the top 20 emitters, six are in the mining industry. Mining facilities will be liable for emissions released during the mining process (known as fugitive emissions, particularly in coal mining) as well as from the combustion of fossil fuels used in equipment and on-site vehicles. In particular, emissions from diesel fuel will be captured under the Scheme, which is currently the preferred fuel in many mining activities, including the haulage of ore and mineral exploration. Fugitive emissions from decommissioned underground mines are excluded from the Scheme.17 Fugitive emissions

Emissions of gases or vapors from pressurised equipment due to leaks and various other unintended or irregular releases of gases, mostly from industrial activities.

Mining facilities are large users of electricity. These scope 2 emissions do not count towards a mining company’s liability under the Scheme, but the carbon cost imposed on electricity generators can still be passed through to the mining operation if permitted under an energy supply contract. In certain circumstances, the mining industry may be able to pass through these costs to end-users, depending on the contractual terms of supply and procurement contracts, mining services agreements and commodity sales agreements. Where mining products are exported, it is less likely that the costs will be able to be passed through.

17. Section 5 of the Clean Energy Act

Australia’s Clean Energy Legislative Package

Who and what are covered?

Case study

A company that mines coal called, Mining Australia, emits 120,000 tonnes of CO2-e in fugitive emissions and 80,000 tonnes of CO2-e from the use of diesel in equipment involved in the mining process at its North side mine. In addition, Mining Australia uses 7,000 tonnes of CO2-e in its use of electricity.

Steel & Co operates a steelworks in Southern Victoria. The steelworks have scope 1 emissions of 400,000 t CO2-e from the use of coal and 15,000 from the use of natural gas in its blast furnaces, as well as 10,000 from diesel used in on-site machinery and vehicles. Steelworks also uses the equivalent of 150,000t CO2-e from electricity which will comprise its scope 2 emissions. As are result, it will need to surrender 410,000 carbon units for compliance with the Scheme, unless its quotes an OTN to its natural gas supplier. In that case, it will have to surrender 425,000 carbon units. Steel & Co is likely to face additional costs associated with its electricity supplier passing on its increased costs and may also have increased costs from its natural gas supplier (where an OTN is not quoted).

As Mining Australia’s use of electricity does not count towards its total liability, Mining Australia has 200,000 tonnes of CO2-e in total covered emissions for the North side mine, making Mining Australia a liable entity. Examples of mining businesses caught under the Scheme

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Rio Tinto Limited

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BHP Billiton Limited

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Centennial Coal Company Limited

Examples of steel and aluminium businesses caught under the Scheme

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Anglo American Australia Limited

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OneSteel Limited

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Bluescope Steel Limited

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Queensland Alumina Limited

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BHP Billiton Aluminium Australia Pty Ltd

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Amcor Limited

(c)

Industrial processes

Industries that involve energy intensive industrial processes will be affected by the carbon price mainly because of the high reliance on electricity generation. In particular, industries such as steel and aluminium will face passed on costs from suppliers of natural gas or coal-powered electricity used to power furnaces involved in the production of steel and the smelting of aluminium. As these facilities are often large consumers of natural gas, they may have to mandatorily quote an OTN to their natural gas suppliers. With respect to synthetic gases, except for perfluorocarbons emissions from aluminium production, emissions from hydrofluorocarbon, sulphur hexafluoride and perfluorocarbon are subject to an equivalent carbon price using existing import and manufacturing levies.

(d) Manufacturing While emissions from the manufacturing industry are not directly targeted under the Scheme, the industry is likely to face significant cost increases as a result of its dependence on other types of materials, resources and services that are covered by the Scheme. In particular, manufacturing industries such as iron manufacturing use large amounts of coal and natural gas to operate blast furnaces in their production process. In addition, the high amounts of energy required in the paper production process means that this industry will be significantly affected by rising energy costs. As described in section 10 below, assistance is available to manufacturing industries to improve energy efficiency and reduce emissions through grants and research and development incentives. Large users of electricity, gas and those directly impacted by the Scheme will be able to access the $800 million Clean Technology Investment Program on a co-investment basis - every $3 invested by industry will receive $1 from the Government. There is also $200 million in special assistance for the food and foundaries industries and a $200 million competitive grants innovation Program.

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www.carbonmarketinstitute.org

A guide for business

Case study PulpCo has operational control over a large paper manufacturing plant, which is supplied natural gas through a natural gas supply pipeline to run the chemical pulping process. In 2010-11 emissions from the plant comprise 30,000 tonnes of CO2-e from use of natural gas. In 2012-13, PulpCo is required to quote an OTN to take on liability for emissions from this supply of natural gas because the plant is a large gas consuming facility. PulpCo also has operational control over another smaller plant which is a facility in its own right. In 2011 emissions from this second plant comprise 15,000 tonnes of CO2-e from the use of natural gas. In 2012-13, PulpCo is permitted to quote an OTN to its natural gas supplier for the natural gas supplied to it at the smaller plant. It is permitted to do this because it is required to quote its OTN as the recipient of natural gas for use at a large gas consuming facility. The company makes an OTN quotation in its natural gas supply contract, and the OTN quotation is accepted by the natural gas supplier. Pulp Co. must manage mechanism obligations for all natural gas supplied under this contract. Examples of manufacturing businesses caught under the Scheme

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Orica Ltd

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Wesfarmers Limited

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Incitec Pivot Limited

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Paper Australia Pty Ltd

(e) Waste Any landfill facility that emits more than 25,000 tonnes of CO2-e will be covered by the Scheme. Other facilities that emit more than 10,000 tonnes of CO2-e will be covered by the Scheme if they are less than a certain distance (to be prescribed in the Regulations) from a designated large landfill facility listed in the Regulations. Facilities closed prior to 1 July 2008 are not covered. All emissions (including those for which there is no liability) are counted when determining whether a facility is covered. Facilities are liable only in relation to emissions from “non-legacy” waste, which is waste deposited at a landfill facility after 1 July 2012. Operators will face no liability for:

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emissions from legacy waste;

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combustion of biofuels and biomass - for example, emissions from the combustion of methane generated from waste; and

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facilities for which the disposal of waste is a secondary purpose - for example, a mine that disposes of mine-generated waste on-site.

There is an additional level of complexity with landfill carbon pricing as the emissions (and therefore the carbon pricing liability) takes place over a long period of time, but the only opportunity to recover the carbon cost is the time at which the waste is taken to the landfill gate. Case study Waste Pty Limited is a landfill facility that emits 15,000 tonnes of CO2-e in an eligible financial year. Waste Pty Limited is within the prescribed distance of another open landfill facility, operated by LandfillCorp, which accepts the same classification of waste and in the previous eligible financial year emitted 25,000 tonnes or more of CO2-e. Waste Pty Limited is covered by the mechanism and is a liable entity. Examples of waste businesses caught under the Scheme

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Transpacific Industries Group Ltd

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Waste Recycling and Processing Corporation

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John Swire and Sons Pty Ltd

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Salvage Pty Ltd

(f ) Transport Certain transport activities are excluded from the operation of the carbon price (see section 3.1(b)). However, other business transport emissions from liquid fuels (rail and shipping) and non-transport emissions from businesses using liquid fuels will be subject to an equivalent carbon price, generally applied by reducing business fuel tax credits or increasing the relevant excise by an amount equivalent to the carbon price. Those large users of fuel may choose to opt-in to the Scheme from 2013 and manage their liability as a liable entity under the Scheme, rather than through the fuel tax system. Companies may be motivated to opt-in to the Scheme for a variety of reasons such as marketing purposes or because they already have teams that manage carbon costs in other countries. The optin approach may allow these companies to enter into long-term relationships with creators of carbon credits that may allow them to pay a lower carbon price or to take advantage of carbon pricing hedging instruments that are expected to be offered by banks and exchanges once the Scheme starts.

Australia’s Clean Energy Legislative Package

Liable entities in the transport sector that have not opted-in to the Scheme will not be able to participate in the trading and surrender of carbon units/offset credits in order to manage their carbon costs. Instead, they will need to manage their liability in other ways, for example by switching to fuels such as ethanol, biodiesel and renewable diesel (which are not subject to the fuel tax credit reductions or changes to excise). The opt-in system will be available from 1 July 2013 to large users of specified fuels that pass eligibility criteria. If fuel is covered by the opt-in scheme, then fuel tax credits for the acquisition, manufacture or import of that covered fuel are provided for an amount equivalent to what the carbon price on the fuel emissions would have been. Case study Trucks-R-Us delivers goods around Australia using public roads. Its main source of fuel is petroleum, from which it emits 27, 000 tonnes of CO2-e. In addition, Trucks-R-Us uses ethanol fuel which produces 3,000 tonnes of CO2-e. Rather than manage its fuel liability through the excise arrangements, Trucks-R-Us decides to opt-in to the Scheme in 2013/14. Whilst in total Trucks-R-Us emits 30,000 tonnes of CO2-e, it is only liable for 27,000, since the emissions from ethanol are not subject to the fuel tax credit reductions or changes to excise. For 2012/13 Trucks-R-Us will need to pay the increased fuel excise. As Trucks-R-Us chose to opt-in to the Scheme, it can manage its liability from 2013/14 onwards through surrendering carbon units under the Scheme. Examples of transport business caught under the Scheme

Who and what are covered?

able to participate in the trading and surrender of carbon units. The aviation sector, which was initially excluded from the Scheme, lobbied hard during the public consultation period for the Scheme to include an option enabling them to manage their carbon liability directly. If fuel in aircraft is covered by the opt-in scheme, then fuel tax credits for the acquisition, manufacture or import of fuel are provided for the amount equivalent to what the carbon price on the fuel emissions would have been. In addition to this, some Australian airlines will also be liable under the European Union Emissions Trading Scheme (EU ETS). Case study AviationCorp operates flights both domestically and internationally. The domestic arm of its operations emits 1,000,000 tonnes of CO2-e in 2013-2014, whilst the international arm emits 500,000 tonnes of CO2-e in the same eligible financial year. AviationCorp opts into the Scheme as it would like to participate in the trading and surrender of carbon units. AviationCorp’s total liability is 1,000,000 tonnes of CO2-e, since its emissions from its international aviation is not relevant to the calculation of liability. As AviationCorp has opted into the Scheme, it can manage its liability through surrendering carbon units. Examples of aviation businesses caught under the Scheme

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Qantas Airways Limited

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Virgin Blue Holdings Ltd

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Boeing Australia Holdings Proprietary Limited

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Southern Cross Airports Corporation Holdings Ltd

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Asciano Limited

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Rail Corporation New South Wales

(h) Construction

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Gladstone Ports Corporation Limited

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Veolia Transport Australasia Pty Ltd

The construction industry is unlikely to have many direct obligations under the Scheme. The construction industry’s major source of direct emissions is through the use of liquid fuels either on-site or in transportation, which has been discussed at section 2.6(f ) above. In certain circumstances, the construction industry may be able to pass through certain of these costs to end-users, depending on the contractual terms of supply and procurement contracts, mining services agreements and commodity sales agreements. See section 3.3 below for further information on cost pass through issues.

(g) Aviation Domestic aviation fuel excise will be increased by an amount equivalent to the effect of placing the carbon price on aviation fuel, however international aviation will not be captured. Liable entities in the aviation sector can choose to opt-in to the Scheme in order to be

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www.carbonmarketinstitute.org

A guide for business

2.7 Business Checklist The carbon price is likely to have significant indirect effects on the construction industry. The construction industry makes a large contribution to emissions indirectly, as it acquires several different types of materials, resources and services, such as steel, cement, bricks, glass, electricity, transport and waste disposal. The construction industry’s dependence on these other suppliers means that increased costs are likely to be passed down from direct emitters, for example, higher prices for cement or steel. The emissions-intensive process of making these materials will potentially see a significant increase in construction costs.

A Business should ask itself the following questions when considering how it will be affected by the Scheme:

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Are emissions from my business covered?

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Do facilities operated by my business emit direct emissions that exceed the 25,000 t CO2-e threshold?

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Do I have operational control of the facilities or is there another operator on-site which could have operational control?

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Does my business involve a joint venture arrangement which might limit my liability for emissions?

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If my businesses’ direct emissions are not above the threshold, do facilities my business operates nevertheless use large amounts of electricity, natural gas or other fuels? As a supplier of goods and services can I pass the increased costs of compliance on in the cost of the goods I produce under my supply contracts?

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If I am purchasing goods or services, can the supplier pass through its carbon costs under the supply contract?

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Is the supplier entitled to free carbon units which would reduce its direct costs?

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Can I take steps to reduce emissions at my facilities or reduce energy costs?

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If I am a liable entity and have an obligation to purchase permits how do I purchase permits? Is there an opportunity to purchase from the Government at auction; can I purchase from third parties, other liable entities, brokers or project developers under the CFI? Will I be able to get a lower permit price that reduces my compliance costs?

Case study A construction company, BricksCorp., emits 18,000 tonnes of CO2-e in the production of bricks in 2012-2013. The emissions are generated half from coal and half from natural gas use in its firing kilns. BrickCorp also transports its bricks across the Eastern states of Australia, for which its trucks emit 7,000 tonnes of CO2-e from LNG combustion in the same year. Brick Corp’s total emissions from 2012-2013 are 25,000 tonnes of CO2-e. However, as the LNG emissions are excluded from the scheme, BricksCorp will not meet the facility level threshold and will not be covered by the Scheme. BrickCorp will face increased costs associated with the carbon content of the LNG it uses as well as increased costs from its coal and natural gas suppliers. Examples of construction businesses caught under the Scheme

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Boral Limited

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Lend Lease Corporation Limited

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James Hardie Austgroup Pty Ltd

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Mirvac Limited A business should review its main contracts to determine whether its own carbon costs can be passed through (e.g. if it has a direct or indirect liability) and whether suppliers can legitimately pass on their increased costs to the business. As part of this exercise, there may be opportunities to renegotiate existing contracts and to ensure new contracts enable carbon costs to be managed effectively. Each contract needs to be assessed on a case by case basis as there are a number of factors which may need to be considered to determine the real cost to each party, including whether suppliers are entitled to incentives or free permits which may reduce their own costs. It will be important to determine whether increased costs are reasonable. The ACCC has been granted additional powers to oversee claims related to price gouging in this space.

Who and what are not covered?

3.1

Overview of non-covered sectors

3.2

Alternative treatment of emissions from transport fuels

3.3

What does this mean for specific industries - input costs and cost pass through?

3.1 Overview of non-covered sectors Some sectors are explicitly excluded from the Scheme and, as such, companies in those sectors will not have a direct obligation to reduce emissions or buy permits. As detailed below, the main sectors excluded from the Scheme are agriculture, transport and synthetic gases. Also excluded are fugitive emissions from decommissioned underground coal mines, legacy emissions from the operation of landfill facilities and certain emissions from landfill facilities that have not accepted any waste since the start of 1 July 2008.18 There are a number of reasons why certain sectors are excluded. These include the fact that in certain sectors it is very difficult to accurately measure emissions at their source (e.g. methane from livestock); applying a carbon price at the point of the emissions would significantly increase the number of persons covered by the Scheme (e.g. individual motorists or farmers); or the emissions relate to historical activities undertaken before a carbon price was imposed (e.g. decommissioned mines and landfill sites). While many of the excluded sectors are targeted through separate legislation (e.g. transport fuels), a minority of sectors are not subject to a carbon price at this time (e.g. agriculture). Under the previous CPRS, there was a proposal to phase in coverage of agriculture. However, this is not presently proposed by the Scheme. By way of comparison, compulsory reporting of agricultural emissions in New Zealand begins in 2012 but the requirement to surrender NZUs for compliance with the NZ ETS begins only in 2015 under the NZ ETS. The agriculture sector is the largest single source of greenhouse gas emissions in New Zealand, making up approximately 48% of its total emissions.

18. Section 30 of the Clean Energy Act

A guide for business

(a) Agriculture Australia’s agricultural emissions represent 15% of our national GHG inventory. Whilst an important contributor, they are not as large a portion of our national emissions as is the case for New Zealand. Direct emissions from agriculture (e.g. from livestock, manure and crop residue) are exempted under the Scheme, as is off-road fuel use for transportation for the agriculture industry. Nevertheless, the agriculture industry will still be subject to price increases as a result of carbon pass through costs, particularly where processing activities are energy intensive (e.g. abattoirs or milk drying enterprises) and some very large food production activities could possibly be caught by the facility level threshold. Whilst the exact nature of the pass through costs will vary according to the specific type of agriculture, common cost increases across the industry will result from the pass through costs from on-road transportation, electricity generation and waste disposal. The following agricultural emissions are expressly excluded from the Scheme:

»»

methane from the digestive tract of livestock or from rice fields or rice plants;

»»

methane or nitrous oxide from the decomposition of livestock urine, livestock dung, the burning of savannas or grasslands, the burning of crop stubble in fields, crop residues in fields or sugar cane before harvest;

»»

carbon dioxide or methane or nitrous oxide from soil; and

»»

emissions attributable to changes in the levels of carbon sequestered in living biomass, dead organic matter or soil or attributable to land use, changes in land use (including land clearing) or forestry activities.

In addition, as mentioned above, the off-road use of fuel is excluded from the fuel tax regime (see section 3.2 below).

(b) Transport In general, where an effective carbon price applies to transport fuels, it will be applied through changes in fuel tax credits or changes in excise. The changes will be calculated to have the same price effect as coverage by the mechanism and will be adjusted periodically to ensure the effective carbon price on transport fuels is in step with the carbon price applying to the rest of the economy. Emissions from liquid petroleum fuel, liquid petroleum gas, liquefied natural gas or compressed natural gas that have been the subject of excise or customs duty will be excluded from the Scheme.19

Liquid petroleum gas, liquefied natural gas or compressed natural gas will be progressively brought into the fuel tax system over a transitional period from 1 December 2011 to 1 July 2015. Over the transition period, the fuel tax rates will be progressively increased until 1 July 2015, when they reach their full excise rate which will be benchmarked on the petrol/diesel excise rate, adjusted for the lower energy content of the gaseous fuels and with a further 50 per cent discount. Household and light commercial vehicles (which are vehicles of 4.5 tonnes or less) will not be subject to a carbon price on their fuel use. As discussed above, the agriculture industry, in addition to the forestry and fishing industries, will not come within the Scheme for their off-road fuel use. Nevertheless, some of these sectors are subject to an equivalent carbon price through changes to fuel tax credits as detailed below. Where liquid petroleum fuel, liquefied natural gas or compressed natural gas are combusted and are subject to excise or customs duty, the resulting emissions will not count as covered emissions.20 This ensures that emissions from transport fuels that are excluded from a carbon price, for example, emissions from private passenger vehicles, are not subject to a carbon price. It also ensures that fuels subject to an equivalent carbon price under fuel tax legislation are not also subject to a carbon price under the Scheme. Some business transport emissions will face an equivalent carbon price through changes to fuel tax credits or fuel excise. Emissions from non-transport uses of liquid petroleum transport fuels (for example, diesel and petrol) and gaseous transport fuels (liquid petroleum gas, liquefied natural gas or compressed natural gas) will also be subject to an equivalent carbon price in this way.

(c) Synthetic gases There are a number of synthetic gases which are used in products like refrigerants, air-conditioners and cold storages. These gases have high global warming potential, but are usually emitted in very small amounts when equipment is operated in premises. Similar to transport fuels, it is difficult to require the operators of equipment to report on these emissions and there are only a few importers and manufacturers of the gases, which makes the separate regulation possible. On this basis, emissions of hydrofluorocarbon, sulphur hexafluoride and perfluorocarbon are all excluded from the Scheme21 but will be

20. Section 5 of the Clean Energy Act 19. Section 30(2) of the Clean Energy Act

21. Section 30(11) of the Clean Energy Act

Australia’s Clean Energy Legislative Package

subject to alternative arrangements. Synthetic GHGs emissions that are excluded from the Scheme will face an equivalent carbon price using existing import and manufacture controls under other elements of the legislative package.

3.2 Alternative treatment of emissions from transport fuels As noted above, an equivalent carbon price will be applied to some uses of excisable liquid petroleum fuels, liquid petroleum gas, liquefied natural gas and compressed natural gas under the Clean Energy (Excise Tariff Legislation Amendment) Act 2011, Clean Energy (Customs Tariff Amendment) Act 2011 and Clean Energy (Fuel Tax Legislation Amendment) Act 2011.22 Business transport emissions from liquid fuels (rail and shipping) and non-transport emissions from businesses using liquid fuels will be affected. The equivalent carbon price will generally be applied by reducing business fuel tax credits or increase in relevant excise by an amount equivalent to that of placing the carbon price on liquid fuel emissions. This will be determined by applying the following formula to taxable fuel acquired, manufactured or imported: Quantity of fuel x Carbon price x Carbon emission rate The carbon emissions rate will be: a. if the fuel is gasoline—0.0024; or b. if the fuel is LPG—0.0016; or c. if the fuel is LNG—0.0029; or

Who and what are not covered?

Non-transport use of compressed natural gas, liquefied natural gas and liquid petroleum gas that currently benefit from an automatic remission of excise will be replaced by a partial remission to reflect the effective carbon price. That is, where in the past each litre of fuel would have received a rebate of 38.143 cents/ litre,23 that rebate will be reduced by the carbon price. Although not yet included in the Scheme, the Government intends to apply an effective carbon price to fuel used by heavy on-road transport from 1 July 2014 through changes in fuel tax credits. This measure, however, has not yet been agreed to by all members of the Multi-Party Climate Change Committee.

3.3 Opt-in for transport fuels The Government has included a mechanism to enable businesses that would be subject to the fuel tax regime to opt-in to the Scheme from 2013 and manage their liability through the surrender of carbon units, rather than paying the increased excise or receiving reduced fuel tax credits. The opt-in system for large users of fuel provides at least some degree of flexibility to suppliers in calculating their liability under the carbon price. The opt-in scheme is likely to be accessed by companies that already have a liability, to enable them to centralise management of their carbon costs and by companies that are able to effectively manage their liability at lower costs as a result of their trading capabilities or exposure to international markets. By way of example, international airlines that may be subject to regulation under the EU ETS and the Australian Scheme may take the view that they can manage their liability for emissions more cost effectively through surrendering carbon units in both Schemes rather than being required to source units in the EU ETS and pay revised fuel taxes in Australia.

d. if the fuel is CNG—0.0029; or e. if the fuel is denatured ethanol for use in an internal combustion engine—nil; or f.

if the fuel is biodiesel or renewable diesel—nil; or

g. for any other taxable fuel (other than a blend of taxable fuels)—0.0027. The carbon price will be the same as the fixed charge for the relevant financial year.

22. Section 5 of the Clean Energy Act

23. except for vehicles greater than 4.5 tonnes travelling on a public road which received a rebate of 15.043 cents/litre.

A guide for business

3.4 What does this mean for specific industries - input costs and cost pass through? As noted above, non-covered sectors may still be affected by a carbon price due to increased costs pass through, in particular, in relation to the cost of electricity, certain non-transport fuels, waste disposal and manufactured goods. This is particularly significant for industries such as agriculture, which have not received transitional assistance from the Government, but which will nonetheless be significantly affected by the Scheme.

Approach

Considerations

Refuse pass through of carbon costs

»»

There are several considerations to bear in mind when a company is confronted with a counterparty’s proposed carbon cost pass-through clause. Depending on the relative bargaining power of the company and the counterparty, the company may want to raise one or more of the following points:

May be possible if: there is a competitive market for the supply of the relevant materials, and other suppliers are not passing through their carbon costs;

»»

the supplier is unlikely to incur any significant carbon costs, or can easily change its operations so as not to be liable under the Scheme;

»» »»

the supplier can pass its carbon costs on to another party, eg upstream;

»» »»

for existing contracts: the contract specifies that prices are fixed and will not be changed for the term of the contract;

»»

for existing contracts: the contract already provides for the company to pay the market price, so no need for a specific carbon cost clause.

the supplier is likely to receive all or most of its carbon units for free from the Government or otherwise receives some benefit, compensation or assistance as, for example, a business that engages in EITE activities; for existing contracts: there is no change in law clause, or the change in law clause does not provide for adjustment to prices to reflect a carbon price; or

Australia’s Clean Energy Legislative Package

Who and what are not covered?

Limit pass through of There are several different ways in which a contract can limit the pass through of carbon costs. More than one of these carbon costs can apply:

Specify how pass through can occur

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refuse any increase in costs beyond those that the company is able to pass on to its customers in turn;

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refuse increase in costs arising as a result of schemes other than the Scheme (There are currently several other Commonwealth/state Government schemes relating to climate change and energy issues which may impose costs on suppliers, e.g. emissions reporting, renewable energy, energy efficiency);

»»

refuse any increase in costs other than the actual cost to the supplier of purchasing carbon units (or other eligible emissions units) for the purposes of its compliance with the Scheme, that can reasonably be apportioned to producing or transporting the materials the company is purchasing under the contract - excluding any indirect or upstream costs;

»»

ensure the company is not paying the supplier in respect of carbon units which the supplier receives for free as an emissions intensive trade-exposed entity (or under any other Government scheme providing free permits or other assistance in relation to carbon price costs), or for which the supplier has already charged another party;

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specify a dollar or percentage limit on the cost increase, eg by adding “but no greater than $[x] per [unit]” or “but no greater than [x]% of the contract price”;

»»

require the supplier to use all reasonable endeavours to minimise its carbon costs, including by sourcing low cost carbon units or other eligible emissions units, reducing its own emissions to the extent it is cost-effective, etc.

There are several possible options - choose the most appropriate depending on the type of contract and the anticipated costs to the company:

»»

set out a formula to calculate the allowable cost increase as a result of the Scheme per unit of materials supplied to the company, eg with reference to the embodied carbon of the materials and the market price of carbon units;

»»

provide for the company to reimburse the supplier for its increased expenses, upon receiving proof of the supplier incurring those expenses as a result of the Scheme in relation to the materials supplied under the contract. This option will prevent the supplier from charging the company for carbon units at the market rate when the supplier is in fact obtaining carbon units more cheaply, or for free from the Government;

»»

set out a formula, or use an existing mark-to-market price mechanism, to provide for the company to pay the supplier any increase in the market price of the materials supplied under the contract, arising as a result of the Scheme. If the market for sale of the relevant materials is competitive, the increase in the market price may be less than the actual increase to the supplier’s costs. If there is an existing mechanism for changes to market price but the company wishes to use a new method specific to carbon costs, exclude carbon costs from the operation of the existing method;

»»

set out a procedure (such as a change in law procedure) and criteria to determine and apportion costs as they arise. The advantage is that the parties are not required to decide which costs to allocate to which party in advance of the Scheme coming into force, avoiding having to guess the relevant costs. The disadvantage is that the decision-making process can be uncertain, may take some time and may be difficult to negotiate. Further, if it is not drafted carefully enough it may be unenforceable, as an agreement to agree.

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A guide for business

What is my legal obligation under the law?

4.1

Determining the extent of liability

4.2

Obligations to report and surrender carbon units

4.3

Penalties for non-compliance

4.1 Determining the extent of liability Under the Scheme, liable entities must either make a payment for, or surrender an equivalent number of, carbon units to their direct emissions. If a liable entity does not surrender any units or an insufficient number to meet its liability, it will have to pay a charge.

The registration and reporting process is similar to that which already in place for NGERS, however new forms will be prepared to reflect the two main changes outlined above, and to accommodate circumstances where an OTN may have been quoted.

The largest emitters may need to surrender over ten million carbon units, the smallest emitters will face a minimum exposure of 25,000 carbon units.

A business will then need to consider the following questions when working out its legal obligations to comply with the Scheme:

The first step in determining the extent of liability is working out what a company’s GHG emissions are for the relevant compliance year. Companies have already been reporting on their GHG emissions, energy consumption and energy production under NGERS for three years. Therefore, most companies that are likely to be covered by the Scheme will already know what their exposure is likely to be. The NGERS reporting framework will underpin the calculation of emissions numbers for the Scheme. However, there are some notable differences, in particular, NGERS applies to controlling corporations which report for their corporate group, and the Scheme applies to the person with operational control of each facility. NGERS also covers scope 1 and scope 2 emissions, whereas the Scheme only applies to scope 1 emissions. A number of consequential amendments have been made to the NGER Act which enable liability to be accurately managed. These include:

»»

providing for registration of persons that will be liable under the Scheme (i.e. at the facility level); and

»»

the submission of emissions reports for the Scheme which will inform each person’s Scheme liability (i.e. the scope 1 emissions for the facility).

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How many carbon units will I need to surrender to meet that liability?

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What steps do I need to take to acquit my liability: how do I register and how do I report under the Scheme?

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When do I have to surrender carbon units by?

»»

How do I surrender carbon units?

»»

Is there any other way to reduce my compliance costs?

Australia’s Clean Energy Legislative Package

What is my legal obligation under the law?

(a) Working out provisional emissions numbers

(b) Reporting emissions numbers

A liable entity is required in each financial year to surrender a number of carbon units equal to its “provisional emissions number” for that year. The provisional emissions number is calculated by reference to the liable entity’s “emission number”, which is the total of the provisional emission numbers of the facilities controlled by the entity.24

Liable entities will have to comply with new reporting obligations in addition to those already required under NGERS. They will need to provide reports to the Regulator that set out the calculation of that person’s provisional emissions number, the emissions attributable to scope 1 emissions, the emissions attributable to potential GHG emissions embodied in an amount of natural gas (if applicable), and the calculation of the person’s emissions number for the eligible financial year.

A provisional emissions number for a facility is the total amount of covered emissions of the facility during a financial year, or where the facility is not controlled by the liable entity for the whole of a financial year, during the days when it is under the operational control of that entity. Where a facility combusts natural gas supplied by a natural gas supplier through a gas supply pipeline, the provisional emissions number will net out the emissions from the combustion of the natural gas, unless the facility operator has quoted an OTN and assumed liability for the emissions.

During the Fixed Price Period, a person is also required to report on the calculation of its interim emissions number, being 75% of the person’s total provisional emissions numbers. A person’s total emissions number is calculated on the basis of the previous eligible financial year’s provisional emissions number or a reasonable estimate of the provisional emissions number for the eligible financial year.

24. Part 3 Division 2 of the Clean Energy Act

4.2 Obligations to report and surrender carbon units A liable entity will need to source and surrender a sufficient number of carbon units to meet its liability for each financial year on or before the final surrender dates.

Source of carbon units

Free allocation under assistance programs (see section 7)

Purchased from the Regulator

The EU ETS experience indicates that some businesses will actively trade in units or hire third parties such as brokers to acquire units for them, others will simply buy permits from the Regulator and

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Generation of new units from projects that generate units under the CFI

Eligible International Units

surrender them, and still others will self manage their liabilities by reducing their emissions or generating units under the CFI.

A guide for business

The types of carbon units that are eligible for surrender in the Fixed and Flexible Price Periods are detailed in section 6 below. The following chart outlines the timetable for reporting GHG emissions and surrendering carbon units: initial free units allocated (september)

COMPLIANCE YEAR 1

COMPLIANCE YEAR 2

partial surrender 15 june y1

full surrender 1 feb y1

1 July

31 Oct

31 Dec

1 July

Sept

31 Oct

31 Dec

31 Mar

30 Jun

31 Oct

1 Dec

1 Feb

30 Jun

2011

2012

2013

2014

NOTIFICATION OF INTERIM EMISSIONS NUMBER

NGER REPORTING PERIOD 2011/12

nger data known 2010/11

NGER REPORTING PERIOD 2012/13

nger data known 2011/12

NGER REPORTING PERIOD 2013/14

nger data known 2012/13 submission of emission number report y1

(a) Fixed Price Period

(b) Flexible Price Period

During the Fixed Price Period, a business covered by the Scheme (i.e. â&#x20AC;&#x2DC;liable entityâ&#x20AC;&#x2122;) must surrender eligible emissions units corresponding to its interim emissions number by 15 June of the eligible financial year (i.e. 75% of its provisional emissions number). The remaining units must be surrendered by 1 February in the following financial year.

During the Flexible Price Period, a liable entity must surrender eligible emissions units corresponding to its emissions number for the year by 1 February in the following financial year.

Australiaâ&#x20AC;&#x2122;s Clean Energy Legislative Package

What is my legal obligation under the law?

4.3 Penalties for non-compliance If a liable entity fails to surrender sufficient carbon units before the final date for surrender it will be required to pay a â&#x20AC;&#x153;unit shortfall chargeâ&#x20AC;? for each carbon unit that it has failed to surrender. During the Fixed Price Period, the unit shortfall charge is set at 130% of the fixed price of a carbon unit for that compliance year. During the Flexible Price Period, the unit shortfall charge will be set at 200% of the average annual auction price for a carbon unit for the compliance year.

For example, if Company X has a liability of 300,000 tonnes for the 2017 compliance year but only surrenders 280,000 carbon units, Company X will have to pay a penalty for its 20,000 shortfall. If the average annual auction price is $25 in 2017, then the penalty amount payable shall be $1 million. It is important to remember that if a corporation contravenes the Scheme, the executive officers may also be found to have contravened the Scheme. This will occur if the executive officer has been reckless or negligent or has failed to take reasonable steps to prevent the contravention.

4.4 Preparing for the Scheme Businesses will need to start considering how and when to manage their liability. Some businesses, particularly those that undertake energy-intensive trade-exposed activities may have to do very little to comply with the Scheme as they may receive sufficient permits to cover their liability. Others will need to purchase carbon units, which will involve participating in auctions, exploring options for purchasing on the domestic and international market (e.g. from exchanges, banks and brokers) or investing in CFI offset projects. There is a risk, particularly in the flexible price period, where the number of carbon units is capped, that a liable entity may be short of units at the date of compliance. This could arise if a company fails to secure a sufficient number of permits through or if units purchased under forward contracts fail to be delivered.

The following table provides a list of steps and the required dates for compliance for companies covered by the Scheme during the fixed price period:

Step

Due Date

Am I registered under NGER?

1 May if quoting an interim emissions number, otherwise 31 August

Have I notified my interim emissions number?

15 June each financial year (fixed price period)

Have I surrendered units to meet interim emissions number?

15 June each financial year (fixed price period)

Have I submitted my full emissions number report?

31 October each financial year

Have I surrendered carbon units to meet my full emissions liability?

1 February in the following financial year

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Yes /No

A guide for business

Can liability be transferred?

5.1

Transferring liability

5.2

Transfer within a corporate Group

5.3

Penalties for non-compliance

5.4

Transfer to an entity with financial control

5.5

Joint venture declarations

5.1 Transferring liability

5.2 Transfer within a corporate group

In certain circumstances, the person who is operating a facility may be doing so under a contract and may not receive financial benefits related to the sale of the output from the facility. The contractor may also not be party to the key supply contracts for the facility, for example, a power purchase agreement between power station owner and off-taker who will on-supply the electricity. Where this situation arises, a rigid application of the Scheme could place a significant financial burden on a contractor who only receives a management fee (or who may, if able to recoup carbon costs from the owner, do so with a mark up for the service) or could prevent the owner of the facility passing through carbon costs to customers (e.g. under a PPA) on the basis that the carbon cost is not directly imposed on the owner. This could result in perverse outcomes with significant economic costs to the businesses involved.

If liability is being transferred within a corporate group, the facility must be under the operational control of another company within the same corporate group and the written consent of the entity with operational control must be obtained.25

In other circumstances, a number of subsidiaries may directly operate facilities, but it may be more convenient for their controlling corporation to manage its corporate groups overall liability under the Scheme where it can engage in bulk transactions to acquire carbon units and centralise reporting and surrender tasks. The legislation establishes a framework whereby liability may be transferred from an entity with operational control to a company within that companyâ&#x20AC;&#x2122;s corporate group or an entity with financial control of the facility. This provides greater flexibility for businesses. Liability is transferred through the issuance of a liability transfer certificate. A liability transfer certificate will only be issued to an applicant that has, and is likely to continue to have, the capacity, access to information and financial resources necessary for it to comply with the obligations under the Scheme.

25. Section 80 of the Clean Energy Act

Australia’s Clean Energy Legislative Package

Can liability be transferred?

5.3 Transfer to an entity with financial control Is established where a person who does not have operational control of a facility either:

Financial control

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contracts out the operation of the facility;

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controls the trading or financial relationships of the operator in relation to the facility;

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has the economic benefits from the facility;

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is able to direct or sell the output of the facility; or

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the regulations specify such control to exist.27

In all cases, the underlying commercial arrangements will be looked at. Similar tests apply for joint venture arrangements. A person who passes the financial control test in relation to a facility can only make an application for a liability transfer certificate with the written consent of the person with operational control. The written consent of the controlling corporation is also required if the applicant is a member of the controlling corporation’s group and is not itself the controlling corporation. Where a liability transfer certificate is issued, the operator is taken to have guaranteed the payment of any unit shortfall charge or associated late payment penalty which is payable by the holder of the liability transfer certificate for the relevant financial year.27 Once issued, a liability transfer certificate remains in force indefinitely.28 However, certificates can be surrendered with the written consent of the Regulator,29 or cancelled by the Regulator.30

26. Section 92 of the Clean Energy Act 27. Section 138 of the Clean Energy Act 28. Section 883(3) of the Clean Energy Act 29. Section 89 of the Clean Energy Act 30. Section 90 of the Clean Energy Act

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Case study Power Operations Co. has been engaged to operate the Blue Valley Power Station which is owned by Blue Valley Power Co. Power Operations Co. has operational control of the power station. Blue Valley Power Co. sells electricity from the power station to Energy Sales Co, which then sells that electricity to customers in the Blue Valley district. The Power Purchase Agreement (PPA) between Blue Valley Power Co. and Energy Sales Co. only allows Blue Valley Power Co. to pass through costs associated with changes in law that directly apply to Blue Valley Power Co. As the Scheme directly applies to Power Operations Co. and not to Blue Valley Power Co., Blue Valley Power Co. cannot pass through the additional carbon costs that Power Operations Co. will add to the operating costs for the power station. If Blue Valley Power Co and Power Operations Co obtained a Liability Transfer Certificate Blue Valley Power Co. will have direct liability under the Scheme and can potentially pass through its carbon costs under the PPA.

A guide for business

5.4 Joint venture declarations to make an application to the Regulator for a participating percentage declaration,31 which will set out the shares of liability for emissions from the facility for each joint venture participant.

Joint ventures often involve a number of parties with very different levels of investment in, and engagement with, the operations that are the subject of the venture. For example, an unincorporated joint venture for a mine may have a majority investor (e.g. 80% interest) and then participants with 10%, 5% and 5% interests. Joint venture participants ordinarily contribute to costs and receive benefits from the operations in accordance with their participating share. On this basis, in order to replicate these arrangements under the Scheme, it may be appropriate for each of the participants to be liable for a portion of the emissions from the facility, rather than one participant having all the liability and then seeking to recover costs of compliance from the other parties.

Applying for a participating percentage declaration is compulsory for a “mandatory joint venture”. If participants are in a mandatory joint venture, they have dual obligations to notify the Regulator that they are participants for the facility and, concurrently, apply for a participating percentage determination for the joint venture in relation to the facility.32 Participants in a joint venture where the joint venture does not satisfy the criteria of a “mandatory joint venture” can nevertheless apply for a participating percentage declaration in certain circumstances to become a “declared designated joint venture”.

In certain circumstances, joint venture participants are able or obliged

Mandatory joint venture

Designated joint venture

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Joint venture participants have an agreement that deals with a facility

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Joint venture participants have an agreement that deals with a facility

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Two or more participants satisfy the operational control test in relation to the facility (see section 2.4(a) above)

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The facility is operated exclusively for the joint venture by a person (who may be a participant in the joint venture)

»»

No declaration under the NGERS legislation has been made (i.e. voluntary nomination)

»»

None of the participants is an individual

»»

The joint venture is not a “mandatory designated joint venture”

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The operator has consented to the application

31. Section 73 of the Clean Energy Act 32. Section 66 and section 74 of the Clean Energy Act

How will liable entities meet their obligations under the Scheme?

6.1

Meeting obligations

6.2

Introduction to emission unit types

6.3

Role of carbon units

6.4

What types of carbon units can be used for compliance?

6.5

Eligible International emissions units

6.6

Carbon Farming Initiative ACCUs

6.7

Purchase of carbon units

6.8

Surrender of carbon units

6.1 Meeting obligations Liable entities will meet their obligations under the Scheme by either physically reducing their emissions or by surrendering carbon units.

Businesses need to be familiar with the different types of units, how they are created and when they can be used.

A carbon unit represents one tonne of CO2-e and can either represent the reduction or sequestration of GHGs or act as a permit to pollute the equivalent volume of GHGs. In this regard, there are a number of different types of carbon units, some of which are “issued” or “sold” by Governments in first instance, and others which are created as a result of verified offsetting activities under the CFI. Each type of carbon unit has different characteristics. This can create confusion, particularly with all the acronyms. The Table in section 6.4 below provides an overview of the unit types. See Appendix 1 for a more detailed table of unit types.

One important point to note is that ACCUs created under the CFI will be produced by domestic abatement undertaken by project developers in the market. The types of abatement activities can include, among others, forestry sinks, landfill gas capture, savannah burning and agricultural methane waste capture to name a few. These projects will be publically registered and such carbon units are expected to be sold at a price lower than the fixed price. After the initial fixed price period, international project based permits may also be purchased and, on current pricing, are again lower than the current fixed price. In this regard such permits have an important role to play in reducing compliance costs. As these projects begin to produce ACCUs under the CFI and international carbon credits through the Clean Development Mechanism (CDM) for example, there will and are a number of avenues through which to purchase such units. This includes directly from project developers, through market exchanges being established in Australia or through market intermediaries and brokers.

Rules have been created around the use of the different types of carbon units that exist. These rules limit the number of particular types of units that can be used for compliance during different periods of the Scheme. For example, international units cannot be used in the fixed price period but are eligible in the flexible price period (for up to 50% of a liable entity’s liability).

A guide for business

Case study Looking ahead to the flexible price period, P&P Co. has a paper-making facility in South-West Melbourne which will emit 350,000t CO2-e per year. As its paper is exported, it is considered moderately trade-exposed and receives 231,000 free carbon units to meet 66% of its liability. P&P Co. has a number of plantations throughout Victoria and decides that, as some of this land is marginal, it will plant mixed biodiverse species on that land as permanent plantings and operate this as a CFI reforestation project. The reforestration project generates 40,000 offset units (at a base cost to P&P of $9/t CO2-e). P&P Co also operates in Vietnam and Cambodia and has undertaken works at its Hanoi factory to reduce emissions through fuel switching. This activity has been registered as a CDM project and creates 140,000 international units (CERs), 100,000 of which are already contracted to be sold to a European Buyer, leaving 40,000 that P&P could use in its Australian operations (at a base cost of $6/t CO2-e). P&P Co. will still need to purchase 39,000 eligible units. These could be bought at auction from the Government; from another liable entity or an intermediary (at the market price of $15). P&P Co. could also purchase additional domestic or international offsets direct from the project or on the secondary market.

6.2 Introduction to emission unit types The legislation provides for the use of a number of types of emission units in the Scheme. These can be divided into:

Domestically-issued units include carbon units and eligible Australian Carbon Credit Units (ACCUs) issued under the CFI.

»»

domestically issued units; and

»»

international units issued under other schemes, including the Kyoto Protocol’s project based offset mechanisms - the CDM and Joint Implementation (JI).

International units useable in the Scheme include some types of Certified Emission Reductions (CERs), Emission Reduction Units (ERUs) and Removal Units (RMUs) issued under the Kyoto Protocol and units issued under other eligible emissions trading schemes.

These different types of units are summarised at Appendix 1. All units are equal to one tonne of GHG emission reductions. The legal characteristics of units issued under the Scheme are set out in the implementing legislation. The legal characteristics of Kyoto Protocol and other international units are set out in the relevant international conventions and also, particularly in the case of units from linked schemes, the domestic law of the countries where these units are created or traded.

In addition to the quantitative restrictions on the use of units, banking and borrowing rules will also apply. These are also discussed below.

Australia’s Clean Energy Legislative Package How will liable entities meet their obligations?

6.3 Role of carbon units Carbon units are intended to be the main units used in the Scheme. They are issued by the Regulator33 in fixed charge sales during the Fixed Price Period, at auction during the Flexible Price Period and freely to recipients of assistance under the Scheme. Each carbon unit has a unique identification number so that it can be tracked in the Australian registry.34 Carbon units will be issued for specified vintage years. This means that the Regulator will be able to issue units for a particular vintage year from 1 January in that year until 31 January in the following year.35 The price that carbon units will be issued at is discussed in section 8 below. The legislation provides detailed guidance on the legal characteristics of carbon units. Key characteristics of carbon units are that:

»»

they are personal property; 36

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the registered holder of a carbon unit can deal with the unit as its legal owner provided that, if the holder is a purchaser, he or she deals with the carbon unit in good faith for value and without notice of any defect in legal or equitable title to the carbon unit; 37

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if a carbon unit is transferred by assignment, the transfer will not be effective until the Registry has been updated to reflect the transfer;38

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if a carbon unit is transferred through the operation of law (for example through a transfer from a deceased estate), the transferee must make a declaration to the Regulator in respect of the transfer and, if the transferee does not have a Registry account, the Regulator must open an account, for the transferee and record an entry in the account for the transferred carbon units;39 and

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equitable interests (for example mortgages or charges) can be given in carbon units and the regulations may provide for the registration of such interests;40 this may be the case when a project developer seeks debt finance to expand its operations and provides its bank with a mortgage over the units generated by its projects.

33. Section 94 of the Clean Energy Act 34. Section 95 of the Clean Energy Act 35. Sections 96 and 97 of the Clean Energy Act 36. Section 103 of the Clean Energy Act 37. Section 103A of the Clean Energy Act 38. Section 105 of the Clean Energy Act 39. Section 106 of the Clean Energy Act 40. Sections 109A and 110 of the Clean Energy Act

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The transfer of carbon units within the Registry is achieved in a manner similar to transfers of money between bank accounts. Where a carbon unit is transferred, at the time of transfer an entry for the relevant carbon unit is removed from the transferor’s Registry account and an entry for the carbon unit is made in the transferee’s account.

6.4 What types of carbon units can be used for compliance? When considering the acquisition of any of the carbon units above, it is important to note that eligibility varies across the Fixed Price Period and the Flexible Price Period. The reason for different treatment between the two periods is three-fold. First, it limits Australia’s exposure to the international price during the early years of the Scheme (although this is also managed for the first three years of the flexible price period by the price floor). Second, it ensures liable entities are sourcing permits domestically at the fixed price - creating a secure revenue stream to support the Government’s compensation and clean energy incentive measures. Third, it kick-starts early investment in CFI projects. The Table below provides an overview of the unit types. See Appendix 1 for a more detailed table of unit types.

A guide for business

Name

Source

Use in Fixed Price Period

Carbon Unit

Carbon Price Mechanism:

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100% use for compliance liability; and »»

(also known as an Eligible Emissions Unit)

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no trading or banking of units as units automatically surrendered upon purchase.

ACCU Australian Carbon Credit Unit

Eligible International Emissions Unit

freely allocated to liable entities eligible under the Jobs and Competitiveness Program or coal-fired electricity generation assistance program);

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purchased from the Regulator; and

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purchased at auction (Flexible Price Period).

Use in Flexible Price Period 100% use for compliance liability (subject to availability of units under the cap);

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subject to a price ceiling and price floor in the first three years of the Flexible Price Period;

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unlimited banking allowed; and

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limited borrowing allowed: in any particular compliance year, surrender of carbon units from the following vintage year to discharge up to 5% of liability.

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eligible for surrender to acquit up to 100% of compliance liability; and

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not subject to floor price or floor cap.

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eligible for surrender to acquit up to 5% of compliance liability (exception for certain waste facilities); and

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no limitation on banking.

Non-Kyoto ACCU - Non Kyotoconsistent ACCU created under the Carbon Farming Initiative

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0% use for compliance liability.

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0% use for compliance liability.

Can be either a CER an ERU, a RMU, a prescribed unit issued in accordance with the Kyoto Rules or a non-Kyoto International Emissions Unit (e.g. from another ETS) with the Kyoto Rules or a non-Kyoto International Emissions Unit (e.g. from another ETS)

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0% use for compliance liability.

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eligible for surrender to acquit up to 50% of compliance liability;

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if acquired CERs or ERUs issued prior to 31 December 2012 can be carried over subject to Kyoto Protocol limitations.

Kyoto ACCU - Kyoto-consistent ACCU created under the Carbon Farming Initiative

Australia’s Clean Energy Legislative Package How will liable entities meet their obligations?

(a) Fixed Price Period During the Fixed Price Period, only carbon units and Kyotocompliant ACCUs will be eligible for compliance use. Liable entities can use carbon units to acquit up to 100% of their compliance liability but can only use eligible ACCUs to acquit up to 5% of their compliance liability during this period.41 An exception to the 5% limit applies to waste facilities where the majority of their liability arises from landfill emissions - these entities are permitted to use eligible ACCUs to acquit up to their full liability during the Fixed Price Period. International units cannot be surrendered to acquit compliance obligations in the Fixed Price Period.42

(b) Flexible Price Period During the Flexible Price Period, the compliance use of ACCUs and international units will be subject to fewer restrictions. No quantitative restrictions will attach to the use of eligible ACCUs and liable entities will be able to use eligible ACCUs to acquit the whole of their compliance liability. It will be possible to surrender international units, but only up to a maximum of 50% of their compliance obligation43 and an international unit surrender charge may apply (this is discussed in section 8.2 below). It is important to note that even though quantitative and qualitative restrictions will apply to the use of ACCUs and international units in the Scheme, these restrictions will not prevent liable entities and other market participants from buying and holding these units - although banking and borrowing and other restrictions will apply, as discussed below.

CERs (other than temporary CERs or long-term CERs), ERUs, RMUs and other units issued under the Kyoto Protocol and other international schemes and prescribed in the regulations.44 CERs are electronic units created by an international registry operated by the UNFCCC secretariat on behalf of the Clean Development Mechanism Executive Board (the CDM Registry). Each CER is based on one tonne of CO2-e abated or reduced by a CDM project, measured in accordance with strict monitoring and verification hprotocols.45 RMUs are also issued under the Kyoto Protocol, in respect of net removals by sinks of GHGs pursuant to article 3 of the Kyoto Protocol. ERUs are tradeable units either converted from Assigned Amount Units or RMUs, but ERUs are issued under the Joint Implementation mechanism which involves a developed country undertaking an emissions reduction project in another developed country. Like CERs, each RMU and ERU is also equal to one tonne of CO2-e.46 The Government has already indicated, though not in the legislation, that certain CERs and ERUs will not be permitted for compliance in the Flexible Price Period. The excluded project activity types are:

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nuclear;

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destruction of trifluoromethane (HFC-23);

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destruction of nitrous oxide from an adipic acid plant; and

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large-scale hydro-electric projects not consistent with criteria adopted by the European Union (based on the World Commission on Dams guidelines).47

International units will likely provide an important source of low-cost abatement for liable entities, particularly during the Flexible Price Period. As noted above “eligible international emissions units” include

The reason these types of projects have been excluded is that there are concerns about their environmental integrity. For example, there has been a wide-ranging debate about whether HFC-23 destruction projects at plants that produce industrial gases have extended the life of those plants, by incentivising the creation of more gas to be destroyed. Concerns have also been raised about the environmental and social impacts of large dams. This approach follows the position of the EU under the EU ETS which also limits CERs from these project types.

41. Sections 125(7) and 128(5) of the Clean Energy Act

44. Section 5, definition of “eligible international emissions units” of the Australian National Registry of Emissions Units Act 2011.

42. Section 122(8) of the Clean Energy Act

45. More information on Certified Emission Reductions can be found in the CDM Rulebook, at http://www.cdmrulebook.org/304.

43. Sections 123 and 133(7) of the Clean Energy Act

46. More information on ERUs and RMUs can be found in the JI Rulebook, at http://www.jirulebook.org/3269 and http://www.jirulebook.org/3277

6.5 Eligible international emissions units

respectively. 47. Department of Climate Change and Energy Efficiency, Exposure Draft of the Clean Energy Bill 2011, 28 July 2011, para 4.85.

A guide for business

It is not clear at this stage whether the Government intends to specify any additional Kyoto Protocol units as being eligible for use in the Scheme. Nor is it yet clear which other international units, if any, will be eligible. The Government has commenced discussions with the European Union in relation to the potential for the Scheme to be linked with the EU ETS. If this occurred, it may be possible to use European Union Allowances in the Scheme. Similarly, if the Scheme was linked to the NZ ETS it may be possible to use New Zealand Units in the Scheme. If linking occurs, it will provide Australian companies with a greater range of units that can be bought for compliance with the Scheme (i.e. increased supply) which may reduce compliance costs. It also provides a potential market for Australian offsets if ACCUs are eligible in other schemes. However, the benefits of this will depend upon the price of permits in other schemes and, as Australia is a significantly smaller market than the EU, it could end up being subject to a higher international price. It is important to note that the use of eligible international units will be subject to Scheme rules in relation to import (and potentially export) and also price floors and caps. These are discussed below.

6.6 Carbon Farming Initiative ACCUs Eligible ACCUs generated under the CFI will provide a source of Australia-sourced offsets for use in the Scheme. The CFI legislation distinguishes between Kyoto ACCUs (which are eligible for compliance use in the Scheme) and non-Kyoto ACCUs (which are not). Non-Kyoto ACCUs are those not generated in compliance with methodologies under the Kyoto Protocol and will likely be as “voluntary” units, for which a separate market is emerging. An ACCU will be eligible for compliance use in the Scheme (and therefore be an eligible ACCU) if its generation is consistent with the rules of the Kyoto Protocol (whether or not the Kyoto Protocol is operational at the time of issue) or the regulations specify it to be an eligible ACCU.48 Activities which are expected to be eligible to generate eligible ACCUs include the following:

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reforestation and revegetation;

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reduced methane emissions from livestock;

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reduced nitrous oxide emissions from fertiliser use; and

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reduced emissions from landfill waste deposited before 1 July 2012.

6.7 Purchase of Carbon Units Liable entities will be able to procure carbon units by purchasing them from the Government, through free allocations or by purchasing them in secondary markets (i.e. from other companies or from intermediaries such as banks or brokers).

(a) Purchase from Government Pricing and sale arrangements for carbon units will vary between the Fixed Price Period and the Flexible Price Period. In general terms, during the Fixed Price Period all carbon units will be sold at the fixed price applicable in each year and will then be automatically surrendered and cancelled. In the Flexible Price Period, most carbon units issued by the Government will be sold at auction, with some sold at a fixed price when the price floor operates. (i) Fixed Price Period The Fixed Price Period commences with the commencement of the Scheme on 1 July 2012 and will end after three years, on 30 June 2015.49 The price will then increase by 2.5% each year. The table below depicts the carbon price for the Fixed Price Period.50

Year

Price per carbon unit

2012 - 2013

$23

2013 - 2014

$24.15

2014 - 2015

$25.40

2015 - 2018

Flexible pricing subject to a price floor and price ceiling

2018 onwards

Flexible pricing

49. Sections 100(1) and 122(6) of the Clean Energy Act 48. Section 5, definitions of “eligible emissions unit” and “eligible Australian carbon credit unit” of the Clean Energy Act

50. Section 113 of the Clean Energy Act

Australia’s Clean Energy Legislative Package How will liable entities meet their obligations?

During the Fixed Price Period, all carbon units will be sold by the Government at a fixed price. Carbon units purchased in this way will automatically be surrendered on behalf of recipients in respect of the vintage year in which they are issued.

and maintain records of auction results, including auction dates, carbon unit vintages auctioned and the charges of carbon units auctioned.58 The Regulator will after each financial year publish the average (or benchmark) auction price for that financial year.59

It will not be possible to bank or borrow carbon units during the Fixed Price Period.51

In order to effectively participate in auctions, businesses should become familiar with the auction process and rules as soon as the auctioning regulations are released. It is likely that businesses wanting to participate in the auction will need to be registered with the Regulator and have a nominated person appointed to directly bid at auctions. It is likely that the Regulator will arrange test auctions to assist businesses in understanding how the auctioning process works.

For each financial year, during the Fixed Price Period there will be two periods when liable entities will be entitled to apply to purchase carbon units. The first period is from 1 April to 15 June in the financial year. The second period will run from when emissions numbers are published (31 October at the latest) after the end of the financial year until 1 February in the following calendar year.52 To ensure that units are not over allocated, at each issuance liable entities will not be able to purchase a number of carbon units greater than their total emissions less the number of units they have already surrendered.53 (ii) Auctioning - Flexible Price Period The Scheme will operate as a flexible price Scheme from 1 July 2015.54 During this period the Government, through its Regulator, will sell carbon units at auction, rather than at a fixed price (except where the floor price applies). During the Flexible Price Period unlimited banking will be allowed. Carbon units will be auctioned (with the exception of those that are freely allocated) by advance auctioning of future vintage carbon units (with no deferred payment arrangements). At the time of publication the Government had not yet released the arrangements which will govern the auctions, or set out the frequency with which they will be held. These will be set out in regulations to the Clean Energy Act.55 There will also be advanced auctions of flexible price carbon units in the Fixed Price Period, although the Government has also not yet set the details for these auctions.56 The number of carbon units auctioned in this way will be limited to 15 million carbon units for each vintage per year, until 12 months before the beginning of the relevant financial year.57 To maximise the transparency of the carbon unit market and protect the integrity of the Scheme’s pollution cap, the Regulator will publish

51. Section 5, definition of “fixed charge year” of the Clean Energy Act 52. Section 100(1) of the Clean Energy Act

(b) Freely allocated by Government - EITEs As discussed below in section 7, carbon units may be freely allocated to companies involved in EITE activities under the Jobs and Competitiveness Program and also to eligible coal-fired electricity generators. Carbon units will be allocated in respect of direct and indirect emissions. Units allocated in this way in the fixed charge period will be tradeable but will not be bankable. Where units have been allocated for free under the Jobs and Competitiveness Program or the coal-fired energy generation assistance package, the Regulator will buy back any carbon units held by liable entities in excess of this number for the particular vintage year.60 The amount at which the Regulator will buy back these carbon units has not been specified, but it is expected to be at a discount to the fixed charge, with the amount linked to the RBA index for the BBB corporate bond rate.

(c) Trading Liable entities will also be able to go into the market to obtain the units that they need for compliance with their obligations under the Scheme, within the limits set out below. During the Fixed Price Period market participants will be able to buy and sell carbon units and other emission units but only carbon units and eligible ACCUs will be useable to acquit surrender obligations, and eligible ACCUs will be subject to the 5% limit discussed above. Free permits allocated to businesses under the jobs and competitiveness program or the coal-fired electricity generation assistance package may also be sold during the year in which they are eligible for compliance, both to the Government under its buy-back scheme or on the market. Market participants could, however, during the Fixed Price Period, begin to accumulate portfolios of ACCUs and international emissions

53. Sections 100(3) and (4) of the Clean Energy Act 54. See also Section 100(1) of the Clean Energy Act 55. Section 113 of the Clean Energy Act 56. See Australian Government (2011) Securing a clean energy future: the Australian Government’s climate change plan, Commonwealth of Australia,

58. Section 195 of the Clean Energy Act

Canberra, Table 3, page 104.

59. Section 114 of the Clean Energy Act

57. Section 101 of the Clean Energy Act

60. Section 116 of the Clean Energy Act

A guide for business

units to be used in the Flexible Price Period when fewer restrictions will apply to the use of those units. As noted above, there will be a number of different ways to source carbon units through market mechanisms in order to reduce compliance costs. It is expected that offset units will trade at a discount to the market price for carbon units sold by the Government either during the fixed price period or at auction. This is consistent with the EU ETS where eligible international offset units have historically traded at a discount to the European Emission Allowances (approximately 15%). On this basis, purchasing ACCUs directly from domestic offset providers (either through primary investments in projects or on the secondary market purchasing units which have been issued), may be of benefit to some businesses. A similar approach could be taken for international offset projects under the CDM. In both cases, it will be important for liable entities to ensure that the credits that they are purchasing are from eligible projects.

In addition to purchasing directly from project developers, it is expected that a number of carbon credit service providers will emerge in the market. These will include banks, brokers and other intermediaries who will be able to source and package carbon units for compliance buyers. Using these types of services enables companies to outsource the purchase of units and limits their exposure to risks associated with dealing directly with project developers. These types of services may result in a higher overall price being paid for units (although this may still be below the market price where offsets are being purchased) but may save companies time and resources. Market exchanges are also expected to be established in Australia, which will enable carbon units to be purchased on a spot basis. The following table provides examples of different market players.

Market Players

Project Developers

Traders

Banks

International Players

»» »» »» »» »»

»» »» »» »»

»»

CO2 Australia Carbon Conscious REDD Forests R.M. Williams

Climate Friendly EMIT Securities Evolution Markets Brokers Carbon

Westpac

Power companies and

NAB

other liable entities who

ANZ

trade

Commonwealth Bank

Greening Australia

Int. Project Developers

Funds

International Banks

»» »» »» »»

»» »»

»» »» »» »»

Camco EcoSecurities Tricorona Peony Capital

World Bank Asian Development Bank

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European Carbon Fund

Standard Bank Macquarie Capital JP Morgan Barclays Bank

6.8 Surrender of carbon units (a) Surrender rules As noted above, eligible emission units must be surrendered by 15 June in the relevant financial year or 1 February in the following

financial year. In order to fulfil their surrender obligations liable entities will need to surrender eligible emissions units in accordance

Australia’s Clean Energy Legislative Package How will liable entities meet their obligations?

with procedures set out in the legislation which requires that units be surrendered by “electronic notice transmitted to the Regulator”.61 The legislation does not clearly specify what form the electronic notice must take but it does state that the notice must be in any form required by the Regulator, including in relation to encryption and confirmation of identity.62 When a carbon unit is surrendered, it is cancelled and the Regulator will then remove the entry for the unit from the Registry account of the person who has surrendered it.63 If an eligible international unit is surrendered, the Regulator must not only remove it from the Registry account of the person who has surrendered it, but also make other account entries relevant to whether the unit is a Kyoto unit or other international unit.64 Other rules also apply to the surrender of international units. International units can only be surrendered during the Flexible Price Period and then only up to 50% of a liable entity’s total surrender obligation. If a liable entity surrenders a number of eligible international emission units greater than 50% of its surrender obligation, the excess will count towards the calculation of its emissions number for the following financial year.65 It is also important to note that the Government can prohibit the surrender of eligible international units in order to protect the environmental integrity of the Scheme. This is discussed further below. Holders of international emission units should also note the Kyoto Protocol carry-over restrictions. These are discussed in section 8.4 below.

(b) Failure to surrender - unit shortfall charge Liable entities which fail to surrender carbon units when required will be liable to pay a penalty to the Administrator for each carbon unit that is not surrendered. The charge payable is a “unit shortfall charge”.66 The unit shortfall charge is the product of the number of carbon units not surrendered and a penalty amount which is specific to each year during the Scheme. The penalty amount is calculated as follows:

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carbon units of the vintage of the carbon units not surrendered; and

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during the Flexible Price Period - either an amount specified in regulations, or 200% of the “benchmark annual auction price” for the previous financial year.67

At the time of the publication of this Guide, no penalty amount had been published in regulations for the Flexible Price Period. The legislation does provide that the benchmark annual auction price is to be calculated as the maximum of the following two numbers:

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the average auction price for that financial year, which is the total auction proceeds for that year divided by the total number of carbon units sold, including carbon units with a future vintage; and

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the average auction price for the final auction conducted in that financial year in which carbon units of the same vintage as that financial year are auctioned, which is the total auction proceeds for that auction divided by the total number of units auctioned, including carbon units with a future vintage.

(c) Administrative and late payment penalties If liable entities fail to pay the unit shortfall charge, they will be subject to an administrative penalty and a late payment penalty. The administrative penalty is calculated as a prescribed amount for each carbon unit not surrendered. This amount is $46 in 2012-2013, $48.30 in 2013-2014 and $50.80 in 2014-2015. After these three years, the amount will be set out in regulations, or if it is not, 200% of the benchmark average auction charge for the previous financial year.68 The late payment penalty is 20% per annum, unless a lower rate is specified in the regulations.69 This amount is a debt due and payable to the Commonwealth.70 The Regulator can remit the penalty, but only in limited circumstances including where the liable entity did not contribute to the delay in payment and has taken reasonable steps to mitigate the delay.71 This late payment penalty will also be payable if the administrative penalty is not paid.72

during the Fixed Price Period - 130% of the fixed price payable for

61. Section 122(1) of the Clean Energy Act

67. Section 8(4) of the Clean Energy (Unit Shortfall Charge - General) Act 2011; see also section114 of the Clean Energy Act

62. Section 7(1)-(5) of the Clean Energy Act

68. Sections 212(1) to (3) of the Clean Energy Act 2011.

63. Section 122(10) of the Clean Energy Act

69. Section 135(1) of the Clean Energy Act 2011.

64. Section 122(11) of the Clean Energy Act

70. Section 136 of the Clean Energy Act 2011.

65. Section 133(7) of the Clean Energy Act

71. Section 135(2) of the Clean Energy Act 2011.

66. Section 8(1) and (2) of the Clean Energy (Unit Shortfall Charge - General) Act 2011.

72. Section 213 of the Clean Energy Act 2011.

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A guide for business

Which industries are given assistance?

7.1

Overview of industry assistance

7.2

Who is eligible for assistance?

7.3

Who is assistance provided to?

7.4

How is assistance calculated over time?

7.5

When will assistance be provided?

7.6

What can recipients of free permits do with those permits during the Fixed and Flexible Price Periods?

7.7

Assistance Reviews

7.1 Overview of industry assistance The design of the Scheme includes the provision of assistance to a number of different sectors of the economy in order to ease both the direct and indirect impacts of the carbon price and support jobs in exposed sectors. There are a number of Australian businesses that export their products internationally and are subject to international competition that puts pressure on the prices that they can charge. For example, if a product is produced by both an Australian company and by its competitor in a country that doesnâ&#x20AC;&#x2122;t have a carbon price, the non-Australian may be at a cost disadvantage if its production costs increase and those costs cannot be passed through. There are also some domestic operations in the electricity generation sector that will be heavily affected by a carbon price as a result of the fuel type they burn. These energy intensive coal-fired generators would be subject to disproportionate cost impacts if they did not receive some form of assistance which could ultimately affect their ability to continue to generate electricity, risking energy security.

Limited assistance is also provided to these generators to ensure that base-load power needs can be met and managed. Industry-specific assistance will primarily be provided through the Jobs and Competitiveness Program (Program) and the Coal-fired Generators Assistance Package. Assistance is provided in the form of free permits, however additional packages have also been negotiated which enable certain EITE industries to apply for grants (e.g. the Steel Transformation Plan - see section 10) and for coal-fired generators to apply for Government loans to assist with the purchase of units, where other debt or equity finance may not be available, and closure contracts for some of the most polluting power stations.

Australia’s Clean Energy Legislative Package

Which industries are given assistance?

7.2 Who is eligible for assistance?

7.3 Who is assistance provided to?

(a) EITEs

The Program provides for free carbon units to be provided to EITE industries that undertake activities within Australia that are defined as eligible activities. These include activities in the steel manufacturing, aluminium, cement, pulp and paper sectors. To receive assistance under the Program, entities must meet certain eligibility requirements, assessed based on an emissions-intensity and trade-exposure test (this test is set out in Appendix 2).

Under the Program, free carbon units will be provided where:

»»

an EITE activity was carried out at a facility during the previous financial year; and

»»

the person had operational control of the facility, was a participant in a designated joint venture with a participating percentage greater than zero, or held a liability transfer certificate for the facility.75

Assistance will be provided for the following:

»»

the direct emissions associated with an activity that gives rise to an obligation under the Scheme;

»»

the emissions associated with the use of steam in an activity;

»»

the cost increase associated with the indirect emissions from the use of electricity in an activity, which is assessed as resulting from the introduction of the Scheme; and

»»

the cost increase related to the upstream emissions from the extraction, processing and transportation of natural gas and its components, such as methane, used as feedstock and sequestered by an activity.

The draft regulations provide details of the activities that are EITE activities and classifies them as being either highly emissions-intensive or moderately emissions-intensive. These are summarised in Appendix 2. The coal mining sector is expressly excluded from the Program.

(b) Coal-fired electricity generators Eligible generation complexes can receive free carbon units in respect of each of the four financial years commencing with the 2013-14 year.73 A generation complex must pass an eligibility test (the test is set out in Appendix 2).74 Power stations that have an emissions intensity greater than 1.0 tonne of CO2-e per MWh of electricity generated and were operational prior to 30 June 2010 will be eligible for assistance. Therefore, new generation complexes that became operational after 1 July 2010 are not eligible for assistance.

The number of free carbon units issued will be directly linked to the level of production of the individual entities conducting an activity. In any given year, the number of free carbon units will be determined using the previous financial year’s production of the activity by that entity adjusted for any over or under allocation in the previous year, with the following exceptions:

»»

for new entrants and significant expansions, the Regulator has the discretion to determine an allocation for the expected production in a given year;

»»

entities operating newly established facilities will have their allocations limited by regulations in a manner to avoid windfall gains from assistance;

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sub-threshold facilities will have assistance adjusted through regulations such that assistance is not provided for emissions which do not attract carbon costs; and

»»

LNG projects will receive a supplementary allocation to ensure that they receive an effective rate of assistance at or above 50%.

To retain the full incentive to invest in emissions reductions technologies, unit allocations will be uncapped for existing facilities. If an entity ceases conducting an EITE activity, it will be required to relinquish carbon units that had been issued to it for production that did not occur.

Very highly-emissions-intensive coal-fired generators with an emissions intensity greater than 1.2 tonnes of CO2-e per MWh of electricity may also be eligible to negotiate closure contracts with the Government in relation to their facility.

73. Part 8 of the Clean Energy Act 74. Section 166 Clean Energy Act

75. Division 2, Part , Schedule 1, Clean Energy Regulation.

A guide for business

(b) Coal-fired electricity generators Similarly, free carbon units will be issued to either the person who has operational control of the generation complex or a person who holds a liability transfer certificate for the generation complex and consistent with participating percentages for joint ventures.76 While it is possible for applications to be made for different generation units that comprise a generation complex, multiple applications for the same generation units cannot be made.

7.4 How is assistance calculated over time? (a) EITEs The Program will deliver carbon units in accordance with an entity’s payment and surrender obligations (see Chapter 4). In most cases, the number of free carbon units to be provided to an eligible applicant in a financial year in relation to an EITE activity will be determined using the provisional allocation formula outlined in Appendix 2. The calculation is broadly based on the assistance rate for a given year, the production level for that year and three baselines for the activity - in terms of its direct emissions intensity, electricity used and natural gas used in production. The assistance rates begin at 94.5% for highly emissions-intensive activities and 66% for moderately emissions-intensive activities. Appendix 2 lists the activities prescribed under the draft regulations to be either highly emissions-intensive or moderately emissionsintensive. The initial rates of assistance accorded each EITE activity will be reduced in the regulations by the “carbon productivity contribution” of 1.3% a year.

(b) Coal-fired electricity generators Coal-fired electricity generators that have an emissions intensity greater than 1 will be eligible to apply for free units. The number of free units which may be issued in respect of a generation complex is to be calculated according to the formula specified in the legislation (see Appendix 2).

of greater than 1.2. The objective of this exercise is to manage the transition to new, cleaner, power stations. We expect that the approach that will be taken with respect to closure contracts will involve payments being made by the Government to generators for the achievement of certain milestones related to the retirement of generation units over a period of time and in a manner that manages such matters as energy security and ensuring workers entitlements are met and sites are remediated The Department of Resources, Energy and Tourism (DRET) is the Government department that is responsible for running the negotiations with eligible generators for contracts for closure. We understand that DRET will be making direct contact with those eligible power stations, however you may wish to make contact directly with DRET to discuss the proposed tender process.

7.5 When will assistance be provided? (a) EITEs An application for assistance must be made before 31 October in the financial year, although the Regulator may approve an application to extend the application period to no later than 31 December in the financial year.77 The Regulator will be able to issue units to applicants as soon as it is satisfied about each application. Special timing provisions apply for newly operating facilities and significant expansions at facilities. For newly operating facilities where there is no relevant historical production upon which to base the issuance of units (e.g. brand new facilities or facilities that were closed for the previous year), applicants will be allocated carbon units based upon expected production for the coming year instead of the previous year’s production. A facility that has been built on a completely greenfield site, or has been completely re built on the site of a previous facility (that is, all of the principal equipment New used to carry out the EITE activity has been replaced) Facility where the construction of the facility or final decision to invest in and construct the facility had not occurred before 10 July 2011. Such facilities will have a maximum cap on allocations applied.79 78

In addition, the Government has indicated that it will seek to negotiate the closure of some of the most emissions-intensive coalfired power stations, i.e. those generators with an emissions intensity

77. Clause 702 of the EITE Regulations. 76. Section 161(6) of the Clean Energy Act 78. Clause 911 of the EITE Regulations.

Australia’s Clean Energy Legislative Package

Which industries are given assistance?

7.6 What can recipients of free permits do with those permits during the Fixed and Flexible Price Periods? Given that applications are due by 31 October each year, newly operating facility status will also apply to facilities which conducted an activity for the first time during the immediately preceding financial year but did not apply for free carbon units under the Program. Investments in significant increases in existing facilities will be eligible for an additional up front allocation of free carbon units that will be provided in situations which involve the installation of new equipment increasing production capacity by more than 20%. This special allocation for expected production is to be additional to the production of that facility in the previous financial year.

(b) Coal-fired electricity generators Where a generation complex is eligible for assistance in an eligible financial year, free units will be issued on 1 September of the eligible financial year.

During the Fixed Price Period, it will only be possible for recipients to surrender these free units in respect of the vintage year for which they are issued.79 There is no other restriction on the transfer of carbon units issued for free. Therefore, carbon units can also be sold to any other third party to monetise their value. This is particularly relevant with the EITE assistance for indirect emissions associated with the use of electricity when carrying out EITE activities. To the extent that liable entities wish to use these carbon units for compliance purposes, they must be surrendered at the end of 1 February in the financial year following the financial year in which they were issued (or they will be cancelled by the Regulator).80 In the event that liable entities have surplus carbon units after they have acquitted their compliance obligations by surrendering carbon units, they can sell these back to the Regulator. They must do this between 1 September and 1 February in the financial year after the financial year for which they receive the carbon units. During the Fixed Price Period, the holders of freely allocated carbon units can sell excess units back to the Regulator at the fixed charge for the relevant year, discounted by a factor to be determined by the Regulations.81 The ‘buy-back’ facility will be open from 1 September of the vintage year of the carbon unit until 1 February of the following year. After these units are cancelled by the Regulator, it will then pay the relevant amount to the liable entity.82 It is important to note that if excess carbon units are received for EITE activities that have ceased, the recipient can be required to relinquish those excess carbon units.

79. Section 122(7) of the Clean Energy Act 80. Section 115 of the Clean Energy Act 81. Section 116 of the Clean Energy Act 82. Clause 5.1 EITE Draft Regulations.

A guide for business

7.7 Assistance Reviews Reviews of the assistance under the Program are to be undertaken by the Productivity Commission in accordance with the following timeline, unless otherwise requested by the Government.

Deadline

Action

31 June 2015

First review of the Program

31 December 2016

Review in conjunction with general Scheme review

1 July 2017

No changes to the Program before this date

31 December 2018

Review in conjunction with general Scheme review

Within 5 years of the last review

Review in conjunction with general Scheme review

The Productivity Commission reviews will consider whether an alternative pattern and level of assistance would meet the Program’s objectives more effectively, particularly economic and environmental efficiency, through an assessment of:

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the operation of assistance arrangements;

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the impact of the Clean Energy Act and associated provisions on EITE industries; and

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the economic and environmental efficiency of assistance arrangements.

Changes to the Program will only be made following consideration of:

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the aims of the Program, including to provide assistance in an economically and environmentally efficient manner to reduce the risks of carbon leakage from EITE industries and help these industries transition under a carbon price;

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the most recent reports from the Productivity Commission; and

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the principle that changes to the regulations that will have a negative effect on recipients of assistance under the Program should not take effect before the later of 1 July 2017 or the end of the three year notice period that begins when the reduction is announced.

Participating in the market

8.1

Operation of the market

8.2

Preconditions to participation

8.3

Price floor and price ceiling during the transition period

8.4

International units

8.5

Treatment of units as financial products

8.1 Operation of the market A central plank in the Government’s policy of imposing a price on carbon has been the argument that doing so provides the lowestcost way of reducing Australia’s emissions. Australia’s currently small carbon market will grow with the evolution of the Scheme. This market growth will likely be slow during the Fixed Price Period because the fixed price and automatic surrender of carbon units issued at the fixed price will provide a disincentive for trading in carbon units. A further brake on market development will be global carbon market uncertainty in relation to the end of the first Kyoto Protocol commitment period at the end of 2012. This will change, however, in the lead-up to the commencement of the Flexible Price Period of the scheme in 2015. At this time, the development of the market will be accelerated not only by the commencement of flexible price auctions, but also by the removal of quantitative restrictions on the surrender of eligible ACCUs by liable entities and the ability to use eligible international units. Under the New Zealand ETS, companies with large compliance obligations have taken advantage of the scheme’s link to international markets to purchase CERs when the price has fallen below the price of units generated under the domestic scheme while other companies have sold the units generated in relation to forest projects in New Zealand into the international compliance market. Similar behaviour is expected from Australian companies under the Australian Scheme once it is linked to international schemes.

(a) The operation of the international market Rather than operating as a single unified market, the global carbon market is, in fact, comprised of a number of individual emissions trading schemes, encompassing both allowance and project-based (or offset) markets with different degrees of interconnection and a number of different tradeable commodities. The primary compliance market is that created by the Kyoto Protocol and the EU ETS, which implements the Kyoto Protocol across Europe.83 The EU has created a bubble around its Kyoto target, and is using the EU ETS as a way to achieve the collective target at least cost across all Member States. In addition, there are a number of independent but overlapping existing or proposed regional, national and sub-national emissions trading schemes, many of which have or will have the use of CDM credits as a common thread. The markets for each carbon commodity (allowances and projectbased offsets) have grown at different rates and experienced different levels of liquidity, different market volumes and vastly different prices. Some commodities, like CERs from CDM projects, have traded for many years in large volumes; for others, like AAUs, an extremely limited volume has been traded. For most commodity types (with the exception of those traded through exchanges or public auction platforms), the market is largely primary and bilateral, making reliable estimates of commodity value and accurate predictions of future prices difficult to make. However, as more transactions are being conducted on public exchanges, and with enhanced market disclosure rules (e.g. ASIC disclosures), greater market transparency is expected. In addition, there are a number of very good market surveys, such as the World Bank’s State and Trends of the Carbon Market report and PointCarbon’s Carbon Market Analyst,84 which provide a useful guide to market developments.

83. The EU ETS has been operating since 2005 and its second phase will align with the first compliance period under the Kyoto Protocol (2008-2012). 84. Note also the New Carbon Finance and Ecosystem Marketplace State of the Voluntary Carbon Market annual reports.

A guide for business

(b) EU ETS

The establishment of the EU ETS created a large market place for the trading of carbon units internationally. Whilst Phase I (2005 - 2007) of the EU ETS was a trial phase, Phase II (2008- 2012) of the Scheme implemented many of the lessons learned in Phase I. For example, permits were over-allocated in Phase I of the EU ETS as a result of companies submitting historical emissions data. For Phase II, the caps in national allocation plans were tightened to reflect actual emissions data that had been monitored over the preceding phase. In addition, the passage of EUâ&#x20AC;&#x2122;s Linking Directive enabled liable entities to access Kyoto Protocol offset credits at lower costs than EUAs for use in the Scheme, stimulating the international carbon market and providing the greatest demand for CDM and JI credits. Further lessons have been learnt through Phase II and from the design of other national trading schemes. In Phase III of the EU ETS (2013-2020), there will be a move towards greater auctioning of EUAs rather than free allocation (although trade exposed sectors will still receive free units), the scheme will be expanded to more industry sectors, registries will be centralised and further financial market oversight is to be implemented.

The CDM market is the second largest carbon market globally and links to the EU ETS. The CDM has also moved through a number of stages of development. In the late 1990s, prior to the commencement of the Kyoto Protocol, Annex I project developers were mainly companies such as EcoSecurities, Camco and Carbon Resource Management. These companies went to developing countries to source projects and worked closely with local project owners to put together and manage CDM projects. Developing country participants had very little knowledge about the CDM and because of the lack of experience and the absence of regulatory frameworks, the projects were relatively high risk. However, the cost of CERs was relatively low. The early Annex I project developers were pioneers in the market. They often paid all of the up front costs to develop projects and in return took the benefit of all (or most of ) the CERs generated from the project. During this time, the contracts that were drafted for the purchase of CERs were not particularly sophisticated, nor were they standardised. Furthermore, a number of the projects did not meet the CDM rules, which meant that projects had to be redeveloped at additional time and expense.

Trading in the EU ETS primarily takes place between those liable entities with additional permits to sell, either through private contracts or through the secondary market via exchanges and registries. Some of the major European players, including Holcim Ltd, Enel, RWE and Statkraft have actively entered the CDM market, some even directly investing in primary projects.

The second phase of CDM market development was dominated by the engagement of multilateral funds such as the World Bank carbon funds. In order to support the development of the carbon market, the World Bank worked closely with Annex I developed country Governments to establish investment funds which would cover the costs of developing projects on the basis that they would receive a reasonable rate of return for the carbon generated from the projects. The Netherlands Government also developed its own fund to purchase CERs on more commercial terms (e.g. the CERUPT fund) as did the European Carbon Fund (ECF) to trade into the EU ETS. In the years that followed, a number of private funds also began to emerge during this period, for example, those developed by NatSource and Climate Change Capital. In association with these funds, procurement teams were established to source eligible projects and engage in capacity building with local operators. Ordinarily, the fund would then cover the costs of developing the project design documents and getting the project registered with the CDM Executive Board. These were followed by the emergence of a number of Government funds or national carbon funds e.g. the Spanish Carbon Fund and the Japan Carbon Fund.

Whilst prices for EUAs have fluctuated widely over the years of the Scheme, during Phase II there has been a strong correlation between prices and demand for energy as well as the availability of supply of both EUAs and CERs. At their peak, EUAs were trading at close to Euro 30 and for most of Phase II have traded between Euro15-22, however, towards the end of 2011, with financial troubles across Europe, many industries have decreased production and are using less energy, hence prices are now closer to Euro 10.

Over the last few years, as experience with the CDM deepens, the market is becoming more sophisticated. Contractual negotiations are becoming more commercial, especially as non-Annex I projects developers have the ability to select counterparties and host country Governments are becoming more involved in the process of approving and regulating CDM project activities. China has put in place detailed laws to govern all aspects of participation in the CDM. India has taken a slightly different approach, favouring less regulation, but also promoting the development of unilateral CDM projects and then

Australia’s Clean Energy Legislative Package

Participating in the ‘market’

selling the CERs generated from those projects directly to the spot market.

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applicants must submit an application form which can be downloaded from the Scheme website;85

In the last few years most of the major international investment banks have set up trading desks with some acquiring CDM businesses and portfolios. These include Macquarie Bank, Citigroup, JP Morgan, Merrill Lynch, Morgan Stanley, Rabobank, Goldman Sachs, Deutsche Bank and Standard Bank. In addition, brokerage activities and carbon funds have been established in response to the demand for carbon credits (see the figure in section 6.7 for an overview of market players).

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both individuals and non-individuals must submit certified copies of original documents proving their identity;

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each entity must have one primary authorised representative and may have one or more secondary authorised representatives - all must prove their identity and will have electronic access to the account and may also transfer units; and

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individuals may nominate secondary authorised representatives who will also have access to the individual’s accounts - these representatives must also prove their identity.

Australian companies also already participate in the CDM. For example, Roaring 40s, Pacific Hydro and Perenia have developed both their own projects and projects in collaboration with local partners, and Cool NRG has been a pioneer in programmatic CDM. Similarly, at an international level, many large industrial companies are also developing their own projects and using the CERs generated as part of their domestic compliance strategies (particularly where regulated under the EU ETS or other compliance regimes). It is likely that Australian compliance entities that have exposure to international projects (e.g. international mining companies) may also follow this route. So how can businesses participate in the Australian carbon market and what potential opportunities and risks does the growth of the Australian carbon market present for participants?

8.2 Preconditions to participation At a basic level, businesses considering becoming involved in the market will need to establish a Registry account. A Registry account is required in order to hold and trade ACCUs, carbon units and international units.

If an application is successful, the Regulator will open an account and the applicant will then receive access and log-in details.

(b) Compliance with laws governing registry and market oversight Market participants should be aware that the Registry administrator has the power to block Registry transactions which it suspects to be fraudulent. It can do this by refusing to make an entry in the Australian Registry for an incoming transfers of both Kyoto and nonKyoto units.86 Separately, carbon market participants in Australia should be aware in relation to their trading activities that the Australian Competition and Consumer Commission (ACCC) has legislated powers to take action against businesses which falsely or misleadingly make claims in relation to the carbon neutrality of their products or services. Participants should ensure that their public communications in relation to carbon neutrality are accurate, truthful and justifiable.87

The Registry is an electronic system which accounts for the issuance, holding, transfer, acquisition, cancellation, retirement and carry-over of emissions units under the Kyoto Protocol, the Scheme and the CFI.

(a) Establishing an account in the Registry Detailed procedures for the establishment of a Registry account are to be set out in regulations. Initial guidance from the Government in relation to the establishment of registry accounts for Kyoto units specifies that: 85. The forms can be downloaded from the Department’s website, at: http://www.climatechange.gov.au/Government/initiatives/anreu/how-will-anreuwork.aspx. 86. Sections 36(2) and 53(2) of the Australian National Registry of Emissions Units Act 2011. 87. Further information on the rights and obligations of businesses and consumers in relation to carbon trading and carbon neutrality can be found on the

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website of the ACCC, at http://www.accc.gov.au/content/index.phtml/itemId/1005648.

A guide for business

8.3 Price floor and price ceiling during the transitional period During the first three years of the Flexible Price Period a price ceiling and price floor will operate. These will help to prevent major price shocks and should also assist in providing market participants with enough price certainty to encourage medium- and long-term investment in emission reduction activities. Each of the price ceiling and price floor will operate in slightly different ways. The price ceiling will initially be set at $20 above the “international price” per unit and will rise by 5% in real terms each year, allowing for 2.5% inflation each year. The price ceiling for 2015-16 will be set through regulations which are to be made before the end of 31 May 2014.1 To enhance market transparency, the ceiling for each of 2016-17 and 2017-18 will be published before the start of each of these years. When the price ceiling is triggered, the Regulator will issue fixed charge carbon units in a manner similar to that in which it issues units during the Fixed Price Period, except that these units will not be automatically surrendered. The Government has not yet indicated how it intends that the international unit price be calculated for the purposes of setting either the price floor or the price ceiling. This could take the form of the contracted price but it is more likely that the price will be linked to international market prices. In the first year of the Scheme the price floor will be $15 and the floor will rise at 4% in real terms each year.2 The price floor will operate as a minimum reserve auction price for carbon units. It will also operate as a fee for the surrender of international units, although this is contingent on the implementation of regulations.3

Year

Price floor

2015 - 2016

$15

2016 - 2017

$16

2017 - 2018

$17.05

2018 onwards

No price floor

The Government has indicated that the surrender charge relating to international units will operate as follows:

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if the price for an eligible unit is the same as or above the floor price, no charge will be payable; and

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if the unit price is below the price floor, the charge will be equal to the difference between the unit price and the floor price.

8.4 International units (a) Eligibility for use and changes to eligibility rules As noted above, the Government has indicated that certain qualitative restrictions will apply to the use of international units for compliance with Scheme obligations. This will add some risk to international emissions unit purchases because the acceptability of these units may change at any time, although the Government has committed to ensure that changes will only operate from the start of the following compliance year. These qualitative restrictions will be set out in regulations, rather than in legislation, which means that the Government will not need to implement any changes to them through Parliament.

(b) Restrictions on surrender In addition to those rules, the legislation also enables the Government to prohibit the surrender of eligible international units where this is necessary to protect the integrity of the Scheme. In doing so, regard must be had to the following:

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Australia’s international objectives and obligations (including under climate change agreements);

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the environmental integrity of the Scheme;

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reporting to the Minister by the Authority in the course of one of its periodic reviews;

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the extent to which eligible international emission units can be traded into the EU ETS and the NZ ETS.

The only qualification to this right is that any prohibition can only apply prospectively and will not apply to the surrender of eligible international emission units in the year in which it is made. It therefore has the potential to have a significant effect on contracting for the sale and purchase of international emissions units, particularly in relation to price. 1. Section 100(14) of the Clean Energy Act 2. Section 111(5) Clean Energy Act 3. Section 111(5) of the Clean Energy Act; The charge will be imposed by the Clean Energy (International Unit Surrender Charge) Act 2011.

Australia’s Clean Energy Legislative Package

Participating in the ‘market’

(e) Changes to rules

Market participants should also note that trading in international units to and from Australian Registry accounts is broadly contingent on Australia remaining in compliance with its obligations under the Kyoto Protocol.91

Trading in international permits is also subject to general policy and regulatory risks other than those discussed here. Trading in international emission units could be affected by Government amendments to the trading or Registry rules. These could include the Government:

If the Climate Change Minister is not satisfied that Australia is in compliance with its Kyoto Protocol obligations, he or she must make a declaration to that effect92 which could result in Australia being suspended from trading of Kyoto units and participation in the CDM. This could result in the stranding in overseas registry accounts of international emission units already purchased for compliance purposes in the Scheme, or in Australian market participants becoming unable to fulfil contractual obligations to purchase and receive delivery of international units. Market participants which expect to undertake significant trading activities in international units, particularly activities which involve forward contracting, should ensure that their trading contracts address the risk of Australian suspension from trading under the Kyoto Protocol.

(d) Restrictions on the carry-over of Kyoto Protocol units A further restriction on the use of international emission units relates to restrictions on holding Kyoto Protocol units. The first commitment period of the Kyoto Protocol ends on 31 December 2012. In general, Kyoto Units may only be traded in the commitment period in which they are issued and only a number of CERs equal to up to 2.5% of a country’s initial emission reduction commitment may be carried over into any future Kyoto Protocol commitment period. This could affect the ability of market participants to use CERs that they hold for surrender in the Scheme, or in other similar schemes, beyond 2012.

91. These are principally Australia’s obligations pursuant to paragraph 2 of the Annex to Decision 11/CMP.1 of the Meeting of the 33 Kyoto Protocol Parties. 92. Section 37(2) of the Australian National Registry of Emissions Units Act 2011.

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tightening qualitative and quantitative restrictions already attaching to the use in the Scheme of international emission units, for example in the event of significant price fluctuations in CER prices;

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seeking to sever links with linked schemes, for example in the event that the environmental integrity of a linked scheme became doubtful;

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taking action to address the risk of fraud in relation to or theft of international units such as the thefts which occurred in some European countries in 2010 and 2011; or

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pre-emptively suspending trading involving registries in Kyoto Protocol parties in danger of falling out of compliance with the Kyoto Protocol rules and therefore being barred from trading under the CDM.

This risk is not unique to the Scheme and the risk of regulatory intervention is a feature of trading in all international carbon markets. Market participants should seek to address this risk through careful contracting and selection of trading counterparties and also by closely monitoring the operation of the Registry and any potential amendments to the Scheme rules in relation to international units.

A guide for business

(f ) Possibility for future linking The Scheme will in effect already be linked to international markets from the start of the Flexible Price Period in that it will be possible to use international emission units for compliance purposes from that time. The implementing legislation also contemplates more direct linking, in transfers of carbon units for use in other trading schemes, and also the use in the Australian Scheme of international units from other schemes:

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exports of carbon units will not be allowed in the Fixed Price Period (which makes it unlikely that linking would occur during this period) but exports into other trading schemes may be allowed from the start of the Flexible Price Period where a bilateral linking agreement is in place;93 and the legislation also contemplates international units other than Kyoto units becoming eligible for use in the Scheme - this would be implemented through regulations, in which case those units would be traded in the same way as Kyoto units, as discussed in section 6 above.

8.5 Treatment of carbon units as financial products Some trading of carbon units will also require licensing under Chapter 7 of the Corporations Act 2001 (Corporations Act). Market participants may need to hold an Australian Financial Services Licence (AFS Licence) with the relevant permissions from the Australian Securities and Investment Commission (ASIC) and may also need to produce a product disclosure statement and financial services guide, where applicable.95 The legislation provides that ACCUs and eligible international units are financial products for the purposes of the Corporations Act. Trading in these units will therefore attract AFS licensing obligations.96 In general terms,97 it will be necessary to obtain an AFS Licence to:

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deal in ACCUs or eligible international units on behalf of other people;

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provide general financial product advice in relation to ACCUs or eligible international units; or

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deal in derivative contracts, which would typically include forward sales of these units where part or all of the sale price is to be paid more than 12 months after the execution of the contract.

The Government has said that linking with other international schemes, including the EU ETS and the NZ ETS, is in Australia’s national interest. It states that linking would be considered with other schemes that are “of a suitable standard”, based on a range of criteria including:

In terms of day to day practice, some examples of circumstances where an activity may require an AFSL include:

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establishing a carbon trading business or platform;

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an internationally acceptable (or, where applicable, a mutually acceptable) level of mitigation commitment;

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working as a dealer or broker of carbon; and

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adequate and comparable monitoring, reporting, verification, compliance and enforcement mechanisms; and

offering an emissions offset scheme involving spot trades of the new types of financial products or forward trades of any other types of carbon credits.

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compatibility in design and market rules.94

Market participants which seek to trade in ACCUs or eligible international units in ways which could attract AFS Licence obligations could consider either obtaining an AFS Licence or arranging with the holder of an AFS Licence to undertake trades on its behalf. In either case, legal advice on AFS Licence obligations should be sought.

95. In general terms, these obligations are imposed by the Carbon Credits (Consequential Amendments) Act 2011. 93. Section 108(3) of the Clean Energy Act

96. Schedule 11 of the Carbon Credits (Consequential Amendments) Act 2011.

94. Paragraph 3.110 and 3.111 of the Explanatory Memorandum to the Clean Energy Act

97. Section 911A(1) of the Corporations Act

Australia’s Clean Energy Legislative Package

Holders of AFS Licences must comply with a number of legal obligations. These include:

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holding appropriate professional indemnity insurance;98

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ensuring that adequate arrangements are in place to manage conflicts of interest;99

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having adequate resources to provide the financial services covered by the AFS Licence and to comply with ASIC’s supervisory requirements;100

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ensuring that its representatives are competent and adequately trained;101

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ensuring that it has implemented adequate risk management systems;102

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providing clients with a financial services guide in relation to the financial service;103 and

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in some circumstances, providing a product disclosure statement to potential clients.104

An AFS Licence will also be required for trading in derivatives. Initial indications are that the a forward contract will be treated as a derivative for AFS Licensing purposes if payment under the contract is to be made 12 months or more after its execution. AFS Licences can be applied for using ASIC’s eLicensing service at www.asic.gov.au, where further information can be found on the documents to be provided with applications.

98. Regulation 7.6.02AA(a) of the Corporations Regulations 2001. 99. Section 912A(1) of the Corporations Act 100. Section 912A(1) of the Corporations Act 101. Section 912A(1) of the Corporations Act 102. Section 912A(1) of the Corporations Act 103. Section 941A of the Corporations Act 104. Section 1012A(3) of the Corporations Act

Participating in the ‘market’

A guide for business

Regulatory oversight

9.1

Roles of the Australian Climate Change Regulator

9.2

Role of the Climate Change Authority

9.3

Administrative review

9.4

Interactions with competition law and the role of the ACCC

9.1 Role of the Australian Climate Change Regulator The Regulator has been established to administer the Scheme along with the CFI, NGERS, the Renewable Energy Target and the Registry. The Regulator has been given powers to encourage compliance and, when problems arise, the ability to investigate and take enforcement action. In particular, the Regulator is charged with the following responsibilities:

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determining liability through assessing emissions data;

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operating the Registry;

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monitoring and enforcing compliance with the Scheme;

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allocating permits, including freely allocated permits, fixed price permits and auctioned permits; and

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determining if a particular entity is eligible for assistance in the form of permits.

The legislation sets up a penalty regime for non-compliance, with certain contraventions making parties liable for civil penalties, while other contraventions can result in criminal penalties being obtained. The Regulator can issue an infringement notice for any civil penalty provision.105 Infringement notices allow the Regulator to take action against minor contraventions more efficiently and effectively than through court action alone, and provide the potential for a speedier resolution of matters than is possible through the courts. Each civil penalty provision has a specified maximum pecuniary penalty. The regime for infringement notices allows the Regulator to impose civil penalties for more minor contraventions, rather than necessitating court action. Examples of civil penalties and their maximum penalty are set out in the table below:

Offence

Maximum penalty

Failure to notify of change of name or address of OTN holder

$55,000 for a corporation

Misuse of an OTN

$1.1 million for a corporation

Failure to notify of mandatory designated JVs Failure to comply with Program reporting and record-keeping requirements Failure to give notice of a significant holding Failure to comply with record-keeping requirements Quotation of a false OTN

$55, 000 for a corporation

105. Section 264 of the Clean Energy Act

Australia’s Clean Energy Legislative Package

Regulatory oversight

9.2 Role of the Climate Change Authority The Authority is an independent body composed of nine independent experts with expertise in climate science, economics, climate change mitigation, emissions trading, investment and business supported by independent staff. The Authority will provide independent expert advice on the Government’s climate change mitigation initiatives and the key elements of the Scheme. The Government will, however, retain responsibility for carbon pricing policy decisions that have significant and far-reaching implications.

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provide independent advice to the Government on the progress being made to reduce Australia’s emissions to meet national targets. To this end, the Authority will analyse the extent to which the emissions reduction objectives are being achieved from reductions in domestic emissions and from the purchase of international units;

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conduct regular reviews of, and make recommendations on, the Scheme as well as the NGERS, the Renewable Energy Target and the CFI;

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provide the Government with recommendations about the role of the price floor and price ceiling beyond the three years of the Flexible Price Period; and

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conduct or commission independent research and analysis into climate change and other matters relevant to its functions.

Specifically, the Authority will perform the following functions:

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make recommendations to the Government with respect to future pollution caps and on the indicative national trajectories and longterm emissions budgets;

Review

First review deadline

Second review deadline

Ongoing review deadline

Review of pollution caps, any indicative national emissions trajectory and the national carbon budget

28 February 2014

28 February 2015

28 February annually

Overall Scheme review

31 December 2016

31 December 2018

Within 5 years of the previous review

9.3 Administrative review Decisions of the Regulator and the Authority are circumscribed and subject to administrative review. Administrative review is a mechanism for reviewing Government decisions to ensure that the conduct of Government officers and agencies is transparent and accountable. The administrative law system has the dual purpose of seeking to improve the quality, efficiency and effectiveness of Government decision making generally, and also enabling people to test the legality and the merits of decisions that affect them.

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The Act provides a process where a person affected by certain decisions of the Regulator may apply to Regulator to reconsider its decision and, following that internal reconsideration, if the person is still dissatisfied, a further application can be made to the Administrative Appeals Tribunal (AAT) to have that decision reviewed.

A guide for business

(a) Avenues for review The following table summarises avenues for administrative review:106

Review

Description

Merits review

The process under which a person or body, other than the primary decision maker, reconsiders the facts, law and policy aspects of the original decision and determines the correct or preferable decision. A new decision can be made after review of the facts.

Internal review

Occurs where a decision made by an officer of an agency is reviewed by another person in the agency. It can be sought by requesting reconsideration of a decision or by following set procedures where more formal mechanisms exist. It may be stipulated in legislation or available through administrative processes in an agency.

External review

Involves a fresh consideration of a case by an external body. This body is often a tribunal, but may also be a regulator reviewing the decision of a private body given decision-making power by legislation, or an independent officer from another agency. External merits review has to be provided for by legislation.

Administrative investigation

The Commonwealth Ombudsman has wide powers to investigate complaints about the administrative actions and decisions of most Australian Government agencies to consider if they are wrong, unlawful or discriminatory.

Judicial review

Judicial review occurs when a court reviews a decision to make sure that the decision maker used the correct legal reasoning or followed the correct legal procedures. It is not the rehearing of the merits of a particular case.

(b) Reviewable decisions Thirty five reviewable decisions are specified under the legislation. They relate broadly to the following matters:

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anti-avoidance;

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issuance, consent to surrender, cancellation of an OTN;

»»

issuance, consent to surrender, cancellation of a liability transfer certificate;

»»

determination of participating percentage declarations for Joint Ventures;

»»

assessment of emissions numbers;

»»

assessment of unit shortfalls;

»»

refusal to open a registry account;

106. Summarised from Administrative Review Council, Judicial Review in Australia, Consultation Paper April 2011.

»»

corrections / rectification of registry information and holdings;

»»

prescribed decisions under the Jobs and Competitiveness Program; and

»»

issuance of certificates of eligibility for coal-fired generator assistance.

Australia’s Clean Energy Legislative Package

(c) Procedure for review A person affected by a reviewable decision may apply to the Regulator, within 28 days of receiving notification of the decision, for a reconsideration of that decision.107 The Regulator must make its decision on reconsideration within 90 days of receiving the application for reconsideration.108 The Regulator must then provide the applicant with written notice of its decision and its reasons for its decision within 28 days after making that decision.109 If an applicant is not notified of the decision within the 90 day period, the Regulator is taken to have affirmed the original decision. If the Regulator has affirmed its decision, the applicant has a further right to apply for review by the AAT. An application to the AAT must be made within 28 days of receiving notice of the Regulator’s decision.110 The AAT review process is more akin to court proceedings, with the applicant and the Regulator providing the Tribunal with further evidence and submissions related to the decision in question. This may result in AAT proceedings taking a number of months to resolve. As a general rule, each party to proceedings in the AAT will bear its own legal costs. It also remains open for an affected person to bring proceedings in the Federal Court pursuant to the Administrative Decisions Judicial Review Act 1976, seeking judicial review on administrative law grounds, such as failure to consider relevant matters, failure to accord due process, unreasonableness, illegality or bias.

107. Section 282 of the Clean Energy Act 108. Section 284 of the Clean Energy Act 109. Section 283 of the Clean Energy Act 110. Section 285 of the Clean Energy Act

Regulatory oversight

9.4 Interactions with competition law and the role of the ACCC In response to a concern that the introduction of a Scheme will lead to certain suppliers and/or retailers exploiting consumers by making false or misleading claims in relation to the carbon price, the Government has introduced new national laws which give the ACCC powers to deal with false and misleading claims about price impacts by issuing penalties of up to $1.1 million per contravention. The Government has also announced an additional $12.8 million over four years to the ACCC to establish a dedicated team of about 20 staff members employed to educate and monitor businesses and consumers. There have already been a number of high profile examples of misleading carbon claims in Australia, including in relation to the supply of “green energy”, carbon neutrality of products, ranging from cars to white goods, and the endorsement of soil carbon products by the Government. So far these claims have resulted in criminal sanctions. The increase in oversight capacity and potential fines should create a significant deterrent.

A guide for business

10 10.1

What is still to come?

Regulations

10.2 Additional guidance for certain industry sectors 10.3 Assistance for households 10.4 Transitional support for Business 10.5 New bodies / funds

10.1 Regulations The Clean Energy Act specifies a number of matters that will be elaborated upon through regulations. Those matters include:

»»

the pollution caps;

»»

auctioning methodologies;

»»

details of the opt-in arrangements for transportation fuels;

»»

conditions for the transfer of international emissions units;

»»

details of any prohibitions on the surrender or international emissions units;

»»

the fixed charged price for the first year of the flexible price period;

»»

technical details related to natural gas supply arrangements;

»»

notice requirements for various communications with the Regulator;

»»

forms, fees, documents and other administrative procedures related to applications for OTNs, joint venture declarations and liability transfer certificates;

»»

requirements for record keeping; and

»»

circumstances for the issuance of infringement notices.

Regulations have already been drafted to provide further detail regarding the Jobs and Competitiveness Program and the coal-fired electricity generators assistance package.

Australia’s Clean Energy Legislative Package

What is still to come?

10.2 Additional guidance for certain industry sectors (a) Transport From 1 July 2014, the Government has indicated its intention to apply a carbon price to fuel used by heavy on-road transport through changes in fuel tax credits. This will require further amendments to the Fuel Tax legislation.

(b) Government support for steel and coal The Government also intends to implement further measures to support jobs in the steel manufacturing and coal mining industries. These measures will be funded outside of the revenue from the Scheme. The Steel Transformation Plan Act 2011(STP) enables constitutional corporations that manufacture steel in Australia using prescribed methods that produce at least 500, 000 tonnes of crude carbon steel in Australia to apply for Government funding. The STP will provide a maximum of $300 million over five years in structural adjustment assistance to the steel industry, focusing on investment and innovation, including by enhancing environmental sustainability and workforce training. The Coal Mining Abatement Technology Support Package will provide transitional support to the coal industry to implement carbon abatement measures. This assistance will be available in the form of grants on a co-contribution basis, with the Government intending to commit $70 million over six years to the Program.

10.3 Assistance for households The Clean Energy (Household Assistance Amendments) Act 2011 introduces the proposed Clean Energy Household Assistance Package (the Package), which is designed to provide financial assistance to eligible persons for projected increases in the cost of living as a result of the Scheme. The proposed Package is to be delivered through lump sum clean energy advances payable to people receiving social security payments. Depending on the type of social security payments received and which clean energy advance period applies, the clean energy advance period will cover a period of 6-18 months. The proposed clean energy advances include:

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the expected additional Consumer Price Index impact of carbon pricing of 0.7 per cent; and

»»

an additional increase of 1 per cent above the Consumer Price Index.

Additional increases to social security payments will be paid as clean energy supplements once normal indexation begins to deliver Consumer Price Index increases in respect of carbon pricing for a particular payment. Ongoing clean energy supplements will be paid from the end of the clean energy advance lump sum period for each payment type. In addition, the Clean Energy (Income Tax Rates Amendments) Act 2011 makes a number of changes to the taxation of low and middle income earners starting from 1 July 2015 and the commencement of section 3 of the Clean Energy Act 2011, whichever comes later.

10.4 Transitional support for Business The Government will provide additional transitional support to businesses. This support includes the following measures:

(a) Clean Energy Finance Corporation $10 billion over 5 years from 2013-14 for the Clean Energy Finance Corporation (CEFC). The CEFC will invest in the commercialisation and deployment of renewable energy, energy efficiency and lowemission technologies, together with the transformation of existing manufacturing businesses, in two streams: (i) 50% to renewable energy; and (ii) 50% to a general clean energy stream, through commercial and concessional loans, loan guarantees and equity. The investment mandate of the CEFC will not be settled until after early 2012. This will provide a significant boost to the development of renewable and clean energy generating and manufacturing capacity in Australia, even if the amounts committed remain small in comparison with funding in the EU, China and the United States.

A guide for business

(b) Australian Renewable Energy Agency $3.2 billion in funding over 9 years from 2011-12 is earmarked for a new statutory body, the Australian Renewable Energy Agency (ARENA). ARENA will incorporate the Australian Centre for Renewable Energy and the Australian Solar Institute, together with other existing agencies and Government Programs. It will support R&D, demonstration and commercialisation of renewable energy technologies through competitive grants.

10.5 New bodies / funds The Government has also announced the following measures as part of the Scheme package:

»»

$946 million over six years from 2011-12 for the Biodiversity Fund, which will support the restoration and protection of biodiverse carbon stores;

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$200 million over seven years from 2012-13 to facilitate structural adjustment in regional areas;

»»

a new national mandatory vehicle emissions standard for light duty vehicles up to 3.5 tonnes, including passenger vehicles, sports utility vehicles and light commercial vehicles. The Government has proposed that the standard be 190g C02/km in emissions by 2015 and 155g/km by 2024;

»»

$44 million over five years from 2011-12 for the Regional NRM Planning and Climate Change Fund, which will help regional communities plan for the impacts of climate change and maximise the benefits of carbon farming projects;

»»

a new Clean Energy Skills program with funding of $32 million to help educational institutions and industry develop the materials and expertise needed to promote clean energy skills; and

»»

$22 million over five years from 2012-13 for the ongoing Indigenous Carbon Farming Fund, which will support Indigenous Australians to implement carbon farming projects.

The Government will provide $1.2 billion over seven years from 2011-2012 for the Clean Technology Program, which will include:

»»

$800 million for the Clean Technology Investment Program (3:1 recipient / Government grant funding);

»»

$200 million for the Clean Technology Food and Foundries Investment Program (3:1 recipient / Government grant funding); and

»»

$200 million for the Clean Technology Innovation Program (matched funding).

(d) Low Carbon Communities $250 million over 6 years from 2010-11 to expand the Low Carbon Communities program, including pilot energy efficiency projects for low-income households and additional support for local Government and community organisations to enhance energy efficiency.

(e) Asset write-off The small business instant asset write-off threshold will be increased from $5,000 to $6,500 for depreciating assets (as defined in tax legislation). It provides an immediate income tax deduction for the costs of eligible assets.

appendix one

summary of carbon unit types

A guide for business

Name

Source

Use in Fixed Price Period

Use in Flexible Price Period

CU - Carbon Unit

Clean Energy Act (s.94)

»»

100% use for compliance liability;

»»

freely allocated to liable entities eligible under the Jobs and Competitiveness Program; or Part 8 of the Act (coal-fired electricity generation);

100% use for compliance liability (subject to availability of units under the cap);

»»

may be purchased at auction;

»»

freely allocated to liable entities eligible under the Jobs and Competitiveness Program; or Part 8 of the Act (coal-fired electricity generation);

»»

subject to a price ceiling and price floor in the first three years of the Flexible Price Period;

»»

unlimited banking allowed; and

»»

limited borrowing allowed: in any particular compliance year, surrender of carbon units from the following vintage year to discharge up to 5% of liability.

(also known as an Eligible Emissions Unit)

»»

if no free allocation then must purchase from the Regulator at the fixed charge rate; and

»»

no trading or banking of units as units automatically surrendered upon purchase.

Kyoto ACCU - Australian Carbon Credit Unit (Kyotoconsistent)

CFI - Carbon Credits (Carbon Farming Initiative) Act 2011 (s.5)

»»

See Eligible ACCU below.

»»

See Eligible ACCU below.

Non-Kyoto ACCU - Australian Carbon Credit Unit (non Kyoto-consistent)

CFI - Carbon Credits (Carbon Farming Initiative) Act 2011 (s.5)

»»

Not able to be surrendered to acquit compliance liabilities unless would otherwise have been issued as a Kyoto ACCU, in which case subject to restriction below; and

»»

Not able to be surrendered to acquit compliance liabilities unless would otherwise have been issued as a Kyoto ACCU, in which case subject to restriction below; and

»»

may be sold to the Government’s land management fund.

»»

may be sold to the Government’s land management fund.

Australia’s Clean Energy Legislative Package

Appendix 1

Name

Source

Use in Fixed Price Period

Use in Flexible Price Period

Eligible ACCU - Eligible Australian Carbon Credit Unit

Clean Energy Act (s.5)

»»

Eligible for surrender to acquit up to 5% of compliance liability (exception for certain waste facilities);

»»

Eligible for surrender to acquit up to 100% of compliance liability; and

»»

no limitation of banking; and

»»

can be converted to an RMU / AAU for export during Kyoto Protocol’s first commitment period.

not subject to floor price or floor cap.

CFI - Australian National Registry of Emissions Units Act 2011 (s.4) / Kyoto Rules

»»

0% use for compliance liability.

»»

Eligible for surrender to acquit up to 50% of compliance liability; and

»»

if acquired CERs or ERUs issued prior to 31 December 2012 can be carried over subject to Kyoto Protocol limitations.

CFI - Australian National Registry of Emissions Units Act 2011 / Kyoto Rules

»»

Eligible for surrender to acquit up to 50% of compliance liability subject to qualitative restrictions provided for in regulations; and

»»

subject to a price ceiling and price floor in the first three years of the Flexible Price Period.

(also known as an Eligible Emissions Unit) Can be either Kyoto ACCU or non-Kyoto ACCU

Eligible International Emissions Unit (also known as an Eligible Emissions Unit) Can be either a CER an ERU, or RMU, a prescribed unit issued in accordance with the Kyoto Rules or a non-Kyoto International Emissions Unit (e.g. from another ETS) CER - Certified Emission Reduction

Not able to be surrendered to acquit compliance liability.

Clean Energy Act (s.123)

ERU - Emission Reduction Unit CFI - Australian (being a unit issued from a Joint National Registry of Emissions Units Act Implementation Projects) 2011 (s.4) / Kyoto Rules

»»

Not able to be surrendered to acquit compliance liability.

»»

Eligible for surrender to acquit up to 50% of compliance liability.

CFI - Australian National Registry of Emissions Units Act 2011 (s.4) / Kyoto Rules

»»

Not able to be surrendered to acquit compliance liability.

»»

Eligible for surrender to acquit up to 50% of compliance liability.

RMU - Removal Unit (being a unit issued by an Annex I Party with respect to sequestration from land use, land use change and forestry activities)

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A guide for business

appendix two

Details regarding the Jobs and Competitiveness Program and the Coal-fired Generators Assistance Package

Australia’s Clean Energy Legislative Package

Appendix 2

Jobs and Competitiveness Program 1 List of activity type and emissions intensive rate As explained in section 7.3, the assistance rates for EITE activities begins at 94.5% for highly emissions intensive activities and 66% for moderately emissions intensive activities. The initial rates of assistance accorded each EITE activity will be reduced in the regulations by the “carbon productivity contribution” of 1.3% a year.

The following table lists the activities prescribed under the draft regulations to be either highly-emissions intensive or moderately emissions-intensive.

Activity

Emissions Intensive Rate

Production of glass containers

Moderate

Production of bulk flat glass

High

Production of methanol

High

Production of carbon black

High

Production of white titanium dioxide pigment

Moderate

Production of silicon

High

Smelting zinc

High

Integrated production of lead and zinc

Moderate

Aluminium smelting

High

Alumina Refining

Moderate

Production of high purity ethanol

Moderate

Production of magnesia

High

Manufacture of newsprint

High

Dry pulp manufacturing

High

Carton board manufacturing

High

Packaging and industrial paper manufacturing

High

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A guide for business

Activity

Emissions Intensive Rate

Printing and writing paper manufacturing

High

Tissue paper manufacturing

Moderate

Integrated iron and steel manufacturing

High

Manufacture of carbon steel from cold ferrous feed

High

Petroleum refining

High

Production of ethane

High

Production of polyethylene

Moderate

Production of synthetic rutile

High

Production of manganese

High

Production of clinker

High

Production of lime

High

Production of fused alumina

High

Production of copper

High

Production of carbamide (urea)

Moderate

Production of sodium carbonate (soda ash) and sodium bicarbonate

High

Australia’s Clean Energy Legislative Package

Appendix 2

2 Emissions-intensity and trade-exposure test

3 Calculation of allocation - EITE provisional allocation formula

To satisfy the emissions-intensity and trade exposure test:

The calculation for eligible EITEs is broadly based on the assistance rate for a given year, the production level for that year and three baselines for the activity - in terms of its direct emissions intensity, electricity used and natural gas used in production. There is also a previous year adjustment for any under-allocation or over-allocation from the previous year (which incorporates adjustments for true up of actual production and sub threshold allocation).

»»

Trade-exposure will be assessed:

»» for trade shares (the ratio of the value of imports and exports to the value of domestic production) being greater than 10% in any one of the 2004-05, 2005-06 or 200708 financial years; or

»» there being a demonstrated lack of capacity to pass through costs due to the potential for international competition;

»»

Initial assistance to eligible activities will be set in the regulations at:

»»

for highly emissions-intensive activities: 94.5% of the allocative baseline for activities that have an emissions-intensity of at least 2,000 tonnes of CO2-e/million dollars of revenue or 6,000 tonnes of CO2 e/million dollars of value added in the specified assessment period; or

»»

for moderately emissions-intensive activities: 66% of the allocative baseline for activities that have an emissions-intensity between 1,000 tonnes CO2-e/million dollars of revenue and 1,999 tonnes of CO2 e/million dollars of revenue, or between 3,000 tonnes of CO2-e/million dollars of value added and 5,999 tonnes of CO2-e/ million dollars of value added in the specified assessment period.

emissions-intensity will be assessed as to whether the industrywide weighted average emissions-intensity of an activity is above a threshold of:

»» 1,000 tonnes of CO2-e per million dollars of revenue; or »» 3,000 tonnes of CO2-e per million dollars of value added.

The initial rates of assistance accorded each EITE activity will be reduced in the regulations by the “carbon productivity contribution” of 1.3% a year. The calculation involves an allocation (per activity per application per year) for:

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»»

direct emissions (EI Allocations) = relevant rate of assistance x (direct emissions intensity baseline x adjusted production amount or volumes);

»»

electricity use (EP Allocations) = relevant rate of assistance x (electricity use baseline x electricity allocation factor x adjusted production amount or volumes);

»»

natural gas (NGP Allocations) = relevant rate of assistance x (natural gas use as a feedstock baseline for the activity x natural gas feedstock allocation factor x adjusted production amount or volumes); and

»»

adjustment for the previous year’s allocation (Previous Year Adjustments).

A guide for business

The formula is: Provisional Allocations = EI Allocations + EP Allocations + NGP Allocations + Previous Year Adjustments

As noted above, the assistance rates begin at 94.5% for highly emissions intensive activities and 66% for moderately emissions intensive activities and are then adjusted for the carbon productivity contribution of 1.3% per annum. The indicative rates of assistance for each category for each year are outlined in the table below.

Year

Moderately emissions-intensive activity Highly emissions-intensive activity

2012-13

66.0%

94.5%

2013-14

65.1%

93.3%

2014-15

64.3%

92.1%

2015-16

63.5%

90.9%

2016-17

62.6%

89.7%

The allocative baselines for each activity are to be set in the Clean Energy Regulations and will take into account historic emissions and production information submitted to the DCCEE about emissions and production levels in 2006-07 and 2007-08. The baselines for allocations will not be updated over time for changes in the emissions intensity of entities conducting EITE activities. For electricity use baselines, an electricity allocation factor will be set at one unit per megawatt hour (MWh) nationwide for the purpose of the eligibility assessment and when setting allocative baselines. This factor may be adjusted for existing large electricity supply contracts for entities consuming greater than 2,000 gigawatt hours (GWh) per annum, and where contractual arrangements entered into before 3 June 2007 are still in force (without having been renegotiated or reviewed) by a date to be set by regulations. In such a situation, these contracts will be considered by the Regulator with a view to determine an entity-specific electricity allocation factor as outlined in the Clean Energy Regulations.

The calculation of assistance is subject to whether the maximum cap on allocations for new facilities should apply, as described below and adjustments to allocations made to sub threshold facilities.

Australia’s Clean Energy Legislative Package

Appendix 2

Coal-fired Electricity Generation 1 Coal-fired electricity generation complex eligibility test To satisfy the coal-fired electricity generation complex eligibility test:

Where:

»»

emissions intensity must be greater than 1.0; and

»»

during the period from and including 1 July 2008 to 30 June 2010 the complex was:

Carbon dioxide equivalence of emissions = the total kilotonnes of GHGs emitted from the combustion of fuel in the complex for the purposes of electricity generation from 1 July 2008 to 30 June 2010 inclusive.

»»

Gigawatt hours of electricity generated = the total number of gigawatt hours of electricity generated by the complex from 1 July 2008 to 30 June 2010 inclusive, as measured at all generator terminals in the complex.

»» in operation and connected to a grid with a grid capacity of at least 100 megawatts; and

»» at least 95% of the electricity generated was attributable to the combustion of coal. Grid capacity will be calculated in accordance with the regulations. The generation complex’s emissions intensity would be calculated according to the following formula:111

carbon dioxide equivalence of emissions gigawatt hours of electricity generated

Supplementary eligibility conditions in respect of free carbon unit issuance Where a certificate of eligibility for coal-fired generation assistance has been obtained in respect of a complex, free carbon units cannot be issued in respect of that complex in any financial year unless three supplementary eligibility conditions have been fulfilled.

(a) Power system reliability test The first of these is that the generation complex must not fail the “power system reliability test” in respect of the immediately preceding financial year. This test is set out in Part 8 Division 4 of the Clean Energy Act. The test is intended to use the value of free carbon units to influence the decisions of owners, operators or controllers of some generation complexes about when to withdraw generating capacity, to promote security of energy supply. The first element of the test is that, as of 1 April in the previous eligible financial year, the owner, controller or operator of the complex must be registered as a generator under applicable energy market laws. The primary legislative instrument relevant to determining who is the owner, controller or operator of a generation complex is the National Electricity Law and National Electricity Rules for the National Electricity Market. Where an intermediary is registered instead of the owner, operator or controller, that intermediary is deemed to be the person who controls the generation complex,112 which means that the power system reliability test can still be met. The test also includes a number of other elements which would be applied by the Regulator to ensure that nameplate rating of the generation complex is not reduced (or if it is, it will not breach relevant AEMO power system reliability standards or alternatively

111. Section 168 of the Clean Energy Act

112. Section 176 of the Clean Energy Act

A guide for business

2 Calculation of allocation - coal-fired electricity generators replacement capacity will be provided). The object of these requirements is to ensure that the maximum continuous electrical output of generators connected to the system is sufficient to supply likely demand.

The number of free units which may be issued in respect of a generation complex would be calculated according to the formula below, noting that different formulae would be used for the 2013, 2015 and 2016 financial years and the 2014 financial year.

(b) Clean Energy Investment Plan

Free units will be issued by the Regulator in respect of eligible generation complexes for the financial years commencing 1 July 2013, 2015 and 2016, according to the following formula:113

The second supplementary condition is that a Clean Energy Investment Plan is provided to the Resources and Minister for the financial year in respect of which free carbon units are sought. The form and substance of Clean Energy Investment Plans are set out in the regulations. These plans will need to identify proposals to reduce CO2-e from existing facilities and to invest in research and development and new low- or zero-emissions capacity.

(c) Closure contracts The third supplementary condition is that carbon units will not be provided where a closure contract has been entered into with the Government in respect of the relevant complex in relation to the four financial years from 2013-2014 to 2016-2017.

annual assitance factor specified in the certificate

x 41,705,000

total annual assistance factors for that eligible financial year The annual assistance factor is calculated by the Regulator as follows:

historical energy x (emissions intensity - 0.86)

For the 2014-2015 financial year, the Regulator is required to use a different formula, being the number worked as follows:114

annual assitance factor specified in the certificate

x 83,410,000

-A-B

total annual assistance factors for that eligible financial year

In this case, “A” would be the total number of free carbon units issued in respect of the generation complex under the Coal Fired Generators Assistance Package before 1 September 2014. “B” would be the Regulator’s reasonable estimate of the number of free carbon units of the 2013-14 vintage year not issued because of the operation of the three supplementary eligibility conditions.

113. Section 161 of the Clean Energy Act 114. Section 167 of the Clean Energy Act

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