It's still early days since the Federal Government announced
its carbon pricing scheme. Although the latest update of the
Garnaut Review released on Thursday 17 March 2011, Carbon Pricing
and Reducing Australia's Emissions, provides some indication of
what the scheme may look like, many of the precise design details
are still unknown. The only certainty is that if a carbon pricing
scheme is implemented in Australia, those businesses that are well
prepared will be in the best position to manage any risk coming
from the scheme's introduction.
Although the tight timeframe for the introduction of the scheme
mean that some elements might be similar to, or even the same as,
the carbon pollution reduction scheme proposed by the Rudd
Government, subtle differences could mean that relying on
preparations made for the former CPRS is not enough to manage
carbon-related costs in the future.
Here, partner Michele Muscillo and solicitor Julian Wright
outline how businesses can ensure they are in the best position to
deal with any carbon costs that may be imposed, and explain why
businesses need to stay informed of any assistance packages offered
by the Government.
Managing contractual risk
The Government has proposed that the carbon pricing scheme will
commence with a fixed price phase, before converting to a
cap-and-trade emissions trading scheme. The latest Garnaut update
has recommended that the starting price should be $20 to $30 per
tonne of carbon dioxide emissions, increasing at four percent per
annum plus inflation. This fixed price phase would last until
mid-2015, unless the independent regulator deems this inappropriate
due to international developments in carbon pricing.
When negotiating contracts that seek to pass on costs under the
carbon pricing scheme, businesses should ensure that the language
and terms used in their contracts adequately cover costs under both
the fixed price phase, and the later cap-and-trade phase. This is
particularly the case for longer-term contracts that may continue
to be in place into the cap-and-trade phase.
The wording of existing contract terms may produce an unexpected
cost outcome between parties, depending on how the carbon price is
imposed under the law. The potential risk is that if clauses are
drafted to specifically deal with carbon costs under a
cap-and-trade system, they may not adequately pass on costs under
the fixed price phase of the carbon pricing scheme. The only way to
determine if this is the case is to review the relevant clauses to
ensure they are cover off both elements of the new carbon pricing
If you are concerned about unexpected costs arising out of any
contracts that are currently in place, it's preferable that you
look at addressing and managing those risks at the earliest
opportunity. Given the political uncertainties surrounding the law,
it may be that the earlier the issues are put on the table, the
stronger your negotiating position.
Ultimately, the point in the economic chain where the
carbon-related costs imposed under the scheme will fall depends on
factors unique to each particular business and industry, such as
general market conditions and the ability to pass on prices to
customers. Given this, the carbon price presents risk management
issues to most, if not all, businesses.
Seeking government assistance
The latest Garnaut update recommends that assistance is provided
to emissions intensive, trade exposed industries if they are
disadvantaged compared to other countries that don't have
comparable carbon restraints. The update also suggests that
assistance to households should primarily take the form of personal
income tax cuts to low and middle income earners.
The packages that will be put forward by the Federal Government
are still to be agreed between the Labor
party and the Greens. When details of these assistance packages
become available, businesses should make sure they understand the
details of the assistance packages, and what the qualifying
criteria may be. It is likely that the eligibility criteria for
these packages will, at least in some respects, be narrow (to
manage the cost to the Federal Government's budget), in a
similar vein to other assistance to industry, such as the tax
breaks that were given out during the global financial crisis.
For more information on how to prepare for the carbon pricing
scheme, please contact HopgoodGanim's Climate Change practice,
who are also available to help channel your comments on the carbon
pricing scheme to the Federal Government or relevant professional
and industry bodies.
This legal update is an overview of existing eligible project activities and new project types proposed to be developed.
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