Australia: The carbon pricing mechanism: a construction industry focus

The carbon pricing mechanism: an industry focus


The carbon pricing mechanism (the Mechanism) will have particular implications for the construction industry. This paper focuses on the implications for construction, including in particular:

  • Costs for the industry.
  • Risk allocation.
  • Carbon liabilities.
  • The implications for both existing and future construction projects (and contracts).

Application of carbon tax

The residential and commercial building sectors produce 23 per cent of Australia's greenhouse emissions. Although the carbon tax covers a broad range of industry sectors, it is important to note that only facilities directly responsible for emitting carbon pollution will have obligations under the Mechanism to reduce their emissions or purchase carbon permits. As the construction industry principally contributes to emissions indirectly, through its acquisition of materials, resources and services (for example cement, steel, electricity, transport and waste disposal) the industry itself is unlikely to have any direct obligations under the Mechanism.

The major source of direct emissions in the construction industry is the use of transport and other liquid fuels either on site or in transportation. The use of such fuels may be captured by the complementary regulatory arrangements designed to impose an equivalent carbon price on the use of transport and other liquid fuels. The equivalent carbon price is imposed through reductions in fuel tax credits available for businesses, and where that option is not available, by increasing fuel excises.

Light commercial vehicles (4.5 tonnes or less) and household vehicles will be exempt from the imposition of an equivalent carbon price. Other business use of transport fuels will be subject to the equivalent carbon price on all transport fuels (and some other liquid fuels in certain situations) from 1 July 2012. For more information on the treatment of liquid fuels, please refer to the transport industry focus.

Indirect costs for the industry

The Mechanism is likely to result in increased costs passed down from direct emitters who are suppliers to the construction industry.

The majority of increased costs to the industry are likely to be as a result of higher electricity prices, manufacture of carbon intensive materials such as cement, and the transportation of goods. Although increased electricity rates will be experienced by industries and households alike the construction industry will be particularly exposed to higher supply costs.

Production costs of carbon intensive materials used in construction, such as aluminium, concrete, bricks, glass and steel are expected to increase. The additional costs of production in these industries are likely to be passed on to customers. Most of these industries however will be supported as "emissions-intensive trade exposed" industries or through bespoke assistance arrangements, being provided with either free carbon permits commensurate with their exposure, or with cash payments. This is likely to lessen the extent of the carbon liabilities for those industries, and as such the costs actually passed through to construction consumers.

The assistance schemes referred to above that are of particular relevance to the construction industry are the Jobs and Competitiveness Program, the Steel Transformation Plan and the Clean Technology Program.

Jobs and Competitiveness Program

Under the Jobs and Competitiveness Program about AUD$9.2 billion of assistance will be provided to help business and support jobs in the first three years of the Mechanism. The assistance aims to prevent 'carbon leakage', that is moving activities offshore to countries without a carbon pricing mechanism to allow for cheaper production. Emissions-intensive trade exposed industries, including many manufacturers of construction materials, may be eligible. We note that although steel, aluminium and glass manufacturers are all considered to be eligible for assistance under the Jobs and Competitiveness Program, the brick manufacturing industry is excluded as it is not considered to be exposed to competition from cheaper overseas markets.

Steel Transformation Plan

The steel industry will be one of the most heavily affected sectors under the Mechanism. In order to ease the transition the Government will provide AUD$300 million to encourage investment, innovation and productivity in the Australian steel manufacturing industry.

Clean Technology Program

The introduction of the Mechanism will see higher standards of energy efficiency in design and materials as demand for buildings with lower operating costs increases. Although the construction industry has already been implementing processes for more energy efficient buildings and facilities through programs such as the Green Building Program the increased use of such design and materials will be further assisted by a number of Clean Technology Programs aimed at supporting investments in energy efficient capital equipment and low-pollution technologies, processes and products:

  • Clean Technology Investment Program: AUD$800 million in grants will be provided to manufacturers.
  • Clean Technology Food and Foundries Program: over six years up to AUD$50 million in assistance will be provided to the metal forging and foundry industries.
  • Clean Technology Innovation Program: AUD$200 million over five years for development in renewable energy, low-emissions technologies and energy efficiency.

Notwithstanding the assistance schemes being implemented by the Government some increased costs are likely to still be incurred by the industry. The consideration of which party is liable for these rising costs under the construction contract will now be an issue for parties to existing contracts and those entering into construction contracts in the future.

Energy efficiency trading scheme

The policy announcement made on 10 July 2011 included the expedition of the development of a national energy savings initiative, a market-based tool for driving economy-wide improvements in energy efficiency. The federal government will "immediately establish a working group" to seek agreement on the replacement of existing state mandatory energy savings schemes (such as exist in New South Wales, Victoria and South Australia) and to report in the first quarter of 2012. The development of such a scheme is consistent with the findings of the Prime Minister's Task Group on Energy Efficiency, which reported to the government in late 2010.

The development of a national energy savings initiative is unlikely to have a significant impact on building processes, however more broadly it is likely to impact on the environmental and efficiency standards that construction customers demand.


Following the announcement of the Mechanism it is essential to conduct a review of existing contracts to determine what liabilities may be incurred and whether any contractual rights or obligations, concerning the pass through of costs, have arisen. A similar review should also be undertaken with respect to any contracts that are currently being finalised or tendered for. Key issues to be aware of in the contractual pass-through of carbon cost include:

  • The scope of the triggering event, whether defined as a "change of law", "change of tax" or as a specific "carbon cost pass-through" clause.
  • The scope of the costs that may be passed through, whether indirect costs may be passed through as well as direct costs;.
  • The mechanisms for transparency in disclosure of how carbon costs are to be calculated; and
  • The procedures for the cheap and efficient resolution of disputes.

For construction contracts that will be in operation after 1 July 2012, it is necessary to consider whether the Principal or Contractor will be liable for cost increases passed through from suppliers, as well as for direct carbon cost increases (which will rest with the party that has "operational control" over the relevant facility).

Contract structure

There is a range of contractual structures generally used in the construction industry, and the type of contract entered into will impact upon any cost liabilities arising from the Mechanism. In particular, whether the contract is cost plus, lump sum, schedule of rates or a mixture, will go some way to determining whether the contract sum may be increased as a result of the Mechanism.

For example, under a 'cost plus' contract the Contractor will be entitled to be paid for costs incurred, as well as an additional amount (usually a percentage or commission). The risk therefore of any increase in the cost of construction materials is borne by the Principal (subject to any guaranteed maximum price mechanism). By way of contrast where the contract price is a fixed sum Contractors are less likely to be able to pass on increases in the costs of construction materials, unless that fixed sum is subject to a valid carbon cost pass through arrangement. Similarly, where a schedule of rates or bill of quantities is used the costs incurred by a Contractor are also usually in effect 'fixed' and the Contractor will most likely remain responsible for any increase in the cost of construction materials. It is important to note that under contracts for domestic building works, cost escalation is only permitted in limited circumstances and in most instances Contractors will be unable to pass on increased costs as a result of the Mechanism.

Specific contractual entitlements

Where a specific clause allocates liability for increases in the cost of materials flowing from a carbon tax, liability will be allocated according to the terms of the specific clause. However, with the exception of recent major projects, most contracts already on foot in the construction industry are unlikely to specifically allocate the risks associated with the Mechanism.

Although most contracts will specifically address the rights and obligations of the parties where there is a change in law, whether the provision adequately deals with the introduction of the Mechanism will depend on the drafting. It is not unusual for these clauses, even where they do provide an entitlement to claim costs, to require that extra works actually has to have been carried out (so cost increases alone may not be claimable). Parties need to careful check their existing contracts (and in-house standard forms) to see whether or not an entitlement arises and importantly whether any time limits are required to be complied with in order to access such entitlements.

Importantly change in law clauses will ordinarily require that for a claim to exist the change must be unforeseeable. Clearly, since the federal government's announcement, this will be difficult to argue. Accordingly, going forward contractors will need to ensure that any increased costs are either expressly dealt with or a contingency included within the agreed price.

Of course a general "rise and fall" clause may also provide an entitlement subject to its terms. However, increasingly such clauses are not being included on standard construction projects unless in response to some specific and foreseen price risk.

Next steps

The costs impact of the Mechanism will be widespread across the economy and will need to be accounted for by the construction industry. In particular, participants in the construction industry should consider:

  • Risk allocation under both supplier and purchaser side contract arrangements for contracts currently under consideration, including consideration of the scope and triggers for the pass-through of costs.
  • With respect to current contracts, whether any contractual obligations have arisen, what liabilities may be incurred and whether there are any entitlements that can be exercised.
  • Their existing contracting policies to ensure that going forward this risk is either priced or otherwise expressly provided for.
  • Assessment of the direct carbon liabilities that may be incurred, in particular through the use of transport and other liquid fuels.
  • The impacts of the Mechanism and its complementary measures on the broader strategic focus of the construction industry, including its affect on the prices of certain materials, the types of technologies being used in the construction process and the demands of customers operating in a regulatory environment that places an impost on the emission of carbon and other greenhouse gases.

Related updates

Carbon pricing mechanism snap shot: key features, certainty and flexibility

A framework for pricing carbon in Australia

Carbon Farming Initiative legislation tabled

Mineral Resources Rent Tax update

Further information

If you would like further information or advice about any aspect of the policies underlying, or the proposed legislation implementing, the Government's Clean Energy Future package, please contact a member of our Construction and Engineering team.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions