Australia: The carbon pricing mechanism: a mining industry focus

The carbon pricing mechanism: an industry focus


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

  • The specific transitional arrangements pertaining to the coal industry.
  • The interaction between the Mechanism and the MRRT.

The implications for the Mechanism for the mining industry

The Mechanism will result in many consequences for the Mining Industry including: (i) charges per tonne of carbon dioxide equivalent (CO2-e) emissions, (ii) potentially increased indirect costs for goods and services as the broader industry begins to adapt to the carbon pricing regime, and (iii) significant implications for planned project development or expansion. In certain circumstances, and depending on contractual terms, proponents may be able to pass-through certain of these costs to end users, and therefore mining industry proponents should, as a priority, review and consider amending their carbon cost pass-through clauses in supply and procurement contracts, in mining services agreements, and in commodity sales agreements to take into consideration the impact of the Mechanism.

Under the proposed framework the Mechanism will be implemented in two stages. There will be:

  • An initial fixed price period of three years – there is a starting fixed price of AUD$23 per tonne which will increase by 2.5 per cent per year in real terms.
  • A transition to a flexible price cap and trade emissions trading scheme on 1 July 2015 - the price will be determined by market forces.

The Mechanism will directly apply to entities that produce more than 25,000 tonnes of carbon dioxide equivalent (CO2-e) emissions per annum. Liable entities will also have continuing reporting obligations under the National Greenhouse and Energy Reporting System (NGERS). Significantly, liability under the Mechanism:

  • Is incurred by the entity with operational control of the emitting facilities.
  • May be shared among unincorporated joint venture participants according to their proportionate interests.

Fugitive emissions

The Mechanism will include in its coverage the emission of fugitive gasses (principally methane) from mine production. Where adequate abatement technologies are not identified, proposed mine expansions and developments may be significantly impacted financially. Government analysis concludes that whereas the average non-gassy mine is likely to face an additional cost of around AUD$1.40 per tonne of saleable coal, the average gassy mine is likely to face an additional cost of around AUD$7.40, and the gassiest mines may face additional costs of up to AUD$25 per tonne.

For mines that are in operation, the government has sought to mitigate potential job losses through its proposed Coal Sector Jobs Package to support "gassy mines" (those that had a fugitive emissions intensity in 2008-09 of at least 0.1 tonnes of carbon dioxide equivalent per tonne of saleable coal produced).

Assistance will be provided to eligible coal mines for up to 80 per cent of their fugitive emissions exposure above the 0.1 tCO2-e per tonne of saleable coal threshold. Assistance will be based on production up to a cap of base period production levels (the higher of 2007-08 or 2008-09). Such support will not be available for new production or expansion of mines with high fugitive emissions intensity.

Transitional assistance for trade exposed industries

The initial cost of CO2-e emissions may be lower than the set price of AUD$23 per tonne as a result of transitional assistance support. General assistance in the form of free allocation of permits will be provided to industries that are both emissions-intensive and trade-exposed (the Emissions Intenstive Trade Exposed Assistance Scheme). The allocation of free permits will be based on the historical industry average levels of emissions per unit of production. In order to reward innovation and responsibility, if the liable entity is more efficient than the industry average, it will receive more free carbon permits per unit of production than less efficient competitors. The Mechanism will allow such entities to sell these excess permits either back to the Government (in the fixed price phase) or to third parties (in the flexible price phase) for their market value as an additional source of revenue.

In satisfying its obligations under the Mechanism and in addition to the use of carbon permits for compliance, liable mining entities are entitled to:

  • During the initial fixed price period - use Kyoto Protocol compliant emission offsets from the Carbon Farming Initiative (Kyoto ACCUs) to reduce up to 5 per cent of their total liability.
  • During the floating price period - use Kyoto ACCUs for 100 per cent of their liability or opt to buy (potentially cheaper) international offsets for up to 50 per cent of their liability.

Further, it should be noted that carbon permit and offset purchases are tax deductible expense items. Specific legislation for the accounting and taxation treatment of carbon permits will be introduced into the existing taxation regime. For more information on the taxation issues that arise under the Mechanism, please refer to our focus on the carbon tax.

Transitional arrangements for the coal industry

The coal industry does not meet the thresholds set out in the relevant tests for the EITE assistance scheme but the Mechanism does set out specific measures for assisting the coal sector, in particular gassy mines. The proposed assistance packages include:

  • The AUD$1.3 billion Coal Sector Jobs Package which will offer transitional assistance over six years, described above in relation to "fugitive emissions".
  • The Coal Mining Abatement Technology Support Package which will provide AUD$70 million over six years to assist coal mines in developing and deploying new technologies. Funding will be provided by grants on a co-contribution basis for the research and demonstration of new technologies, and grants on a two to one basis to assist smaller coal mines in developing abatement technology.

Interface between the Mechanism and the Mineral Resources Rent Tax

Proponents should consider the combined effect of the Mechanism with the Mineral Resources Rent Tax (MRRT) when assessing project and financing structures in the resources industry. On 24 March 2011, the Commonwealth Government announced it would accept all the recommendations made by the Policy Transition Group (PTG) that was established to review the MRRT as proposed on the 2 July 2010. If adopted, these recommendations will also take effect on 1 July 2012, simultaneously with the proposed CPM.

Whether a project will be subject to both the Mechanism and the MRRT will depend on a number of factors - for example, the emissions profile and profitability of the project. The MRRT is a project-based tax which applies to iron ore and coal extraction projects which exceed a profit threshold. It can also extend to encompass (1) coal mine methane extracted as a necessary and integral part of a coal mining operation; (2) coal mining operations where gas is extracted from the underground conversion of coal; (3) incidental production of coal or iron ore as part of a broader mining operation.

Pass-through of costs

Mining firms may be able to pass-through certain costs associated with the Mechanism. Mining related contacts may include "change in law", "change in tax", "carbon cost pass-through" or other like clauses that could permit the pass-through of additional costs which are imposed through the Mechanism. Proponents should carefully consider the language used, in particular, the nature of the thresholds and events that can trigger the pass-through of carbon costs. In this context it is worth noting that the Mechanism may not be strictly interpreted as a tax, but rather an emissions trading scheme that, during the initial fixed price period, in practice operates in the manner of a tax. A generic contractual pass-through of "taxes" may not capture costs imposed under the Mechanism.

Mining firms may also seek to negotiate carbon cost pass-through arrangements for the sale of commodities to end users; although any such arrangement will of course have significant commercial implications which will need to be considered in light of arrangements other producers are subject to in other jurisdictions.

Liable entities

Under the Mechanism, the liable entity for direct emissions is generally the person exercising control over operations of the emitting facility. Where the facility is operated by an unincorporated joint venture, then all of the venture parties will be liable entities in proportion to their respective interests in the facility (provided no one entity has "operational control").

Entities that are directly liable under the Mechanism will need to develop policies and procedures setting out how they intend to manage that liability, including determining:

  • Which entity within the corporate group has operational control of the project or facility.
  • Whether it is entitled to and appropriate to transfer that liability. Currently, the Mechanism allows for the operator to apply for a liability transfer certificate to transfer liability to another member of its corporate group, a person outside of its corporate group that has financial control over the facility or in respect of an operator of an unincorporated joint venture, to the joint venture participants in proportion to their interest in the facility.
  • How to manage and mitigate that liability (for example, through the purchase of carbon permits or domestic or international offsets in the most cost effective way including, after the Fixed Priced Period, by forward purchasing permits in order to provide price certainty, by accessing international carbon markets, and by trading permits).
  • Whether the costs associated with that liability can be passed-through under the various contractual arrangements entered into with third parties.
  • Whether any of the financial assistance measures detailed by the Government are available.

Continuous disclosure under the ASX Listing Rules

Finally, listed entities should consider the extent to which, amongst other things, the Mechanism will affect its existing or planned operations, and whether that information should be disclosed to the market in compliance with ASX Listing Rule 3.1

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, or the MRRT, please contact a member of our Energy and Resources 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.

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