Australia: Carbon pricing mechanism – Draft legislation for the Clean Energy Package released 28 July 2011

Last Updated: 8 August 2011
Article by Jennifer Mee and Fiona Melville

Tax via trading scheme

Draft legislation released on 28 July 2011 confirms that the carbon pricing mechanism will sit within a trading scheme ("Scheme"). The Scheme obliges liable entities to buy and surrender carbon units equal to their direct emissions of carbon dioxide equivalents (CO2-e). Failure to surrender sufficient carbon units will result in a penalty. For the first three years the carbon unit prices will be fixed after which carbon units will be auctioned. It is called a "tax" because during the fixed price period the obligation on liable entities to purchase fixed price carbon units falls within the legal definition of a "tax".

Start date

1 July 2012

Carbon Price

A$23 for 2012/2013 financial year and increasing in real terms by 2.5% in each of the following two years. From 1 July 2015 the carbon units will be auctioned. For at least the first three years of market prices there will be with a "floor" of A$15 (increasing by 4% pa) and a ceiling of A$20 above an "international price" (increasing by 5% pa) (to be reviewed in 2017). The carbon unit price under the Scheme is expected to track the international price but could trade above the international price because only 50% of internationally recognised carbon units will be eligible for surrender under the Scheme.

The floor price will apply to international permits1

Liable entities

The Scheme covers 40-50% of Australia's greenhouse gas emissions2 primarily from stationary energy, industrial processes, fugitive emissions and emissions from waste. It imposes an obligation on around 500 entities who operate facilities which emit carbon dioxide equivalent in excess of 25,000 tonnes per year and certain waste facilities emitting more than 10,000 tonnes per year. The Scheme excludes agriculture and transport fuels. Transport fuels used by 'off-road' heavy vehicles (other than agriculture, fishing and forestry) will however be indirectly covered by a reduction in fuel tax concessions3 (estimated to raise A$1.9 billion over the first four years). In addition fuel excise will be increased to 'account' for a carbon price for rail, domestic shipping and domestic aviation4. The treatment of fuel will be reconsidered in 2014.

The legislation authorises:

  • "liability transfer certificates" to move liability to a person with financial control or within a group of companies subject to a parent company guarantee
  • "Obligation Transfer Numbers" to move liability from a gas retailer to a large user at the user's request and with the retailer's consent

Carbon units

The carbon units are uncertificated and recorded in a registry. One carbon unit being equal to one tonne of CO2-e. The carbon units will be classified as financial products and liable entities may need a financial services licence for certain kinds of forward trading.

Carbon units will have identification numbers, the last 4 digits of which, shall be the vintage year.

Carbon unit acquisition during fixed price period

Fixed price carbon units will be sold by the Scheme administrator (the Clean Energy Regulator) to liable entities and automatically surrendered on purchase by bookkeeping entries. In addition, liable entities can purchase and surrender up to 5% of their carbon unit requirements from Carbon Farming Initiative credits (see below). International permits cannot be used to acquit liability during the fixed price period. Up to 75% of carbon units must be acquired and surrendered during each year of the fixed price period with the balance being surrendered by the following 1 February.

Carbon unit acquisition during market price period

The Clean Energy Regulator will periodically auction carbon units for a current year and on a forward basis. The carbon units will be fully bankable and up to 5% of a following year's vintage can be surrendered for a current year. Until 2020 certain types of internationally recognised permits may be used to acquit up to 50% of an entity's liability. In addition an unlimited quantity of Kyoto compliant Carbon Farming Initiative credits can be used to acquit liability. The carbon units must be surrendered on 1 February following a financial year.

The types of international permits that are acceptable are certain types of CER, ERUs, RMUs and any other prescribed units issued under the Kyoto rules or specified in Regulations5.

Auctions of carbon units for future years are limited to 15 million per future year.

Cap on emissions

There is no cap on emissions in the three year fixed price period. The number of carbon units is unlimited. A cap will be set by 31 May 2014 for the five years starting 2015/2016. The Climate Change Authority (an independent statutory body) will report to Government by 28th February 2014 on the suitable level of emission reduction targets in line with international considerations and announced Australian Government targets. The current Australian Government targets are a 5% reduction in emissions from 2000 levels by 2020 and an 80% reduction in emissions from 2000 levels by 2050. Parliament will determine the caps and in the absence of parliamentary agreement, the first cap will reflect the required emissions to achieve a 5% reduction in emissions from 2000 levels by 2020.

Whereas the default target of 5% reduction is set out in the legislation the 80% target is recommended but not compulsory6.

Carbon Farming Initiative

Entities achieving abatement of CO2-e under the Carbon Farming Initiative will be allocated CFI credits. CFI Credits which are "Kyoto compliant" under the Carbon Farming Initiative can be sold to liable entities for surrender under the Scheme, these credits can be banked for future use and exported.

Assistance to emissions intensive trade exposed (EITE) industry – A$9.2 billion

  • 94.5% free carbon units will be allocated to the EITE industries with emissions intensity equal to or above 2,000 t CO2-e /$m revenue or 6,000t CO2-e/$m value added (steel manufacturing, aluminium smelting, lime, cement clinker)
  • 66% free carbon units will be allocated to EITE industries whose emissions are between 1,000t CO2-e /$m and 1,999 t CO2-e/$m revenue or between 3,000t CO2-e /$m and 5,999t CO2-e /$m value added (plastics, chemical manufacturing, pulp and paper, LNG)
  • a supplementary allocation will be made to LNG projects to ensure they receive 50% free carbon units for the entire LNG production process,

for direct emissions for the first five years of the Scheme with three years' notice of any modifications after that period. The EITE industries will also receive assistance for indirect emissions from electricity, steam and natural gas at the rate of one carbon unit per MWh. The number of free carbon units will reduce by 1.3% pa. The level of assistance will be reviewed by the Productivity Commission in 2014, 2016 and 2018.

The activities for which free units are issued and the quantity of such units will be set out in Regulations to be issued by 1 March 2012 and must exclude the extraction of coal.

Free permits issued to EITE industries and generators during the fixed price period may be sold to the Regulator for the fixed price discounted by a factor to be specified in the Regulations.

Assistance to coal generation

Coal generation whose emissions are above 1t CO2-e MWh will receive a percentage of free carbon units and cash payments for the emissions above 1t CO2-e MWh up to 1.3t CO2-e MWh (at a cost of A$5.5 billion over six years). This will generally assist brown coal only. In addition the Energy Security Fund will fund the closure of up to 2000MW of brown coal generation by 2020. Loans for refinancing debt where finance is not available on commercial terms may also be available from the Fund.

Assistance to coal mining7

A$1.3 billion is allocated over six years for existing coal mines with gaseous content above 0.1t CO2-e per tonne of salable coal (baseline) capped at 80% of fugitive emissions above the baseline. In addition there is a new mining technology fund for low emission mining. This is estimated to increase coal prices by A$1.40 - A$1.80 per tonne.

Assistance to steel manufacturing8

In addition to receiving free carbon units under the EITE Industry assistance A$300 million is available in grants for upgrading technology to reduce emissions in the manufacturing process and the entity seeking funding must contribute an equal amount.

Assistance to small business9

The instant asset write-off threshold for businesses with a turnover of less than A$2 million will be increased from A$5,000 to A$6,000.

Assistance to households10

Four million of the lowest income households are to receive 120% of the anticipated consumer price rise of A$9.90 pw, six million lower income households (below A$80,000) to receive up to 100% of the expected consumer price rise, and the remaining three million households to receive negligible compensation.

Australian Renewable Energy Agency

An independent statutory body will be created to oversee renewable programs with A$3.2 billion existing funding drawn from the 10 existing programs. Future funding can be allocated from carbon unit sales.

Clean Energy Finance Corporation

An independent corporation will be established with A$10 billion for funding renewable and low emission projects.

Other funding/grant programs11

A variety of other programs are available to assist a variety of industries including food, foundries and manufacturing, on a 1:3 dollar basis, for energy efficient capital equipment and low emission technologies (A$1 billion) and a biodiversity fund for the land sector.

Revenue and expenditure

Over the first four years carbon unit sales are anticipated to raise A$27.3 billion with assistance measures costing A$31.2 billion leaving a funding shortfall of A$3.9 billion. After the first four years the Scheme is anticipated to be broadly revenue neutral.

Cost of the Scheme

Initially A$6-7 billion pa with a 0.7% CPI increase in 2012/2013 and a reduction in GPD of 0.1%.

Climate Change Authority

Its key roles are to review and provide recommendations on:

  • the Renewable Energy Target in the second half of 2012 and every two years after that
  • caps and trajectories for the first five years of the Scheme by 28 February 2014 and extended by one year after that to maintain five years of caps
  • the Carbon Farming Initiative by 31 December 2014 and every three years after that
  • the integrity of international units and review of the 50% limitation on using international carbon units by 31st December 2016
  • the need and level of a floor and ceiling on the market price by 2017.

Action for business

Liable entities may now wish to revitalise their "carbon readiness programs" including; consideration of liability, emission/energy savings opportunities, review of contract chains, consideration of the need for a financial services licence and a carbon trading team. Non liable entities should also review their contract supply chains as electricity and gas retailers will be seeking to pass through the increases in costs which are estimated as 10% for electricity and 9% for gas.

The executive officers may suffer personal liability if the body corporate contravenes certain provisions in the Clean Energy Bill and the officer failed to take all reasonable steps to prevent a contravention.

1 The Clean Energy(International Unit Surrender Charge) Bill states that Regulations will specify how this provision will apply.

2 Four of the six Kyoto greenhouse gasses are covered, carbon dioxide, methane, nitrous oxide and per fluorocarbons. Adjustments to levies will effectively 'cover' the other two greenhouse gases.

3 This is set out in the Fuel Tax Legislation Amendment (Clean Energy) Bill 2011.

4 This is set out in the Excise Tariff Legislation Amendment (Clean Energy) Bill 2011 and the Customs Tariff Amendment (Clean Energy) Bill 2011.

5 The Commentary on the provisions also states that international linking with the European Union scheme and New Zealand Schemes are desirable and if agreed EU Allowances and NZ units would be prescribed under the Clean Energy Bill.

6 The 80% target is set out in section 4 as being one of the objects of the Act and in section 14 as being one of the matters to which the Minister must have regard to in setting the caps.

7 This is not set out in the draft bills and will be set out in a separate package.

8 This is not set out in the draft bills and will be set out in a separate package.

9 This will be set out in a separate bill.

10 This is set out in the Clean Energy (Household Assistance) Amendment Bill 2011.

11 This is not set out in the draft Bills and will be set out in a separate administrative package.

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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