The Clean Energy Bill 2011 and the associated 18 Bills setting out the Carbon Pricing Mechanism were approved by the Senate on 8 November 2011 by a majority of 36 to 32. Obligations under the legislation will commence on a date to be fixed by Proclamation and are anticipated to commence from 1 July 2012.
What should you do to prepare for the carbon pricing mechanism?
All businesses with a direct liability under the Carbon Pricing Mechanism or with significant indirect costs1 should be investigating what the Mechanism means for their business by setting up a carbon readiness team to consider some or all of the following action items.
Which entity is liable and should liability be transferred?
Direct emitters - A liable entity is the operating entity of a facility which emits more than 25,000 tCO2-e (Threshold Amount) rather than the controlling corporation (as is currently the case for the data collected under the National Greenhouse and Energy Reporting Act 2007 (NGER)). However, liability can be transferred within a group or to an entity with financial control via a 'liability transfer certificate' (LTC). If an LTC is issued the operating entity is taken to have guaranteed any payments due under the Mechanism and will take on reporting obligations under the NGER Act. Liability may also be allocated within a joint venture structure. Businesses should map out which are the liable entities within a corporate structure and determine whether liability should be transferred to another entity. This will be particularly useful where an entity other than the operating entity has the ability to pass carbon costs though to customers.
Gas suppliers are liable for emissions embodied in the gas sold to their customers, other than customers quoting an obligation transfer number (OTN) and will seek to pass the carbon costs through to their customers as an increase in the gas price.
A large gas user, being an entity whose use of gas at a facility emits more than the Threshold Amount, will be allocated an obligation transfer number and become a liable entity for that facility's emissions. A large gas user with other facilities under the Threshold Amount may apply to transfer liability for gas emissions at those facilities from the gas supplier to the large gas user via an 'obligation transfer number' as an alternative to accepting a pass through of carbon costs. A gas supplier is not obliged to accept an OTN for facilities under the Threshold Amount. Such users should now consider whether or not to take on liability and if so should liaise with their gas suppliers to obtain their consent. Gas users whose use does not result in emissions such as use as a feedstock or conversion to LPG, LNG or CNG should also apply for a OTN and their gas supplier must accept the OTN and cannot pass onto such users carbon costs.
Large fuel users can take advantage of an Opt-in Scheme (to be published by 15 December 2012) to allow users of transport fuel to 'opt-in' to the Carbon Pricing Mechanism from 1 July 2013 rather than suffer a reduction in the fuel tax rebate. We understand that the LPG fuel users are lobbying the Government for similar treatment. If your business is a large LPG fuel user you may wish to consider adding support to this cause.
If you have not already audited your NGER data and tested your data collection processes you may now wish to do so as this data will now be used to establish your liability under the Carbon Pricing Mechanism. Your executive officers will have personal liability if they fail to take all reasonable steps to avoid contravention by the corporation with its obligations in the legislation. Reasonable steps would include educating your employees, arranging professional assessments of compliance and implementing recommendations.
The direct and indirect financial impact of the Mechanism should be quantified and steps taken to make appropriate provisions for costs which cannot be passed through to your customers. Appropriate disclosures may need to be made to your lenders against financial covenants and in your accounts.
Can costs be passed through?
If you are a liable entity you will need to examine your customer contracts to determine if your carbon costs can be passed through to your customers. In some contracts (particularly provisions relating to a change in law, a change in tax or price review clause) there are strict time periods for serving notice to activate the pass through provision which must be complied with.
If you are a customer you should examine your supply contracts to see if the carbon costs can be passed through to you (often under a change in law, change in tax or price review clause). Do they include the costs of acquiring carbon units and administering liability (including the costs of running a carbon trading desk) in addition to the direct cost of units themselves? If you have a fixed price contract extending past 1st July 2015 you may wish to consider negotiating with your supplier to take over liability for carbon unit acquisition as an alternative to accepting a carbon pass through cost.
What energy savings opportunities are available?
An alternative to paying carbon costs based on current emissions is to lower those emissions. You should map energy saving opportunities to determine the trigger points for change. If you are part of the Energy Efficiencies Opportunities program you will have conducted an energy saving program identifying projects with a four year pay-back. That program should now be revisited to recalculate the savings taking into account the carbon cost.
Is it practicable to switch or supplement your energy needs with an on-site renewable or distributed tri-generation or co-generation supply?
Is your business eligible for any form of government assistance?
Is your business emissions intensive and trade exposed? If so, you may be eligible for assistance. Draft Regulations detailing allocative baselines for specified activities have been published and should be reviewed as time is quickly running out for you to lobby the government for any revisions to the draft baselines and activity classifications.
How will you acquire your carbon units?
You can buy fixed priced carbon units from the Clean Energy Regulator and Kyoto compliant carbon units3 issued under the Carbon Credits (Carbon Farming Initiative) Act 2011 from the creators of such units4.
The Regulator will start to auction 'floating' priced carbon units from a date to be determined. Not more than 15 million carbon units may be issued before 31 December 2014 if the emissions cap5 has not been set by this date.
In addition to buying carbon units in the auction process we anticipate that secondary markets and derivative markets will quickly develop.
In addition, certain types of international units6 (including certified emission reduction units (CERs)) can be surrendered to satisfy up to 50% of liability for the period after 1 July 2015. CERs are currently trading at around A$10 and will require a 'top up' to a floor price of A$15 under rules yet to be finalised and published. Care should be taken in buying international units too far in advance as the legislation authorises these units to be disallowed in subsequent compliance years to the year in which the decision to disallow is made.
Buying carbon units at an auction or from intermediaries such as banks and brokers is unlikely to require you to hold an Australian Financial Services Licence. However if you intend to operate an active carbon unit trading desk it is likely that you will need a licence7 and obtaining a licence is likely to take upwards of 6 months.
Avoid misleading carbon claims
The ACCC has received additional funding for 'carbon cops' and can impose hefty penalties on business making inaccurate claims about price increases due to the Carbon Pricing Mechanism, being carbon neutral or clean and green. We know of two recent incidents where clients have received requests to justify carbon pricing statements.
Are there opportunities for renewables, energy efficiency and low emission funding?
A$10 billion has been earmarked for project funding under the Clean Energy Finance Corporation's portfolio which is expected to commence operations in 2013 - 2014. Its investment mandate is expected to authorise investment in projects which have passed the initial development stage but are struggling to attract private investment. You may wish to consider whether there are any suitable projects which might assist your business. There is also A$1.2 billion in targeted funds and grants available for specific industries, including high energy using manufacturing industries, food processors, metal forging and foundry and research and development for renewable and energy efficiency projects.
1 All business will experience increased electricity costs (10%), gas costs (9%), rail and domestic freight and increased costs of emission intensive inputs (to the extent that these can be passed through).
2 Unincorporated JVs can apply to the Regulator to be treated as 'mandatory' or 'declared' designated JVs under the legislation with the consequence that each JV party will have liability equal to its share in the JV project.
3 There are two types of units which can be created under this Act and only Kyoto compliant units can be surrendered under the Mechanism.
4 For the first three years up to 5% of liability can be satisfied by surrendering Kyoto compliant carbon farming initiative units.
5 The emissions caps for the first five years are due to be tabled in Parliament by 31 May 2014.
6 Eligible international units are assigned amount units, certified emission reduction units, removal units or a prescribed unit issued in accordance with the Kyoto rules but not units issued under the New Zealand emission trading scheme nor units issued under the European Union's emission trading scheme until such time as those schemes are linked to the carbon pricing mechanism.
7 This is particularly the case if you are advising others on carbon pricing or 'making a market' in carbon units under section 766D of the Corporations Act 2001 (Cth) by regularly stating prices at which you will buy or sell carbon units.
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.