After several false starts, Australia's Parliament today
passed the legislation which will introduce a carbon price for
greenhouse emissions in Australia from 1 July 2012.
However, rule-wise this is just the beginning, because many of
the details are still to be finalised.
The emissions cap
We do not know yet what will be the emissions cap to apply when
the scheme moves from fixed price to capped emissions from 1July
2015. This cap will probably not be set until 2014. However, many
businesses will not want to wait until 2014 to contract with carbon
price certainty for their business for 2015, and will be looking to
buy carbon units much earlier than that in order to firm up their
The international floor price
We do not know yet how the floor price on international carbon
permits will be calculated and imposed. Although these units cannot
be used in Australia until 1July 2015, many liable entities are
likely to be buying them from now in order to minimise and hedge
their liability, particularly since international permits are
presently trading well below the Australian starting price of
carbon ($23 per tonne).
Assistance levels and regulations
The government has drafted regulations for the allocation of
free units to some emissions-intensive trade-exposed industries,
such as the aluminium smelting and steel manufacturing sectors, but
regulations for some other sectors have not been finalised. We do
not know yet what will be the benchmark emission levels against
which carbon units will be allocated to LNG producers, who are to
receive a minimum allocation of 50% of the benchmark emissions,
whatever that is.
Existing power contracts
Regulations for assessing the level of assistance to be provided
for large trade-exposed consumers of electric power under existing
power contracts are also still in the development stage. The
exposure draft regulations have a problem with circularity, with
large consumers of electric power able to receive free carbon units
only if they have a carbon cost under their power contract, and
those large consumers often having committed to pay a carbon cost
under their power contract only if they receive free permits.
Contracts will need to be re-written
Since the prospect of a carbon price first emerged early in the
last decade, many businesses have included a "change of
law" clause in their contracts, allowing the adjustment of
prices under the contracts should a carbon price law be introduced
after the date of the contract. Now that the carbon price has come
into law, those clauses will no longer work for new contracts, and
businesses will need to introduce new pricing provisions to deal
with the fluctuating value of carbon where their business is at all
emissions or energy-intensive.
A soft start now looks hard
When details of the scheme were announced earlier this year, the
Government probably thought that a fixed price scheme for the
initial three years would be a "soft start". However, a
few months later, and the fixed price of A$23 per tonne in
Australia from 2012 is looking far more expensive than the price
being paid by carbon emitters in Europe, where international carbon
units are currently trading at about € 7 (under A$10). A
market-based price from the start might have ensured that the
Australian scheme stays consistent with carbon costs being incurred
in other countries that have implemented carbon controls. The
advantages of a flexible price market-based scheme rather than a
fixed price or tax are already apparent.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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