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Judging by recent press, local councils and Senate Estimates
Committees are in a spin over councils' potential liability for
emissions from landfill waste under the Carbon Price Mechanism
(CPM), due to commence on 1 July 2012.
Some quick points of clarification are required:
merely because a local council has been reporting emissions
from landfill waste under the National Greenhouse and Energy
Reporting Scheme (NGERS), or will have an obligation to do so in
the future, does not mean that the council has a liability
equivalent to the emissions which it reports. Current reporting
under the NGERS Scheme does not equate to financial accountability
under the CPM;
for persons with operational control of landfill facilities,
financial accountability under the CPM is limited to the amount of
covered emissions. Emissions from waste deposited
in a landfill prior to 1 July 2012 (that is, the day that the
commencement of the CPM), will not count towards a facility's
covered emissions, now or in the future.
What is unclear: councils' future financial liability under
the CPM
Where councils should have a concern is the quantification of
their financial liability under the CPM going forward. While there
are methodologies which enable councils to estimate the emissions
from the types of waste received in a landfill facility, and
consequently determine the emissions profile of waste deposited
from 1 July 2012, those emissions will occur over an extended
period, potentially 15 to 20 years.
The issue for councils is that in order to manage their future
liability under the CPM they will need to start charging from 1
July 2012 an amount that will reflect the "carbon cost"
for waste placed in landfill facilities. The challenge is that they
do not know how much a carbon unit will cost when the actual
emissions occur.
During the first three years of the CPM, the price for a carbon
unit is fixed ($15 in 2012 rising 5% in real terms each year),
transitioning to a floating price in 2015. Treasury modelling
estimates that the price of a carbon unit will be approximately $29
at this time. Beyond that date, little is known as to what future
carbon unit prices will be, since no caps on the number of carbon
units available to be purchased have been announced.
Forward auction of carbon units will be limited in both quantity
and the number of carbon units. It is likely that only four vintage
years of carbon units will be auctioned in any compliance year and
there will only be a small percentage of future vintages sold on a
forward basis. So while prices for the next five years will be
known or could be estimated, there will be nothing available which
will enable councils to determine the likely carbon price at the
time the emissions from waste deposited in July 2012 actually
occur. Councils therefore run the risk of greatly underestimating
or overestimating their future financial liability.
The problem could be alleviated if councils could purchase
carbon units now which could be used to meet that future liability.
The design of the CPM, with its initial fixed price period,
however, prohibits "banking" of units purchased during
the first three years. Instead, such units are generally
automatically surrendered at the time of purchase. Further, while
it is possible for councils to buy eligible emissions units (such
as Australian Carbon Credit units under the Carbon Farming
Initiative, or eligible international emissions credits), there are
limits on how many can be used to meet liability at least during
the initial use of the CPM, and also there is a risk of paying a
surcharge for any international credit if its value is less than
the floor price. Accordingly, councils will be assuming
considerable risk in buying eligible credits now for potential use
in 15 to 20 years' time when the regulatory environment could
be quite different from what it is now.
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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