Australia: Australia’s Clean Energy Future Package - Does It Have A Future?

Last Updated: 25 June 2012
Article by Nick Molan

In the federal budget handed down on May 8 of this year, Australia's Labor government has confirmed its commitment to the Clean Energy Future Package, a legislative program including a Carbon Price Mechanism (CPM) which will come into effect on July 1 of this year.1 The legislation will compel around 500 of the country's biggest polluters to pay AUD23.00 for each ton of carbon dioxide they emit, and aims to cut carbon emissions to five percent below 2000 levels by 2020.2 Proposals for a carbon tax have historically been politically sensitive in Australia, which is one of the biggest greenhouse gas emitters (on a per capita basis) and is the world's largest coal exporter. Moreover, at a time when much of the world is experiencing economic uncertainty, many in Australia (which has generally been insulated from the current economic situation by an export-led resources boom) question whether it is the best time for a legislative program of this nature. As the Australian public approaches an election year in 2013, the future of the Clean Energy Future Package is expected to be a question returned to the voters.

The Carbon Price Mechanism

The Clean Energy Future Package is an integrated set of 19 acts of parliament designed to combat climate change. The legislation passed the House of Representatives by a narrow majority in October 2011 and the Senate in November 2011. Central to the legislative package is the Clean Energy Act 2011 (the Act), which establishes the framework for the CPM.3

Who is Liable?

The CPM will cover facilities that have annual direct greenhouse gas emissions of 25,000 tons or more of CO2e (excluding emissions from transport fuels and some synthetic greenhouse gases), and the liable entity will be the person with "operational control" of the emitting facility.4 In the case of unincorporated joint ventures (JV), the Act provides for each of the JV participants to be liable in proportion to their equity share, rather than the operator of the facility bearing such liability.5 However, the Act expressly excludes biofuel, biogas, and biomass from covered emissions.6 The Permits Carbon permits will be personal property but will also be regulated as financial products, and accordingly there will be certain licensing requirements in relation to them.7 From a tax perspective, any income from the sale of permits will be treated as ordinary income rather than capital gains, and transactions will generally not attract general service taxes (GST) unless they constitute derivative transactions.8

Setting the Price

The CPM is broken into two phases for pricing purposes: 1. The preliminary stage (July 1, 2012 to June 30, 2015), where the price of carbon will be fixed at AUD23.00 per ton of carbon dioxide during the period July 1, 2012 to June 30, 2013, and thereafter rising by 2.5% in each of the following two financial years;9 and

2. The flexible price phase (July 1, 2015 onwards), where a limited number of permits will be auctioned each year, creating a cap-and-trade system with the market determining price.10

The fixed price stage is designed to create price certainty, giving liable businesses (and their customers) time to assess the cost of their carbon emissions and the impact of the same on their business, while the flexible price phase is expected to create emissions certainty, as a reducing number of permits (in line with emissions reduction targets) will incentivize companies to reduce emissions and trade excess permits for profit.

The Cap

Starting from 2014, the government will announce caps for the following five years and will repeat the process on a rolling basis every five years thereafter.11 In setting the caps, the government of the day will be guided by the non-binding advice of the Climate Change Authority, an independent statutory authority.12 In the event parliament does not pass the regulations at each five year interval, a default cap consistent with the five percent target discussed above will apply.

Compliance and Enforcement

Any liable entity that fails to acquire any permits required by the Act will be liable to a fine equal to 1.3 times the fixed price (during the preliminary stage) and double the average market price for that year (during the flexible price phase).13 The Act provides for a statutory regulator, the Clean Energy Regulator, to be established to monitor and enforce compliance with the CPM.14

Reaction To The Clean Energy Future Package

The introduction and passage of this clean energy legislation in Australia was highly controversial, particularly given that the Labor Party went into the last election promising not to introduce a carbon tax but was forced to retract this position in order to win the support of the Greens party to form government.

Critics of the package have claimed that 60% of Australians will be worse off under it, while supporters claim that (taking into account related tax cuts and welfare payments) 90% of the population will be better off.15 Equally confusing, while certain business and industry groups have been highly vocal in their opposition to the legislation, others have argued that carbon pricing legislation gives businesses more certainty for their investments in an area often with long leadtimes and that will be increasingly subject to legislative intervention on a global level. The only thing that is clear is that the legislation appears to have polarized opinion within the country, with the conservative opposition leader, Tony Abbott, pledging 'in blood' to repeal the legislation as his first move in government if elected in 2013.

However, for the time being the Clean Energy Future Package represents the law of the land in Australia, and accordingly liable entities under the CPM as well as businesses dealing with supply contracts or carbon intensive products and services with such entities need to be aware of the liabilities and risks which their current and future contractual relationships may attract.


1 See Greg Combet, Minister for Climate and Energy Efficiency, Securing a Clean Energy Future: Implementing the Australian Government's Climate Change Plan, The Australian Government Department of Climate Change and Energy Efficiency1-3 (May 8, 2012), available at " statements/climate/download/climate_change.pdf" . 2 Id. at 7.

3 Clean Energy Act 2011, (Cth) pt 4 (Austl.).

4 Id. at pt 3, div 2, s A(20).

5 Id. at pt 3, div 2, s A(21).

6 Id. at pt 3, div 1, s 19.

7 Id. at pt 4, div 3, s 103.

8 Fact Sheet: Tax Treatment, Clean Energy Future 1, " au/wp-content/uploads/2011/06/17-FS-Tax-Treatment-110707-1358hrs.pdf" . 9 Clean Energy Act 2011, (Cth) pt 1, s 4 (Austl.).

10 Id.

11 Id. at pt 22, div 2, s 289.

12 Id.

13 Managing the Commercial Implications of a Price on Carbon, KPMG Austl. 20 (2012), " of-a-price-on-carbon-nov-2011.pdf" .

14 Clean Energy Act 2011, (Cth) pt 1, s 4 (Austl.).

15 Australian Parliament Passes Divisive Carbon Tax, BBC News (Oct. 12, 2011),

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