Australia: Carbon Pricing Mechanism takes shape

Yesterday marked the first day of the first compliance year under Australia's carbon pricing mechanism (CPM). Entities liable under the CPM will need to record and report their covered greenhouse gas emissions. The threshold emissions level for an entity to be liable is 25,000 tonnes of carbon dioxide equivalent (CO2e), with liability payable by 1 February 2014. However, entities with emissions over 35,000 tonnes will need to pay 75% of their liability before 15 June 2013. From yesterday, many businesses that use fuel will also pay a carbon price via a reduction in their fuel tax credit entitlements.

RECENT AMENDMENTS

A little over a month prior to the commencement of the CPM, Climate Change Minister Greg Combet introduced a number of legislative amendments into Parliament. In summary, the amendments:

• Bring suppliers of non-transport fuels into the scheme from 1 July 2012 for compressed natural gas (CNG), and from 1 July 2013 for liquefied petroleum gas (LPG) and liquefied natural gas (LNG)
• Amend the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) to specify that the Clean Energy Regulator (Regulator), which began operation in April, only needs to publish net rather than total energy consumption, and to improve procedures for nominating who has operational control of a facility
• Allow the Regulator to have five days rather than two to defer giving effect to a transfer instruction, in order to properly deal with suspicious transactions
• Amend the legislation underpinning the Carbon Farming Mechanism (CFI) to require that projects have received regulatory approvals before any credits are granted, and to allow "back dating" for credits generated since mid-2010 (so long as the methodology is approved by mid 2013).

GREENHOUSE AND ENERGY MINIMUM STANDARDS

In line with investment into the establishment of cleaner technologies, the Federal Government (Government) has also recently introduced the Greenhouse and Energy Minimum Standards Bill 2012. If passed, the Bill will establish a national framework for regulating the energy efficiency of certain appliance products supplied or used within Australia in the residential, commercial and industrial sectors. These include refrigerators, washers, dryers, heating, cooling, gas appliances and office equipment.

The framework will support the existing "energy ratings" program (the Equipment Energy Efficiency or E3 Program), which already regulates such products, but will harmonise and improve efforts across Australian jurisdictions and expand the range of products covered. Regulated products will need to be registered with the national regulator, and businesses that deal with the products will need to ensure that they meet minimum requirements and are appropriately labelled. Importers of regulated products for commercial use will also be responsible for ensuring compliance.

FUNDING

The Federal Budget, released in May, includes funding for aspects of the Government's Clean Energy Plan (under which the CPM was set up) for the first CPM compliance year. Significant funds are to be invested in:

• The establishment of the Clean Energy Finance Corporation, which from 2013 will invest in renewable energy and low emissions technologies (to commence once the Clean Energy Finance Corporation Bill 2012 is passed)
• The Clean Energy Technology Innovation Program, which will encourage research and development in clean technologies
• The household assistance program, which will provide support to households through tax cuts and Government payments
• The Australian Competition and Consumer Commission (ACCC), which will investigate misleading and deceptive conduct in relation to price increase claims (read the ACCC's Carbon Price Claims - Guide for Business here).

PREVIOUS CHANGES TO THE CPM

Following our publication on the exposure of the Clean Energy legislation in late 2011, various changes were made between the draft and final forms of the legislation underpinning the CPM, outlined below. Since that time, the Regulator has also commenced operation, streamlining the CPM, the NGER scheme, the CFI and the Renewable Energy Target under the administration of the one government body.

Voluntary liability for fuels

An "opt in" scheme was created to allow large users of liquid fuels to voluntarily assume liability under the CPM. Under the draft legislation, combustion of transport fuels was not covered by the CPM; instead relevant members of the transport sector would have been required to pay an effective price via adjustments in fuel tax credits. The opt in arrangement will be available from 1 July 2013.

Joint ventures

Changes were made in relation to the CPM's application to unincorporated joint ventures (JVs) that have covered facilities. Unincorporated JVs are treated differently depending on whether they are 'mandatory' or 'declared' under the Clean Energy Act 2011 (Cth) (Clean Energy Act).

A mandatory designated JV exists where:

• Two or more persons share operational control over a facility, but neither has a greater authority to exercise operational control
• Notification has been given to the Regulator by 31 July 2012 or within 30 days of coming into existence.

A declared designated JV exists where:

• A JV has a facility that is operated exclusively for the JV by a person, who may be a participant, but where no participants are individuals
• The JV is not a mandatory designated JV
• The JV is declared by the Regulator (following application).

Changes include that:

• The persons sharing operational control over a facility in a mandatory designated JV do not need to be venture participants.
• The operator of a declared designated JV can be a venture participant
• Unincorporated JV participants can be foreign parties
• Liability can be transferred from the operator of the facility to the venture parties in accordance with their interests (determined by the Regulator)
• If payment of a unit shortfall charge by a participant in a declared designated JV is more than three months overdue, the Regulator will revoke the declaration from the next 1 July after notifying participants, and the person with operational control of the facility will assume liability. Note that the JV participants can avoid this by applying to the Regulator for a new declaration excluding the defaulting participant.

Natural gas

A number of changes were made that affect natural gas suppliers/users and the Obligation Transfer Number (OTN) system. The OTN system allows liability to be tracked and transferred so that it is not imposed both on the supplier of natural gas for potential emissions embodied in the gas and on the facility that uses the gas. In some cases it is mandatory for a facility to carry liability, by quoting an OTN, and in others it is voluntary.

The key changes were:

• Where no OTN is quoted, under the draft legislation, the retailer of natural gas would have had liability for the potential emissions embodied in that gas. Under the current legislation, the entity liable for the natural gas supplied from a pipeline is the supplier
• Although voluntary under the draft legislation, it is now mandatory for:
  • OTN quotation in relation to facilities using natural gas with potential emissions of over 25,000 tonnes of CO2e in a financial year. Entities responsible for such facilities are liable entities under the current legislation. This is to ensure large facilities are treated equally and to improve the ability of carbon passthrough to large end-users
  • Natural gas suppliers to accept an OTN quotation for natural gas used as a feedstock, or to manufacture CNG, LNG or LPG that enters the excise system. This is to ensure that non-emission uses of natural gas will not attract a carbon price

WHERE TO FROM HERE FOR LIABLE ENTITIES?

The following timeline applies to liable entity reporting:

In general terms, a liable entity is an entity that emits more than 25,000 CO2e from a facility for which it has operational control in a relevant compliance year (for further information, visit the Regulator's website here). An estimate of which entities are likely to be liable is available via the Liable Entities Public Information Database. This is based on past NGER reporting data. Liability is governed by the requirements of the Clean Energy Act and associated regulations, not by what is in the database. Liable entities are likely to already be registered and report under the NGER scheme, but newly liable entities are required to register under the NGER scheme by 1 May of the compliance year in which they become liable if they have an interim emissions number, or by 31 August following that year otherwise.

Failure to pay liability by the required date will attract a penalty in the form of a unit shortfall charge. Other businesses may face cost increases through the increased cost of materials supplied by liable entities, including construction materials and energy, via contractual pass through of the carbon price through a business supply chain. Contractual issues associated with carbon price pass through are addressed in Section 5 of our publication Australia's Clean Energy Future. For both liable entities and other businesses we published a guide for in-house counsel to assist with preparation for the commencement of the CPM. A copy can be found here.

WHERE TO FROM HERE FOR BUSINESSES THAT USE FUEL?

Fuel is generally subject to tax via the imposition of excise and customs duties. Businesses are able to claim back all or part of these taxes for certain uses of fuel through fuel tax credits. In most cases, fuel usage is excluded from the CPM. Instead, from yesterday, a carbon price is imposed on certain business fuel usage via an increase in excise or a reduction in fuel tax credits. The exact impact depends on the type of fuel used, the use of the fuel and the carbon price in the relevant year. The new rules are likely to affect the large number of businesses that are heavy fuel users, particularly those in the mining, construction and domestic rail and marine transport industries.

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