Australia: Carbon Price Mechanism and EU carbon scheme linkage - more details revealed

Key Points:

Business now has greater certainty to manage its forward carbon liability, and, if the international carbon price remains at current levels, reduced compliance costs.

The Australian Government has moved on its promise to link the Australian Carbon Price Mechanism (CPM) and the European Union's Emissions Trading Scheme (ETS), and other changes to the CPM it announced in late August, with the introduction into Parliament last week of a new package of clean energy bills.

A number of other amendments are proposed to the application of the effective price on carbon for liquid and gaseous fuel users and those dealing with synthetic greenhouse gases, so that those who pay the carbon price outside of the CPM are paying a rate that reflects that paid by CPM participants.

Linking with the EU ETS

The EU ETS covers the European Union plus Norway, Iceland and Liechtenstein. It is the world's largest emissions trading scheme covering approximately 11,000 facilities and with a value in 2011 of US$176 billion. Emissions in the EU fell to 17.5% below 1990 levels in 2011, although the contribution of the EU ETS to this reduction is questionable given the impacts of the Global Financial Crisis and other energy policies such as renewable energy feed in tariffs in some EU members.

Linking with the EU ETS will mean that to the extent that Australian liable entities choose to meet some of their liability under the CPM with international units, or the price of carbon units in Australian follows the European price, Australian liable entities will be affected by decisions made by European regulators.

In order to facilitate linking with the largest carbon market in the world, the international unit surcharge originally proposed by Australia will be removed by repealing the Clean Energy (International Unit Surcharge) Act 2011.

Whereas a limit on the use of international units was originally a general limit of 50% for the period from 1 July 2015, more detail has been applied, and a sublimit of 12.5% will be applied to eligible Kyoto units (Emissions Reduction Units and Certified Emissions Reductions), so that a liable entity in Australia may discharge its liability by surrendering up to 50% of international units from 2015, and the balance in Australian units, but of the total units surrendered only 12.5% may be Kyoto units. The sublimit will remain in place until 2020. That is, a liable entity could surrender 12.5% Kyoto international units, 37.5% EU allowances, and 50% Australian carbon units.

The Government may change these designated limits, but must provide three years' notice of any such change, except where the change is made to facilitate linking to another emissions trading scheme, in which case one year's notice must be provided. This limitation on amendment is intended to provide certainty and therefore stability to the market.

If a liable entity surrenders international units in amounts that exceeds the general or sub limits, the excess will be applied to liability for the following year following a formula set out in the legislation that is intended to ensure that the lowest cost units are surrendered first.

The Australian National Registry of Emissions Units Act 2011 will also be amended to provide for linking to international registries where this is possible. Where this is not possible, the Government will (to the extent that this is permitted by international registries) be able to open and operate international registry accounts and then issue Australian issued international units (AIIU), which will be another class of prescribed international unit. This means that AIIUs may be used to meet a liability under the CPM up to prescribed limits.

No surcharge on international units

There will be no surcharge for the use of international units, but here will be limits on their use units as described above.

Removal of the auction floor price, but addition of a reserve

The rationale for the removal of the auction floor price is to ensure that the cost of carbon units in the CPM reflects the cost of carbon units in the international market.

However, proposed amendments to the Clean Energy Act, amending section 111(5), which currently sets out the auction floor price, and inserting a new subsection 111(6A), provide that the Minister may by Ministerial determination establish a "reserve charge amount" for a specified auction. Explanatory memoranda released with the Bills suggest that a Ministerial determination which specifies how the calculation for the reserve charge amount will be made would provide market participants with certainty regarding the method of determining future auction reserve charges.

As to the procedural arrangements for the auction process, the Minister may establish all the policies and procedures for the auctioning process through a determination. This means that with respect to the actual auction processes market participants still need to wait and see.

The number of carbon units from a particular compliance year (or vintage) that may be auctioned prior to that year has been increased from 15 million to 40 million for 2015-16 carbon units auctioned in 2013-14, and 20 million for all advance auctions where the cap for the year of the vintage has not been set.

Further, units may not be auctioned more than three years in advance of their vintage year.

Equivalent carbon pricing for liquid and gaseous fuels and synthetic gases

In recognition of the fact that the use of eligible international emissions units may bring the cost of compliance under the CPM during the flexible price period from 1 July 2015 to an amount per tonne of emissions that is lower than the price of carbon units sold at auction by the Clean Energy Regulator, the calculation of the "equivalent carbon price" will be amended so that:

  • the price applied to synthetic greenhouse gases and liquid fuels is now known as the "per-tonne carbon price equivalent" and is calculated to take into account international links, by using a weighted average of domestic and international units; and
  • where the calculated "per tonne carbon price equivalent" is higher than the average carbon unit auction price, it will be the same as the average carbon unit auction price.

Changes to the treatment of some natural gas supply and use arrangements

There is concern that the legislation as presently enacted does not ensure full coverage for natural gas supply scenarios. Currently users of natural gas in small facilities (with under 25,000 tonnes of greenhouse emissions per annum) are not covered by the CPM if they produce and use their own natural gas, or buy their natural gas under an arrangement where the supplier's delivery and metering occurs upstream of the point of withdrawal of the gas from a pipeline.

The proposed amendments provide the Minister with the power to create regulations to provide for alternative gas supply arrangements to ensure full coverage of the sector and maintain competitive neutrality.

The amendments are seeking to achieve this by:

  • amending the definition of the supply so that regulations may specify circumstances that constitute supply for the purpose of the Act;
  • creating an "own use notification", and "follow up notifications" which are mechanisms by which suppliers of natural gas are able to identify when gas they have supplied has been used by the recipient.

What does this all mean to participants in the carbon market and liable entities?

The additional detail means greater certainty as business looks to manage its forward carbon liability, at least from 2015. If the international carbon price at that time remains at current levels, it also means reduced costs of compliance.

There is also some assurance for those entities who do not opt in to the CPM, but rather manage their liability for liquid, gaseous and synthetic gases through the various excise and tariff schemes, that the carbon price they pay aligns with the cost of compliance of those businesses that are liable entities under the CPM. For those in the natural gas sector, there can be confidence that there will be full coverage across the sector.

If you would like further detail on these matters, please let us know.

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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. Persons listed may not be admitted in all states and territories.

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