In a move designed to integrate Australia's carbon tax regime with international regimes, the Federal Government announced last month that it would abolish the pricing floor during the carbon tax's trading/floating price period.
Instead, from 2015, Australian emitters will be able to buy European Union carbon credits at the EU price and use them in Australia. From 2018, Europeans will be able to buy Australian carbon credits to fulfil their carbon tax liabilities in the EU, effectively creating a combined market with a common price on carbon.
Special counsel Justin Byrne outlines the changes introduced and explains how they will affect Australian businesses.
- The Government's announcement brings forward the integration of Australia's carbon tax regime with international carbon tax regimes.
- While removing the pricing floor means that Australian businesses may enjoy a lower than expected carbon tax liability, a downturn in the European carbon credit market could reduce interest in low carbon investments and business operations in Australia.
- Businesses may choose to start 'banking' international carbon credits by purchasing now with a view to using them at a future point in time.
Australia's current carbon tax regime
Australia's carbon tax regime, as originally designed and passed as law, provides for an initial three year period in which the price of carbon credits is fixed. The regime then moves into a trading/floating price period, in which the price of carbon credits is effectively determined by market forces. A price 'floor' was incorporated into this stage to ensure that even if market forces didn't command a high price, there would still be a disincentive to pollute, given the minimum floor price payable.
The carbon tax regime as originally designed also imposes a limit of 50 percent on the amount of international carbon tax credits that can be purchased and used to satisfy an Australian carbon tax liability.
Under the changes, a sub-limit of 12.5 percent will be applied to eligible Kyoto units (ie Emissions Reduction Units and Certified Emissions Reductions), presumably to prevent Kyoto credits setting the Australian price. As a result, from 2015, an Australian carbon tax liability will be able to be satisfied by surrendering up to 50 percent as international carbon credits (with Australian carbon credits making up the remaining 50 percent), but only 12.5 percent of the total credits surrendered may be Kyoto credits. This sub-limit will remain in place until 2020.
Removing the carbon floor price
According to the Government, removing the floor price will ensure that the cost of carbon units in Australia's carbon regime reflects the cost of carbon units in the international market.
However, limiting the use of international units to 50 percent of the total, with a maximum of 12.5 percent as eligible Kyoto credits, will allow Australian emitters to fulfil part of their carbon tax liability by using cheap international credits. As a result, the price of units in Australia from 2015 onwards is expected to match the EU carbon price.
Whether this will be higher or lower than the Government's predetermined floor price of $15 per tonne remains to be seen. Previously, a charge applied if foreign credits were purchased and used in Australia at a price lower than the floor price. That charge will be removed.
What does all this mean for businesses?
If current EU carbon pricing remains as it is, removing the pricing floor means that Australian businesses can look forward to a lower than expected carbon tax liability - at least from 2015 onwards. However, if the price of EU carbon credits plummets, the reduced carbon tax liability may fail to incentivise low carbon investments and business operations. This may have an impact on, for example, the rate at which renewable technologies are developed.
There is, and always has been, the ability to lock in pricing by buying international credits (up to the limits outlined above), but businesses need to accurately forecast future carbon tax liability in order to correctly assess forward purchasing requirements. If this can be achieved with some accuracy, and assuming that the carbon price will increase over time, it may be worthwhile for businesses to begin 'banking' international carbon credits by purchasing now with a view to using them at a future point in time.
There is no tax advantage or disadvantage that flows from purchasing credits ahead of time in the floating/trading period. Credits acquired during this period can be used in the year of purchase, or any subsequent year. Generally, only once credits are surrendered to satisfy an entity's carbon tax liability will a tax deduction be allowed to that entity in relation to the cost of the carbon credit surrendered.
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