Australia: Implications of repealing the Carbon Pricing Mechanism and moving to the Direct Action Plan

How the change in government could affect you
Last Updated: 4 October 2013
Article by Elisa de Wit and Hannah Gould

The Government has stated that its first order of business will be the repeal of the Carbon Pricing Mechanism (CPM) (or the so-called 'carbon tax'). In place of the CPM, the Government will address climate change and carbon emissions through its Direct Action Plan (Direct Action Plan). It is intended that implementation of the Direct Action Plan will provide the mechanism for the Government to achieve its commitment to reduce greenhouse gas emissions by at least 5% on 2000 levels by 2020.

Repealing the CPM

Assuming the Government sticks to its previously announced deadlines, the Government will introduce legislation to repeal the CPM (Repeal Bill) on the first sitting day of Parliament. The Honourable Greg Hunt has stated that the CPM will then be repealed by April 2014 or, at the latest, by July 2014.

However, as the Government does not currently have control of the Senate, in order to repeal the CPM before 1 July 2014 it will need Labor to support the passage of the Repeal Bill. It remains uncertain whether Labor will agree that the new Government has a mandate to repeal the CPM and therefore whether it will support the Repeal Bill. Indications prior to the election were that Labor would not countenance reversing its position on this issue.

If Labor does not support the Repeal Bill, then the Government's ability to pass the Repeal Bill through Parliament will depend on the final composition of the Senate. At the time of posting this article it remained uncertain whether the Government would have a majority in the Senate in its own right from 1 July 2014. If the Government does not achieve the required numbers it has committed to call a double dissolution election. The fastest possible time frame for repeal via a double dissolution is likely to be approximately 8-9 months from the election, but the repeal could potentially take several months longer than this.

Direct Action Plan

The Government aims to commence its Direct Action Plan by 1 July 2014. The Direct Action Plan is an incentive based policy designed to support emissions reduction activities through:

  1. a capped1 government fund which will purchase "lowest cost abatement" from projects that reduce or avoid greenhouse gas emissions (Emissions Reduction Fund), and
  2. the imposition of financial penalties on businesses which exceed their "business as usual" emissions baselines.

The details of the Direct Action Plan will be developed through a white paper process which the Government proposes to start by 7 October 2013. We note that legislation to introduce the Direct Action Plan will be subject to the same hurdles as discussed above for the Repeal Bill.

Although the exact details of the Emissions Reduction Fund will be finalised during the white paper process, it is proposed that Low Carbon Australia will buy the "lowest cost per tonne abatement" from entities which:

  • reduce emissions through a project approved under the existing and/or expanded Carbon Farming Initiative (CFI), or
  • create abatement by operating below their "business as usual" baseline.

Low Carbon Australia will purchase abatement through a reverse auction where entities can voluntarily place bids based on the lowest price they are willing to sell their abatement for. Low Carbon Australia will be able to enter into forward contracts with entities to purchase abatement which may be delivered up to 7 years in the future. Funding, however, will only be delivered once abatement is actually achieved. The Government is adamant that it will not pick and choose what types of projects it will purchase abatement from, but rather, will simply purchase the lowest cost abatement.

The exact details of who will be liable to pay financial penalties under the Direct Action Plan and the value of these penalties is expected to be finalised during the white paper process. The Government has, however, announced that the "business as usual" emissions baselines will be calculated on an individual firm basis, will be based on a firm's average emissions over the past five years using data reported via the National Greenhouse and Energy Reporting Scheme and may potentially be linked to a firm's emissions intensity.

The Government's targets and approach to emissions reduction will be re-assessed in 2015 when an eight year plan for post-2020 will be developed.

Carbon Farming Initiative

The CFI will continue under the new Government and will be one of the main platforms for developing abatement under the Direct Action Plan. The Government intends to retain the project types and methodology determinations which have been approved to date under the CFI and also proposes to expand the CFI by:

  • expanding the types of projects which are eligible under the CFI (for example, adding types of projects which deliver abatement from energy efficiency, waste coal mine gas, transport, composting/recycling etc)
  • expanding the methodology determinations which are available under the CFI and in particular speeding up the process to have a methodology determination approved (for example, methodologies from international schemes such as the Clean Development Mechanism are proposed to be imported into the CFI), and
  • providing an option for carbon sequestration projects to be carried out with a shorter permanence period of 25 years (instead of 100 years).

Changes in institutional and governance arrangements

The Government has announced that it intends to merge the Commonwealth Climate Change and Environment Departments.

The Government has also committed to abolish the Climate Commission, the Climate Change Authority, the Clean Energy Finance Corporation (CEFC) and the Energy SecurityFund. In particular the Government intends to introduce legislation to Parliament which will shut down the CEFC within the first sitting fortnight of Parliament.

The Government intends to retain the following organisations:

  • the Clean Energy Regulator, which will be responsible for administering the expanded CFI (including new powers to approve methodology determinations), Renewable Energy Target and the National Greenhouse and Energy Reporting Scheme
  • Low Carbon Australia, which will conduct reverse auctions on behalf of the Emissions Reduction Fund, and
  • the Australian Renewable Energy Agency, however, the Government has announced that there will be budget cuts to the agency.

Implications for CPM liable entities and other participants in carbon markets

Assuming the CPM is successfully repealed, the termination date for the CPM will most likely be the first quarterly accounting day after the Repeal Bill is passed. Importantly, the Government has stated that it will not repeal the CPM retrospectively.

If the CPM is successfully repealed part way through the 2013/14 compliance year, the Government has announced that liability under the CPM will be calculated on a pro-rata basis. For example if the CPM is repealed on 1 April 2014, the CPM will have operated for 9 months of the compliance year and liable entities will be required to surrender eligible emissions units to cover three quarters of their greenhouse gas emissions for 2013/14 by 1 February 2015.

Moving forward, although liable entities will no longer be subject to liability under the CPM, it remains uncertain whether the same entities would then be covered by the "business as usual" baseline under the Direct Action Plan. If so, these entities would be able to either sell abatement to the Emissions Reduction Fund if they emit below their baselines or could be subject to financial penalties if they emit above their baselines.

Repealing the CPM will also have implications for the demand for Australian Carbon Credit Units (ACCUs) which are generated under the CFI. In the 2012/13 financial year, 97% of all ACCUs issued were purchased by liable entities under the CPM. The Government, however, is confident that there will be demand for ACCUs through the Emissions Reduction Fund and on international markets.


1$300 million in the first year, $500 million in the second year and $750 million in the third year

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Elisa de Wit
Hannah Gould
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