Australia: How will the new Government respond to the need to take domestic action on climate change?

Introduction

The new Coalition Government has stated that its first order of business will be 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 in the second half of October 2013. The Honourable Greg Hunt, who is expected to be the Minister for Climate Action, Environment and Heritage in the new Government, has stated that the CPM will then be repealed by April 2014 or, at the latest, by July 2014.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, although this position could conceivably change under a new Labor leader.

If Labor does not support the Repeal Bill, then the Government's ability to get the Repeal Bill through Parliament will depend on the final composition of the Senate. At the time of posting this article it seemed certain that the Government will not have a majority in the Senate in its own right from 1 July 2014, and that several Senate seats will be won by minor parties or independents. If the Government does not achieve the required numbers (either on its own accord or with support of cross-benchers) it has indicated that it will proceed to 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.

It is our expectation therefore, that unless Labor vote with the Government after the election to pass the Repeal Bill, the second full year of the CPM will need to take place.

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:

• a capped¹ government fund which will purchase "lowest cost abatement" from projects that reduce or avoid greenhouse gas emissions (Emissions Reduction Fund), and
• 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 (White Paper). Submissions will be sought by 7 October, consultation will take place between 6 November and 16 December, and implementing legislation will be ready by 5 February 2014.We note that legislation to introduce the Direct Action Plan will be subject to the same hurdles as discussed above for the Repeal Bill.

Emissions Reduction Fund

Although the exact details of the Emissions Reduction Fund (Fund) will be finalised during the White Paper process, it is currently proposed that Low Carbon Australia (which will be demerged from the Clean Energy Finance Corporation to act as administrator of the Fund) 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 over a 5 to 7 year period. Funding, however, will only be delivered once abatement is actually achieved.

One issue which will need to be determined during the White Paper process is whether there will be any consequences for a project which does not deliver its contracted abatement. Although it is clear that the project will not receive payment if the abatement is not delivered, consideration may need to be given as to whether there will be other incentives or penalties included to guarantee the contracted abatement. This will be particularly important where the Government is relying on the contracted emissions reductions to achieve its 2020 target.

The Honourable Greg Hunt has indicated that a Coalition Government will not pick and choose what types of projects it will purchase abatement from (for example, through funding categories or "bands" based on sector or abatement type), but rather, will simply purchase the lowest cost abatement offered through the auctions. He has expressed it as "buying up the cost curve". This approach may raise issues about the viability of existing or proposed CFI projects if they find that they are unable to compete with other project types participating in the auctions. For example, it is widely anticipated that energy efficiency projects are likely to be the lowest cost form of abatement and that with aggregation, these types of projects may easily absorb a large part of the allocated funding for the Fund. Conversely, land sector projects (such as reforestation) which often have significant up front capital costs and long lead times for abatement to be realised, may struggle to compete for funding under the Fund.

Baseline and penalty/credit scheme

The exact details of who will be liable to pay financial penalties under the Direct Action Plan and the value of those penalties is expected to be consulted on and finalised through the White Paper process.

The Government has, however, referred to the fact 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 (NGERS) and may potentially be linked to a firm's emissions intensity.

One issue which will need to be worked through during the White Paper process is how to determine the baseline for newly established firms, firms which undergo greenfield or brownfield expansions, or firms which have not previously been reporting under NGERS and would like to "opt-in" to the baseline system in order to benefit from the ability to sell abatement below their baseline. We understand that the Government may assign new businesses an Australian industry average baseline. Given the complexities experienced in determining the emissions intensive trade-exposed (EITE) industry baselines for the Jobs and Competitiveness Program this may not be a straightforward exercise.

We also understand that while the calculation of baselines would be normalised for particular events such as fire or flood, or activities taken off-line, there is no proposal to include a "buffer" in the calculations to account for baseline variability or uncertainty. The White Paper process will presumably further examine options on these and other issues.

Emissions reduction targets

The new Government has committed to a 5% reduction of 2000² emission levels by 2020. It is confident that implementation of its Direct Action Plan will allow it to meet this target. However, it is worth noting that prior to the election, the Prime Minister elect, The Honourable Tony Abbott, stated that "the bottom line is we will spend as much as we have budgeted, no more and no less" and "we will get as much environmental improvement, as much emissions reduction as we can for the spending that we've budgeted."

One implication from these comments is that the Government may not meet the 2020 target if it turns out that more money than what has been allocated is needed to purchase the necessary abatement. However, The Honourable Greg Hunt has said that the budget allocation for the Fund has been based on conservative estimates and he expects there to be sufficient funds to meet this target.

The Government does not have a public policy on achieving a 2050 target and intends to repeal the current target in the Clean Energy Act 2011 (that is, to reduce emissions to 80% below 2000 levels by 2050).

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

It is uncertain what will become of the Caps and Targets report that the Climate Change Authority is currently working on, given that the Government proposes to abolish this organisation (see below). The Authority is due to produce a draft report in October 2013, with its final report required to be produced pursuant to its legislative requirement by the end of February 2014. As stated above, it is unlikely that the legislation which establishes the Authority will be able to be repealed prior to 1 July 2014, therefore it is our expectation that the Authority will need to proceed with its work. It is unknown how the Government will react to, or deal with, a report which may recommend a target higher than the 5%, which the Government has committed to.

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), although there is a possibility that projects in these circumstances would only be eligible for a credit for each four tonnes of abatement given that the international standard for permanence is 100 years. The proposed rules governing this will presumably form part of the White Paper process.

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 Change 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. It is very likely, however, that the contracts entered into by the CEFC prior to the election will need to be honoured by the new Government.

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.

The Government's budget announcement prior to the election also reveals a variety of savings linked to the CPM, which include discontinuing:

• the Jobs and Competitiveness Program ($4 billion),
• the Steel Transformation Plan ($0.1 billion),
• the Clean Technology Program ($0.4 billion),
• the Coal Sector Jobs Package ($0.3 billion),
• removing the instant asset write-off threshold to $6500 ($0.2 billion), and
• other smaller Clean Energy Future compensation measures, including the Energy Efficiency Information Grants, the Clean Energy Skills package, and the Clean Technology Focus for Supply Chain programs.

Moving forward

CPM

Assuming the CPM is 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 repealed part way through the 2013/14 compliance year, we have been told 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.

It is not clear what will happen in relation to the free units issued under the Jobs and Competitiveness Program. For example, whether there may need to be some form of clawback in the event of repeal taking effect part way through a compliance year (as per the proportional approach proposed for compliance obligations).

Direct Action

Moving forward, although liable entities will no longer be subject to liability under the CPM from the time that a repeal takes effect, the expectation is that most or all of 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.

It will therefore be important for liable entities to be involved in the White Paper process, as this will govern the development of the baseline which is allocated to them. If the Government sticks to its previously announced timeframes, the White Paper process will be as follows:

• The Government will call for submissions on the Direct Action Plan by 7 October 2013;
• The Government will consult with industry from 6 November to 16 December 2013;
• The Government will release a white paper which will provide further details on the Direct Action Plan by 16 December 2013;
• The Government will finalise legislation by 5 February 2014.

Carbon Farming Initiative

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.

Although the Government is confident that there will be demand for ACCUs through the Fund and on international markets, companies or organisations that are already participating in the CFI, or are planning to develop projects under the CFI, should engage early in the consultation process for the White Paper. In particular, those companies who have already invested in the CFI and whose projects may not be able to compete with other projects likely to participate in the Fund may wish to suggest that there is some form of "banding" or separate allocation to reward their early investment.

NGER Reporting

The Government has committed to retain NGERS. Companies should therefore continue to prepare and submit their NGER reports by the 31 October 2013 deadline.

Funding agreements

For an analysis of the legal issues relevant to the recipients of funding programs and finance packages under the CPM and wider Clean Energy Package, see our separate election update article Breaking up is hard to do – Can the Clean Energy Future package be completely disbanded? The doctrine of executive necessity and termination for convenience in government contracts.

Footnotes

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

²We note that page 1 of the Coalition's Direct Action Plan, which was issued in 2010, references the year 1990, instead of 2000. We have assumed that this was an error as the Coalition has consistently maintained that it supports the targets put forward by the former Government after Copenhagen and these targets (ie the range of 5-25%) were always based on the year of 2000.

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