Australia: Australia's Carbon Repeal – unveiled - carbon tax and carbon trading scheme to be repealed from 1 July 2014

Last Updated: 18 October 2013
Article by Fiona Melville, Jenny K. Mee and Julia F. Smith

Draft legislation, published on 15 October 2013, sets out the Australian Government's plans to repeal the Clean Energy Act 2011 (Cth) and associated legislation1 (Carbon Acts) with effect from 1 July 2014. The impact, if passed, would be that the obligations of liable entities' to pay a price for carbon emissions will cease with effect from 1 July 2014. In broad terms, removal of the carbon price will result in a reduction in the cost of carbon intensive goods and services. In particular electricity and gas prices should reduce by approximately 9% and 7% respectively.

Impact for Business From 1 July 2014

In their current form the Bills, remove liability under the Carbon Acts with effect from 1 July 2014. As indicated below, it appears likely that the Bills will not be passed before the first sitting of the new Senate; some time after 1 July 2014. This means that removal of liability will operate retrospectively, contrary to the Government's pre-election promise.

Retrospective removal of businesses' liability under the legislation does not mean that carbon costs paid between 1 July 2014 and the date of repeal will be refunded. Nor do the repeal Bills contain a power to "undo" contractual arrangements to remove carbon costs going forward. Consequently, many entities may be contractually obliged to pay an amount on account of a carbon cost to a counterparty long after the carbon liability has been removed.

This perverse outcome could be avoided, to a significant extent, by providing a lead-in period such that the repeal takes effect after a period of time following the passage of the Bills. The Government has indicated that businesses should "get ready" for repeal and act accordingly, but in many instances it is not practical for businesses to act in anticipation of a legislative outcome without suffering severe disadvantage if that outcome is not achieved.

Impact on Supply Chain

The most significant impact of the proposed repeal is on the carbon pass through supply chain and the apparent (but incorrect) assumption that legislative removal of liability will be reflected in contractual removal of the same liability at the same time. Specifically many contracts for carbon intensive goods and services will include a fixed component for carbon costs in the fixed price of the goods and services with no adjustment mechanism.

By way of example, the standardised terms of a fixed forward quarter electricity derivative contract offered on the Sydney Futures Exchange is priced as carbon inclusive and it does not contain a price adjustment provision to remove the carbon component on repeal of the carbon tax. Electricity retailers purchase such contracts in order to offer fixed prices to their customers. This is to manage the risk of exposure to the spot price of electricity which is extremely volatile ranging from minus AUD1,000 to AUD13,100 per half hour. In other words, the electricity retailer in that example was taking the carbon price risk in order to offer its customer a fixed electricity price. If the Carbon Acts are repealed the retailer will still be obliged to pay the carbon component (as part of the carbon inclusive price) to its counterparty for the period of the Sydney Futures Exchange contract. If the legislation contained a lead-in period, energy market participants would have time to reposition their wholesale purchases to better align with the legislation. A failure to include such a lead time is likely to drive up customer costs by increasing the risk premium.

Impact on Carbon Units

Any carbon units remaining in the Registry after the final compliance date of 2 February 2015 will be cancelled. The Government has indicated this will not raise the prospect of a claim by the holders of such units for acquisition of property on "other than just terms" contrary to section 51(xxxi) of the Constitution. Presumably this is on the basis that (a) the holder can apply to the Regulator to have excess free carbon units purchased by the Regulator (until the final surrender date), and (b) the holder can sell carbon units they have purchased at an auction back to the Regulator.

Carbon Unit Auctions

A determination2 made under the Clean Energy Act 2011 (Cth) obliges the Clean Energy Regulator to hold at least two auctions of 2015 vintage carbon units before 30 June 2014. Participation is voluntary. To the extent that liable entities participate in the auction, the Bills propose providing a refund for those auctioned units at the auction price. Participants thus face a cost of carry as the price of participation.

Australian Carbon Credit Units

Australian Carbon Credit Units issued under the Carbon Farming Initiative (CFI)3 continue to remain in force under the CFI and are expected to have a significant role under the Government's Direct Action Plan. The value of such units is likely to be significantly impacted by the repeal, but that of itself may not give rise to a claim for compensation.

To the extent that there has been an over surrender of such units under the Clean Energy Act by a liable entity under that Act, transitional provisions will re-credit these units by reinserting these in the CFI Register.

Recovery of Over-allocated Free Carbon Units

The Bills impose a levy to recover over-allocated free carbon units in place of the current obligation requiring such entities to relinquish such units.

Climate Change Authority

The Bills will abolish the Climate Change Authority whose function is to set carbon pollution caps and a carbon tax price ceiling. Any ongoing obligations will be transferred to the Department of Environment.

Carbon Tax Price Exploitation

New provisions to be inserted into the Competition and Consumer Act 2010 (Cth) will introduce a new prohibition preventing businesses from engaging in carbon tax related price exploitation in relation to electricity, gas and synthetic greenhouse gases for one year up to 30 June 2015. The Australian Competition and Consumer Commission (ACCC) will have new powers to monitor prices for six months before and 12 months after the repeal. However, as indicated above, this power cannot apply to pre-existing carbon inclusive fixed price contracts. To the extent that businesses are selling goods and services under contractual terms which included a carbon price, those goods will remain on sale at the carbon inclusive price. It therefore seems a hugely difficult task for the ACCC to oversee.

Reporting under National Greenhouse and Energy Reporting Act (Cth)

Controlling corporations will continue to be required to issue emission reports under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act).

Reviews Under CFI, NGER and Renewable Energy (Electricity) Act 2000 (Cth)

The Bills make review under these Acts initiated at the discretion of the Minister. This will create significant uncertainty for the renewable energy industry.

Personal Income Tax Cuts

Low income earners who have received compensation by way of a tax cut will retain that benefit until 30 June 2015. Customers who are not on fixed price carbon inclusive contracts will receive a double benefit in that firstly their electricity bills should reduce by approximately 9% and gas by approximately 7%, and in addition they will retain the tax cut carbon compensation as though a carbon price remained in existence.

Repeal Process, Timing and Prospects

The Government has announced that the Bills will be introduced into the House of Representatives in the first sitting of Parliament in November, where they will almost certainly pass. They will then proceed to the Senate where the current Greens-Labor dominated Senate has indicated that the Bills will be defeated.

The Government is then likely to wait until the composition of the Senate changes before re-introducing the draft legislation (sometime after 1 July 2014).

In order to obtain a majority in the new Senate, the Government is likely to require the co-operation of the Palmer United Party (PUP) alliance. Clive Palmer (whose Senate seat is subject to confirmation) looks set to extract some sort of deal from the Australian Government's in return for the support of his alliance. Currently he is demanding that liable entities be reimbursed for any taxes already paid under the carbon pricing scheme when it is repealed. The Government has rejected this idea, as well as demands that PUP aligned senators receive extra funding. If a deal is not struck and the PUP group vote against the repeal Bills then the Government will have the trigger for a double dissolution election – a drastic option which it has not ruled out using.

If the Government is unable to pass the bills by 1 July 2014, repealing the Carbon Acts retrospectively to that date will become even more problematic and expensive. Free carbon units will be issued in September 2014 which can be sold to the Government upon issue, so any legislation introduced after that time would need to be revised further to prevent what would otherwise be a windfall gain for emitters.

The next nine months will reveal just how crucial a role negotiations between the government and the dynamic PUP alliance will play in Australia's climate policy future.

Impact on 2012/2013 and 2013/2014 Liability Years

The proposed Bills contain transitional provisions for ensuring compliance with the obligations under the Carbon Acts for the 2012/2013 and 2013/2014 liability period. Compliance obligations will be enforced and the architecture under the Carbon Acts remains in place for as long as it's required to enforce compliance.

This means it is business as usual for the 2012/2013 liability year, and liable entities:

  • who have already received free carbon units under the Jobs and Competitiveness Program (JCP) or Energy Security Fund (ESF) are entitled to retain these
  • eligible under the JCP will receive the second tranche of free carbon units attributable to 2012/2013 liability
  • will need to report their 2012/2013 emissions number by 31 October 2013
  • who have received free carbon units under the JCP or ESF can sell these to the Clean Energy Regulator up to 2 February 2014
  • will need to acquire eligible emission units5 for their final carbon tax liability for the 2012/2013 emissions number (taking account of the initial surrender of units to meet the provisional liability on 16 June 2013) and surrender these by 3 February 2014
  • must pay a shortfall charge of AUD29.90 per unit for any shortfall in the number of units surrendered to the Regulator by 10 February 2014.

It is also business as usual for the 2013/2014 liability year, and liable entities:

  • eligible under the JCP will receive free carbon units attributable to 2013/2014 liability
  • eligible under the ESF will be entitled to retain the free carbon units issued on 2 September 2013
  • who have received free carbon units under the JCP or ESF can sell these to the Clean Energy Regulator up to 2 February 2015
  • will need to report their 2013/2014 emissions number by 31 October 2014
  • will need to acquire eligible emission units6 for their 2013/2014 provisional emissions number and surrender these by 16 June 2014
  • must pay a shortfall charge of AUD31.40 per unit for any shortfall in the number of units below the provisional emissions number surrendered to the Regulator, by 23 June 2014
  • will need to acquire eligible emission units for their 2013/2014 final emissions number and surrender these by 2 February 2015
  • must pay a shortfall charge of AUD31.40 per unit for any shortfall in the number of units surrendered to the Regulator, by 9 June 2015.

Submissions on Proposal

Submissions on the Governments proposed repeal should be submitted by 5pm on Monday 4 November 2013. Click here for more information.

Footnotes

1The associated Acts remove the equivalent carbon tax from taxable fuels and remove the associated reduction in the fuel tax credit, and remove the levy on synthetic greenhouse gases (used in refrigerators and air-conditioners).
2Clean Energy (Auction of Carbon Units) Determination 2013.
3Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth).
4For the 2012/2013 period the eligible emission units are free carbon units issued by the Clean Energy Regulator under the JCP or ESF or carbon units purchased from the Regulator at a fixed charge of AUD23.00.
5For the 2013/2014 period the eliglble emission units are free carbon units issued by the Clean Energy Regulator under the JCP or ESF or carbon units purchased from the Regulator at a fixed charge of AUD24.15.

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.

K&L Gates has been awarded a 2012 EOWA Employer of Choice for Women citation acknowledging our commitment to workplace diversity.

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