Business should be getting specific advice now on the impacts of the carbon tax repeal on a wide range of matters.
The Federal Government released a Consultation Paper and exposure drafts of a suite of eight draft bills (the Carbon Tax Repeal Bills) that will abolish the Carbon Price Mechanism last week.
While they would in fact abolish the carbon tax, the Carbon Tax Repeal Bills as they currently stand are predicated on the assumption that they will be passed and the Carbon Price Mechanism abolished by 30 June 2014 – an assumption that is optimistic, given the composition of the current Senate.
As a result, there are concerns in some sectors about how and when the abolition will occur, and what that will mean for their business models.
Three elements to the abolition of the Carbon Price Mechanism
The draft Carbon Tax Repeal Bills have three main objectives.
First, they abolish the Clean Energy Act 2011 and its supporting legislation and entities, including:
- the Climate Change Authority, whose functions for periodic legislative review of the Carbon Farming Initiative, the Renewable Energy Target and the National Greenhouse & Energy Reporting Scheme are transferred to the Minister of the Department of the Environment;
- the Jobs & Competitiveness Program industry assistance after 1 July 2014; and
- the income tax cuts, which were to commence in 2015.
Secondly, they retain the Clean Energy Regulator and energy reporting requirements under the National Greenhouse and Energy Reporting Act 2007 and the Australian National Registry of Emissions Act 2011.
Finally, the Australian Competition and Consumer Commission gets new powers to monitor prices and ensure businesses are not exploiting or making false or misleading statements about the carbon tax repeal.
When will the carbon tax be abolished?
Critically, the Government has publically committed to abolishing the carbon tax on 1 July 2014, even if Parliament has not passed the Carbon Tax Repeal Bills by this date.
Given that the Greens and Labor are currently opposed to the repeal of the carbon tax unless its replacement includes some form of emissions trading scheme, however, their combined power in the Senate is likely to frustrate the Government's plans to axe the tax by the end of this financial year.
Nonetheless, the Government is adamant that the repeal will occur by the stipulated deadline and has not ruled out a double dissolution election should the Senate frustrate the passage of the carbon tax repeal bills (although politically this might be more threat than a promise). The alternative is to wait until the formation of the new Senate in July 2013.
No retrospective effect for the carbon tax abolition
If the carbon tax repeal bills are not passed until after 1 July 2014, it is unclear if the Government intends for the legislation to operate retrospectively.
The current form of the draft legislation does not contemplate its retrospective application, and if this was the Government's intention, then it would need to include an express provision to that effect. It is more likely that if the scheme could not be repealed before the proposed 1 July 2014 deadline, that either some abridged compliance period would ensue, or the scheme continues for a further full compliance period until June 2015. Either scenario would lead to considerable complexity and uncertainty for business.
Carbon Price windfall?
Many of the concerns about transitional issues that we have raised previously are not addressed in the draft Carbon Tax Repeal Bills, because the Government is operating on the basis that the Bills will be passed and commence by 30 June 2014.
As an example, what would happen with permits surrendered after 1 July 2014, or for any excess free permits retained at this date? If the abolition occurs before that date, as the Government intends it to, then no compensation would be payable. Consequently the transitional provisions in the draft Carbon Tax Repeal Bills only permit the issue and dealing in carbon units, and surrender of eligible permits, in order to discharge liabilities in the financial year ending 30 June 2014. But what if the carbon tax is still in place?
If the Government has to delay the abolition until a friendlier Senate is sworn in, a possible end-point for the Carbon Price Mechanism could be September 2014. If this was the case, entities entitled to assistance under the Jobs and Competitiveness Program, could apply to receive an allocation of free carbon units. If that happens, RepuTex says that:
"the government can expect companies to utilise the buy-back facility before the permits become worthless, with government facing a bill in excess of A$2 billion to cash in nearly 87 million freely allocated permits. In such a scenario, the Metals, Energy, and Power sectors stand to receive a significant cash windfall, while avoiding almost all liability for their emissions."
Whether this in fact transpires will depend on the approach adopted by the CER in determining such applications, and the manner in which any allocations are made. Nevertheless, the CER is constrained by the current terms of the Clean Energy Act and associated regulations, and it has limited ability to reduce or pro-rata allocations. It is likely however that if the passage of the Bill is delayed beyond July 2014, it will be amended to address this scenario.
Direct Action and its Emissions Reduction Fund still not finalised
Following the draft Carbon Tax Repeal Bills, the Government called for public comment on the Emissions Reduction Fund. This will be the major component of the Direct Action Plan that will replace the carbon tax as the Coalition's policy response to carbon emission reduction.
The Terms of Reference for the Emissions Reduction Fund contain insufficient detail to assess this replacement policy. We will have to wait until December before a consultation Green Paper is released indicating the Government's preference for the structure and operation of the fund, before we get a White Paper and draft legislation in early 2014. Whether the Government can keep to this timetable remains to be seen.
Consequently, there is clear possibility that the debate over the repeal of the Clean Energy Act will occur without the benefit of any detail of the policy alternative to reduce emissions.
So what should you do now?
The first point to remember is that until it is repealed, businesses must still comply with their obligations under the Clean Energy Act, including reporting of covered emissions and surrendering of eligible units to meet any liability.
Business should be getting specific advice on the impacts of the carbon tax repeal on matters such as:
- the permits they hold and could be entitled to apply for if the carbon tax is still in place as at 1 July 2014;
- supplier / customer contracts and how they handle carbon cost pass through as well as changes to fuel taxes;
- electricity contracts and any derivatives used to manage their exposure;
- their participation in the Carbon Farming Initiative and the National Greenhouse and Energy Reporting Schemes, or any carbon unit auctions (scheduled to commence in early 2014);
- their exposure on the domestic secondary market via the purchase of Australian Carbon Units or Australian Carbon Credit Units; and
- the viability of their emissions abatement projects.
The Government has released a Consultation Paper which calls for submissions on the Carbon Tax Repeal Bills. Stakeholders are asked to submit responses to Government identifying any technical issues with the draft carbon tax repeal bills as well as any transitional issues for liable businesses and entities.
Given the issues we've identified, businesses affected by the repeal of the Carbon Price Mechanism should take this opportunity to seek more detail about the transitional issues. The closing date for public comments is 5pm Monday 4 November 2013.You might also be interested in...
- Carbon tax repeal bills released for public comment
- Axing the Tax: What's involved and what are the implications for business?
- The Coalition and CFI
- Simplicity and incentive? What the Direct Action plan means for business
- Government takes direct action to develop Emissions Reduction Fund
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.