Draft carbon tax repeal legislation released - What does it mean for your business? - Climate Change

On 15 October 2013, the Government took its first step towards abolishing the carbon pricing mechanism by releasing eight draft repeal bills for consultation. Under the draft bills, the Government proposes to abolish the carbon price from 1 July 2014, grant new powers to the Australian Competition and Consumer Commission, and disband the Climate Change Authority.

For businesses, the big issue is the uncertainty around timing - when will the repeal legislation be passed and what are the implications if it is not passed before 1 July 2014?

The repeal bills will be the first item of legislative business when the new Government sits for the first time (expected to be the week beginning 11 November). However, it is unlikely that the repeal bills will be passed whilst Labor and the Greens control the Senate (unless Labor changes its position). It is more likely that the repeal bills will be passed after 1 July 2014, when the balance of power in the Senate shifts to the new independent and minor party Senators.

There are two key implications if the repeal bills are not passed until after 1 July 2014.

First, the carbon price would be abolished retrospectively and, until it is, the scheme would continue to be legally binding. Therefore, for at least part of the 2014/15 compliance year, the scheme would still be in place with no certainty as to whether or when it would in fact be repealed.

Second, as the new Senators have not yet shown their hands on the proposed repeal arrangements, it is not clear whether they will demand changes to those arrangements in return for support for the repeal legislation. Therefore, there is some uncertainty as to what the repeal legislation will look like if/when it is finally passed. Also, it remains to be seen whether the support (or otherwise) for the Government's proposed replacement scheme, the Direct Action Plan, will have any impact on the progress of the repeal bills through the new Senate.

These uncertainties raise complex issues for liable entities and other businesses. For example, if the repeal legislation has not been passed by 1 July 2014, businesses will need to decide whether to continue to pass carbon costs on to customers. If they don't, and the scheme is not retrospectively repealed before further carbon costs become payable, they will be caught short. But if they do, and no further carbon costs actually become payable, how should they manage the money that has been collected? These issues are not addressed in the draft repeal bills and will be important considerations when negotiating and drafting new or amended contracts with customers and suppliers.

Also, if the repeal bills are not passed by 1 July 2014, businesses that are paying an equivalent carbon price through reductions in fuel tax credits (and changes in other duties and levies) will continue to pay until the repeal bills are passed. Unlike liable entities, who would not be required to surrender carbon units for the 2014/15 compliance year until 15 June 2015, businesses that are receiving fewer fuel tax credits than previously effectively pay the carbon price when they claim their fuel tax credits (generally quarterly). There is currently no provision in the draft repeal legislation for these businesses to be re-imbursed if the scheme is retrospectively repealed. If this is not rectified, alternative compliance strategies should be explored by affected businesses.

WHAT ALL BUSINESSES SHOULD KNOW:

The draft repeal bills are open for consultation. Submissions are due by Monday, 4 November 2013 (although the Government encourages submissions by Tuesday 29 October 2013).
The Government has also released Terms of Reference for the Emissions Reduction Fund (the centrepiece of its proposed Direct Action Plan) for public comment. Submissions on the design of the Fund are due by Monday, 18 November 2013. We have outlined what we currently know of the Direct Action Plan below.
Businesses must comply with their carbon pricing obligations for the 2013/14 compliance year and until the repeal bills are passed.
Businesses should review their current and proposed contracting arrangements, pricing and (if relevant) compliance strategies to assess the implications of the repeal of the carbon price from 1 July 2014 (noting that the repeal may be retrospective).
Businesses that are eligible for assistance under the Jobs and Competitiveness Program may seek assistance for the 2013/14 compliance year and until the repeal bills are passed. However, there is a question mark over the fate of any financial assistance that is provided for the 2014/15 compliance year (as that may result in windfall gains for recipients).
Given the political context, it is not certain when the repeal legislation will be passed or exactly what it will look like when it is passed. Businesses should monitor the progress of the repeal legislation through the Parliament (particularly the Senate).

NEW POWERS FOR THE ACCC

The main draft bill includes new provisions to be inserted into the Competition and Consumer Act 2010 (Cth) concerning price exploitation, price monitoring and false or misleading representations.

First, the draft bill provides that a corporation must not engage in price exploitation in relation to the repeal. Price exploitation is defined to include any supply of a regulated good (currently electricity, natural gas, synthetic greenhouse gas and synthetic greenhouse gas equipment) at a price which is unreasonably high "having regard alone to the carbon tax repeal" (our emphasis) and, somewhat confusingly, even if the supplier's costs and demand and supply conditions are taken into account.

The proposed penalties for breaching this prohibition are significant – up to $1.7 million for a corporation and $340,000 for an individual.

Second, the draft bill gives the ACCC the power to monitor the prices charged by certain corporations to assess the general effect of repeal. This power applies to the regulated goods (mentioned above), goods supplied by liable entities and any other goods later designated by regulation. The ACCC must report to the Minister on its price monitoring activities.

Finally, the draft bill specifically prohibits a corporation from making false or misleading representations about the effect of the repeal on prices during a one year transitional period. Again, there are significant penalties for breaching this prohibition – up to $1.105 million for a corporation and $221,000 for an individual.

WHAT WE KNOW OF THE GOVERNMENT'S PROPOSED DIRECT ACTION PLAN

There is currently a lack of detail about the Government's proposed Direct Action Plan, however what we do know isⁱ:

An Emissions Reduction Fund (ERF) will be established to buy greenhouse gas abatement at the lowest price via a reverse auction process.
The Government has stated that the ERF will commence operations on 1 July 2014. It is not clear whether this would still be the case if the repeal legislation has not been passed before then. Also, we anticipate that the Direct Action Plan will need to be underpinned by new legislation and it is not clear whether that legislation will be supported by the Senate.
The ERF will be capped at $300m for 2014-15, $500m for 2015-16 and $750m for 2016-17. Funding is expected to rise to $1b in 2017-18. The funding of the ERF up to 2020 will be reviewed in 2015.
To receive ERF funding a project must be formulated in advance and accepted under the auction process. The Government will not pay until abatement has been achieved and verified.
The existing Carbon Farming Initiative will be expanded to include a greater range of methodologies, which will be used as the basis to deliver ERF funding.
The ERF reverse auction process is intended to be "source neutral". Eligible projects may include energy efficiency measures (including power stations), abatement of fugitive mine emissions, landfill gas abatement, as well as reforestation and soil carbon measures.
Businesses will be able to bid for ERF funding for operating at below their 'business as usual' emissions baseline. It is unclear how this will work in practice. The Government has suggested that the baselines will be calculated on an individual basis using data reported under the National Greenhouse and Energy Reporting Scheme.
Businesses that exceed their 'business as usual' emission baseline will be required to pay a penalty. The Government has suggested that the baselines will be calculated on an individual basis using data reported under the National Greenhouse and Energy Reporting Scheme. The details of the penalty scheme will be determined in 2013/14 in consultation with industry. In the Terms of Reference for the ERF, the Government is seeking views on "the design and operation of a mechanism applying to emissions above the business as usual baseline" which presumably is referring to the proposed penalty regime.
The Clean Energy Regulator will manage the penalty scheme and verification of ERF projects, while ERF auctions will be conducted by Low Carbon Australia.
The Direct Action Plan also encompasses a number of other separate initiatives, including solar projects (such as the $50m four-year 'one million solar roofs' project and $45m three-year 'solar schools and towns' project), a $5m research program into renewable fuels and $36m worth of funding over three years for urban forest and green corridor spending.
The National Climate Change Adaptation Research Facility, which was defunded by Labor in the last budget, will be provided with $12m of funding.

Following consultation on the Terms of Reference, it appears there will be two further rounds of public consultation on the Fund – in late 2013 (after release of the Green Paper on the development of the ERF), and again after the release of the White Paper and exposure draft legislation in early 2014.

Footnote

ⁱ

This information was sourced from the Coalition's original release of the Direct Action Plan in 2010 (which the Prime Minister indicated was still current Coalition policy during the 2013 election), as well as in speeches and announcements during the election campaign.

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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