New Bill Takes The First Steps To National Emissions Trading

The Australian Government has taken the first legislative step toward national emission trading by introducing a Bill that will make it mandatory to report certain emissions of greenhouse gases, namely carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, certain hydrofluorocarbons and perfluorocarbons (GHG).

One of the stated purposes of the Bill is to eliminate inconsistencies and establish a single, standardised reporting framework through the Federal Government.

In introducing the National Greenhouse and Energy Reporting Bill 2007 (Bill) into Federal Parliament on 15 August 2007, Minister for the Environment and Water Resources, Malcolm Turnbull, stated that Australia's emissions trading scheme will be:

The Federal Government estimates the emissions trading scheme will capture 70-75 per cent of Australia's total emissions, and most of the industrial energy and mining sector GHG emissions. The Bill sets the framework for, and is central to establishing a national scheme.

The Bill was introduced amidst pressure from state and territory governments to establish a mandatory reporting scheme.

Will there be a supporting regulatory framework?

The Bill introduces a central registry system, operated by a newly established Greenhouse and Energy Data Officer, for the annual reporting of:

• GHG emissions;

• energy production; and

• energy consumption.

The proposed central registry will be pivotal to Australia's emissions trading scheme. While the registry will initially record emission profiles for company participants, eventually it will also hold accounts, which record companies' 'emission credits' and 'offset credits', process credit transfers between participants (or trading), reconcile a company's carbon debt against its credit account, and prosecute participants for non-compliance with the scheme.

While the Bill would establish a reporting system for greenhouse emissions, and a central registry system, as a precursor to an emissions trading scheme, a good deal of relevant detail has been left to regulations.

Australia currently has a fragmented series of mandatory and voluntary reporting systems at both state and federal levels for GHG emissions and energy consumption.

Company 'groups' that collectively exceed one of the thresholds for GHG emissions, energy production or energy consumption will be bound. The Bill uses a concept of controlling corporation, which will essentially be the company at the top of a corporate group hierarchy. Controlling corporations will be responsible for the reporting on behalf of facilities operated by subsidiaries, joint ventures and partnership companies. This collectively forms the company 'group'.

A facility is described as an undertaking or enterprise that involves the production of GHG, or the production or consumption of energy. The term specifically includes oil and gas extraction activities in Australia's Exclusive Economic Zone (the area beyond and adjacent to the territorial sea).

The controlling corporation will be the most senior company within a group and will have operational control of the companies within the group, if it has the authority over:

• operating policies;

• health and safety policies; and

• environmental policies.

These groupings may well provide some interesting questions in practice. For example, a joint venture may own a power station or industrial project, and contract one of their members (or an independent third-party) to operate the facility. There is a risk of two entities reporting the same emissions depending on how environmental responsibilities are apportioned between joint venture parties and the operator.

Regulations will be introduced to provide further guidance.

The Bill introduces various thresholds for GHG emitted, energy produced and energy consumed. If the company group collectively triggers any one of these thresholds, the controlling corporation has a reporting obligation.

Beginning 1 July 2008, the Bill establishes a series of thresholds that will be tightened over time:

GHG emissions – 125 kilo tonnes or more
Energy produced – 500 terajoules or more
Energy consumed – 500 terajoules or more

GHG emissions – 87.5 kilo tonnes or more
Energy produced – 350 terajoules or more
Energy consumed – 350 terajoules or more

GHG emissions – 50 kilo tonnes or more
Energy produced – 200 terajoules or more
Energy consumed – 200 terajoules or more

In addition to these 'tightening' thresholds, an 'entity that is a member of' the company group, will have to report where that entity has 'operational control' of a facility that causes:

• GHG emissions – 25 kilo tonnes or more

• Energy produced – 100 terajoules or more

• Energy consumed – 100 terajoules or more

A significant issue for Australian companies will be to resolve whether they are obliged to report their 'emissions' and their energy 'produced' or 'consumed'. The definitions will be determined by the regulations and the methods for measurement will be determined by the Minister.

The Government said there were already some existing standardised reporting methodologies, such as the Australian Greenhouse Office's 'Factors and Methods Workbook', (Workbook) and the World Business Council for Sustainable Development and World Resources Institute standard entitled "Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard' published 1 March 2004 ('GHG Protocol').

These documents provide reporting methods of 'indirect' emissions, including what are known defined in the GHG Protocol as 'scope 2' and 'scope 3' emissions.

By way of example, 'scope 3' emissions would include emissions that are a consequence of the extraction of fossil fuel based products such as coal, where the extraction of those products is for export to foreign countries. Reporting of scope 3 emissions is currently voluntary under the GHG Protocol. The Environment Minister states that scope 3 emissions and emissions offsets will not be considered when applying the threshold, but 'would be reported by companies participating in mandatory reporting, at their discretion'.

Another important issue for Australian companies to consider is whether all 'scope 2' emissions will be reportable under s.10 of the Bill. The GHG Protocol and AGO Workbook define scope 2 emissions to include transmission loss from electricity transmission and distribution systems, which, if reportable as 'consumption' under s.10 of the Bill, would include the owners and operators of electricity transmission and distribution systems. The Environment Minister states that 'scope 2' indirect emissions would be included in the application of the reporting threshold, but would be reported separately from 'scope 1' ('direct') emissions.

A controlling corporation must apply to be registered with the scheme if it exceeds the prescribed thresholds by no later than 31 August in the financial year.

For example, if Company X Ltd's group of companies emits more than 125 kilo tonnes of GHG per annum in the financial year 2008/2009, it must register with the scheme by 31 August 2009.

The maximum fine for failing to comply with this obligation totals $220,000.

This is a relatively tight reporting timeframe.

A registered controlling corporation must provide a report in the prescribed form to the Greenhouse and Energy Data Officer. The report must detail for the relevant financial years, the group's:

• GHG emissions;

• energy production; and

• energy consumption.

The report must be based on the agreed methods determined under the Bill (still to be provided), and must be submitted within four months after the relevant financial year.

For example, companies that are bound in the first financial year of operation (2008/2009), will be required to complete their first report by 31 October 2009.

The maximum fine for failing to meet this obligation is $220,000.

The Bill places particular obligations on chief executive officers (CEO) of any relevant controlling corporation to take all reasonable steps to prevent contravention of the controlling corporation's obligations. If a CEO fails to take all reasonable steps, they will be liable to a maximum penalty of $220,000. In determining whether a CEO has failed to take all reasonable steps – various factors will be considered including:

The onus will be on the CEO to show that these compliance systems are in place.

The Greenhouse and Energy Data Officer must publish on a website, by no later than 28 February in the relevant financial year, for each reporting company group for the previous financial year:

• GHG emissions;

• energy production; and

• energy consumption.

A controlling corporation has the right to apply to the Greenhouse and Energy Data Officer, requesting that the information it supplies is not published on the grounds that the data reveals trade secrets, or has some other commercial value. Review of this decision or other decisions by the Greenhouse and Energy Data Officer may be heard by the Administrative Appeals Tribunal.

The Bill contains strict controls to ensure that information provided in a report is not used inappropriately or released prematurely.

Companies potentially impacted by the proposed reporting scheme will need to:

• identify the relevant entities in their corporate group;

• identify their controlling corporation;

• identify whether, and in which phase, their corporate group is likely to be bound by the Bill;

• identify what emission and energy monitoring is currently conducted by their corporate group;

• consider the potential relevance of the Workbook and GHG Protocol as current industry guidelines;

• consider how any current monitoring could be rationalised, and made compliant with the proposed scheme;

• consider what steps and advice the company needs to take to ensure that it is compliant;

• determine whether information, which is supplied to the Greenhouse and Energy Data Officer, is likely to reveal trade secrets or has some other commercial value (to support any application that the Greenhouse and Energy Data Officer refrain from publishing the information); and

• monitor implementation of the Bill.

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.