Australia: CPRS: A Financier’s Perspective: Assessing And Managing Regulatory Risks

Last Updated: 13 March 2009
Article by Geoff Charnock


The introduction of the Carbon Pollution Reduction Scheme (CPRS) in July 2010 will fundamentally alter the regulatory environment within which entities that are liable under the scheme will operate.

In particular, liable entities will be subjected to a new suite of obligations aimed at reducing the level of national greenhouse gas emissions, including obligations to monitor and report emissions and to acquire and surrender a carbon pollution permit (permit) for every tonne of emissions produced each year.

The scope of entities that may be liable under the CPRS is broad, including:

  • electricity generators
  • fuel suppliers for road and rail transport
  • entities involved in the production, processing, transport, storage and distribution of coal, oil and gas
  • manufacturers, mineral processors and chemical and metal producers
  • importers of synthetic greenhouse gases, importers of equipment containing synthetic greenhouse gases and domestic synthetic greenhouse gas manufacturers
  • owners and operators of landfill sites, waste water treatment plants and solvent and clinical waste incineration facilities

The CPRS will also have consequences for financiers that have lent money to or have invested in entities that are liable under the scheme.

The CPRS will impose additional costs on borrowers, which may include the cost of acquiring permits and increased expenditure on capital items to reduce emissions or increase energy efficiency.

The facility agreements and supporting security documents between liable entities (in their capacity as borrowers) and their financiers could call for a review of the loan arrangements if these costs will or could have a significant impact on the borrowers' assets and/or revenue stream.

A lender's review may entail assessment of the impact of CPRS obligations on the borrower's with the obligation in the facility agreement to comply with all relevant laws and obligations, which would include the CPRS once legislation implementing the scheme is passed.

The lender may also need to consider the possibility of taking security over the permits, which the borrower is obliged to acquire under the CPRS.

There is currently some uncertainty surrounding the precise nature of the scheme that the government intends to introduce to reduce national greenhouse emissions. Nevertheless, the White Paper is likely to form the basis for the government's approach.

Accordingly, we consider that it would be prudent for financiers to use the White Paper as a basis to undertake a comprehensive risk assessment of the implications of the CPRS for their facility agreements with entities that may be liable under the CPRS, particularly in light of the current global economic crisis.

Such a risk assessment will involve consideration of each of the relevant elements of the CPRS to determine the likely impact and probability of consequences for liable entities.

The risk assessment may need to be reviewed when the CPRS legislation is finally released. This paper will help guide financiers in undertaking that risk assessment and will assist in determining what action needs to be taken, if any, to protect their financial position prior to the implementation of the CPRS.



It is important to articulate the objectives underlying a risk assessment of the CPRS as this will affect the nature of the assessment undertaken. More specifically, the objectives will help determine the criteria to be used to assess the overall level of risk associated with a particular aspect of the scheme.

For financiers, the objective is clear: to determine whether obligations under the CPRS will or may affect the borrower's assets and/or revenue stream.

This will entail determination of whether a borrower is liable under the CPRS, the extent of liability and whether such liability will or could have a significant impact on the borrowers' assets and/or revenue stream.

Some CPRS obligations will entail a greater risk of affecting borrowers assets and/or revenue stream than others. A comprehensive risk assessment will allow financiers to rank CPRS obligations and monitor how individual borrowers are addressing the high risk provisions.

This will place financiers in a better position to decide upon appropriate action to ensure borrowers adequately address the risk before and after the CPRS comes into effect so as to avoid an adverse impact upon their business.


'Risk' is most commonly defined in terms of the expected impact that may be caused by a situation or event and the probability of that situation or event occurring. Generally speaking, the greater the impact and probability, the higher the overall risk.

Applying these elements in the CPRS context, a financier's risk assessment will entail consideration of the actual or possible impact of each relevant element of the CPRS on the borrower's assets and/or revenue stream and the probability of that impact occurring.

Impact Factors

There will be several dimensions to the consideration of impact under the CPRS. In particular, it will be important to understand both:

  • the nature of the impact: that is, whether or not the particular CPRS obligation affects the borrower's assets and revenue stream and, if so, how; and
  • the degree of impact: that is, the extent to which the CPRS obligation affects the borrower's assets and revenue stream.

Financiers need only be concerned if obligations under the CPRS are of a kind that will significantly affect the borrowers' assets and/or revenue stream in the medium to long term.

There are a number of obligations in the CPRS that impose on-going costs on liable entities, some of which may be significant. These types of obligations are likely to be ranked by financiers as having a 'high impact' and, depending upon the probability of the impact eventuating, need to be closely monitored by financiers.

Obligation To Acquire And Surrender Permits

Under the CPRS, entities are free to emit greenhouse gases at whatever level they choose. However, if they do decide to emit, they are obliged to acquire and surrender a permit for every tonne of greenhouse gases emitted in a particular year.

The impact of the obligation to acquire and surrender permits on a borrower's assets and revenue stream will depend upon a variety of factors, including:

  • the number of permits that must be obtained (corresponding to the level of the borrower's emissions)
  • the timing of permit acquisition
  • the prevailing price for permits

Large emitters, like the coal-fired generators, will bear the heaviest liability under the CPRS. These entities have limited ability to pass on the costs of meeting their liability under the CPRS to consumers because they compete with other less emissions-intensive generators whose CPRS liability will not be as great. Consequently, the impact on their assets and revenue of this CPRS obligation is likely to be significant.

Obligation To Monitor And Report Emissions

Liable entities are required to monitor their emissions according to defined methodologies to determine the extent of their CPRS obligations each year.

They are also required to keep appropriate documentation and records to enable reported emissions to be assured. O nce liable entities have monitored and estimated their emissions, they are obliged to report them.

Compliance with these CPRS obligations will involve the initial costs of establishing and installing monitoring and reporting mechanisms as well as the ongoing costs of monitoring emissions.

Depending upon the sector in which a particular borrower is operating and its relative size, these costs could impose a significant burden.

For example, facility-specific emissions measurement could be prohibitively costly for small-to-medium sized landfill owners and operators.

Despite the relatively small size of these entities, some may still be covered under the CPRS given that a lower emissions threshold is applicable to metropolitan and urban landfill sites.

Probability Factors

The probability that a particular CPRS obligation will have a significant impact upon a borrower's assets and/or revenue stream will depend upon a variety of factors, which largely revolve around the individual circumstances of the borrower.

These factors include:

  • Terms of the loan agreement: the trigger thresholds for loan default may vary from sector to sector and from borrower to borrower. In general terms, the more highly leveraged the borrower, the lower the trigger thresholds may be. Nevertheless, ultimately, the terms of the relevant loan agreement must be assessed on a case-by-case basis.
  • Borrower's debt structure: the borrower's overall debt structure, level of leverage, and the impact of CPRS on its cash flow and earnings may affect the borrower's ability to obtain additional finance to meet its CPRS obligations.
  • Emissions abatement options available to the borrower: the abatement options might be limited for some entities and/or might be prohibitively expensive – for example, gas capture and storage for coal-fired generators. The more limited the abatement options, the greater the financial burden the CPRS will impose on the borrower.
  • Competitive environment in which the borrower is operating: the more competitive the environment, the more limited the options for the borrower to pass on CPRS compliance costs to its customers.

Other Relevant Factors

There are a number of other factors that should be borne in mind when undertaking a risk assessment under the CPRS.

Interplay Of Elements Of The CPRS

It will be important for financiers to have a good understanding of the interplay of the various CPRS provisions so that an overall risk assessment can be undertaken. Specifically, with respect to a particular borrower's liability to acquire and surrender permits under the scheme, financiers will need to take into account matters including:

  • Whether or not the borrower is entitled to any adjustment assistance under the scheme, for example, in its capacity as a member of an emissions-intensive trade-exposed industry or strongly affected industry. If so, the borrower's CPRS liability is likely to be reduced.
  • Whether or not the borrower has access to Kyoto units to demonstrate CPRS compliance. Kyoto units are units related to the reduction of emissions that are recognised and tradeable under the Kyoto Protocol, including under the Clean Development Mechanism for offset projects in developing countries and Joint Implementation for offset projects in developed projects. Depending upon the price and availability of Kyoto units, the borrower's access to such units may also alleviate its CPRS liability.
  • The prevailing price cap for permits in Australia, which will effectively set an upper limit on the quantum of liability that a borrower will face.

Dynamic Assessment

Given the known or possible changes to some key elements of the CPRS over time, it will be essential for financiers to have mechanisms in place to ensure that the risk assessment is dynamic and reflects those changes if and when they occur.

Some elements of the CPRS that will or may change over time include:

  • Assistance to coal-fired generators under the Electricity Sector Adjustment Scheme: Under the scheme, the most emissions-intensive electricity generators will receive free permits to the value of $3.9 billion, to be allocated over a five year period. Assistance will terminate after this period has expired, which will, therefore, have an impact on the beneficiaries' financial position. Financiers need to account for the termination of such assistance in their risk assessment.
  • CPRS targets: The government has made a minimum, unconditional commitment to reduce emissions by 5% below 2000 levels by 2020. However, the possibility has also been flagged that this target could be increased to 15% if a global agreement is struck under which all major economies commit to substantially restraining emissions and all advanced economies take on reductions comparable to Australia. If the target is increased, the number of permits available for purchase will be less, which will drive up the permit price and, therefore, increase entities' liability under the scheme.
  • Permit price: Following the implementation of the CPRS and as the carbon market (where permits will be traded) evolves, the permit price is likely to change. Financiers' risk assessment should take into account the possible changes to the permit price over time.

Contextual Assessment

Finally, the risk assessment should be undertaken in the context of the broader policy and legal environment in which the CPRS will operate. Other policy initiatives, such as the Mandatory Renewable Energy Target Scheme (MRET) may increase or decrease the overall CPRS risk for a particular borrower.

For example, entities that are liable for emissions from landfill sites under the CPRS may be able to reduce their liability and simultaneously generate renewable energy certificates (RE Cs) under the MRE T scheme if landfill gas is converted to renewable energy.

In addition, account should be taken of other environmental obligations imposed upon the borrower under other legislative instruments or contained in the relevant facility and security documents, which may be complementary or supplementary to obligations contained in the CPRS.


A comprehensive CPRS risk assessment should provide financiers with a good sense of:

  • what the risks are and their relative significance
  • how those risks are likely to evolve over time as the CPRS matures

The risk assessment should also assist financiers in determining what pro-active action, if any, might be needed to monitor and respond to the CPRS risks.

Accordingly, prior to the introduction of the CPRS, financiers should consider:

  • incorporating the results of their risk assessment of the scheme into their business plans to account for the various risks
  • verifying that borrowers have undertaken their own CPRS risk assessment to identify the nature, extent and impact of CPRS obligations on their loan obligations
  • requesting borrowers to disclose the steps they are taking to manage the costs of compliance with the scheme
  • instituting regular credit reviews with borrowers to help address CPRS risks

In some cases, the facility agreement may need to be amended to ensure that the risks associated with CPRS compliance are appropriately allocated between the borrower and the financier.

In addition, it may be appropriate to incorporate an additional covenant in the finance documents requiring the borrower to provide regular reports on the current and future impact of the CPRS and on the borrower's compliance with its CPRS obligations.

Exceptional Service Award Winner | 2007 BRW-St George Client Service Awards
Australasian Legal Business 2008 Fast 10 Law Firms
EOWA Employer of Choice for Women 2004 - 2008

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions