Michele Muscillo, Partner
Yesterday, 10 March 2009 saw the release into Parliament of exposure drafts of the highly anticipated suite of proposed legislation by the Federal Government for its Carbon Pollution Reduction Scheme (CPRS).
Though there has been, and will no doubt continue to be, much political debate as to the timing of the commencement of the scheme, the release of the drafts finally provides details of the Government's plan as generally outlined in Professor Garnaut's report, and the subsequent green and white papers that followed it.
Whilst the legislation (6 draft bills, approximately 500 pages including reams of explanatory material) were released into Parliament yesterday afternoon, we have taken the opportunity to review the document and provide some immediate comments of the key question of coverage. Put simply, now that we know the detail, who will the Bill apply to and from when?
Clearly to be a matter of much public debate, at least in so far as the Bill is concerned, the first issue of from when the scheme will operate is quite simple. The Bill provides that from 1 July 2010, the mandatory requirements of the CPRS Cap and Trade system of Australian Emissions Units will commence.
Structure of the Bill
In very general terms, the Bill does the following:
- Provides a framework for the creation (by virtue of separate legislation) of the Australian Climate Change Regulatory Authority to be a separate administering the Bill.
- Provides for the Federal Government to set the National Scheme Cap (Clause14) – the maximum quantity of greenhouse gas to be emitted within a specified financial year (determined by Regulation).
- Determines who will take responsibility for greenhouse gas emissions, both in terms of group structures, part ownership of facilities and potential upstream and downstream emissions.
- Provides for the issue of Australian emissions units and the procedure for the surrender of the Australian emissions units.
- Introduces the Emissions Intensive Trade Exposed (EITE) assistance program.
- Provides for the issue of Australian emissions units in respect of coal fired, electricity generation.
The Bill also (amongst other provisions) introduces penalties for non-compliance and monitoring and review procedures.
The Bill's relationship with the National Greenhouse and Energy Report Act (NGER Act) 2007
The sister legislation to the Bill, the NGER Act, is maintained as a central piece of legislation in the Federal Government's Carbon Pollution Reduction Scheme. Importantly, a number of key definitions that trigger the reporting obligations under the NGER Act are grandfathered into the operation of the Bill (and a variety of others are being introduced into the NGER Act as part of the current suite of proposed legislation). Accordingly before determining the coverage of the Bill, it is necessary to make some comment on the effect of the NGER Act on those who produce emissions and use energy.
The following summary of key definitions will be grandfathered from the NGER Act:
Greenhouse gas: Means carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, hydrofluorocarbons, and perfluorocarbon as specified in regulations.
Facilities: An activity, or a series of activities (including ancillary activities), that involve the production of greenhouse gas emissions, the production of energy, or the consumption of energy that form a single undertaking or enterprise.
Operational control: A controlling corporation has operational control if it has the authority to introduce and implement operating policies, health and safety policies or environmental policies in respect of a facility.
Controlling corporation: In simple terms, means an entity that does not have a parent company incorporated in Australia.
As can be seen from the synopsis below, the Bill carries on the theme identified in the NGER Act to regulate facilities with a minimum emission level of 25,000 tons of carbon dioxide equivalence of greenhouse gases from a single facility (Clause17(4)).
Section 3 – What is an emission?
Clause 24 of the Bill provides that an emission occurs when a greenhouse gas is released into the atmosphere as a direct result of the operation of the facility (unless extended by regulation).
Who does the scheme cover?
Part 3 of the Bill sets out the regime for determining who is liable for emissions, and consequently, who will be liable to purchase and surrender Australian emission units under the scheme.
Clause17 identifies, as a general rule, that where a facility is under the operational control of one or more members of a controlling corporation's group in a financial year commencing after 1 July 2010, then the controlling corporation will be liable for the total amount of greenhouse gasses omitted from the operation of that facility.
As indicated above, Clause 17(4) provides for an exemption from the calculation of emissions where an individual facility emits less than 25,000 tons of carbon dioxide equivalence during the relevant financial year; that is, the emissions from that facility do not count for determining the liability of the controlling corporation and, consequently, the number of Australian emission units required to be surrendered by that controlling corporation. Clause 17 also deals with where an entity has operational control over a facility for only a part of an eligible financial year.
For the purposes of this overview, we have focused on the key or at least, more well known aspects of the scheme to give an idea of the type of regulation proposed – namely to make emitters, suppliers and manufacturers of traditional greenhouse gasses liable. However, Clause 17 contains companion provisions which deal in a similar way with emissions by non-group entities, synthetic greenhouse gas emissions, and landfill operations (in the latter case, by providing for a lower emissions threshold for facilities), which have not been addressed in this paper.
While Clause17 (and its companion provisions in division 2 of part 3 of the Bill) set out the general obligation on emitters of greenhouse gases to be liable for relevant emissions, Division 4 of part 3 of the Bill deals with (amongst others) liability on producers and suppliers of fuels which may be used in the emission of greenhouse gases (known as eligible upstream fuels).
The division deals with importers, producers and suppliers of a wide range of fuels. However, for the purposes of this overview, the mechanism for dealing with the supply of liquid petroleum fuels and other more common fuels (such as LNG, CSG and coal) is described below.
Liquid petroleum fuel
Clause 32 of the Bill provides that if an amount of liquid petroleum fuel is manufactured in Australia during a financial year and a person pays excise duties on that amount of fuel, that person is (subject to the discussion below) liable for the "potential greenhouse gas emissions" for that fuel (defined by virtue of proposed amendments to the NGER Act as the amount of greenhouse gas that would be released into the atmosphere as a result of combustion of the fuel. See the proposed addition of Section 7C of the NGER Act, as contained in the Carbon Pollution Reduction Scheme (consequential amendments) Bill 2009).
Other eligible upstream fuels
The definition of eligible upstream fuels, (other than liquid petroleum fuel) includes fuels such as coal, LPG, CSG and LNG.
Where these eligible upstream fuels are supplied to a person in an "untransformed" form (and the supplier did not itself acquire the fuel from another supplier), then subject to the discussion below, the supplier is liable for the potential greenhouse gas emissions embodied in that fuel (Clause 33). Clause 35 deals with the supply of "transformed" fuels, in similar terms. The rationale for dealing with transformed and untransformed fuels separately is to take into account that emissions from one form may be different from another.
Double counting – Obligation Transfer Number (OTN)
To avoid the obvious potential for double counting between the liability of an emitter (under Clause 17) and a producer (eg under Clauses 32 and 33) in circumstances where the very emissions to which the emitter is liable arise as a result of the same "potential emissions" on which the producer is liable, the Bill outlines mechanisms for transferring the obligation between the emitter and producer in appropriate circumstances.
The Bill does this by establishing a concept known as an obligation transfer number, which is a unique number issued on application to an emitter, in accordance with Division 5 of part 3 of the Bill.
In essence, as a result of reading Clause 17(7) (and its companion provisions) with Clauses 32 and 33 (as appropriate), it appears that in the case of an eligible upstream fuel supplied in a manner contemplated by, for example, Clauses 32 or 33;
- if the emitter quotes their OTN – then the emissions relating to that fuel will remain the liability of the emitter (rather than the supplier); or
- if the emitter does not quote its OTN in relation to the supply - then the potential greenhouse gas emissions will remain the liability of the supplier.
Who gets an OTN?
Clause 44(3) of the Bill provides that an OTN will be issued to persons who are likely to be required or permitted to quote an OTN in respect of the supply to the person of an eligible upstream fuel.
Clause 52(1) of the Bill goes on to provide that it is mandatory for a person to quote an OTN in respect of an acquisition of an eligible upstream fuel if the emissions by the "emitter" from that type of fuel exceed 25,000 tons of carbon dioxide equivalence in a year.
Re-Supply and Own Use
The general theme of the liability regime is to impose liability on the end emitter (provided that emitter is covered by the general liability rules in clause 17).
To ensure that all emissions are covered, liability is also imposed on manufacturers, importers and suppliers. Double counting is avoided by the general proposition that the person who quotes an OTN in a supply will be liable for the emissions from that fuel (See for example, clauses 17(7) and 32(1)).
Clause 37 (when read with clause 17(7) and its companion provisions) takes this theme further by providing that re-suppliers may also pass on liability in certain circumstances.
Take the following example - where a supplier (Party A) supplies eligible upstream fuel to a person who quotes an OTN (Party B) (which has the effect of Party B being liable for the emissions under the general liability regime in clause 17), but Party B then resupplies part of that fuel to a third party (Party C), then:
- if Party C quotes an OTN – it will be liable for the emissions under clause 17; and
- if Party C does not quote an OTN – Party B will remain liable for the emissions under clause 37.
Own Use Emissions
Clause 38 also provides for an exception to the general liability rules where a person acquires eligible upstream fuel and quotes an OTN (making that person generally liable), but for some reason those emissions fall outside the general liability regime under clause 17 (and its companion provisions). This might occur where that fuel is used at a facility with emissions under the 25,000 tonne threshold, which is exempt under clause 17. In this case, clause 38 provides that the person is liable for the emissions in this case regardless of where they are used.
Transfer of liabilities within a group
To ensure all emissions are captured, liability is generally imposed on the controlling corporation of a group. However, the Bill recognises that in certain circumstances that may be inappropriate.
Part 3, Division 6 of the Bill allows for liability to be transferred in two circumstances:
- Where another member of the group would be more appropriate to carry the liability. For example, where to keep the controlling corporation liable would significantly impair the ability to pass through carbon costs (Clause 69).
- Where the entity with operational control (and primary liability) is not the entity with financial control (and therefore not the most appropriate entity to make decisions designed to reduce emissions (Clause 81)).
Overview on coverage of the Bill
Though this short paper constitutes a selection of some of the key, and perhaps more relevant, concepts on liability and coverage of the Bill to emitters, producers and suppliers, the following general principles can be noted:
- If all of the individual facilities under the operational control of a controlling corporation do not exceed 25,000 tons of carbon dioxide equivalence in a financial year commencing on or after 1 July 2010, it would appear that the entity does not have primary liability as an emitter under the Bill.
- If an emitter emits more than 25,000 tons of carbon dioxide equivalence of greenhouse gases from the consumption of a particular eligible upstream fuel (which include, amongst others, LPG, coal, CSG and LNG), then that emitter will be obliged to quote an OTN on acquisitions of that fuel.
- Where an emitter acquires fuel and quotes an OTN, the emitter will remain liable for those emissions.
- Where a supplier supplies fuel to a person who does not quote an OTN, the supplier will remain liable for those emissions.
Whilst the lengthy task of pouring over the detail contained in the Bill and the full suite of proposed legislation and explanatory memoranda is underway, even accounting for the fact that the current form of the Bill is likely to be amended (probably even in a significant respect) prior to its passing by Federal Parliament, it is clear that with just under 15 months until the proposed commencement of the scheme on 1 July 2010, importers, suppliers, producers and emitters are now on notice as to the detail of the scheme.
This paper constitutes only a snap shot of what is, perhaps necessarily, a complex legislation. The legislation also provides in a number of respects for its scope to be amended or extended by regulations, the details of which have not yet been provided. As our review process continues following yesterday afternoon's release, and as further details are provided, we will provide you with further updates on the application of the scheme.
In the interim, below is link to the relevant Bills and explanatory memoranda.http://www.climatechange.gov.au/emissionstrading/legislation/index.html
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