The Commonwealth Government released its exposure draft legislation for the Carbon Pollution Reduction Scheme (CPRS) on 10 March 2009. The legislative package confirms its commitment to:
- establish the CPR Scheme by June 2010
- reduce national greenhouse gas emissions by 5% - 15% of 1990 levels by 2020
- take complementary action including an expanded Renewable Energy Target, investment in renewable energy, carbon storage and carbon capture, and adopt other energy efficiency initiatives.
The legislative package is comprehensive and complex. It elaborates upon the policy positions taken in the recent White Paper but also leaves important areas for resolution in regulations. The key issues are summarised below.
Cap and trade scheme
The CPRS is a 'cap and trade' scheme and emissions units will be issued up to the national scheme cap specified for a particular year in regulations. From 2015, the national scheme cap must also fall within the upper and lower bounds of 'national scheme gateways' that are designed to achieve the projected emissions trajectory. These will also be specified in the regulations.
The legislation establishes the Australian Climate Change Regulatory Authority (Authority) as the entity responsible for the registry, issuing Australian emissions units, assessing entitlements, administering the reporting regime, issuing obligation transfer numbers (OTNs) and carrying out other administrative functions. Details of its constitution, membership and powers are set out in the Australian Climate Change Regulatory Authority Bill.
The CPRS will utilise the existing National Registry of Emissions Units, giving account holders online access to receive, deal with, surrender and cancel emissions units. The registry will also perform accounting functions.
Reporting obligations for liable entities
All liable entities will need to assess and report on their emissions number (in tonnes of carbon dioxide equivalence emitted) for a financial year, using the formula set out in the Bill. The National Greenhouse and Energy Reporting Act 2007 (NGER Act) will be amended to enable reporting under the existing framework. The measurement methods described in the National Greenhouse and Energy Reporting (Measurement) Determination 2008 will also be used for this purpose.
Liable entities include persons responsible for the operational control of facilities which emit 25,000 tonnes of carbon dioxide equivalence or more, or persons that import, produce, manufacture or supply certain upstream fuels or synthetic greenhouse gas. Liability transfer certificates may be issued to transfer liability for a particular facility between related bodies corporate, or from an entity with operational control over a facility, to the entity with financial control over that facility.
Transfer of liability for fuel supply – obligation transfer numbers
For most fuels, liable entities will be the upstream importers, producers or fuel suppliers. However, the Bill also provides for the imposition of liability on the holder of an OTN issued by the Authority. The Authority may (for example) issue an OTN to a downstream purchaser of eligible fuel (either on the Authority's own initiative or in response to an application by that purchaser).
In order to avoid double-counting or gaps, a supplier of eligible fuel may (and, in some cases, must) transfer liability for emissions associated with that fuel to the holder of an OTN quoted in the supply agreement. In these situations the holder of an OTN will be the liable entity for that fuel supply.
Surrender obligations for liable entities
Liable entities must surrender enough eligible emissions units to match their emissions number. They may borrow and bank units, and may surrender both Australian emissions units and eligible Kyoto units.
Administrative penalty for shortfall
Any liable entity that has a unit shortfall will incur an administrative penalty. The administrative penalty will be set at either 110% of the 'benchmark average auction price' for the previous financial year, or the amount prescribed in regulations. A late penalty of up to 20% will also apply on late payments. The number of units that a liable entity fails to surrender will become a 'make good number' and will be added to the entity's emissions number for the following financial year.
Issue of emissions units
Emissions units will be issued up to the national scheme cap for a particular year, through the use of auctions, assistance to emissions-intensive trade-exposed activities (EITE) or coal-fired electricity generators, and as credits for reforestation and destruction of synthetic greenhouse gases. In addition, from 2010/11 to 2014/15 emissions units may also be issued for a fixed charge of $40 (rising each year by 5%), effectively acting as a cap on prices.
The Bill confirms that Australian emissions units will be auctioned, but leaves all details to be determined by the Minister in a yet to be developed legislative instrument. The White Paper supported monthly auctions that use an ascending clock format.
Because Australian and Kyoto emissions units are classified as personal property rights, their transfer will attract GST. However, the cost of purchasing a unit will be tax deductible. Emissions units that are allocated for free will not be taxable unless later transferred. The legislative package includes amendments that specifically address taxation, custom and excise issues.
The Bill provides for a raft of compliance and enforcement provisions including administrative penalties and civil and criminal sanctions. This includes anti-avoidance provisions to prohibit any artificial scheme that seeks to avoid or gain the benefit of provisions of the Bill (for example, engaging in asset stripping).
The Bill includes detailed provision for civil penalties, and applies vicarious liability to companies' executive officers. It also allows a court to order a person convicted of a criminal offence under the Bill to relinquish units received as a result of the criminal act.
Assistance for EITE Industries
As set out in the White Paper and the Commonwealth Government's Guidance Paper "Assessment of activities for the purposes of the emissions-intensive trade-exposed assistance program" (February 2009), the legislation proposes to establish an assistance program for Emissions-Intensive Trade-Exposed (EITE) industries by 1 July 2010.
The program's details are left to be formulated in regulations, including details such as the eligibility criteria, reporting and relinquishment requirements, application and approval criteria, and the method for calculating an entity's entitlement to free Australian emissions units.
Coal fired generation
For the first five years of the Scheme, the Authority will issue
free Australian emissions units in respect of eligible generation
assets. The free units will be allocated on a pro rata basis based
on the entity's 'annual assistance factor', determined
by applying the following formula:
Annual assistance factor = historical energy × (emissions intensity – 0.86)
'Historical energy' means the generation asset's electricity output over the three year period 1 July 2004 to 30 June 2007 (or the nameplate rating as proxy for this amount). 'Emissions intensity' means the generation asset's emissions intensity in kilotonnes of carbon dioxide equivalence of emissions per gigawatt hour of electricity generated based on actual data or the Authority's discretionary estimate.
Entities seeking this assistance must apply within 90 days of the legislation commencing. In order to be eligible, the relevant generation asset must:
- be in operation in June 2007 or committed to be constructed as of 3 June 2007;
- use coal for 95% of its primary energy supply
- connect to a grid with a capacity of at least 100MW
- comply with the 'power system reliability test'.
After three years, all generation assets that have received assistance must undergo a windfall gain review. This involves the Authority assessing whether the value of assistance delivered in respect of a generation asset is likely to exceed the impact of the CPRS on the value of that asset. If the Authority finds that a windfall gain is likely, it may issue a windfall gain declaration and may withhold assistance for the remaining two years. This decision is reviewable by the Adminstrative Appeals Tribunal.
The Authority may issue free Australian emissions units for net greenhouse gas removals that occur after the CPRS starts. To be eligible, a person must be a recognised reforestation entity and hold sequestration rights in relation to the project. A person must submit a reforestation report and obtain a certificate of reforestation from the Authority in order to obtain emissions units. The Bill sets out a formula for determining the unit entitlements that apply to a reforestation period, with further detail to be provided in the Regulations.
The future of the proposed legislation is uncertain, with a Senate enquiry reporting back on whether Australia should adopt an emissions trading scheme on 14 May 2009.
Consultation on this draft legislation closes on 14 April 2009 as the Government hurries to comply with its June 2009 deadline to pass the legislation. However, currently the draft legislation appears not to have enough Parliamentary cross bench support, so its passage into legislation is not guaranteed.
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.