Following the Federal Government's recent announcement of an intention to link Australia's carbon pricing mechanism (CPM) with the European Union Emissions Trading Scheme (EUETS) from 1 July 2015 (discussed in our recent legal update), the Exposure draft: Clean Energy Amendment Regulation 2012 (Draft Regulation) has been released for consultation. This update examines the two key topics covered by the Draft Regulation:

  • identifying those international carbon units which are proposed to be prohibited from being surrendered under the CPM, on the basis of environmental and/or social integrity concerns; and
  • providing details of the requirements which large liquid fuel users must meet if they wish to "opt-in" to the CPM and manage their liability directly under the CPM, as opposed to paying an effective (indirect) carbon price through receiving reduced fuel tax credits, or in the case of aviation fuel, an increased excise.

Prohibited Certified Emissions Reductions units (CERs) and Emissions Reduction Units (ERUs)

In accordance with the Government's commitments leading up to the formulation of the CPM, the Draft Regulations propose qualitative restrictions on the types of eligible international emissions units that can be surrendered under the CPM. In particular, the Draft Regulations disallow liable entities from meeting their obligations through surrendering CERs and ERUs arising from the following Clean Development Mechanism or Joint Implementation projects:

  1. the destruction of trifluoromethane;
  2. the destruction of nitrous oxide from adipic acid plants;
  3. nuclear projects; and
  4. large scale hydro power projects that are inconsistent with criteria adopted by the European Union (based on the World Commission on Dams guidelines).

These restrictions are in addition to the temporary and long terms CERs that have already been excluded from being eligible for surrender under the CPM. Furthermore, as noted in our previous legal update, liable entities are only permitted to use Kyoto units to meet up to 12.5% of their liability.

The Opt-in Scheme

The Opt-in Scheme (Scheme) allows large liquid fuel users to nominate a designated opt-in person (DOIP) for eligible fuel acquired, manufactured or imported by the user. The effect of this nomination is to make the DOIP a liable entity under the Clean Energy Act 2011 (Act) for the embodied emissions of a specified amount of fuel (the 'opt-in amount').

The Scheme applies to "liquid petroleum fuels" such as petrol, diesel, aviation fuels and blends of fuels, and is to be managed primarily by the Clean Energy Regulator (Regulator), with assistance from the ATO and Customs as required.

The Draft Regulations set out the eligibility test for nomination as a DOIP, as well as the process for making an application and the information required to be included.

Importantly the Draft Regulations do not permit an individual or a foreign person to be nominated as a DOIP, and require that if the nomination is in relation to a GST group or GST joint venture, the DOIP must be the representative of the GST group or the joint venture operator, respectively.

The Draft Regulations also propose a "threshold test" for eligibility, which requires that:

  • the DOIP use an amount of fuel embodying potential greenhouse gas emissions of 25,000 tonnes of carbon dioxide equivalence (CO2-e) or more, or
  • the DOIP has or had an entry on the Liable Entity Public Information Database in specific financial years.

The Draft Regulations also outline the application process to be followed by large fuel users to vary both the DOIP and their opt-in amount. Applications must be made on or before 31 March of the financial year before the financial year in which the declaration is to have effect.

In certain circumstances a DOIP may voluntarily opt-out, and the Draft Regulation also provides for circumstances in which the Clean Energy Regulator may remove someone from the opt-in scheme.

Finally, the Draft Regulations set out the record keeping, notification and reporting requirements of the DOIP. Importantly, the Draft Regulations propose that a DOIP must provide a report to the Regulator by 14 July each year, which must:

  1. demonstrate that the DOIP passes the eligibility test for the financial year;
  2. identify the name of the entity that is entitled to a fuel tax credit in relation to the person's opt-in amount for the financial year; and
  3. in the case where the DOIP applied as a representative member or joint venture operator, identify the name of the members of the GST group or the participants in the GST joint venture, at the start of the financial year, for which the DOIP is liable.

Next Steps

Submissions on the Draft Regulations close on 12 November 2012, with the Act requiring that the regulations implementing the Opt-in Scheme be finalised by 15 December 2012.

If you would like further detail on any aspect of the Draft Regulations, or if you have any questions about how these proposed changes will impact your compliance options or the Australian carbon market more generally, please contact a member of our Climate Change team.

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.