Sustainability is no longer an issue limited to a small number of environmentalists or 'greenies'. With the introduction of energy reporting legislation and regulation, it now impacts on everyday business and contract negotiations and can no longer be ignored. To survive, entities need to understand the obligations and determine how best to apportion this responsibility.

The federal government's proposed Carbon Pollution Reduction Scheme (CPRS) aims to reduce Australia's greenhouse gas emissions by between 5% and 15% below 2000 levels by 2020. The federal government recently announced however that a target of 25% of 2000 levels by 2020 would be adopted in the event of a global agreement designed to limit the concentration of greenhouse gases in the atmosphere at 450 parts per million. The long term target is a 60% reduction in greenhouse gas emissions below 2000 levels by 2050.

The new requirements not only impose onerous reporting obligations, but will increase input costs and ultimately the overall costs of projects. This will impact on building and construction contracts, transportation contracts, and even leases, whether existing or still at the negotiation stage.

A number of long term contracts do not effectively deal with the consequences of the recent changes in terms of allocating responsibility for reporting and payment of the increased costs. This article considers the impacts of the proposed CPRS, including the impact of the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act), on contracts and how best to respond to this new challenge which may be faced by entities.

Recent Change

The CPRS which was expected to commence in 2010 but has been delayed to mid-2012 due to the global financial crisis, employs a 'cap and trade' emission trading mechanism to limit carbon pollution. Caps will be set on the annual emissions of the sectors covered, with tradable carbon pollution permits issued up to the CPRS cap. Each permit allows the emission of one tonne of carbon dioxide equivalent CO2-e emissions. Entities are obliged to purchase and surrender Australian emission units equivalent to their greenhouse gas emissions each year. Emission units will be tradable. For the first year of the CPRS commencing on 1 July 2011, the units will have a fixed price of $10 per tonne of CO2-e. From 1 July 2012, the price of units will be determined by the market. Fixed-price units cannot be banked for use in later periods.

The first step for the introduction of the CPRS is underway through the enactment of the NGER Act which requires 'controlling corporations' (constitutional corporations that do not have a holding corporation incorporated in Australia) to register and report if it has operational control over a facility that:

  • Emits 25 kilotonnes or more of greenhouse gases each year; or
  • Produces or consumes 100 terajoules or more of energy each year.

Corporations that meet these thresholds have until 31 August 2009 to register with the Greenhouse and Energy Data Officer, a government body set up to administer the NGER Act. These corporations will then have until 31 October 2009 to report on their emissions and energy production and consumption.

Entities that have operational control of a facility that directly produces emissions above the threshold of 25 kilotonnes CO2-e each year will be caught by the CPRS. An entity has operational control if it has the authority to introduce and implement operating, health and safety or environmental policies in relation to a facility.

It is essential to ensure that leases and construction contracts take account of, and apportion responsibility for, reporting in relation to the CPRS and the NGER Act, and for the sale or purchase of any units.

Variation Provisions For Existing Contracts

Long term contracts that are on foot are unlikely to include specific provisions that deal with the new carbon emission requirements. There are three possible outcomes for existing contracts:

  • The majority of contracts contain provisions that require the parties to comply with local laws, which ultimately includes applicable environmental laws and regulations. To ensure certainty, the clause could be amended to make specific references to the environmental legislation that the parties are required to comply with ie the NGER Act, although this may not be strictly required in order for the contractor to be responsible.
  • Where the contractor is required to comply with the obligations, it would be able to argue that it is a variation to the contract. This may be through a change of law provision in the variation clause which may trigger a variation or due to an argument by the contractor that the works and requirements have fundamentally changed.
  • If the contract makes no reference to a change in law, or does not allow for variations, the party with the operational control will be obliged to solely comply with the reporting requirements and would be responsible for the associated costs.

New Contracts, New Clauses

It is imperative for parties in the process of negotiating construction contracts or leases to carefully consider the obligations imposed by the new legislation and, in particular, who is responsible for complying with these obligations and the associated costs. A little time spent contemplating these issues at the beginning of the project will save a great deal of time, expense and potentially litigation in the long run.

The following should be considered when drafting the contract:

  • The responsibilities of each of the parties should be clearly spelled out in relation to greenhouse and CPRS issues.
  • The material that should be used to reduce emissions and whether targets should be set.
  • Emissions to be produced, the means to measure them, and whether a carbon management plan is required.
  • Responsibility for removing the emissions and the cost of removal.
  • The consequences of non-compliance.

In the UK, the Joint Contracts Tribunal (JCT) has established a working group to prepare sustainability provisions, with the aim of incorporating them within the JCT 2005 contracts in early to mid 2009.

Clause 16 of the JCT 2007 Form, headed, 'Sustainable Development and Environmental Considerations', currently states the following:

'The Provider will assist the Employer and the other Project Participants in exploring ways in which the environmental performance and sustainability of the Tasks might be improved and environmental impact reduced. For instance, the selection of products and materials and/or the adoption of construction/ engineering techniques and processes which result in or involve:

  1. reductions in waste;
  2. reductions in energy consumption;
  3. reductions in mains water consumption;
  4. reductions in CO2 emissions;
  5. reductions in materials from non-renewable sources;
  6. reductions in commercial vehicle movements;
  7. maintenance or optimisation of biodiversity;
  8. maintenance or optimisation of ecologically valuable habitat; and
  9. improvements in whole life performance.'

Sustainability provisions should not only cover the construction of the building but also make reference to the long term sustainability of the project, ie the cost of maintenance of the asset.

The main difficulty when drafting sustainability provisions is the vague language used in such clauses. A number of questions are raised with the use of such language. How is assistance to be measured? How will a breach of the clause be determined? Are there any remedies for noncompliance with the clause? One possible solution would be to set sustainability key performance indicators with actual targets, against which the contractor's performance can be measured.

Above all it is important that any requirements or obligations are specifically stated in the contract to avoid long and expensive litigation down the track.

Who Pays?

At present, the increase in costs falls on the entity who has operational control of a facility, which in the majority of cases will be the entity with management responsibilities. As these costs are likely to be significant, it is vital to determine from the outset who will be responsible for the increased costs.

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This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.