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Focus: Carbon pricing scheme legislation introduced

16 September 2011

In brief: Following the recent release of both its climate change policy, Securing a clean energy future: The Australian Government's climate change plan, and exposure draft legislation to implement its proposed carbon pricing scheme, the Federal Government has introduced its clean energy legislation package into the House of Representatives. Partner Grant Anderson (view CV) reports on the principal differences between the exposure draft legislation and the legislation package as introduced into Parliament.

How does it affect you?

  • The legislation package largely reflects the previously announced policy positions of the Federal Government. However, it includes a number of technical (but nonetheless important) changes from the exposure draft legislation.
  • The liability arrangements for embodied emissions in natural gas, and the associated obligation transfer number arrangements, have been substantially revised.
  • Provision is made for the establishment of an opt-in scheme under which entities that purchase taxable liquid fuels can choose to assume liability for the embodied emissions in those fuels rather than have their fuel tax credits reduced to reflect the effective carbon price.
  • A number of improvements have been made to the provisions that impose carbon liability on participants in unincorporated joint ventures. Unfortunately, the treatment of unincorporated joint ventures has not been extended to partnerships.

Background

On 10 July 2011 the Federal Government released its policy document, Securing a clean energy future: The Australian Government's climate change plan, which set out the detail of its proposed carbon pricing scheme as agreed to by the Multi-Party Climate Change Committee. This was followed on 28 July 2011 by the release of exposure draft legislation to establish the scheme. After a very short (and intensive) three-week consultation period, the Government has now introduced into the House of Representatives its clean energy legislation package of 19 Bills. It is proposed that the package will be referred to a joint committee of both Houses, which is to report by 4 October 2011, with the House of Representatives to vote on the package on 12 October 2011 and the Senate to vote on the package in the second week of November.

As outlined in our two previous Focus articles, the carbon pricing scheme will comprise two phases: a three-year fixed price phase from 1 July 2012 to 30 June 2015 and a subsequent floating price phase that will commence automatically on 1 July 2015. The scheme will cover greenhouse gas emissions in the stationary energy, industrial processing, resources and waste sectors. Entities that have operational control of a facility that emits more than 25,000tCO2-epa in greenhouse gas emissions in these covered sectors will be required to surrender carbon units to cover those emissions. A similar obligation will attach to certain natural gas suppliers for the greenhouse gas emissions embodied in their natural gas. While emissions from the combustion of transport fuels, and most synthetic greenhouse gas emissions, will not be covered by the scheme, an effective carbon price will be imposed on some of those emissions through increases in the excise duties, customs/import duties and manufacture levies, and reductions in the fuel tax credits, that apply to or are otherwise available for such fuels and gases. Emissions from the agriculture and land sectors will also be excluded from the scheme, but an incentive to abate emissions in those sectors is provided through the Carbon Farming Initiative.

The legislation package introduced into the House of Representatives is largely consistent with the Federal Government's carbon pricing policy as outlined in Securing a clean energy future: The Australian Government's climate change plan. However, the Government has made a number of technical (but nonetheless important) changes to the exposure draft legislation. The purpose of this article is to outline the principal changes in this regard. The legislation package also includes a number of Bills (not previously released for comment) that implement the household compensation commitments made by the Government, but these arrangements are not the subject of this article.

Carbon liability for natural gas

Under the exposure draft legislation, natural gas retailers were liable for the potential greenhouse gas emissions embodied in the natural gas that they supplied where that natural gas was withdrawn from a distribution pipeline. However, provision was made for this liability to be transferred to a purchaser where the natural gas was purchased under an obligation transfer number (OTN). In order to be eligible to purchase natural gas under an OTN, the purchaser either had to have operational control over a facility where the covered emissions of the facility that were attributable to the combustion of natural gas were 25,000tCO2-epa or more or to use the natural gas as feedstock or for the manufacture of LPG, LNG or CNG. Moreover, except in the case of a limited range of existing natural gas supply agreements, the natural gas retailer was not obliged to accept the quotation of the OTN by the purchaser, but could instead decide to retain its liability for the embodied emissions and charge the purchaser a carbon-inclusive price for the natural gas. Entities that combusted natural gas at a sub-threshold facility in circumstances where that natural gas was withdrawn from a distribution pipeline (but not supplied by a natural gas retailer) or from a transmission pipeline were also liable for the emissions embodied in that natural gas.

The legislation package introduced into the House of Representatives makes a number of changes to these arrangements. First, liability for the emissions embodied in natural gas will now only arise where the natural gas is supplied to a person in circumstances where it may reasonably be expected that the person will use some or all of that natural gas1 and that natural gas is withdrawn from a 'natural gas supply pipeline'. A natural gas supply pipeline will be any pipeline that is not prescribed by regulations (which are yet to be made). In this regard, it is intended to exclude pipelines that are outside the natural gas supply pipeline system, eg pipelines that transport natural gas between a gas well, on the one hand, and a gas processing plant or LNG plant, on the other hand. Second, this liability will attach to the person who supplies the natural gas (who may or may not be a retailer in the usual sense of that word). Third, an entity that combusts natural gas at a sub-threshold facility will not have any liability for emissions embodied in that natural gas (unless it has purchased the natural gas under an OTN). Fourth, while the natural gas supplier may transfer its liability to a purchaser of the gas under an OTN, there have also been a number of changes made to the OTN scheme:

  • where the gas may reasonably be expected to be used in the operation of a 'large gas consuming facility' (ie a facility that produces 25,000tCO2-epa or more of emissions from the combustion of natural gas), the purchaser must purchase that gas under an OTN (having given advance notice to the natural gas supplier when it intends to quote its OTN for the first time), and the supplier must accept the quotation of the OTN – in such a case, it is the entity that is liable for the facility's covered emissions (eg the entity that has operational control over the facility) that has liability for the emissions resulting from the combustion of the natural gas;
  • while such a purchaser may also purchase any other natural gas using its OTN (provided it has operational control over a facility),2 the supplier is not obliged to accept the quotation of the OTN;
  • where the natural gas is to be used as feedstock or to manufacture LPG, LNG or CNG, the purchaser may purchase that gas under an OTN (having given advance notice to the natural gas supplier when it intends to quote its OTN for the first time), in which case the supplier must accept the quotation of the OTN; and
  • the holder of an OTN can on-supply the natural gas to another OTN holder and, in that way, transfer its liability for the embodied emissions to that holder.

Fuel opt-in scheme

Under the exposure draft legislation, the carbon pricing scheme did not apply to emissions from the combustion of transport fuels. Instead, an effective carbon price was imposed in certain circumstances in relation to these fuels through adjustments to the tax arrangements applying to the import, manufacture and acquisition of those fuels.

The legislation package introduced into the House of Representatives now provides for a scheme to be established by regulations (such regulations being intended to be made before 15 December 2012) under which a 'designated opt-in person' can assume liability for the potential greenhouse gas emissions embodied in taxable fuel. Where this occurs there will be no carbon-related reduction in the fuel tax credits available for the fuel. A person will be eligible to be a 'designated opt-in person' where that person is a member of a GST group that is entitled to fuel tax credits, is a participant in a GST joint venture that is entitled to fuel tax credits or is itself entitled to fuel tax credits, and the fuel is subject to the fuel tax credits regime.3 This formulation is intended to provide substantial flexibility as the entity with operational control over the facility in which the fuel is used, or who purchases the fuel, will not invariably be the entity that is entitled to the fuel tax credits available for the fuel. The opt-in arrangements will only apply for fuel that is acquired, manufactured or imported from 1 July 2013.

The Government has indicated that it intends to consult on the detailed design of the opt-in scheme.

Unincorporated joint ventures

The exposure draft legislation recognised two kinds of unincorporated joint ventures:

  • a mandatory designated joint venture, which is a joint venture where no one person has operational control over the facility of the joint venture (eg as would be the situation in the unusual case where the facility is under the operational control of the joint venturers acting through the joint venture management committee) – in such a case, the joint venturers are required to notify the Clean Energy Regulator of the existence of the joint venture and each of the joint venturers is liable for their joint venture share of the facility's covered emissions; and
  • a voluntary designated joint venture, which is a joint venture where the operator has operational control over the facility of the joint venture (which will be the more common case) – in such a case, the joint venturers (with the operator's consent) could apply to the Clean Energy Regulator for the joint venture to be declared as a voluntary designated joint venture, with the result that the liability of the operator for the facility's covered emissions would instead be imposed directly on each of the joint venturers in proportion to their joint venture interests.

The legislation package introduced into the House of Representatives retains these concepts but makes two very significant improvements in relation to voluntary designated joint ventures, which are now called 'declared designated joint ventures'. First, the Clean Energy Regulator will now be able to declare a joint venture to be a declared designated joint venture irrespective of whether the operator is itself a joint venture participant and irrespective of whether one of the joint venturers is a foreign person. This will enable a greater range of joint ventures to benefit from the declared designated joint venture mechanism than would have been permitted under the exposure draft legislation. Second, the operator is no longer required to provide a statutory guarantee that each joint venturer will pay its unit shortfall charge (and any associated late penalties). This requirement, which was included in the exposure draft legislation, substantially negated the benefit of the operator being able to transfer its carbon liability to the joint venturers. However, the legislation package provides that if a joint venturer fails to pay its unit shortfall charge for more than three months then the Clean Energy Regulator must, having first provided notice to the other joint venturers, revoke the declaration of the joint venture (so that liability for the facility's covered emissions reverts to the operator).

The legislation package also makes some useful administrative refinements by enabling the declaration of a declared designated joint venture, as well as participating percentage determinations, to be both backdated and forward dated. This should assist joint venturers in keeping their shares of the facility's carbon liability in tandem with their actual joint venture interests. (Similar amendments have been made for liability transfer certificates.) Joint venturers should also note that they will now be obliged to notify the Clean Energy Regulator if the joint venture ceases to be either a mandatory or a declared designated joint venture.

Unfortunately, no changes have been made in relation to the imposition of carbon liability on partnerships. This means that the operator of a partnership's facility will be unable to transfer its carbon liability to the partners (while the financial control liability transfer certificate mechanism enables such an operator to transfer its liability to a partner, this mechanism only allows for the transfer of all of that liability to one partner, which is unlikely to be attractive in most circumstances). It also means that, where operational control over a facility is shared by the partners, they will need to nominate one of their number to be liable for all of the facility's covered emissions, failing which the partners will each be liable to a monetary penalty and will each bear an equal share of the carbon liability for the facility.

Covered and excluded emissions

One of the flaws of the exposure draft legislation was that it defined covered emissions as scope 1 emissions except where those emissions were expressly declared by the legislation not to be covered emissions. The legislation package introduced into the House of Representatives improves on the exposure draft legislation by making it clear that, for emissions to be covered emissions, they must not only be scope 1 emissions, but provision must also be made for their measurement under a Measurement Determination made pursuant to the National Greenhouse and Energy Reporting Act 2007 (Cth). As a result it will be possible to ensure that emissions from sources such as explosives will not be covered by the carbon pricing scheme because there will be no methodology for their measurement in the Measurement Determination.

Moreover, consistently with the Government's previously announced policy position, emissions attributable to the combustion of biomass, biofuel and biogas are now expressly declared to be excluded emissions. Similarly, the legislation also makes it clear that emissions attributable to land use, changes in land use and forestry activities (as in the case of changes in the levels of carbon sequestered in living biomass, dead organic matter and soil) are not covered by the carbon pricing scheme. Finally, the legislation package excludes from coverage emissions from closed landfill facilities where those facilities have ceased to accept waste since 1 July 2012 (rather than 1 July 2008, which was the cut-off date under the exposure draft legislation).

Industry assistance programs

One of the issues with the exposure draft legislation was that it did not enshrine in legislation fundamental features of the Jobs and Competitiveness Program but left this to regulations (which have yet to be released, although their release is expected shortly). This issue has not been addressed by the legislation package introduced into the House of Representatives. However, one small improvement has been to include a provision that, before changing the regulations that govern the program, the government must take into account the 'principle' that changes that will have a negative effect on assistance recipients 'should not' take effect before the later of 1 July 2017 and three years from the announcement of the changes. This is consistent with the Government's previously announced policy position.

In so far as the coal-fired electricity generation assistance program is concerned, the legislation package sets out in a little bit more detail the content of the clean energy investment plans that must be provided for a generator to continue to be eligible to receive free carbon units under the program. Such plans are required to include the plans (if any) that the assistance recipient has for investment in new electricity generation, investment in reductions in the emissions intensity of the relevant generation plant, and investment in research and development in relation to clean energy technology. The legislation package also empowers the Federal Treasurer to authorise loans for the forward purchase of flexible phase carbon units by qualifying generators and loans in connection with the refinancing of loans, over the short term, that relate to qualifying generators. For these purposes a qualifying generator is a coal-fired generator the emissions intensity of which is greater than 0.8tCO2-e/MWh.

In addition, the legislation package includes the Steel Transformation Plan Bill, which was not part of the exposure draft legislation and is not currently supported by the Australian Greens (whose votes will be needed to pass this Bill if the Opposition decides to vote against it). This Bill requires the responsible Minister to establish a steel transformation plan, under which up to $300 million of funding will be made available over the first four years of the carbon pricing scheme to assist the Australian steel manufacturing industry to invest in plant and equipment, research and development, and competitiveness in the context of the transformation to a low carbon economy. Advance 'competitiveness assistance' payments of up to $164 million (which will be offset against the steel transformation plan funding) may also be made by the Minister up to 30 June 2012.

Miscellaneous

Other changes made by the legislation package introduced into the House of Representatives from the exposure draft legislation are:

  • provision to extend the time period within which carbon units issued at the capped price (either during the fixed price phase or during the currency of the price collar that applies in the floating price phase) may be issued, and free fixed price phase carbon units allocated under the industry assistance packages may be bought back, where a registry malfunction precludes application for the issue of those units being made in time;
  • express recognition of the registered holder of a carbon unit, Kyoto unit or Carbon Farming Initiative carbon credit as the legal owner of the unit or credit from whom a bona fide purchaser for value may obtain indefeasible title in relation to that unit or credit;
  • provision (to be included in regulations) for registration, in the Australian National Registry of Emissions Units, of equitable interests in relation to carbon units, Kyoto units or Carbon Farming Initiative carbon credits (at least in so far as those equitable interests are not subject to the Personal Property Securities Act 2011 (Cth));
  • provision for the Clean Energy Regulator to remit a unit shortfall charge (and any associated late payment penalty) where the relevant liable entity voluntarily discloses the under-reporting that has led to the charge being imposed; and
  • provision for the holder of an intra-group liability transfer certificate, by agreement with its ultimate Australian holding company, to take over all the reporting obligations for the relevant facility arising under the National Greenhouse and Energy Reporting Act (this is consistent with the position that applies in relation to the holder of a financial control liability transfer certificate, who automatically assumes such reporting obligations).

If you would like any advice in relation to the legislation package, please contact one of the people below.

Footnotes
  1. Among other things, this is intended to exclude gas producers from liability where they make a wholesale supply of natural gas to a retailer.
  2. It will no longer be sufficient that the purchaser is the holder of a liability transfer certificate in relation to the facility.
  3. Similar arrangements apply for aviation fuel, where an effective carbon price is being imposed through increases in the excise and customs duties that apply to that fuel.

For further information, please contact:

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