The importance of carbon-ready contracts

Climate Change Energy Environment & Planning

How adaptable are your contracts to a potential new price on carbon?

Very few areas of law are more changeable and subject to the political tides as climate change law. A range of federal and state regulatory schemes and policies relating to greenhouse emissions have been implemented in recent years, some economy-wide and some industry-specific, and some more permanent than others. There is also the prospect that, at some point, a national carbon price will be reintroduced in Australia either by way of a 'tax' or an emissions trading scheme.

All contracts that could be materially impacted by rises in costs or that could face additional risks arising from new emissions regulatory regime(s) should contain specific clauses that enable your organisation to take advantage of future carbon opportunities, as well as pass on or allocate risks and costs of compliance.

Conversely, contracts that relate to activities that have the potential to generate tradeable units, such as Australian Carbon Credit Units, should contain provisions allocating rights to such units, and contain mechanical provisions to clarify each party's responsibilities in relation to the schemes under which those units are created. It is important that contracts are drafted to respond to current and potential future schemes, particularly for long-term contracts.

Key risks and opportunities

The introduction (and sometimes repeal) of these schemes has real and direct impacts on a wide range of services, procurement and operational contracts since they can:

  • increase costs – administrative costs of compliance, the cost of procuring carbon credits, costs associated with implementing emissions abatement technologies or processes;
  • increase risks – compliance and regulatory risk, reputational risks and litigation risk - particularly where contracts do not adequately address the impacts of these new regimes and give rise to disputes between parties;
  • create opportunities – to devise new income streams from the generation and sale of carbon credit units; and
  • impose obligations that require cooperation between the parties to fulfil – eg where the obligation holder may need to rely on its contractor to provide required information about activities and emissions.

In our experience, standard change-in-law provisions are ill-equipped to adequately address these new schemes. This is because they can rely on complex concepts to determine how to group and calculate emissions and define who is responsible for reporting and/or emissions abatement. In some circumstances those responsibilities can be shifted between parties (eg between a principal and their contractor/operator of a facility, or between different entities in a corporate group) and sometimes they cannot. In some circumstances these clauses are drafted in a way that cannot apply to these schemes at all as they exclude changes in law that are reasonably foreseeable.

Key questions

  • What existing or proposed contracts are on foot in your organisation that are affected by current carbon policies and/or may be affected by the introduction of any new carbon price?
  • What new costs and risks would your organisation wish to pass on to the other contracting party (such as clients, customers, service providers, operators) and do your contracts currently provide for this?
  • Is it possible your organisation would wish to take advantage of opportunities arising under current offsetting schemes (such as the Climate Solutions Fund – see here) or future expanded carbon emissions trading schemes, and do your contracts currently facilitate this?
  • Do your organisation's contracts currently require reasonable cooperation between the parties to fulfil any new regulatory requirements?
  • Does your organisation have processes to ensure any contracts into which your organisation enters appropriately consider where bespoke carbon-ready language is adopted?

Climate change guide

This insight is part of our climate change guide for legal and compliance teams in Australia