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Client Update: Carbon pricing legislation crosses first hurdle

13 October 2011

In brief: Following the release of the policy package agreed by the Multi-Party Climate Change Committee, together with exposure draft legislation to implement that policy, the introduction of a package of 18 Bills into Parliament, and a report on that legislation by a joint parliamentary committee, the Federal Government's carbon pricing scheme legislation has been passed by the lower House of Parliament. Partner Grant Anderson reports.

Treatment of natural gas

In our Focuses of 12 July and 3 August this year, we outlined the principal features of the Government's carbon pricing scheme, and in our Focus of 16 September this year we described the principal differences between the exposure draft legislation and the legislation that was introduced into Parliament. The legislation as passed includes some more recent amendments made by the Government. The most significant of these relates to liability for emissions arising from the combustion of natural gas. Under the legislation, a person who supplies natural gas to another person through a natural gas supply pipeline will be liable for the emissions embodied in that natural gas where it may reasonably be expected that the other person will use some or all of it. That liability, however, may be effectively transferred to the purchaser where the purchaser quotes an obligation transfer number (OTN) in relation to the supply of the natural gas:

  • where the natural gas is 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 quote, and the supplier must accept, the purchaser's OTN – in such a case, the entity that has operational control over the large gas consuming facility (who may not be the OTN holder) is liable for the emissions resulting from the combustion of the natural gas;
  • where the natural gas is used in the operation of a large facility that is not a large gas consuming facility (ie a facility that produces 25,000tCO2-epa or more of covered emissions), the natural gas supplier will be liable for the emissions embodied in the natural gas unless the natural gas is purchased under an OTN, in which case the entity that has operational control over the large facility is liable for all of the covered emissions of the facility (including those resulting from the combustion of natural gas) – in these circumstances, the quotation and acceptance of the purchaser's OTN is voluntary, and the purchaser will generally only be entitled to quote an OTN if it also purchases gas for a large gas consuming facility; and
  • where the natural gas is used in the operation of a small facility (ie a facility that produces less than 25,000tCO2-epa of covered emissions), the natural gas supplier will be liable for the emissions embodied in the natural gas unless the natural gas is purchased under an OTN, in which case the OTN holder is liable for those embodied emissions – again, in these circumstances, the quotation and acceptance of the purchaser's OTN is voluntary, and the purchaser will generally only be entitled to quote an OTN if it also purchases gas for a large gas consuming facility.1

One issue in the legislation as introduced into Parliament was that an entity that purchased natural gas in bulk for use within its corporate group, where that entity did not itself use that natural gas or have operational control over a facility, would not have been entitled to purchase any natural gas using an OTN (even if that natural gas were to be used by a large gas consuming facility). This deficiency has now been rectified by amendments made to the legislation. While it remains the case that a natural gas supplier can refuse to accept the quotation of an OTN where the natural gas is to be used in a facility that is not a large gas consuming facility, it is expected that natural gas suppliers will (in practice) accept the quotation of an OTN where the natural gas is being purchased in bulk for facilities that include a large gas consuming facility. To do otherwise will result in considerable complexity: it will be necessary to distinguish between gas purchased for use in large gas consuming facilities and gas purchased for use in other facilities, with the former being priced on a carbon-exclusive basis and the latter being priced on a carbon-inclusive basis.

Unresolved issue

Unfortunately the Government has not taken the opportunity to remove the discriminatory treatment of partnerships compared with unincorporated joint ventures:

  • where operational control over an emitting facility is 'shared' by joint venturers, the joint venture constitutes a mandatory designated joint venture, with the result that the carbon liability for the facility is allocated to the joint venturers in proportion to their joint venture interests – in contrast, where operational control over an emitting facility is 'shared' by partners in a partnership, the partners are required to agree as to which one of their number will accept the entire carbon liability for the facility (if they fail to agree, they are each liable to a monetary penalty and to an equal share of that carbon liability); and
  • where an operator of an unincorporated joint venture's emitting facility has operational control over the facility, the operator and the joint venturers may (by agreement) have the joint venture declared to be a declared designated joint venture, with the result that the carbon liability for the facility (which would otherwise rest with the operator) is transferred to the joint venturers in proportion to their joint venture interests – in contrast, no such mechanism is available to an operator of a partnership's facility (while the operator's carbon liability could be transferred under a financial control liability transfer certificate, such a certificate only enables all of the carbon liability to be transferred to one partner).

Regulations

The passage of the legislation does not mean that the consultation process is over. A considerable volume of regulations is needed to implement the carbon pricing scheme, and these will be progressively released for public consultation. Our Focus of 26 September this year describes the exposure draft regulations that have been released to underpin the Jobs and Competitiveness Program (the emissions-intensive trade-exposed assistance program), with submissions on those regulations due by 28 October. More regulations are expected to be released over the forthcoming months.

What should you do now?

Given the virtual certainty that the legislation will be passed by the upper House of Parliament (which is due to vote on it in the second week of November), in which case the carbon pricing scheme will come into operation on 1 July 2012, businesses should now be taking steps to prepare for the introduction of the scheme. One of the steps should be to review existing contracts to determine whether the business (as a supplier) is able to pass through to its customers the costs it may incur as a result of the carbon pricing scheme, whether as an entity that is directly liable under the scheme or as an entity whose cost of inputs will increase because they are energy or emissions-intensive. Conversely, businesses that are customers will want to review their contracts to determine whether they are obliged to accept a pass through of the supplier's carbon costs. In many contracts, the pass through mechanism is likely to be a change in law clause, and the operation of these clauses in the context of a carbon pricing scheme is likely to give rise to some dispute as to the quantification and allocation of the associated carbon costs.

If you would like further information in relation to the carbon pricing scheme legislation, or assistance in reviewing existing contracts for carbon pass through issues (or drafting new contracts that accommodate the pass through of carbon costs), please contact one of the people below.

Footnotes
  1. The above description sets out the general position. Purchasers of natural gas as a feedstock or for the manufacture of LPG, LNG or CNG are also entitled to quote an OTN for their natural gas purchases. In such a case, while the OTN holder would notionally assume liability for the embodied emissions (and pay a carbon-exclusive price for the natural gas), that liability is entirely negated by the application of offset provisions.

For further information, please contact:

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