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Focus: Repeal of carbon pricing scheme

17 October 2013

In brief: The Federal Government has released exposure draft legislation for the repeal of the carbon pricing scheme, as well as terms of reference for the establishment of its Emissions Reduction Fund. Partner Grant Anderson and Law Graduate Levona Lavi report.

How does it affect you?

  • The Federal Government proposes to repeal the carbon pricing scheme, effective as from 1 July 2014 but liable entities will still be required to fully acquit their 2013/14 liabilities, including by making an interim surrender by 15 June 2014 and a final surrender by 1 February 2015 (failing which a unit shortfall charge will be payable).
  • While free 2013 vintage carbon units will be issued under the Jobs and Competitiveness Program (the JCP) in the ordinary course, there will be a true up in respect of any under or over-allocation of those units, with the detailed rules relating to such adjustments to be made by the Minister.
  • Companies should review their contractual arrangements to identify whether any unintended financial or timing consequences arise as a result of the repeal of the carbon pricing scheme, bearing in mind that (as a matter of political reality) the repeal is likely to occur after 1 July 2014.
  • Companies will be prohibited from exploiting prices or making false or misleading representations in relation to the removal of the carbon impost imposed under the carbon pricing scheme. The Australian Competition & Consumer Commission (the ACCC) will be given significant powers to monitor the behaviour of companies in this regard, and a breach of these prohibitions will attract significant sanctions.
  • Companies should review their pricing structures to ensure that they are not in breach of the price exploitation prohibition.
  • The Government has released terms of reference in relation to the development of its proposed Emissions Reduction Fund, and has invited submissions on the design of the Fund.

Background

One of the key commitments of the recently elected Federal Government is to repeal the existing carbon pricing scheme, with the repealing legislation to be introduced on the first day of the next Parliamentary session (currently scheduled for 12 November 2013). As part of fulfilling this commitment the Government has released exposure draft repeal legislation, together with a consultation paper. Submissions on the consultation paper and exposure draft legislation are due by 4 November 2013.

The Government is also committed to implementing its Direct Action Plan, the centrepiece of which is a $3.2 billion Emissions Reduction Fund. It has released terms of reference for the development of the Fund, and is requesting submissions on the design of the Fund by 18 November 2013.

Repeal of the carbon pricing scheme

Effect of repeal

The draft repealing legislation provides for the repeal of the Clean Energy Act 2011 (Cth) (the CE Act), which establishes the carbon pricing scheme, as well as the repeal or amendment of associated legislation such as the charging Acts (which provide for the payment for carbon units and the imposition of a unit shortfall charge) and the National Greenhouse and Energy Reporting Act 2007 (Cth) (the NGER Act) (which mandates the submission of carbon liability reports).

The repeal of the CE Act is expressed to occur on 1 July 2014. However, this does not mean that liable entities will not be required to fully acquit their 2013/14 scheme liabilities. On the contrary, under the Government's proposed legislation, 2013/14 will simply be the last year in respect of which carbon pricing scheme liabilities will be incurred. As a result, liable entities will still be required to acquire and surrender fixed price carbon units (at a price of $24.15 per unit) for the purpose of satisfying both:

  • their 2013/14 interim scheme liability, which is for an estimated 75 per cent of their 2013/14 direct and embodied emissions and must be acquitted by 15 June 2014;1 and
  • their 2013/14 final scheme liability, which is for the balance of their 2013/14 direct and embodied emissions and must be acquitted by 1 February 2015,2

failing which they will incur a unit shortfall charge.

In short, liable entities will need to acquit their 2013/14 scheme liabilities in full and in the ordinary course. The draft legislation effects this outcome by confining the concept of 'eligible financial year' to 2012/13 and 2013/14 (an entity's carbon pricing scheme liability is determined by reference to a specified eligible financial year), and by largely preserving the operation of those provisions of the CE Act and associated legislation in so far as they relate to these years and carbon units with a 2012 or 2013 vintage. So, for example, the provisions of the NGER Act that relate to the submission of carbon liability reports, the keeping of associated records and the conduct of audits will be continued in operation to the extent they relate to 2012/13 and 2013/14. The Minister is empowered to make rules dealing with any further transitional arrangements that may be needed. All outstanding carbon units (other than those issued at auction) will be cancelled on 9 February 2015 and the Clean Energy Regulator will be prohibited from issuing further carbon units after that date (this means that the Regulator will still be able to issue 2013 vintage carbon units to enable the acquittal of 2013/14 carbon pricing scheme liabilities).

The draft legislation contemplates that auctions for 2015 and 2016 vintage carbon units (scheduled during 2013/14) may still occur. In this regard it prohibits the Regulator from auctioning carbon units after 30 June 2014 and terminates the existing auction determination from that date, but provides for the cancellation of any previously auctioned units and the refund of the price paid for them. The Minister currently has the power to revoke the auction determination immediately. However, these provisions have presumably been included because any such revocation could be disallowed by the Senate. In practice this would seem doubtful; even a Senate that is hostile to the repeal of the carbon pricing scheme would surely not object to at least the deferral of such auctions pending certainty as to the fate of the scheme. In any event, given current circumstances, it seems unlikely that many entities would be interested in buying 2015+ vintage carbon units at auction anyway.

The approach to repeal adopted by the Government is not the only possible approach. An alternative would have been to terminate the carbon pricing scheme between 2 February and 14 June 2014. This would have avoided any 2013/14 carbon liability accruing at all. However, given the Government's commitment against retrospective repeal, this would only be possible if the repealing legislation were passed by the current Senate or (if not) following a double dissolution election. The current Senate, with its ALP/Green majority, will continue until 30 June 2014, when the Senators elected at the 7 September 2013 election take their seats. Assuming that the ALP and Greens maintain their opposition to the repeal of the carbon pricing scheme, then the current Senate will not pass the repealing legislation. If the current Senate were to reject the repealing legislation twice, with a three-month interval between the legislation being put to it for the first and second times, then this would form the basis for a double dissolution election and the potential passage of the repealing legislation by a newly elected Senate or at a joint sitting of both Houses of Parliament. However, the double dissolution route might be considered unnecessarily politically risky for the Government, particularly given that it appears that from 1 July 2014 the Government will have sufficient support from the recently elected 'independent' Senators to repeal the scheme and that the installation of a new Senate following a double dissolution election is likely to be very close to 1 July 2014 in any event. Moreover, this alternative would also be complicated by the fact that 2013/14 free carbon units will have been issued under the JCP and the coal-fired electricity generation assistance scheme, thus resulting in an over-allocation that could be converted into a windfall gain through the recipients of those units selling them back to the Government under the free carbon unit buy back mechanism.

Another alternative would have been to terminate the carbon pricing scheme between 1 July 2014 (when the new Senate commences operation) and 1 February 2015 – that is, after liable entities have accrued and acquitted their 2013/14 interim liability (on 15 June 2014) but before they become liable to acquit their 2013/14 final liability (on 1 February 2015). This would avoid liable entities having to pay for around one-quarter of their 2013/14 carbon liability. However, this alternative would also require a true-up mechanism because (at least for direct emissions) a liable entity's interim liability is merely an estimate that would need to be reconciled against 75 per cent of the liable entity's 2013/14 emissions as reported in the carbon liability reports that are required to be submitted by 31 October 2014).3

Assuming (as seems likely) that the repealing legislation is not passed until after 1 July 2014 by the new Senate, it is critical that it comes into effect before 1 September 2014 because that is the date on which the Clean Energy Regulator must issue 2014/15 carbon units under the coal-fired electricity generation assistance scheme. The recipients of these units will be able to realise a significant windfall gain by selling these free units back to the Government under the buy back mechanism in circumstances where they do not have 2014/15 carbon pricing scheme liability.4 In addition, if the repealing legislation is only passed after 1 July 2014, then there are likely to be a number of other revisions required to it given that many provisions of the CE Act and associated legislation are expressed to be modified or repealed with effect from or before that date.

Jobs and Competitiveness Program

Given that there will be direct emissions liability under the carbon pricing scheme for 2013/14, it is appropriate that there be an allocation of free carbon units under the JCP to entities in emissions-intensive trade-exposed (EITE) industries who are liable for direct emissions from their EITE activities and/or who need to sell such units to fund the higher electricity prices under the carbon pricing scheme. However, because JCP unit allocations are based on estimated production, the draft legislation contains a true up mechanism. If there has been an under-allocation of 2013 vintage JCP carbon units (eg because 2012/13 production, on which the allocation is based, is less than 2013/14 production) then the Clean Energy Regulator is required to issue additional free 2013 vintage carbon units to the recipient. These carbon units will be able to be surrendered to meet 2013/14 carbon scheme liabilities or cashed in under the buy back mechanism to pay the higher electricity prices resulting from the scheme imposing liability for 2013/14. Conversely, if there has been an over-allocation of 2013 vintage JCP carbon units, and the recipient fails to relinquish those units, a levy of $24.15 per unit will be imposed on the recipient. Rules are to be made by the Minister that set out the circumstances in which under and over-allocations are to be treated in this way. It is anticipated that these rules will be made by 1 July 2014.

Tax-related amendments

Effective from 1 July 2014, the repealing legislation will remove:

  • the reduction in fuel tax credits attributable to the carbon impost that would otherwise apply in respect of taxable fuels acquired, manufactured or imported on or after 1 July 2014;
  • the carbon impost that is included in the customs and excise duties payable on gasoline and kerosene that is used as aircraft fuel; and
  • the carbon impost that is included in the manufacture and import levies payable in respect of synthetic greenhouse gases.

If the repealing legislation is passed after 1 July 2014 then the carbon impost-inflated customs/excise duties and synthetic greenhouse gas manufacture/import levies will need to be paid until that time, and only carbon impost-reduced fuel tax credits will be able to be claimed before that time. If there is truly to be no 2014/15 carbon liability then the removal of these carbon imposts would need to take effect retrospectively, in which case provision would need to be made for the refund of such of the carbon component of these duties, levies and credits as is referable to 2014/15.

What companies should do

Companies would be well advised to review their contractual arrangements, including carbon cost pass through provisions (whether they operate on the basis of increased charges or the transfer of carbon units) and carbon unit forward purchase agreements, to ensure they operate as intended in light of these repeal arrangements, particularly if (as is likely) the repealing legislation only takes effect after 1 July 2014. At the very least there may be unintended financial or timing transitional issues that need to be considered. The Government has made it clear that it will not provide for transitional arrangements to deal with specific contracts, but considers the renegotiation of such contracts to accommodate the repeal of the carbon pricing scheme to be a matter to be resolved between the contractual counterparties. Finally, there may well be IT system changes that need to be made to accommodate the removal of the carbon impost (particularly in so far as the calculation and claiming of fuel tax credits is concerned).

ACCC and price exploitation

New prohibitions

The draft legislation amends the Competition and Consumer Act 2010 (Cth) to create two new prohibitions.

The first prohibition is on a corporation engaging in 'price exploitation' in relation to the removal of the carbon impost that is currently imposed under the carbon pricing scheme and through the tax system (ie through fuel tax credits, customs/excise duties and synthetic greenhouse gas manufacture/import levies). A corporation will breach this prohibition if:

  • during the period from 1 July 2014 to 30 June 2015 (the 'carbon tax repeal transition period') the corporation supplies natural gas, electricity, synthetic greenhouse gases or equipment that contains a synthetic greenhouse gas (eg refrigeration units) – these are referred to as 'regulated goods';
  • the price for the supply of the regulated goods is unreasonably high having regard alone to the removal of the carbon impost; and
  • the price for the supply of the regulated goods is unreasonably high even if all other relevant matters (including the supplier's costs and supply and demand conditions) are also taken into account.

The second prohibition is on a corporation making a false or misleading representation during the carbon tax repeal transition period, in connection with the supply or promotion of goods or services, concerning the effect of either the carbon impost or its repeal on the price for the supply of those goods or services.

The corporation's officers and employees may also be liable for a breach of these prohibitions where they are in any way, directly or indirectly, knowingly concerned in, or party to, the contravention.

Sanctions

A breach of either of these prohibitions may result in a court-ordered pecuniary penalty of up to $1.7 million (for a body corporate) or $340,000 (for a non-body corporate) in the case of price exploitation, and $1,105,000 (for a body corporate) and $221,000 (for a non-body corporate) in the case of a false or misleading representation.

In addition, the ACCC may apply for injunctive relief against actual or proposed conduct in breach of these prohibitions, as well as for a corrective advertising order. In the case of price exploitation, the ACCC may also apply for a court order that the corporation not supply the regulated goods at above a specified price and/or that the corporation refund money to purchasers of the regulated goods.

Moreover, any person who suffers loss or damage as a result of a breach of either prohibition may recover the amount of the loss or damage or have the benefit of a court compensation order.

Instead of pursuing court action, the ACCC will have the alternative of issuing an infringement notice if it has reasonable grounds to believe that a person has contravened either of the prohibitions. Payment of the penalty specified in the infringement notice ($102,000 for a listed corporation, $10,200 for any other body corporate and $2,040 for a non-body corporate) does not constitute acceptance that there has been a breach of the prohibition but precludes further action being taken by the ACCC (or the Commonwealth) for the alleged breach. It does not, however, preclude a third party action for compensation.

Price exploitation prohibition

The price exploitation prohibition is more confined than the false or misleading statement prohibition in that it only relates to the supply of prescribed goods. In addition, the ACCC may give a notice to a corporation where it considers that the corporation has engaged in price exploitation, and that notice will constitute prima facie evidence of an unreasonably high price for the purposes of any resultant legal proceedings. The ACCC may also notify a corporation of the maximum price that it considers may be charged without breaching the price exploitation prohibition; such a notice may be given by the ACCC on its own initiative (ie as a 'warning') or on application by the corporation (ie as a 'protection').

Of the two prohibitions, the price exploitation prohibition is the more problematic. If, as suggested above, the repealing legislation is passed after 1 July 2014, then companies will still need to proceed on the basis that they will be liable for their 2014/15 emissions. This means that 2014/15 prices will include costs associated with potential 2014/15 carbon scheme liability (at least except to the extent any carbon pass through clause operates on a 'costs actually incurred' basis). Equally, many companies will have entered into contracts that have already built in allowance for a 2014/15 carbon price – for example, electricity retailers will have entered into forward contracts for 2014/15 that include a carbon cost component – or where the carbon cost component has been included higher up in the supply chain. It would be hoped that the inclusion of such costs in prices would not be considered 'unreasonable' given (in the first case) the need to provide for a potentially accruing liability and (in the second case) the potential inability to renegotiate these contracts to remove the carbon cost component. Conversely, assuming there is no 2014/15 carbon pricing scheme liability, such carbon-inclusive pricing will result in a windfall gain to the supplying companies, and it will then be a matter of whether customers have the bargaining power to recoup this gain in the form of lower future prices or a refund. Perhaps this is where the ACCC will seek to use its powers to require such reduced prices or refunds once it is clear that there will be no such liability.

Price monitoring

The ACCC will also be given the power to monitor:

  • prices to assess the general effect of the removal of the carbon impost on the prices at which regulated goods (or other prescribed goods) are supplied (or offered for supply) during the carbon tax repeal transition period – this power may be used to determine whether a corporation is breaching the price exploitation prohibition; and
  • the price of any goods supplied by an entity that is a liable entity under the carbon pricing scheme – this could conceivably form the basis for the Minister exercising the Minister's power to expand the category of regulated goods.
What companies should do

In view of the potentially broad application of the price exploitation prohibition, the ACCC's extensive monitoring and enforcement powers, and the serious sanctions that may be imposed if that prohibition is breached, companies should carefully review their pricing structures to ensure that they do not contravene the price exploitation prohibition. This is particularly so where companies have previously advertised that an increase in their prices was the result of the carbon tax. Companies should also review their advertising and other material to ensure that they do not breach the prohibition on false or misleading statements in relation to the imposition or removal of the carbon tax.

Direct Action Plan – the Emissions Reduction Fund

In place of the carbon pricing scheme, the Government has proposed to establish an Emissions Reduction Fund as part of its Direct Action Plan. The Emissions Reduction Fund, which will be funded with $3.2 billion up to 2020, will purchase emissions reductions, using a reverse auction process, from a range of projects such as forestry and soil sequestration, energy efficiency, the generation of electricity from the combustion of waste coal mine gas and landfill gas, recycling and composting.

The Government is now calling for submissions on the design of the Emissions Reduction Fund, including:

  • the likely sources of low-cost, large-scale abatement for purchase by the Fund;
  • how the Fund can facilitate the development of abatement projects;
  • the auction arrangements;
  • the governance arrangements to support the Fund;
  • the details of the monitoring, verification, compliance and payments arrangements to apply to entities that successfully bid emissions reductions into the Fund;
  • the relationship between the existing Carbon Farming Initiative and the Fund (potentially including how the Carbon Farming Initiative may be subsumed by the Fund); and
  • the design and operation of a mechanism applying to emissions above the business as usual baseline – this seems to be a reference to the possible imposition of 'penalties' on entities that emit above-baseline emissions and how those penalties could be satisfied (eg by purchasing emissions reductions from the Fund).

The Government intends to release a Green Paper on the development of the Emissions Reduction Fund for public comment in late 2013, with a White Paper containing the final policy design to be released in early 2014.

The Government's aim is to legislate for the establishment of the Emissions Reduction Fund prior to 1 July 2014 so that it can commence operation on that date. However, assuming the current Senate is not willing to repeal the carbon pricing scheme, it is also unlikely to pass this legislation. As a consequence, the Government will need to rely on the new Senate passing the legislation after 1 July 2014. Given that the majority of the new 'independent' Senators are likely to oppose the Fund for a variety of reasons, the Government will need to rely on the support of the ALP or the Greens, which may well be forthcoming once the carbon pricing scheme has been repealed.

Other matters

As part of the repeal of carbon pricing scheme-related provisions, the NGER Act will be amended so that it only applies to corporations, as opposed to unincorporated entities such as trusts and governments. This means that such unincorporated entities will no longer be required to report their greenhouse gas emissions, energy production or energy consumption under the NGER Act.

In addition, the repealing legislation contains amendments to the income tax, GST and PRRT laws to accommodate the repeal of relevant parts of the carbon pricing scheme. The income tax, GST and PRRT laws generally continue to apply to carbon units on hand at 9 February 2015.

As previously foreshadowed by the Government, the legislative package also provides for the abolition of the Climate Change Authority and of the carbon-related income tax reductions that would have occurred for 2015/16. As well, the steel transformation plan will be abolished with effect from 1 July 2014, and no future payments under that plan (including those in respect of the six months ending 30 June 2014) will be made.

Finally, the Government has committed to review Australia's Renewable Energy Target in a separate consultative process in 2014. In the absence of the carbon pricing scheme, the Renewable Energy Target scheme is likely to assume increased importance in driving investment in renewable energy. Currently there seems to be bipartisan support for the scheme, although the Government has previously indicated that it would be looking to make some refinements – for example, reserving 6,000GWh for above-50MW renewable energy projects and above-10MW emerging renewable energy (solar fields, geothermal, tidal and wave) projects. It may also be that the absolute GWh target for the scheme is reduced.

Next steps

Companies should review their contractual arrangements in light of the transitional arrangements for the repeal of the carbon pricing scheme, noting that these may change if (as expected) the repealing legislation is not passed until after 1 July 2014. In addition to making submissions on the exposure draft repeal legislation, companies may also wish to make submissions on the terms of reference for the Emissions Reduction Fund.

Footnotes
  1. While reference is made to 15 June 2014, this is a Sunday and so the last surrender date for 2013/14 interim scheme liabilities is actually 16 June 2014.
  2. While reference is made to 1 February 2015, this is a Sunday and so the last surrender date for 2013/14 final scheme liabilities is actually 2 February 2015.
  3. Provision would also need to be made for liable entities whose direct emissions liability is less than 35ktCO2-epa as they only have a final (rather than an interim) liability.
  4. A similar issue would arise if 2014/15 JCP carbon units were issued prior to repeal. Such carbon units will, however, be issued after 1 September 2014.

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