Allens

Climate Change

Increase text sizeDecrease text sizeDefault text size

Focus: Gaseous fuels and carbon pricing

3 July 2012

In brief: Those involved in the manufacture, importation and use of LPG, LNG or CNG should be aware of recently passed amendments that now bring emissions associated with the combustion of these fuels for non-transport uses within the coverage of the carbon pricing scheme. Partner Grant Anderson and Law Graduate Albert Yu report.

How does it affect you?

  • An effective carbon price will no longer be imposed on CNG for non-transport use through the fuel tax system. Instead, in most cases, the supplier of the natural gas that is used to manufacture the CNG, or the CNG manufacturer, will be liable under the carbon pricing scheme for the embodied emissions in the natural gas or CNG.
  • An effective carbon price will be imposed on LPG and LNG for non-transport use through the fuel tax system until 1 July 2013. From that time, the manufacturers, importers and purchasers of LPG and LNG will be liable under the carbon pricing scheme for the embodied emissions in the LPG and LNG.
  • These changes will expand the number of entities that are required to report, and surrender carbon permits, under the carbon pricing scheme.
  • Emissions from the combustion of CNG, LPG and LNG will be included in determining whether the facility in which they are combusted exceeds the 25ktCO2-e liability threshold under the carbon pricing scheme. This may mean that the number of facilities that are covered by the scheme increases.

Coverage of gaseous fuels before the recent amendments

The carbon pricing scheme established by the Clean Energy Act 2011 (Cth) (the CEA) does not cover greenhouse gas emissions from the combustion of compressed natural gas (CNG), liquefied petroleum gas (LPG) or liquefied natural gas (LNG) to the extent those fuels have been subject to excise or customs duty. Prior to the introduction of the Clean Energy Future legislation (of which the CEA forms a part), CNG for non-transport uses was not subject to excise or customs duty; however the Clean Energy Future legislation provided for the imposition of excise and customs duty on CNG for non-transport uses (in addition to transport use). Unlike CNG, prior to the introduction of the Clean Energy Future legislation, LPG and LNG for most uses was subject to excise or customs duty,1 and that legislation did not seek to change this position. The consequence was that emissions from the combustion of CNG, LPG and LNG in most transport and non-transport uses were not 'covered emissions' and so did not attract direct emissions liability under the carbon pricing scheme.

However, this did not mean that the use of CNG, LPG and LNG did not attract any carbon impost. On the contrary, the Clean Energy Future legislation (as originally enacted) provided that, as from 1 July 2012 (the commencement of the carbon pricing scheme), CNG for non-transport uses would be subject to excise and customs duties that incorporated a carbon component that reflected the then-prevailing cost of carbon units. Moreover, while there had previously been a full remission of excise and customs duties where LPG or LNG was for non-transport use, it was proposed that this remission would also be reduced by a similar carbon component. Correspondingly, the fuel tax credits available for the manufacture, import or acquisition of CNG, LPG and LNG for non-transport use were to be reduced, as from 1 July 2012, by this carbon component.2 The exception is that fuel used in agriculture, fishing and forestry is not subject to any such fuel tax credit reduction, so that these industry sectors do not face an effective carbon price on their fuel use.

Coverage of gaseous fuels after the recent amendments

Background

Recent amendments to the CEA and related fuel tax legislation,3 have now resulted in emissions associated with the non-transport use of CNG (from 1 July 2012) and the non-transport use of LPG and LNG (from 1 July 2013) being subject to coverage by the carbon pricing scheme, rather than facing an effective carbon price through adjustments to the excise and customs duty and fuel tax credit regimes.

These amendments were developed in response to concerns that imposing a carbon price through the excise system would:

  • increase compliance costs for CNG, LPG and LNG suppliers;
  • reduce the ability of these suppliers to manage the resultant carbon cost in a cost-effective manner by precluding them from being able to surrender carbon permits that they were able to acquire at a cheaper price than the carbon component that is included in the excise and customs duties; and
  • increase cash carrying costs because of the need to discharge excise and customs duty obligations monthly, compared to discharging carbon pricing scheme obligations twice a year (for the fixed price phase) and once a year (for the floating price phase).

However, CNG, on the one hand, and LPG and LNG, on the other hand, are made subject to the carbon pricing scheme in quite different ways.

CNG – from 1 July 2012

The recent amendments restore the excise and customs duty treatment of CNG to the pre-Clean Energy Future position – that is, CNG for non-transport uses is not subject to excise or customs duty. The consequence of this is that, while emissions from CNG for transport use continue to be excluded from the carbon pricing scheme (as well as not having any effective carbon price imposed on them through fuel tax credit reductions), emissions associated with the combustion of CNG for non-transport uses are now covered by the carbon pricing scheme (because they are not subject to excise or customs duty). However, the point of liability will depend on the circumstances:

  • Where the natural gas used to produce the CNG is supplied to the CNG manufacturer though a natural gas supply pipeline, and the CNG manufacturer does not quote an obligation transfer number (OTN) for that gas, the gas supplier will be liable for the embodied emissions in the natural gas and will presumably charge the CNG manufacturer a carbon-inclusive price for the natural gas, which the CNG manufacturer will seek to pass onto its CNG gas customers in the form of a higher CNG price.
  • Where the natural gas used to produce the CNG is supplied to the CNG manufacturer through a natural gas supply pipeline, and the CNG manufacturer quotes an OTN for that gas, the CNG manufacturer will be liable for the embodied emissions in the natural gas – whereas the CNG manufacturer would previously have been able to net off this liability because the CNG would have been subject to excise duty, this net-off provision is no longer applicable because CNG for non-transport use is not subject to excise duty. As a result, the CNG manufacturer can again be expected to seek to pass on the cost associated with this liability to its customers in the form of higher CNG prices. Having said this, there is an argument that a CNG manufacturer would be entitled to net off its embodied emissions liability under another net-off provision which applies where natural gas is used in such a way as not to emit greenhouse gases, in which case no carbon impost would in fact attach to the CNG thereby resulting in carbon liability leakage.
  • Where the CNG is combusted at the facility at which it is manufactured using natural gas supplied under an OTN, the emissions from the combustion of the CNG are included in the facility's covered emissions,4 ie. they attract direct emissions liability – where an OTN is not quoted, liability for the embodied emissions in the natural gas will be imposed on the natural gas supplier who will presumably pass the associated costs onto the CNG manufacturer in a carbon-inclusive gas price.

In each of these cases, the emissions from the combustion of CNG at a facility will be included in determining whether the facility's emissions exceed the 25ktCO2-epa threshold necessary to attract liability for the facility's direct emissions. This is so even if, as in the first two cases, these emissions do not themselves attract direct emissions liability but only embodied emissions liability (which rests with the natural gas supplier or CNG manufacturer).

LPG and LNG – from 1 July 2013

The recent amendments do not alter the position that LPG and LNG for most transport and non-transport uses are subject to excise or customs duty, and so will not be 'covered' emissions that attract direct emissions liability under the carbon pricing scheme. However, these amendments have the effect that, from 1 July 2013, carbon liability will be imposed on LPG and LNG for non-transport uses in a similar way to that in which such liability is imposed on the supply of natural gas.

Under these amendments, the manufacturers and importers of LPG and LNG that is subject to excise or customs duty – where that duty is remitted on the grounds that the LPG or LNG is for a non-transport use – will be liable for the embodied emissions in that LPG or LNG. However, the manufacturer or importer will be able to transfer this liability to a purchaser of the LPG or LNG who quotes an OTN. If that LPG or LNG is combusted for a non-transport use in a facility that emits more than 25ktCO2-epa of covered emissions, it is apparently intended that the emissions from the combustion of the LPG or LNG should be included in the direct emissions liability associated with the facility.

If an OTN is not quoted in these circumstances, then the LPG or LNG manufacturer or importer will be liable for the embodied emissions in the LPG or LNG, but it is apparently intended that the emissions from the combustion of the LPG or LNG will be included in determining whether the facility's emissions exceed the 25ktCO2-epa threshold necessary to attract liability for the facility's direct emissions. This is so even though those emissions do not themselves attract direct emissions liability but only embodied emissions liability that rests with the LPG or LNG manufacturer or importer.

This is the intended position,5 but the amendments proceed on the incorrect assumption that emissions from the combustion of LPG and LNG for non-transport use are 'covered emissions'.6 In fact, they are not 'covered emissions' because excise and customs duty is payable on such LPG and LNG, even though that duty is remitted.

In order to give effect to this new liability regime, the provisions regarding the issue, quotation, cancellation, surrender, withdrawal and misuse of OTNs that currently apply in respect of natural gas have been extended to apply in respect of the supply of LPG and LNG for non-transport uses. In particular, provision has been included for regulations to be made that will specify the circumstances in which:

  • an LPG or LNG purchaser must quote, and the LPG or LNG manufacturer or importer must accept, an OTN in respect of the supply of LPG or LNG – this is likely to be the case for large LPG or LNG users;7
  • an LPG or LNG purchaser may quote, in which case the LPG or LNG manufacturer or importer must accept, an OTN in respect of the supply of LPG or LNG – this is likely to be the case for purchasers that use LPG and LNG as a feedstock;8 and
  • an LPG or LNG purchaser may quote, and the LPG or LNG manufacture may (but need not) accept, an OTN in respect of the supply of LPG or LNG.

Until 1 July 2013, LPG and LNG for non-transport uses will continue to have an effective carbon price imposed through the excise duty, customs duty and fuel tax credit regime.

Fuel tax regime

Because CNG for non-transport uses is not subject to excise or customs duty, no fuel tax credits will be available for its manufacture, import or acquisition. However, such CNG will bear a carbon impost because of the emissions liability that is imposed in respect of the natural gas used to manufacture it.

Until 1 July 2013, fuel tax credits will be available for LPG and LNG that is manufactured, imported or acquired for non-transport uses. After that time, such LPG and LNG will bear a carbon impost because of the emissions liability that is imposed in respect of its supply.

In order to avoid double liability, the Fuel Tax Act 2006 (Cth) has been amended to exclude fuel tax credits for CNG, LPG and LNG for non-transport uses. The exception is that fuel tax credits will be able to be claimed for CNG, LPG and LNG that is used in the agricultural, fishing or forestry industries. These fuel tax credits are calculated on the basis of the carbon component of these fuels, and the effect of this is that these industries will be insulated from the carbon price that is otherwise imposed on these fuels. These fuel tax credits can be claimed even though no excise or customs duty has been paid on the fuel (due to exemptions in the case of CNG or remissions in the case of LPG and LNG).

The next steps

Businesses that manufacture, import, acquire or use CNG, LPG or LNG should review their arrangements to ensure that they are able to deal with their liability for emissions embodied in, or arising from the combustion of, these fuels in accordance with the carbon pricing scheme.

Footnotes
  1. The exception was that LPG or LNG used in licensed premises to manufacture LPG or LNG was (and still is) exempt from excise duty, eg as where LNG is combusted to produce LNG at an LNG production facility.
  2. Light on-road transport fuel use does not qualify for fuel tax credits in the first place and the fuel tax credits for heavy on-road transport fuel use are not reduced by a carbon component, although the current Government's policy is to legislate for such a reduction with effect from 1 July 2014.
  3. Clean Energy Legislation Amendment Act 2012 (Cth), Clean Energy (Excise Tariff Legislation Amendment) Act 2012 (Cth) and Clean Energy (Customs Tariff Amendment) Act 2012 (Cth).
  4. As a consequence they are netted out of the OTN holder's embodied emissions liability.
  5. Explanatory Memorandum, pars.2.43, 2.44.
  6. See the CEA, new ss 20(12)(b), 36D(4)(b), (c).
  7. Explanatory Memorandum, par.2.35.
  8. Explanatory Memorandum, par.2.35.

Share or Save for later

What are these?

 

To save this publication on your smartphone or
tablet for off-line reading (eg on a plane flight),
we recommend Pocket.

 

 

You can leave a comment on this publication below. Please note, we are not able to provide specific legal advice in this forum. If you would like advice relating to this topic, contact one of the authors directly. Please do not include links to websites or your comment may not be published.

Comment Box is loading comments...