Australia introduces historic carbon price mechanism

By Michael Sheng and Jeff Lynn, Blake Dawson
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On 8 November, the Australian Parliament passed the clean energy legislative package. The newly created law includes:

  • the Clean Energy Act 2011 (Cth), which establishes a carbon price mechanism, also known as the greenhouse gas scheme;
  • the Clean Energy Regulator Act 2011 (Cth), which establishes the Clean Energy Regulator, the regulatory body that will administer the greenhouse gas scheme; and
  • the Climate Change Authority Act 2011 (Cth), which establishes the Climate Change Authority, the authority that will advise on the future design of the greenhouse gas scheme.

The greenhouse gas scheme will commence on 1 July 2012.

Design of the scheme

Michael Sheng
Michael Sheng
Partner
Blake Dawson

The greenhouse gas scheme is designed to help meet Australia’s emissions reduction target of 5% below 2000 levels by 2020.

Liable entities will be required to acquire and surrender carbon units for each tonne of carbon dioxide equivalent emitted. There will be an initial fixed price period before a transition into a cap-and-trade emissions trading scheme with a flexible price.

Fixed price periods

Under the Clean Energy Act, the financial years beginning on 1 July 2012, 1 July 2013 and 1 July 2014 will be known as “fixed charge years”. The greenhouse gas scheme will operate like a tax during the fixed charge years, with carbon units being issued by the government at a fixed price starting at A$23, increasing to A$24.15 and then to A$25.40 (a rise of 2.5% per annum in real terms).

Up to 5% of a liable entity’s compliance obligation will be able to be met through Kyoto Protocol-compliant credits created under the Carbon Farming Initiative, an Australian government scheme which enables the creation of credits from certain activities in the forestry and agricultural sectors.

Jeff Lynn,Blake Dawson
Jeff Lynn
Partner
Blake Dawson

Flexible price period

In the “flexible charge years” (starting on 1 July 2015), the greenhouse gas scheme will operate as a “cap-and-trade” emissions trading scheme with carbon units auctioned by the government. Carbon units will subsequently be traded on the secondary market (much like shares).

Certain international credits may be used, but at least half of a liable entity’s compliance obligation must be met through the use of domestic carbon units until at least 2020. For the first three flexible charge years, there will be a price ceiling set at A$20 above the average international price (rising by 5% in real terms each year) and a price floor starting at A$15 (rising annually by 4%).

Liable entities

Liability to surrender carbon units under the greenhouse gas scheme will generally be determined in accordance with the National Greenhouse and Energy Reporting Act 2007 (Cth). Liable entities will be those with operational control of a facility (determined in accordance with that Act) that emits more than 25,000 tonnes of carbon dioxide equivalent in a financial year.

There are technical rules for determining liability in the case of joint ventures. Natural gas suppliers will be liable for the emissions from the use of the gas by their customers, although it will be mandatory for large natural gas users to take a transfer of liability from their supplier. Similar provisions have not been included in relation to coal or other high-emission business inputs.

Coverage

The greenhouse gas scheme will have broad coverage from the date of its commencement, including stationary energy generation, industrial processes, non-legacy waste (emissions from waste deposited in landfill after 1 July 2012); and fugitive emissions.

Transport fuels will be excluded from the greenhouse gas scheme, but an equivalent carbon price will be applied through changes in fuel tax credits and excises (with certain exceptions).

Assistance for industry and households

The government will provide assistance for industry and households to soften the impact of the introduction of the greenhouse gas scheme, including:

  • a Jobs and Competitiveness Programme which will provide for carbon units to be freely allocated by the government to companies in emissions-intensive trade-exposed industries. Additional funding through a Steel Transformation Plan is also proposed to help make the steel industry more efficient and sustainable in the long term;
  • an Energy Security Fund which will provide monetary compensation for the closure of certain highly emissions-intensive coal-fired power stations, and will provide support for badly affected electricity generators through the provision of cash assistance and free carbon units; and
  • other funding initiatives which will include specific funding programmes for the renewable energy, clean technology and the coal sectors.

Governance, compliance, enforcement

The government will be responsible for major policy decisions concerning the greenhouse gas scheme. The day-to-day operation of the greenhouse gas scheme will be governed by the regulator, with periodic reviews to be carried out by the Authority and the Productivity Commission.

If a liable entity fails to surrender sufficient carbon units, it will be subject to a shortfall charge. The Clean Energy Act also contains measures to promote compliance and provide for enforcement.

Implications for business

It will be important for companies operating or investing in Australia to be aware of the implications of the greenhouse gas scheme for their business. Liable entities should ensure that they have systems in place to enable compliance with the Clean Energy Act and related legislation. Liable entities and non-liable entities should give consideration to the allocation of the costs of the greenhouse gas scheme under their existing and future contracts. There will also be opportunities for investors, such as investing in projects eligible to generate credits under the Carbon Farming Initiative.

Michael Sheng is a partner in the Shanghai office and Jeff Lynn is a partner in the Melbourne office of Blake Dawson

Blake Dawson Shanghai office Suites 3408-10, CITIC Square

1168 Nanjing Road West, Shanghai

Postal code: 200041

Tel: 86 21 5100 1796

Fax: 86 21 5292 5161

E-mail:

michael.sheng@blakedawson.com

jeff.lynn@blakedawson.com

www.blakedawson.com

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