Legal Impact of Carbon Pricing in Australia Sep11

Environment & Environmental Markets
Australia
Australian Government's Proposed Carbon Pricing Mechanism

A guide to the Clean Energy Bills
Martijn Wilder Partner +61 2 8922 5276 martijn.wilder@bakermckenzie.com Paul Curnow Partner +61 2 8922 5173 paul.curnow@bakermckenzie.com Andrew Beatty Partner +61 2 8922 5632 andrew.beatty@bakermckenzie.com
Contents
1. 2. Scheme Overview Scheme Coverage 2.1 Included and Excluded Sectors 2.2 Treatment of transport Who is liable and can liability be transferred? 3.1 Liable entities 3.2 Natural gas 3.3 OTNs 3.4 Joint Ventures 3.5 Liability transfer Carbon units 4.1 Characterisation of carbon units 4.2 Treatment of Carbon Units What is a liable entity's surrender obligation? 5.1 Timing for compliance 5.2 Unit shortfall charges How does the scheme work in the fixed price period? 6.1 Starting price and the fixed price period 6.2 Free allocation of units How does the scheme work in the flexible price period? 7.1 Transition arrangements and setting pollution caps 7.2 Flexible price architecture price ceilings and floors 7.3 Flexible price architecture Banking and Borrowing 7.4 Flexible price architecture Auctioning Access to domestic and international offsets 8.1 Carbon Farming Initiative eligibility 8.2 International linking 1 2 2 3 5 5 6 6 7 8 10 13 14 15 15 15 17 17 18 19 19 20 20 21 22 22 23
9. 10.
Tax treatment 9.1 Tax treatment
25 25
What assistance is available to industry? 27 10.1 Industry assistance EITEs 27 10.2 Industry assistance electricity generation 29 10.3 Additional sector-specific industry assistance not agreed by the MPCCC steel and coal 30 Governance of the Scheme 11.1 General governance 11.2 Authority 11.3 Regulator 11.4 Information Gathering & Monitoring Powers and Requirement to be Notified 11.5 Land Sector Carbon and Biodiversity Board 11.6 Penalties for Non-compliance 11.7 Administrative Review Other assistance packages 12.1 Key transitional support to business 12.2 Key energy efficiency measures 12.3 Other initiatives 31 31 31 32 33 33 33 34 35 35 36 36
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Key compliance dates in fixed price and flexible price periods 38
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The Australian Government's Proposed Carbon Pricing Mechanism Baker & McKenzie | 1
1.
Scheme Overview
Legislation
The primary legislative instrument is the Clean Energy Bill 2011 (Clean Energy Bill), which is accompanied by 18 other legislative instruments: Clean Energy Regulator Bill 2011; Climate Change Authority Bill 2011; Clean Energy (Consequential Amendments) Bill 2011; Clean Energy (Income Tax Rates Amendments) Bill 2011; Clean Energy (Tax Laws Amendments) Bill 2011; Clean Energy (Unit Shortfall Charge General) Bill 2011; Clean Energy (Unit Issue Charge Auctions) Bill 2011; Clean Energy (Unit Issue Charge Fixed Charge) Bill 2011; Clean Energy (Charges Excise) Bill 2011; Clean Energy (Excise Tariff Legislation Amendment) Bill 2011; Clean Energy (International Unit Surrender Charge) Bill 2011; Ozone Protection and Synthetic Greenhouse Gas (Import Levy) Amendment Bill 2011; Ozone Protection and Synthetic Greenhouse Gas (Manufacture Levy) Amendment Bill 2011; Clean Energy (Charges Customs) Bill 2011; Clean Energy (Customs Tariff Amendment) Bill 2011 Steel Transformation Plan Bill 2011; Clean Energy (Fuel Tax Legislation Amendment) Bill 2011; and Clean Energy (Household Assistance Amendments) Bill 2011.
Key policy element

On 10 July 2011, the Government announced its intention to introduce its carbon pricing mechanism (Scheme). The exposure drafts of the Bills that comprise the Scheme (Legislative Package) were published on 29 July 2011. Submissions on the Legislative Package are invited before 22 August 2011. The Clean Energy Bill and its ancillary legislative instruments were introduced into parliament on 13 September 2011. The Government is seeking passage of the legislation before the end of 2011 and possibly as early as November. If the Legislative Package passes, the Scheme will commence on 1 July 2012 with an initial three year fixed price period and will transition to a flexible price cap and trade emissions trading scheme on 1 July 2015. Liable entities will be obliged to surrender carbon units (or certain other eligible carbon units) equivalent to their emissions (in the fixed price period) and their "pollution cap" (in the flexible price period). The Scheme is designed to ensure Australia meets its unconditional pollution reduction target of 5% below 2000 levels by 2020 (Target), which translates to 160 million tones of carbon abatement by 2020. A further target has been set to reduce Australia's emissions by 80% below 2000 levels by 2050 (previously set at 60%).
Analysis
The Scheme is the second part of the Australian Government's climate change policy, complementing the previously announced introduction of the Carbon Farming Initiative (CFI), legislation for which is currently before Parliament. Read our client alert on the CFI. Whilst the Scheme is broadly similar to the previous Rudd Government's blocked Carbon Reduction Pollution Scheme (CPRS), there are some significant departures, including: emissions from certain synthetic greenhouse gases, most on-road vehicles (unless they opt-in to the scheme), the agricultural sector and decommissioned coal mines are excluded from the Scheme; and a more diversified assistance package covering not only household and industry compensation, but also channelling investment into clean energy and low-emissions technology. Key to the design of the Scheme is the intention for it, coupled with the CFI, to provide greater investment certainty to the Australian business community and those wishing to invest in Australia, both in terms of covered organisations being able to assess (and manage) their carbon liabilities and developers of off-set projects and clean / low-emission technologies being able to take advantage of market opportunities (and assistance packages). The long-term pollution reduction target is ambitious given that most other developed countries targets, pledged in the Cancun Agreements, are qualified on the condition that an over-arching international agreement is in place. The 2020 Target has not been included in the Clean Energy Bill. However, the Bill provides a mechanism for pollution caps for the flexible price period to be set 5 years in advance through Regulations, so that liable entities will be able to manage their compliance obligations.
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2.
Scheme Coverage
Key policy element
The Scheme will have broad coverage of emission sources from its commencement, encompassing: stationary energy; industrial processes; fugitive emissions (other than from decommissioned coal mines); and emissions from non-legacy waste. An equivalent carbon price will be applied through separate legislation to some business transport emissions (see Table 2.2 for a discussion on the transport sector), non-transport use of liquid and gaseous fuels, and synthetic greenhouse gases. Agriculture and land sector emissions will not be covered and nor will emissions from the combustion of biofuels and biomass, including CO2-e emissions from combustion of methane from landfill facilities. Also excluded are those emissions that are attributable to changes in the levels of carbon sequestered in living biomass, dead organic matter or soil. Emissions that are attributable to land use, changes in land use (including land clearing) or forestry activities are further excluded, unless the emission is attributable to the operation of a landfill facility. The Scheme will cover four of the six greenhouse gases counted under the Kyoto Protocol carbon dioxide, methane, nitrous oxide and perfluorocarbons from aluminium smelting. For most sectors, 25,000 tonnes of CO2-e will be set as the threshold for determining whether a facility will be covered by the Scheme.
Feature
2.1 Included and Excluded Sectors
Legislation
Clean Energy Bill: Part 3 Division 2
Analysis
Coverage is addressed on an exception basis. That is, all facilities with scope 1 emissions above the threshold will be covered unless expressly exempted from the Scheme.
Covered emissions from the operation of a facility are those scope 1 emissions released The thresholds for coverage translates to around 500 into the atmosphere as a direct result of the Australian entities being covered under the Scheme. (As operation of the facility within Australia (s.30(1)). a general comment many of the remaining 500 entities Certain emissions are excluded from the which the Government had initially indicated would likely operation of a facility, being: be covered by the Scheme have been caught in other ways, for example through increases to fuel excise.) those emissions that are attributable to the combustion of liquid petroleum fuel; or liquid Synthetic greenhouse gases (excluding perfluorocarbons petroleum gas; or liquefied natural gas; or from aluminium smelting ) are not covered by the carbon compressed natural gas; that has been pricing mechanism but will be subject to an equivalent subject to a duty under the Customs Tariff carbon price using existing import and manufacturing Act 1995 or the Excise Tariff Act 1921 levies under the Ozone Protection and Synthetic GHG (s.30(2)); Management legislation. listed agricultural emissions (s.30(4)); emissions attributable to changes in the levels of carbon sequestered in certain matter or land use or forestry activities (s.30(6)); fugitive emissions from underground coal mines (s.30(8)); legacy emissions from the operation of a landfill facility (s.30(9)); certain emissions from landfill facilities that have not accepted any waste since the start of 1 July 2008 (s.30(10)); and emissions of certain synthetic gases (s.30(11)).
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Feature
2.2 Treatment of transport
Key policy element

Light commercial vehicles (vehicles 4.5 tonnes or less) and households will not face a carbon price on the fuel they use for transport. In addition, the agriculture, forestry and fishery industries will not pay a carbon price on their fuel use. Other business transport emissions from liquid fuels (rail and shipping) and non-transport emissions from businesses using liquid fuels will be subject to an equivalent carbon price, generally applied by reducing business fuel tax credits or increase in relevant excise by an amount equivalent to that of placing the carbon price on liquid fuel emissions. Although not yet included in the Scheme, the Government has expressed an intention to apply an effective carbon price to fuel used by heavy on-road transport from 1 July 2014 (again, through changes in fuel tax credits). This will broaden coverage of the carbon price substantially as heavy on-road vehicles account for over 25% of road transport emissions. The Bill contains an opt-in Scheme, wherein large users of specified fuels can voluntary opt-in to the mechanism from 1 July 2013, instead of paying the equivalent carbon price under the fuel tax or excise systems. Domestic aviation fuel excise will be increased by an amount equivalent to the effect of placing the carbon price on aviation fuel (international aviation will not be captured). Non-transport use of CNG, LNG and LPG that currently benefits from an automatic remission of excise will be replaced by a partial remission to reflect the effective carbon price.
Legislation
The Excise Tariff Legislation Amendment (Clean Energy) Bill 2011 imposes a carbon price on aviation and non-transport gaseous fuels through customs tariffs. The Custom Tariff Amendment (Clean Energy) Bill 2011 imposes a carbon price on aviation and non-transport gaseous fuels through excise. The Fuel Tax Legislation Amendment (Clean Energy) Bill 2011 reduces the fuel tax credit entitlement of non-exempted industries for their use of liquid and gaseous transport fuels. The Clean Energy Bill allows large users of certain fuels to opt-in to the Scheme (Division 7, sections 92A 92G).
Analysis
Inclusion of heavy on-road vehicles will provide consistent treatment across the freight sector (given that rail, domestic shipping and domestic aviation will face an effective carbon price from the Scheme's commencement). As noted, the carbon price will not be imposed directly on the transport sector through the Scheme, unless large users of fuel users choose to opt-in to the Scheme. Instead, the carbon price will be imposed by reducing fuel tax credits or increasing the relevant excise by an amount equivalent to placing the carbon price on liquid fuel emissions. If fuel is covered by the Opt-in Scheme, then fuel tax credits for the acquisition, manufacture or import (which may be part of a larger quantity of fuel so acquired, manufactured or imported) of that covered fuel are provided for an amount equivalent to what the carbon price on the fuel emissions would have been. This includes fuel tax credits for the acquisition, manufacture, import of fuel for use in aircraft. Given the above, liable entities in the transport sector that have chosen not to opt-in to the Scheme will not be able to participate in the trading and surrender of carbon units/offset credits in order to manage their carbon costs and will need to manage their liability in other ways, for example by switching to fuels such as ethanol, biodiesel and renewable diesel (which are not subject to the fuel tax credit reductions or changes to excise). It is expected that liable entities within the transport sector will manage the bulk of their carbon cost by passing such costs on to their consumers. For example, independent analysis suggests that domestic aviation fares will increase by an average of $3.50 per sector in FY13 (Citigroup Global Markets, Transport Sector Update - the Cost of Carbon, July 2011.
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Feature
Key policy element
Legislation
Analysis
Adjustments to fuel tax credits and excise will be annual during the fixed price phase and every six months (based on the average carbon price over the previous six months) during the flexible price phase. The Productivity Commission will undertake a review of fuel tax credit and excise mechanism to asses its effectiveness, however, no date has been set for such a review.
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3.
Who is liable and can liability be transferred?

Key policy element
For most sectors, the liable entity for emissions from a facility will be the person with operational control over that facility.
Feature
3.1 Liable entities
Legislation
Clean Energy Bill: Part 3 Division 2 A person who had operational control of a facility which passes the threshold test in an eligible financial year shall be the liable entity (s.20). Designated joint ventures and facilities where a liability transfer certificate is in force are exempt (and liability is addressed separately see Table 3.4).
Analysis
As noted, the liable entity for emissions from a facility will generally be the person with "operational control" over that facility. This is a departure from the CPRS where liability sat with the controlling corporation. The previous CPRS position had been criticised by a number of stakeholders as it did not adequately address concerns raised about the ability of subsidiaries and unincorporated joint ventures that have operation control of facilities to pass through carbon costs under their supply contract. Most supply contracts are with the operator of the facility rather than its controlling corporation. This change helps to enable a more efficient and effective pass through of carbon liability in contracts (as the controlling entity will not need to be a party to the contract). Under the CPRS, there was some criticism from stakeholders that the legislation did not clarify where exactly in the supply chain the carbon cost would sit (i.e. CPRS legislation did not set out the specific circumstances where the costs could be passed through). The Government has not changed this key policy position in the design of the Scheme, such that stakeholders will need to continue to rely on the terms of existing supply contracts to determine which party bears the carbon costs. This is a particular issue for existing supply contracts that do not include a carbon pass through mechanism or other trigger for price review (i.e. change of law).
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Feature
3.2 Natural gas Natural gas will be treated differently under the Scheme. Natural gas suppliers will be responsible for emissions from the use of natural gas unless such liability is taken on by 'large gas consuming facilities'. Large gas consuming facilities are those facilities that have, in a financial year after 1 July 2010, combusted natural gas with a carbon dioxide equivalent of 25,000 tonnes or more. The Clean Energy Bill provides that particular amounts of natural gas may be 'netted out' from an OTN holder's Preliminary Emissions Number (PEN), as the OTN holder's PEN is reduced by the netted-out numbers. 3.3 OTNs This is a mechanism designed to manage scheme obligations between upstream fuel suppliers and direct emitters so as to avoid double-counting of emissions and gaps in coverage. It allows obligations to be transferred from upstream suppliers of fuels to intermediate suppliers and end users. If an entity quotes a valid OTN to an upstream supplier, the supplier is relieved of liability for the relevant supply, and the potential liability is transferred to the entity that quoted the OTN.
Legislation
Clean Energy Bill: Part 3 Division 3 Liability for the supply of natural gas distributed through a supply pipeline is placed on the supplier unless such liability is held by 'large gas consuming facilities' or an OTN is quoted (ss.33 and 35). Liability for the use of natural gas is also placed on a 'large gas consuming facility' that meets or exceeds a carbon dioxide equivalent threshold. (sections 20 and 55A). An OTN holder's PEN can be reduced by netted-out numbers (ss 35(4) (9)). Clean Energy Bill: Part 3 Division 4
Analysis
Liability will generally be imposed on natural gas suppliers for the natural gas they supply or 'large gas consuming facilities'. This is intended to achieve comprehensive and efficient coverage of emissions from natural gas. The liability of 'large gas consuming facilities' promotes legal certainty, as it ensures that facilities do not fluctuate in and out of coverage from year to year, and can therefore better predict their likely liability under the Scheme. The netting out possibility under the Bill ensures that double counting of liability is avoided in situations where a facility purchases natural gas by an entity other than the facility operator, by ensuring that where an OTN is quoted for natural gas, the liable entity has ultimate liability. The obligation transfer number mechanism that was developed under the CPRS which had intended to include the transport sector will now only be used to provide for the voluntary transfer of carbon price liability (from natural gas retailers to large gas customers) in certain circumstances.
This part provides for the application by a person who is supplied natural gas by a retailer to obtain an OTN or for the Regulator to issue an OTN of its own initiative (ss.40-41). The Regulator must publish on its website a list of OTNs that have been cancelled or For certain supplies, a retailer must accept the quotation surrendered. (s.43A). of an OTN. Those circumstances include where gas is An OTN is not transferrable (s.44). supplied under a contract entered into before the Royal Assent to the Bill; and where gas is used as a feedstock The Regulator will keep a register of OTNs or where more than 25,000t CO2e per year is attributable which shall include a list of natural gas retailers to the use of the gas supplied. who are willing to accept quotation of OTNs (s.45). Subdivisions B provides the method for quotation of an OTN. An OTN may be quoted in respect of supplies of natural gas to large users (s.56); where natural gas is used as a feedstock (s.57); for use in manufacturing compressed natural gas, LNG or LPG (s.58).
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Feature
Key policy element
Legislation
Provision is made for the quotation for single supplies and for a class of supplies. It is an offence to make a false or misleading declaration when quoting an OTN (s.62). It is also an offence to quote an OTN where such a quotation is not permitted by the Act (s.63).
Analysis
3.4 Joint Ventures
Where joint ventures exist, specific provisions have been adopted to clarify how liability will be shared between joint venture participants.
Clean Energy Bill: Part 3 Division 5 If a joint venture agreement applies to a facility and 2 or more participants could satisfy the operational control test in relation to the facility and no declaration under s.55 or 55A of the National Greenhouse and Energy Reporting Act 2007 (NGER Act) has been made (i.e. voluntary nomination) then the joint venture will be a mandatory joint venture (s.65). The participants in a mandatory joint venture must notify the Regulator that that they are participants for the facility (s.66) and request an application for a participating percentage determination for the joint venture pursuant to s.74. Where a joint venture that is not a "mandatory designated joint venture" (s.65) has a facility which is operated exclusively for the joint venture by a person (who may be a participant in the joint venture) and the parties in the joint venture are parties to an agreement that deals with the facility and none of the participants in the joint venture are an individual it will pass the joint venture declaration test (s.67).
The Bill defines a joint venture as an unincorporated enterprise carried on by 2 or more persons in common other than in partnership. Partnerships have not been treated in the same way as joint ventures. This means that one of the partners will need to nominate that is has operational control of a facility operated by the partnership and take on full liability for compliance. The mandatory joint venture declaration provisions are intended to mandatorily apportion liability where operational control is shared and the parties have not sought a declaration from the GEDO under the NGER Act. The voluntary joint venture declaration provisions are intended to enable participants in a joint venture to transfer liability from the operator of the facility to the joint venture participants in accordance with their percentage share with the operators' consent. Penalties will apply if a mandatory joint venture does not notify the Regulator of its arrangements by 31 July 2012 or within 30 days of the joint venture coming into existence. Mandatory joint ventures that cease to exist after 1 July 2012 must notify the Regulator of the cessation within 30 days of the cessation.
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Feature
Key policy element
Legislation
A joint venture that passes the joint venture declaration test may apply, with the consent of the operator, to have the joint venture declared a voluntary designated joint venture (s.68) and have a provisional participating percentage declaration made (s.73). Clean Energy Bill: Part 6 Division 4 If a declaration is in force regarding a joint venture, a person who has consented to the making of the application for the declaration is taken to have guaranteed payment of the unit shortfall charge and any penalty amount (s.139)
Analysis
3.5 Liability transfer
As was provided in the CPRS, the operator of a facility will be able to apply for a liability transfer certificate to transfer liability for emissions from that facility to: another member of its corporate group; a person outside of its corporate group that has financial control over the facility (excluding individuals or foreign entities); or unincorporated joint venture participants in proportion to their interest in the facility where the facility is operated for the unincorporated joint venture.
Clean Energy Bill: Part 3 Division 6 The Bill allows liability for emissions to be transferred between entities via a system of liability transfer certificates. Certificates can be issued in two situations: (i) Within a corporate group: A liability transfer certificate will enable the transfer of liability from one member to another member of the controlling corporation's corporate group (s.83). (ii) To an entity with financial control: Liability may be transferred from the facility operator to an entity that has financial control of the facility (s.84).
The ability to transfer liability between members of a corporate group or between the operator of a facility and the entity with financial control of the facility will enable corporations to manage liability in the most cost effective manner. In the contract operator context, this means that corporations with financial control can avoid additional costs associated with managing the carbon liability being passed on. In the corporate group context, corporations can streamline their purchasing and surrender obligations. The liability transfer mechanism does not necessarily overcome issues associated with managing carbon cost pass through or the application of change in law clauses in supply contracts as the decision to accept the transfer of liability remains voluntary.
All reporting obligations under the NGER Act (including reporting of greenhouse gas emissions, energy production and energy consumption data), The regulator must not issue a liability transfer certificate unless the applicant has, and is likely in relation to the facility for which a liability transfer to have, the capacity, access to information and certificate is issued, will be transferred to the financial resources to comply with the holder of the liability transfer certificate. obligations under the Bill (s.83(3), s.87(3)).
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Feature
Key policy element
Legislation
A liability transfer certificate issued remains in force indefinitely (s.88(3)). However, a certificate may be surrendered with the written consent of the Regulator (s.89) or cancelled by the Regulator (s.90). If a declaration is in force regarding a liability transfer certificate, a person who has consented to the making of the application for the certificate is taken to have guaranteed payment of the unit shortfall charge and any penalty amount (s.138)
Analysis
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4.
Carbon units
Summary
Name
CU Carbon Unit
(also known as an Eligible Emissions Unit)
Source
Clean Energy Bill (s.94)
Use in fixed price period

100% use for compliance liability.
Use in flexible price period

100% use for compliance liability (subject to availability of units under the cap).
Freely allocated to liable entities eligible under the Jobs and May be purchased at auction. Competitiveness Program; or Part 8 of Freely allocated to liable entities eligible under the Jobs the Bill (coal-fired electricity and Competitiveness Program; or Part 8 of the Bill (coalgeneration). fired electricity generation). If no free allocation then must Subject to a price ceiling and price floor in the first three purchase from the Regulator at the years of the flexible price period. fixed charge rate. Unlimited banking allowed. No trading or banking of units as units automatically surrendered upon Limited borrowing allowed: in any particular compliance purchase. year, surrender of carbon units from the following vintage year to discharge up to 5% of liability. CFI Carbon Credits (Carbon Farming Initiative) Bill (s.5) See Eligible ACCU below. See Eligible ACCU below.
Kyoto ACCU Australian Carbon Credit Unit (Kyoto-consistent) Non-Kyoto ACCU Australian Carbon Credit Unit (non Kyoto-consistent)
CFI Carbon Credits (Carbon Farming Initiative) Bill (s.5)
Not able to be surrendered to acquit compliance liabilities unless would otherwise have been issued as a Kyoto ACCU, in which case subject to restriction below. May be sold to the Government's land management fund.
Not able to be surrendered to acquit compliance liabilities unless would otherwise have been issued as a Kyoto ACCU, in which case subject to restriction below. May be sold to the Government's land management fund.
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Name
Eligible ACCU Eligible Australian Carbon Credit Unit (also known as an Eligible Emissions Unit) Clean Energy Bill (s.5) Kyoto ACCU non-Kyoto ACCU that would have otherwise been issued as Kyoto ACCUs ACCUs specified in the Regulation (can be converted into Assigned Amount Units) Eligible International Emissions Unit (also known as an Eligible Emissions Unit) CFI Australian National Registry of Emissions Units Bill (s.4) / Kyoto Rules a CER (other than a temporary certified emission reduction or a long-term certified emission reduction or generated in respect of an excluded emission reduction project type, e.g. HFC23) an Emission Reduction Unit (ERU) a Removal Unit (RMU) a prescribed unit issued in accordance with the Kyoto Rules a non-Kyoto International Emissions Unit (e.g. from another ETS)

Eligible for surrender to acquit up to 5% of compliance liability. No limitation of banking. Can be converted to an RMU / AAU for export during Kyoto Protocol's first commitment period.

Eligible for surrender to acquit up to 100% of compliance liability. Not subject to floor price or floor cap.
0% use for compliance liability.
Eligible for surrender to acquit up to 50% of compliance liability. If acquired CERs or ERUs issued prior to 31 December 2012 can be carried over subject to Kyoto Protocol limitations.
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Name
CER Certified Emission Reduction
Source
CFI Australian National Registry of Emissions Units Bill / Kyoto Rules Clean Energy Bill (s.123)

Not able to be surrendered to acquit compliance liability.

Eligible for surrender to acquit up to 50% of compliance liability subject to qualitative restrictions provided for in regulations. Subject to a price ceiling and price floor in the first three years of the flexible price period.
ERU Emission Reduction Unit (being a unit issued from a Joint Implementation Projects) RMU Removal Unit (being a unit issued by an Annex I Party with respect to sequestration from land use, land use change and forestry activities)
CFI Australian National Registry of Emissions Units Bill (s.4) / Kyoto Rules
Eligible for surrender to acquit up to 50% of compliance liability.
CFI Australian National Registry of Emissions Units Bill (s.4) / Kyoto Rules
Eligible for surrender to acquit up to 50% of compliance liability.
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Feature
4.1 Characterisa tion of carbon units
Key policy element

The domestic unit for compliance with the Scheme will be the carbon unit.
Legislation
Clean Energy Bill: Part 4 The Regulator shall issue carbon units on behalf of the Commonwealth (s.94). Each carbon unit shall have a unique identification number and will have a vintage year (for each financial year) (ss.95-96).
Analysis
The total number of carbon units allocated for free or at auction during the flexible price period will be equal to the pollution cap. This means that any units from the CFI or eligible international units imported will be in addition to the cap. All liable entities and auction participants must have an account in the Registry, in which Kyoto units and Australian emissions units will be held.
Carbon units of a particular vintage may be issued at any time before 1 February of the year Legislative backing for the National Registry of Emissions following the vintage year (s.97). Units (Registry) is provided in the Australian National Registry of Emissions Units Bill 2011. The mechanical Carbon units shall be issued into the Registry details about account opening procedures and unit account kept by the person purchasing or transfers will be contained in regulations. otherwise entitled to the unit (s.98). The Regulator must not issue a carbon unit other than as a result of an auction; or the provisions of s.100 which provides the fixed charge units; or the Jobs and Competitiveness Program; or Part 8 of the Bill (coal-fired electricity generation) (s.99). The charge for units of a particular vintage year is specified in s.100 of the Bill. The Regulator must ensure that the total number of units with a particular vintage year that are auctioned or freely allocated equals the carbon pollution cap for that vintage year (s.102)
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Feature
4.2 Treatment of Carbon Units
Key policy element

The registered holder of a carbon unit is the legal owner of the unit and may deal with the unit as a financial product. The regulations may make provision for the registration of equitable interests in relation to carbon units.
Legislation
Clean Energy Bill: Part 4 Division 3 The legal owner of the unit is the registered holder of the unit (s.103A) A carbon unit is personal property and is transmissible by assignment, by will and by devolution by operation of law (s.103).
Analysis
The legal properties of carbon units under the Scheme are broadly consistent with the proposed approach under the CPRS, notably in that they will be personal property regulated as financial products in respect of which equitable interests and security may be taken. ACCUs under the CFI also share these properties. This will facilitate the creation of markets in derivatives and other financial products for carbon units and ACCUs.
The Regulations may provide for the registration of equitable interests in carbon units (s.109A). Persons wishing to market, deal or otherwise provide a financial service in relation to ACCUs, eligible The Bill will not affect the creation of; or any international emissions units and carbon units will need to dealings with; or the enforcement of; equitable comply with the licensing and disclosure regime set out in interests in relation to a carbon unit (s.110). Chapter 7 of the Corporations Act 2001. In other words, they will need to hold an Australian Financial Services If the operation of the Bill would result in the Licence (AFSL) with the relevant permissions from ASIC acquisition of property otherwise than on just and will need to produce a Product Disclosure Statement terms, the Commonwealth has to pay (PDS) and Financial Services Guide (FSG), where reasonable compensation (s.308). applicable. For further details, see here. Similar treatment is also afforded to ACCUs The provision of certainty for property rights relating to under the Carbon Credits (Carbon Farming carbon units will promote confidence in the integrity of the Initiative) Bill 2011. units and reduce uncertainty for their holders. Such Paragraph 11 of Schedule 1 to the Carbon confidence, in turn, is likely to flow into the development of Credits Bill and cl. 260 of the Clean Energy the market for carbon units. The creation of secure (Consequential Amendments) Bill amend property rights for carbon units is in line with international Section 764A(1) of the Corporations Act 2001 developments, similar provisions having been made for and adds the following to the list of specific ACCUs, Kyoto units and prescribed international units in things that are financial products: consequential amendments to the CFI Act and ANREU Act. (i) ACCUs; (ii) eligible international emissions units; and (iii) carbon units. Once units have been issued, if the Government were to cancel those units other than in accordance with the Bill, it may be liable to compensate to the holder of the unit.
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5.
What is a liable entity's surrender obligation?

Key policy element
During the fixed price period, most liable entities will be required to discharge their emissions obligations through a "progressive" surrender obligation of 75% of their obligation by 15 June in the relevant compliance year and a 'true up' of the remaining 25% by the following 1 February. During the flexible price period only the 1 February deadline will apply. A single compliance date of 1 February will apply in respect of direct emissions for: facilities that reported emissions of less than 35 kilotonnes CO2-e in the previous year's NGERS report, or was not required to provide an NGERS report in the previous year; or facilities that are expected to have emissions of less than 35 kilotonnes CO2-e in the current compliance year.
Feature
5.1 Timing for compliance
Legislation
Clean Energy Bill: Part 5 A liable entity will have an "emission number" for each eligible financial year. The provisional emissions number will be based on a liable entity's NGERs report (if made in accordance with the NGER Act) or otherwise as assessed by the Regulator (ss.119-120) The registered holder of one or more eligible emissions units may surrender any or all of those units to the Regulator during the eligible financial year (s.122(1)). A carbon unit must not be surrendered in relation to an eligible financial year unless that year is immediately preceding, the same or a later vintage as the unit (s.122(4)). A carbon unit must not be surrendered in relation to an eligible financial year that is a fixed charge year unless the unit has the vintage year of that financial year (s.122(6)). Carbon units that were issued for free may also only be surrendered in the eligible financial year that is the vintage year (s.122(7)).
Analysis
The legislation does not address whether, in the event of a shortfall, liable entities which pay the emissions charge will also be liable to acquit carbon units in the following compliance period to make up the shortfall (as is required in the EU ETS and was proposed under the CPRS). In the absence of a make good provision in the Bill, we can assume it will not be imposed. No formula has been provided for the calculation of market prices during the flexible price period for the purposes of determining emissions charges. It is most likely that these would be calculated on the basis of auction prices. This will need to be clarified in the regulations. This will be important to entities which need to quantify compliance risks. Section 114 of the Bill establishes the process for determining the benchmark average auction charges (see Table 7.4).
5.2 Unit shortfall charges
An emissions charge will apply in respect of failures to acquit obligations. This will be 1.3 times the fixed price for carbon units during the fixed price period and double the annual average price of carbon units during the flexible price period.
Clean Energy Bill: Part 6 Division 3 The Unit Shortfall charge is defined as a charge imposed by either Part 3 of the Clean Energy (Charges Excise) Bill 2011 or Clean Energy (Unit Shortfall Charge General) Bill 2011.
Unit short fall charges are imposed through the Charges Bill to ensure compliance with s.55 of the Constitution.
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Feature
Key policy element
Legislation
Unit shortfall calculations for the fixed price period are provided for under ss.128 -132 of the Bill; and for the flexible charge year under s.133 of the Bill. If a person has a unit shortfall under s.125 for a fixed price year, the unit shortfall charge is due and payable 5 business days after 15 June in the fixed charge year. If a person has a unit shortfall under s.128 or 129 for a fixed price year, or s.133 for a flexible year, the unit shortfall charge is due and payable 5 business days after 1 February next following the fixed charge year. If a unit shortfall charge payable remains unpaid after the time it was due and payable, a penalty, calculated at the rate of 20% or such other amount prescribed by the regulations, will be applied to the amount (s.135) unless the Regulator uses its discretion to remit a portion of the shortfall charge (s.134A).. The Regulator will have discretion to remit the whole or any part of a penalty amount if satisfied that the person did not contribute to the delay in payment and had taken reasonable steps to mitigate the cause of the delay. (s.135(2).) A penalty amount (of a kind specified by the regulations) may be set off against an amount owed by the Commonwealth to the person (s.137). The Regulator may extend the surrender deadline in circumstances where there have been malfunctions in the Registry computer systems or other telecommunications facility services (s.142).
Analysis
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6.
How does the scheme work in the fixed price period?

Key policy element
During the fixed price period the carbon price will start at $23 p/tonne and increase by 2.5% each year to $24.15 in 2013-14 and to $25.40 in 201415. Liable entities may purchase carbon units from the Government at the fixed price, up to the number of their emissions each compliance year (being 1 July to 30 June). Any carbon units purchased at the fixed price will be automatically surrendered and cannot be traded or banked for future use.
Feature
6.1 Starting price and the fixed price period
Legislation
Clean Energy Bill: Part 4 When making an application for carbon units in accordance with s.100 the number of carbon units requested must not exceed the person's total interim or final emissions number for the vintage year less the total number of eligible emissions units surrendered by that person for the vintage year. Carbon units issued in accordance with s.100 will be automatically surrendered.
Analysis
During the fixed price period, liable entities will need to satisfy their compliance obligations by either purchasing carbon units (for immediate surrender) from the Government at the fixed price in each compliance year, or surrendering domestic ACCUs created from eligible offset projects under the CFI. The 5% limitation on the use of Kyoto-compliant ACCUs to meet liabilities during the fixed price period (see Table 8.1) effectively means that during this period the fixed price will also become an effective price cap for Kyoto-compliant ACCUs. Carbon permit prices are still likely to set prices for Kyotocompliant ACCUs and international credits during flexible price period despite unlimited use of Kyoto-compliant ACCUs and a 50% limitation on eligible international units (see Table 9). This is because traded volumes in carbon units will be higher than traded volumes in Kyotocompliant ACCUs and international credits traded into and within the Australian market. Once the Scheme is legislated, it is expected that Scheme and other market participants will start to look at some forward purchasing of Kyoto-compliant ACCUs and international credits (including CERs) ahead of surrender deadlines.
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Feature
6.2 Free allocation of units
Key policy element
Legislation
Analysis
Clean Energy Bill: Part 4 Division 5 Carbon units freely allocated may be either Under the Regulations applications for the allocation of surrendered or traded until the true-up date for the free carbon units under the Jobs and Competitiveness Unused free carbon units issued in accordance compliance year in which they were issued. Program must be made no later than 31 October in the with the Jobs and Competitiveness Program or They cannot be banked for use in a future relevant financial year. The Government has indicated Part 8 of the Bill (coal-fired electricity compliance year. that 75% of the allocations for direct emissions and all of generation) with a vintage year that is a fixed the allocations for indirect emissions will be issued early in charge year shall be cancelled if still in a The holders of freely allocated carbon units will be the compliance year, likely prior to 1 September. Registry account at 1 February of the year able to sell them to the Government from 1 following the vintage year for that carbon unit September to 1 February of the following We note that once the units are issued into the Registry (s.115) compliance year (at a slight discount to reflect the account of the holder they may be transferred in present market value). accordance with the rules provided for under the During the period 1 September in a vintage year Australian National Register of Emissions Units Bill. At until 1 February the year following the vintage this stage, we are not aware of any restrictions on transfer year, a person may request that the Regulator (beyond limitations on use of units in subsequent vintage cancel free units in exchange for a buy-back years see Table 5.1). amount. The buy-back amount is calculated by reference to the fixed charge for the vintage year x factor specified in the regulations x the number of units (s.116)
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7.
How does the scheme work in the flexible price period?

Key policy element
The Scheme will transition to a flexible price capand-trade emissions trading scheme on 1 July 2015, with the first five years of pollution caps being set in the 2014 Budget and tabled in regulations by 31 May 2014 (based on, among other things, the recommendations made by the Climate Change Authority). The pollution cap will be extended by one year every year in regulations from 2015-16, such that five years of known caps will be known at any one time. In the event that the Parliament disallows the regulations, the legislation will provide for a default pollution cap to ensure that emissions are reduced in absolute terms each year by a specified amount consistent with meeting the Government's Target.
Feature
7.1 Transition arrangement s and setting pollution caps
Legislation
Clean Energy Bill: Part 2 The Bill provides for the setting of annual pollution caps for the flexible charge years through regulations (s.14). In making recommendations to the Governor-General, the Minister must have regard to the matters listed in s.14(2), including Australian's international obligations; the most recent report of the Authority that deals with pollution caps; medium and long-term targets, progress to achieving emission reductions, economic and social implications associated with various levels of pollution caps, voluntary action, compliance issues and other relevant matters. The regulations are disallowable instruments, meaning that either House of Parliament may, following a motion on notice, pass a resolution disallowing the regulations (s.15).
Analysis
The default position in the event that the Parliament rejects the tabled pollution cap regulations in any year is a linear reduction in pollution caps out to 2020 consistent with meeting the agreed unilateral Target of 5% reductions below 2000 levels. Unlike the European Union's Emissions Trading Schemes (EU ETS), the Scheme will not operate in phases. (Under the EU ETS pollution caps were set at the start of each phase for the relevant period, being, 2005-07 (Phase I), 2008-12 (Phase II) and 2013-20 (Phase III)).) Under the Scheme, from 2015-16, pollution caps will be set annually to maintain five years of known caps at any given time (either via regulations or the default mechanism). This will prevent price shocks (as was seen in the rolling over of Phase I to Phase II of the EU ETS) and provide investment certainty to market participants as it will be possible to determine the volume (i.e. scarcity) of carbon units and the forward price curve over the medium term.
If no regulations are in effect that declare the However, in the lead up to the start of the flexible price carbon pollution cap, for the flexible charge year period, liable entities will only know what the pollution beginning 1 July 2015, the cap will be the total caps for the first five years in the flexible price period will emissions number for the 2012 financial year, be around 13 months ahead of the start of the flexible less 38,000,000 (s.17). price period. Whilst data under the existing National Greenhouse Emissions and Energy Reporting scheme For subsequent years, the cap will be the (NGERs) will provide liable entities with a reasonable lead carbon pollution cap number for the previous time to establish its carbon pollution baseline, the flexible charge year less 12,000,000 (s.18). announcement of the first five year caps will not provide liable entities with a long lead time to know how many carbon units will be available for auction and, if required, source and enter into forward contracts for (domestic or international) offset credits.
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Feature
Key policy element
Legislation
Analysis
The Climate Change Authority will be set up as an independent body and will have an important role to play in recommending pollution caps and balancing economic and social impacts with meeting the 2020 Target.
7.2 Flexible price architecture price ceilings and floors
A price ceiling will apply for the first three years of Clean Energy Bill: Part 4 Division 4 the flexible price period, set at $20 above the The Regulator will prescribe the unit charge for international price and will rise by 5% in real terms the financial year 2015 in the regulation. The each year. A price floor will apply for the first three unit charge for the financial years 2016 and years of the flexible price period. The price floor 2017 will be determined by multiplying the per will start at $15 and rise at 4% in real terms each unit charge applicable in the previous year by year. 1.07625 (s.100). This will effectively set the price ceiling. Price floors will be set through the auction process. The amount of the charge payable at auction shall be the amount the person indicated or The fixed price charges for the first three years of declared, in the course of the auction, that the the flexible price will effectively operate as the person would be willing to pay by way of charge price cap. for the issue of the units is not less than the floor price for that vintage year (starting at $15 for the 2015 vintage year) (s.111).
The price ceiling and price floor will operate only for the first three years of the flexible price period. This is designed to help prevent major price shocks and should assist in offering market participants with enough price certainty to encourage investment over the required medium - long term horizon. The Policy Package suggested that the price ceiling would be set by reference to the international market price. This is not addressed in the Bill, however further details are expected in the regulations. The price floor is expected to apply to eligible international units imported for compliance. This means that if eligible international units are purchased below the floor price, the holder of the unit will need to pay a top up to the government for the difference between the reference international price and the floor price. The methodology for determining and then applying the international reference price will be in the regulations.
7.3 Flexible price architecture Banking and Borrowing
Unlimited banking of carbon units will be allowed in the flexible price period.
Clean Energy Bill: Part 6 Division 3
During the flexible price period, surplus surrender units from a previous financial year Limited borrowing of carbon units will be allowed may be used for compliance (s.133(5)) in the flexible price period such that, in any banking. particular compliance year, liable entities can surrender carbon units from the following Up to 5% of carbon units with a vintage year vintage year to discharge up to 5% of their liability. that follows the eligible financial year may be surrendered. Carbon units from the subsequent vintage year that exceed that threshold will be applied to the next eligible financial year (s.133(6)).
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Feature
Key policy element
Legislation
Under certain circumstances, a person's surplus surrender number may be reduced (133(8)).
Analysis
7.4 Flexible price architecture Auctioning
Carbon units will be auctioned (with the exception of those that are freely allocated) by advance auctioning of future vintage carbon units (with no deferred payment arrangements). There will be advance auctions of flexible price carbon units in the fixed price period. There will be no double-sided auctions of carbon units (i.e. liable entities who are over-allocated carbon units will not be able to sell them on the market). If carbon units are relinquished, the Regulator may, on behalf of the Commonwealth auction the units.
Clean Energy Bill: Part 4 Division 4 Not more than 15 million carbon units will be issued with a particular vintage as a result of auctions if there are no regulations in effect that declare the pollution cap (s.101). The Minister may, by legislative instrument, determine the policies, procedures and rules that apply in relation to the auctioning of carbon units by the Regulator (s.113). Units shall only be issued as a result of the auction process once the person has paid the charge for the units or has lodged a deposit and tendered the balance of the total amount of the charge (s.111). Section 114 sets out the formula for establishing the benchmark average auction charge for all auctions in a financial year and the last auction for a financial year.
Under the CPRS, monthly auctions were scheduled in respect of carbon units for the current compliance year and the three subsequent years. Auctions were to be conducted on an "ascending clock" basis whereby bidders indicated the number of carbon units they were prepared to purchase at the Government's published price and if demand exceeded supply, the auctioneer raised the price in the next round where bidders resubmitted their bids (and the process continued until the number offered was equal to or greater than demand, and bidders were to pay the price set at the previous round). The government has not yet determined what method will be adopted for the auctions or the frequency with which it will hold auctions; however the Determination made under s.113 is expected to address matters such as reserve prices, deposits, security, guarantees etc.
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8.
Access to domestic and international offsets

Key policy element
ACCUs issued under the CFI may be used for compliance if they are: Kyoto-compliant; non-Kyoto compliant but would have been compliant had underlying abatement occurred before the end of the first Kyoto Protocol commitment period at the end of 2012; or prescribed in the regulations. The Scheme will not limit the export of ACCUs and the CFI rules provide for the exchange of ACCUs for international units. The Government has also announced funding of $250 million over 6 years from 2012-13 for the purchase of non-Kyoto compliant ACCUs. It is expected that this will increase incentives for purchases of non-compliant credits generated by activities including soil carbon, revegetation and cessation of logging in native forests. The Government has also announced the $429 million Carbon Farming Futures Fund, which will fund: research into abatement technologies and practices; the development of estimation methodologies; on-farm physical abatement; and the employment of new extension officers to help farmers to benefit from carbon farming.
Feature
8.1 Carbon Farming Initiative eligibility
Legislation
Clean Energy Bill: Part 1 and Part 6 Division 2 Eligible emissions units are defined as a carbon unit, an eligible international emissions units, or an eligible ACCU. Eligible ACCUs are defined by reference to the Carbon Credits (Carbon Farming Initiative) Bill 2011. The surrender limit for eligible ACCUs during the fixed charge years is limited to 5% of the emissions number of the person for the eligible financial year (s.128(7)). There is no equivalent provision during the flexible charge years as unlimited eligible ACCUs may be surrendered.
Analysis
The CFI will provide a mechanism for the generation of carbon credits from land-based carbon offsetting and emissions avoidance activities. Kyoto-compliant offsetting activities (e.g. reforestation) will be eligible to generate Kyoto-compliant ACCUs for sequestration or abatement from 1 July 2010. Other eligible activities will be able to generate non-Kyoto compliant ACCUs for sale into voluntary markets and to the Government's land management fund. The scheme also provides for the import and export of ACCUs and international carbon credits. Legislation to introduce the CFI was introduced into the House of Representatives on 24 March 2011 and is under consideration in the Senate. The Government has indicated an intention to revisit the Scheme after 2012 to potentially allow liable entities to surrender all ACCUs created under the CFI (both Kyoto and non-Kyoto compliant ACCUs). In the context of potential restrictions on forward contracting for international credits (see Table 8.2), Kyotocompliant ACCUs may provide a source of offsets. Incentive for the development of high environmental quality projects will be provided by the inclusion in the policy package of a mechanism for biodiversity conservation grants through the Biodiversity Fund (though project developers will need to approach CFI additionality requirements with care in seeking to access any such grants).
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Feature
8.2 International linking
Key policy element

It will not be possible to use international units to acquit surrender obligations during the fixed price period and nor will the export of domestic carbon units other than Kyoto ACCUs be permitted. During the flexible price period certain CERs, Emission Reduction Units (ERUs), Removal Units (RMUs) and other units permitted by regulation may be used to acquit surrender obligations, but only up to 50% until 2020, unless this is modified by the Climate Change Authority after 2016. It is important to note that some sub-types will not be useable, including tCERs, ICERs, units from nuclear projects, the destruction of trifluoromethane (also known as HFC-23), the destruction of nitrous oxide from adipic acid plants and large-scale hydroelectric projects not consistent with EU criteria (principally the World Commission on Dams guidelines). The Government may disallow the use of some international units to ensure the environmental integrity of the Scheme. No international linking to other domestic schemes is expected initially but may be considered by the Government on the basis of criteria including compatibility, international acceptability and adequacy and comparability of key design elements.
Legislation
Clean Energy Bill: Part 6 Eligible international units are defined in the Australian National Registry of Emissions Units Bill (s.4) / Kyoto Rules as being: a CER (other than a temporary certified emission reduction or a long-term certified emission reduction or generated in respect of an excluded emission reduction project type, e.g. HFC-23); an Emission Reduction Unit (ERU); a Removal Unit (RMU); a prescribed unit issued in accordance with Kyoto Rules; or a non-Kyoto International Emissions Unit (e.g. from another ETS). Eligible international units must not be surrendered in relation to an eligible financial year that is a fixed charge year (s.122(8)). Eligible international emissions units must not be surrendered if the surrender would breach regulations made for the purposes of s.123(1). Those surrender restrictions relate to the potential for the regulations to prohibit the surrender of certain types of eligible international emissions units.
Analysis
The ability of liable entities to procure lowest-cost abatement is strengthened by their ability to use most types of CERs, ERUs and RMUs. This is likely to also enhance the liquidity and depth of Australian markets. The quantitative limits applying in respect of the use of such credits are generous compared to those that apply in the EU ETS. The excluded sub-types are generally consistent with the general approach taken in other schemes, notably the EU ETS, except that the some additional eligibility requirements attach to the use of CERs generated after 2012 in the EU ETS, including that they be generated in respect of projects registered under the Clean Development Mechanism registered before the end of 2012, that the projects be situated in Least Developed Countries, or that the Host Country have a bilateral agreement with the EU in respect of hosting CDM projects. The market will need to consider how it manages risk around changing eligibility with reference to the Government's right to disallow the use of any type of international unit at any time. Presumably this condition has been included to enable the Government to respond quickly to changes in international accreditation standards. However, it has the potential to create uncertainty for market participants wishing to contract on a forward basis for the purchase of international units for use in the Scheme. They may therefore be required to pay higher prices to purchase on a spot-, semi-spot or best efforts basis.
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Feature
Key policy element
Legislation
Section 123 specifies the matters that the Minister may have regard to when making a recommendation to the Governor general to restrict the use of units including Australia's international objectives ; international obligations; the environmental integrity of the Act; reports from the ACA; and the extent to which other international schemes such as the NZ ETS and the EU ETS restrict the use of those units, The surrender limit for eligible international emission units (50%) is prescribed by s.133(7) of the Bill.
Analysis
Purchasers will likely address this risk by seeking to purchase international units generated in respect of projects with high environmental value, which will be less likely to be disallowed, and otherwise manage this risk under forward contracts. Potential pricing issues relating to international linking are discussed in 'Starting price and the fixed price period' above.) Another issue relevant to pricing will be potential limitations in post-2012 CER supply. If the Government does elect to link the Scheme to other international schemes during the fixed price period, this may result in market distortions given that the largest scheme, the EU ETS, which accounted for almost 85% of global trading value in 2010 (World Bank, 2011), does not include fixed pricing. Kyoto Protocol parties can carry over up to a maximum of 2.5% of CERs between Kyoto Protocol Commitment periods; this may make it possible to bank CERs after 2012.
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9.
Tax treatment
Key policy element
The cost of a unit will be deductible, with the deduction effectively being deferred through the rolling balance method until the unit is sold or surrendered. The proceeds of selling a unit will be assessable income on revenue account in the income year the unit is sold. The legislation contemplates carbon units being valued at market value for taxation purposes for some internal transfers, import and export of carbon units. The legislation also provides that supplies of carbon units under the Scheme will be Goods and Services Tax (GST)-free. However, the normal GST rules will apply to transactions involving financial derivatives of carbon units and the payment of grants. Other significant elements of tax treatment under the Scheme include: Proceeds from selling units will be assessable in the year of sale. Purchasers of units will be deemed to have received market value for a unit in certain circumstances (e.g. transactions between related entities). Company tax deductions will be allowed for the cost of acquiring units but the benefit of any such deductions will be deferred until the year in which the unit is surrendered or sold. In relation to the valuation of units held at the end of financial years, unit holders of units will be required to elect a valuation method from
Feature
9.1 Tax treatment
Legislation
Clean Energy (Consequential Amendments) Bill Schedule 2 will amend the following taxation legislation: A New Tax System (Goods and Services Tax) Act 1999 (s.38-590); Income Tax Assessment Act 1936; and Income Tax Assessment Act 1997 (notably ss.410-1, 420-15, 420-25, 420-42, Subdivision 420D).
Analysis
The GST treatment of carbon units is consistent with the approach adopted under the CPRS. In relation to valuation methods, the default application of the cost valuation method has the potential to expose some unit holders to the risk of fluctuations in market prices. Holders of units under the Scheme should carefully consider the taxation treatments of the units that they hold to ensure that the valuation method they select is appropriate to their circumstances. We will release more detailed information on the taxation treatment of carbon units under the Scheme.
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Feature
Key policy element

either cost or market valuation methods. The default method will be cost. Unit holders will be able to change valuation methodology once during the fixed charge period and will have limited ability to change during flexible charge years.
Legislation
Analysis
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10. What assistance is available to industry?

Feature
10.1 Industry assistance EITEs
Key policy element

Under the Jobs and Competitiveness Program, free carbon units will be allocated to entities engaged in emissions-intensive trade-exposed activities, based on trued-up production in the immediately preceding year. It is intended that businesses will receive assistance for their direct emissions as well as the cost of their indirect emissions from electricity and steam use, and the cost increases for upstream emissions from natural gas and its components (for example, methane and ethane) used as feedstock and sequestered in the output of the activity. Carbon units will be allocated in respect of direct and indirect emissions. During the fixed price period, 100% of carbon units allocated in respect of indirect emissions and 75% of carbon units allocated in respect of direct emissions will be provided early in each compliance period, with the remaining 25% of carbon units for direct emissions allocated early in the following compliance year. Initial rates of assistance set at: 94.5% of the industry average baseline for activities with an emissions intensity of at least 2,000t CO2-e/$m revenue or at least 6,000t CO2-e/$m value added. 66% of the industry average baseline for activities with an emissions intensity between 1,000t CO2-e/$m and 1,999t CO2-e/$m revenue or between 3,000t CO2-e/$m and 5,999t CO2-e/$m value added.
Legislation
Clean Energy Bill: Part 7 Part 7 provides the basic framework for the Jobs and Competitiveness Program. The program itself is detailed in the Regulations, which the Bill prescribes should be made before 1 March 2012. Part 7 also details a range of reporting and compliance provisions, including the Minister's information gathering powers (in Division 4) and Productivity Commission inquiries (in Division 5).
Analysis
The trade-exposure and emissions-intensity assessment bases are largely consistent with those included in the CPRS, except that under the CPRS the 66% of industry average emissions baselines was calculated on the basis of emissions intensity of 1,000t CO2-e/$m revenue or greater, or 3,000t CO2-e/$m or greater of value added. A lay difference between this package and the CPRS architecture relates to the review period. As discussed in Table 11.1, the initial Productivity Commission review of assistance will be conducted in the third year of the Scheme's operation. Under the comparable CPRS Expert Advisory Committee reviews would have been conducted every 5 years or as otherwise requested by the relevant Minister based on commodity price changes. The Bill does not specify how indirect emissions will be calculated; presumably this will be in accordance with NGERs scope 2 reporting disciplines. The buy-back for unused free EITE carbon units is consistent with the approach adopted in the CPRS, where free 2011-2012 carbon units could be sold for $10 per unit, subject to discounting. Presumably any buy-back under the Scheme will be at a discount to the fixed price, although this has not yet been specified. Potential recipients of EITE assistance will be encouraged that allocations to new EITE entrants will not affect those made to existing EITE assistance recipients. Further detail regarding the baseline methodology for allocations to new entrants is included in the draft regulations.
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Feature
Key policy element

This assistance will decay at a rate of 1.3% per annum. During the flexible price period, assistance will be provided "early in each compliance year." The Government will provide a buy-back facility for firms in receipt of free carbon units to sell these carbon units back to the Government as outlined above. Trade-exposure will be assessed through quantitative and qualitative tests. Emissions intensity assessment will be based on average emissions per million dollars of revenue or emissions per million dollars of value added. New entities conducting an existing EITE activity will receive the same assistance as existing entities conducting the same activity. Activities new to Australia will be able to apply for EITE eligibility. Assessments and baselines will be made on the basis of international best practice emissions intensity. Allocations to existing entities conducting EITE activities will not be adjusted for allocations to new entrants. Any changes to assistance arrangements that will have a negative effect on business will not occur before the sixth year of the carbon price. Three years notice will be provided for modifications to EITE allocations that will have a negative effect on business. Finally, the Legislative Package also includes funding for structural adjustment innovation (see Table 10.2).
Legislation
Analysis
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Feature
10.2 Industry assistance electricity generation
Key policy element

An Energy Security Fund (Fund) will provide transitional assistance to promote the transformation of the electricity generation sector from high to low-emissions generation. The Fund will comprise:
Legislation
Clean Energy Bill: Part 8 Part 8 sets out the detailed formula for how and when transitional assistance will be supplied to emissions-intensive coal-fired generators. The Bill does not refer to closure contracts for very high emissions-intensive coal-fired generators.
Analysis
There will be a number of plants eligible for closure payments given that the generating capacity of the Yallourn and Hazelwood facilities alone exceeds 2,000MW. The Government has already commenced consultation on this process. Recipients of administrative allocations of free carbon units may be reluctant to include commercial-inconfidence information in Clean Energy Investment Plans, given that these will be made public.
scope for payments for the closure of around 2,000MW of very highly emissions-intensive Free units will be issued from 1 July 2013 for coal-fired generation capacity by 2020; and the next three years. The number of units an estimated $5.5 billion in administrative issued will be capped (s.161). allocation of carbon units and cash over six years in structural adjustment assistance to Before units are allocated, generators must highly emissions-intensive coal-fired generators. apply for a certificate of eligibility for assistance Generators receiving administrative allocations of within 270 days of the commencement of s.162 free carbon units will be required to provide Clean of the Bill (s.162(1)). Energy Investment Plans, which will be made Based on the criteria in s.166 (generation public. complex assistance eligibility test, capacity of A new Energy Security Council will provide advice grid and rounding) the Annual Assistance to the Treasurer on policy approaches to address Factor is determined based on the formula set energy security risks. out in ss.167-168. That is: Under amendments to the Exposure Draft to the Historical Energy x (Emissions Intensity Clean Energy Bill, a person is exempted from 0.86) passing the power system reliability test and The Generator must also pass a power system compiling a Clean Energy Investment Plan in reliability test as specified in ss.169-170. relation to the generation complex if: a person owns, operates or controls a Generators receiving assistance must also generation complex and has entered into a provide Clean Energy Investment Plans to the Minister for Resources and Energy and the contract with the Commonwealth that relates Regulator, which will be made public. to the closure of the generation complex; and
the contract contains a provision to the effect

that the contract is a closure contract for the purposes of the Act in relation to:
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Feature
Key policy element
Legislation
Analysis
the eligible financial year beginning on 1

July 2013;

July 2014;

July 2015; or

July 2016.
10.3 Additional sectorspecific industry assistance not agreed by the MPCCC steel and coal
The Government has indicated that it intends to pursue four additional measures: (i) Application of an effective carbon price to fuel used by heavy on-road transport (see Table 2.2).
The Fuel Tax Legislation Amendments (Clean Energy) Bill 2011 only applies the carbon price to fuel used on-road in light vehicles for business purposes. The Steel Transformation Plan Bill 2011 provides funding for constitutional corporations that manufacture steel in Australia using prescribed methods that produce at least 500, 000 tonnes of crude carbon steel in Australia. Details of the Coal Sector Jobs Package and the Coal Mining Abatement Technology Support Package are not included in the Legislative Package. Funding measures, including the coal sector assistance package will be implemented through the budget process.
These measures are at a very early stage in development because they have not yet been agreed by the MPCCC. These measures will operate in addition to funding and other support provided under the Jobs and Competitiveness Program. Their focus will be on enhancing the transformative ability of the coal and steel sectors in order to maximise their environmental and economic sustainability. In the likely absence of Opposition support for these measures, their development and implementation will be contingent on the Government obtaining the support of the Greens. Initial media reporting suggests that the Greens may support the steel and coal packages but this has not yet been confirmed.
(ii) Steel Transformation Plan (STP): $300 million over five years in structural adjustment assistance to the steel industry, focusing on investment and innovation, including by enhancing environmental sustainability and workforce training. (iii) Coal Sector Jobs Package: $1.3 billion over six years in structural adjustment assistance to enable the most emissions intensive coal mines to manage their fugitive emissions. (iv) Coal Mining Abatement Technology Support Package: $70 million over six years to support investment in carbon abatement technologies through grants on a co-contribution basis.
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11. Governance of the Scheme

Feature
11.1 General governance
Key policy element

Three main elements, through the establishment of the following bodies: (i) Climate Change Authority (Authority) advisory function.
Legislation
Clean Energy Bill: Chapters 9, 12-22 Clean Energy Regulator Bill 2011 Climate Change Authority Bill 2011
Analysis
The governance arrangements show that the Government is seeking to apply the lessons of the EU ETS by ensuring that a framework exists for the development and application of insights into the effectiveness of the operation of the Scheme. The Government has also sought to minimise the potential for Scheme reviews and cap-setting to become politicised, by conferring the central roles in these processes to the Authority and the Productivity Commission, as agencies comparatively independent of political influence. The Productivity Commission's role in assistance reviews mirrors that of the Expert Advisory Committee appointed to conduct reviews of assistance under the CPRS (though, as under this Scheme, affected firms would have had the right to request that the Government commission a Productivity Commission review of the effect of the CPRS on their sector).
(ii) Clean Energy Regulator (Regulator) administrative function. (iii) Productivity Commission review and reporting function. The Productivity Commissions role is to quantify mitigation policies in other economies, review assistance arrangements in 2014-2015 (or earlier if requested by the Government) and review the impact of the Scheme on particular sectors when requested by Government or market participants. The Government has also separately announced additional funding of $13 million for the Australian Competition and Consumer Commission to help it to investigate and potentially prosecute businesses who increase their prices and falsely attribute this to the imposition of the Scheme. 11.2 Authority Climate Change Authority (Authority) advisory function an independent body which will provide expert advice to Government on pollution caps for the first five years of the flexible price phase (by 28 February 2014), report on the progress of meeting national targets and trajectories (by 28 February 2014 and then annually), and review of the Clean Energy Bill: Part 22 Climate Change Authority Bill 2011 Part 2 Division 1 of the Climate Change Authority Bill sets out the basic powers, functions and liabilities of the Authority. Division 2 sets out the powers for appointing authority members.
The Authority has been provided with a powerful advisory function within the suite of climate change law. Given that its members are to include a Chief Scientist, CEO and 7 other members drawn from a variety of disciplines, it is clear that this Authority will be charged with taking a holistic approach to climate change. The Authority's independence from the government is obtained through its composition as an independent statutory authority
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Feature
Key policy element

Scheme (by end-2016, then end-2018 and then at five yearly intervals thereafter). The Authority will also review the Renewable Energy Target, CFI and NGERS.
Legislation
Under Part 22 of the Clean Energy Bill: The Authority has a remit to review the climate change law as a whole, including its economic and environmental impacts, and review that in the context of adaptation and current foreign policy. The Authority's recommendations must be tabled in Parliament (i.e. made public), and if a government disagrees with any such recommendation it must explain its reasoning to the Parliament. The Bill makes it a criminal offence to refuse to produce documents or answer the questions of the Regulator where entry to a premises is under warrant and a civil offence to fail to produce documents when requested by the Regulator.
Analysis
which is divorced from the implementation of government policy. It is within that framework that the Authority will most importantly advise the government on the appropriate greenhouse gas reduction targets under the Clean Energy Bill, as well as suggesting other measures to assist Australia in meeting its current and future international obligations. This alone will assist in providing certainty under the regime, as the more contentious aspect of target setting will be able to be removed largely from the political arena, and (hopefully) will result in a less politicised process for target setting, which has the real potential (as seen in the EU ETS) to generate greater uncertainty and instability within the regime itself.
11.3 Regulator
Clean Energy Regulator (Regulator) is established to administer the Scheme within limited legislatively prescribed discretion, including by operating the Australian National Registry of Emissions Units, allocating permits, making determinations on emission reduction liabilities, administering the Renewable Energy Target, the CFI and NGERS.
Clean Energy Bill Clean Energy Regulator Bill The Regulator is constituted under Part 2 of the Clean Energy Regulator Bill, which also sets out the Regulators basic functions, power and liabilities. Key sections of the Clean Energy Bill are as follows: Part 13 information gathering powers. Part 15 monitoring powers. Part 17 civil penalty orders. Part 18 infringement notices. Part 21 review of decisions.
The Regulator is a new body which has the same functions as the Australian Climate Change Regulatory Authority established under the CPRS. The Government has attempted to ensure that inconsistencies between the various schemes designed to mitigate climate change in Australia are less likely by centralising administration with one body.
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Feature
11.4 Information Gathering & Monitoring Powers and Requirement to be Notified
Key policy element

Regulator is granted extensive information gathering and monitoring powers including: The power to demand and seize relevant documents. The power to enter premises and inspect documents and equipment either with occupiers consent or under warrant the power to question individuals in limited circumstances, the power to secure things on a premises. The controlling corporation of a group or the entity holding the carbon units must notify the Regulator if the group has a significant holding of carbon units.
Legislation
Clean Energy Bill: Parts 12 15
Analysis
The information gathering and monitoring powers of the Regulator are the same as those given to the ACCRA under the CPRS. These powers ensure that the Regulator will have significant powers to ensure compliance with the regime. The controlling corporation's group has a significant holding of carbon units if the members of the controlling corporation's group have a holding of 10% or more.
11.5 Land Sector Carbon and Biodiversity Board
The Land Sector Carbon and Biodiversity Board is established to advise the relevant Ministers about measures to increase the land sector's resilience to climate change. The Board is also required to advise the Environment Minister about guidelines for the funding of Biodiversity Fund program measures.
Climate Change Authority Bill 2011, Part 4
One of the purposes of the Board is to minimise the duplication of efforts in the governance of the Scheme. In particular, the Board is required to advise on the coordination of research to reduce duplication across the research community, target gaps and enhance the independence of research advice to Government.
11.6 Penalties for Noncompliance
Clean Energy Bill: Parts 16 19 The Bill sets up a penalty regime similar to that under the CPRS for non-compliance, with certain Parts 17 and 18 set out a compliance regime contraventions making parties liable for civil which allows the Regulator to bring court action penalties, while other contraventions can result for the imposition of both civil and criminal in criminal penalties being obtained. A new penalties for non-compliance. regime for infringement notices allows the Part 16 also includes provisions which can Regulator to impose civil penalties for more make officers of a corporation personally liable minor contraventions, rather than necessitating for certain offences, particularly when the court action. executive officers were reckless or negligent in allowing the relevant body corporate to contravene the regime.
All companies should ensure regular professional assessments of their operations vis-a-vis the regime and undertake regular training programs for employees, agents and contractors to mitigate the potential personal liability of its executive officers. Among other reasons, this is because where an executive officer is being prosecuted by the Regulator, the Court may take into account the extent to which a company has regular professional assessments undertaken of its compliance with the regime, and the extent to which staff and contractors are aware of the regimes requirements.
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Feature
Legislation
Part 18 provides the regulator the right to issue civil penalties to participants for certain contraventions of the regime. Under s.267, the Regulator can only impose a penalty of a maximum of 20% of the maximum penalty chargeable for a contravention of the relevant provision.
Analysis
It is the new concept of infringement notices that makes the non-compliance regime in the Bill different to that under the CPRS. That the Regulator is intended to use these notices for "minor" infractions is evidenced by the limits on these penalties. The Regulator's ability to issue infringement notice penalties ensures that the Regulator can administer the regime effectively without having to apply to the courts in all circumstances. It would seem that in setting out this process the Government is attempting to ensure that minor infractions of the regime do not go unpunished because it is decided that court actions would be too costly (both in time and money) to prosecute the smaller offences. It also provides the Regulator with more flexibility in dealing with the various infractions. From a scheme participant perspective, the ability of the Regulator to issue infringement notices should also create an adequate deterrent to participating in minor breaches, and should assist in ensuring the integrity of the regime itself.
11.7 The Bill sets up a typical process for the review Administrative of the decisions of the Regulator, with the review Review body being dependent on the person making the relevant decision. Where a Regulator delegate (i.e. a person who has been delegated some of the functions of the Regulator) has made the decision, then a person can apply to the Regulator to have the decision re-made. However, where the decision is one made by the Regulator and not a delegate, the decision can only be challenged in the Administrative Appeals Tribunal.
Clean Energy Bill: Part 21
Most decisions of the Regulator will be made by delegates. Challenging such decisions will be more timely Reviewable decisions are set out in s. 281. and cost effective than appealing to the Administrative Sections 283 and 285 set out procedures for the Appeals Tribunal. Further this system ensures that the review of delegate decisions by the Regulator, Regulator will have a chance to review such decisions on and by the Administrative Appeals Tribunal, their merits. respectively. This regime reflects the administrative review process which was set out in the CPRS.
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12. Other assistance packages

Feature
12.1 Key transitional support to business
Key policy element

$10 billion over 5 years from 2013-14 for the Clean Energy Finance Corporation (CEFC). The CEFC will invest in the commercialisation and deployment of renewable energy, energy efficiency and low-emission technologies, together with the transformation of existing manufacturing businesses, in two streams: (i) 50% to renewable energy; and (ii) 50% to a general clean energy stream, through commercial and concessional loans, loan guarantees and equity. The investment mandate of the CEFC will not be settled until after early 2012. $3.2 billion in funding over 9 years from 2011-12 for a new statutory body, the Australian Renewable Energy Agency (ARENA). ARENA will incorporate the Australian Centre for Renewable Energy and the Australian Solar Institute, together with other existing agencies and Government programmes. It will support R&D, demonstration and commercialisation of renewable energy technologies through competitive grants. $1.2 billion over seven years from 2011-2012 for the Clean Technology Program, which will include: $800 million for the Clean Technology Investment Program (3:1 recipient / Government grant funding); $200 million for the Clean Technology Food
Legislation
Legislation to establish the CEFC and ARENA will be introduced in 2012 following the consideration of advice from the Chair as to governance and the investment mandate of the CEFC.
Analysis
The Government's allocation of $13.2 billion to renewable and clean energy investment and commercialisation will provide a significant boost to the development of renewable and clean energy generating and manufacturing capacity in Australia, even if the amounts committed remain small in comparison with funding in the EU, China and the United States. The consolidation of these Government renewable energy agencies and programmes into ARENA will better position the Government to strategically foster the development of renewable energy in Australia. The Clean Technology Program will likely build on existing Government and also state and territory government support for clean technology, particularly low carbon coal. These strategic initiatives will be complemented by the increase in the small business instant asset write-off threshold to $6,500 for depreciating assets, which will enhance incentives for small businesses to adapt to the Scheme and improve energy efficiency and reduce carbon intensity. Support for carbon capture and storage (CCS) has been expressly excluded from these packages. CCS may continue to be supported through the Global Carbon Capture and Storage Institute and other policy mechanisms.
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Feature
Key policy element

and Foundries Investment Program (3:1 recipient / Government grant funding); and $200 million for the Clean Technology Innovation Program (matched funding). $250 million over 6 years from 2010-11 to expand the Low Carbon Communities program, including pilot energy efficiency projects for lowincome households and additional support for local government and community organisations to enhance energy efficiency. The small business instant asset write-off threshold will be increased from $5,000 to $6,500 for depreciating assets (as defined in tax legislation). It provides an immediate income tax deduction for the costs of eligible assets.
Legislation
Analysis
12.2 Key energy efficiency measures
Further development of the National Energy Savings Initiative (ESI) white certificate scheme. Expansion of the Energy Efficiency Opportunities program to include energy generators, transmitters and distributors to incorporate over 60% of Australia's primary energy users, to be increased to 65%.
The energy efficiency measures are not included in the Legislative Package but the development of any ESI will likely be dealt with through COAG.
The measures will build on the support for tradeable energy efficiency certificate schemes provided in the 2010 "Report of the Prime Minister's Task Group on Energy Efficiency" and the existing white certificate schemes in New South Wales and Victoria. It is important to note that any ESI will not be implemented, and will not replace State and Territory energy efficiency schemes, without the agreement of the States and Territories.
12.3 Other initiatives
The Government has also announced the following measures as part of the Scheme package: $946 million over six years from 2011-12 for the Biodiversity Fund, which will support the restoration and protection of biodiverse carbon stores.
The land sector programs are not included in the Legislative Package. Funding for these programs will be implemented through the budget process.
These measures will broaden the impact of the Scheme and will also make it more accessible.
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Feature
$200 million over seven years from 2012-13 to facilitate structural adjustment in regional areas; a new national mandatory vehicle emissions standard for light duty vehicles up to 3.5 tonnes, including passenger vehicles, sports utility vehicles and light commercial vehicles. The Government has proposed that the standard be 190g C02/km in emissions by 2015 and 155g/km by 2024; $44 million over five years from 2011-12 for the Regional NRM Planning and Climate Change Fund, which will help regional communities plan for the impacts of climate change and maximise the benefits of carbon farming projects; and $22 million over five years from 2012-13 for the ongoing Indigenous Carbon Farming Fund, which will support Indigenous Australians to implement carbon farming projects.
Legislation
Analysis
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13. Key compliance dates in fixed price and flexible price periods
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Legal Impact of Carbon Pricing in Australia Sep11

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Legal Impact of Carbon Pricing in Australia Sep11

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Environment & Environmental Markets

Australian Government's Proposed Carbon Pricing Mechanism

Tax treatment 9.1 Tax treatment

Key compliance dates in fixed price and flexible price periods 38

Key policy element

Key policy element

Key policy element

Who is liable and can liability be transferred?

Key policy element

3.4 Joint Ventures

Key policy element

3.5 Liability transfer

Key policy element

Use in fixed price period

Use in flexible price period

CFI Carbon Credits (Carbon Farming Initiative) Bill (s.5)

Use in fixed price period

Use in flexible price period

0% use for compliance liability.

Use in fixed price period

Use in flexible price period

Not able to be surrendered to acquit compliance liability.

Eligible for surrender to acquit up to 50% of compliance liability.

Not able to be surrendered to acquit compliance liability.

Eligible for surrender to acquit up to 50% of compliance liability.

Key policy element

Key policy element

What is a liable entity's surrender obligation?

5.2 Unit shortfall charges

Key policy element

How does the scheme work in the fixed price period?

Key policy element

How does the scheme work in the flexible price period?

Key policy element

7.2 Flexible price architecture price ceilings and floors

7.3 Flexible price architecture Banking and Borrowing

Clean Energy Bill: Part 6 Division 3

Key policy element

7.4 Flexible price architecture Auctioning

Access to domestic and international offsets

Key policy element

Key policy element

Key policy element

10. What assistance is available to industry?

Key policy element

Key policy element

Key policy element

the contract contains a provision to the effect

Key policy element

the eligible financial year beginning on 1

the eligible financial year beginning on 1

the eligible financial year beginning on 1

the eligible financial year beginning on 1

11. Governance of the Scheme

Key policy element

Key policy element

Key policy element

11.5 Land Sector Carbon and Biodiversity Board

Climate Change Authority Bill 2011, Part 4

11.6 Penalties for Noncompliance

Clean Energy Bill: Part 21

12. Other assistance packages

Key policy element