Carbon Price - are you ready?

The start date of the carbon pricing mechanism (CPM) is rapidly approaching, with just under four weeks until the CPM formally commences. We have been extremely busy helping our clients prepare for the start date and keeping them up to date with the developments that have unfolded since the legislation passed in November last year. This legal update provides a snapshot of those developments and highlights some key areas to ensure you are ready for the start of the carbon price. It also covers some recent changes to the Carbon Farming Initiative (CFI). For an overview of the CPM and its impact on different industry sectors, please refer to our previous legal updates. For an introduction to the CFI and the opportunities for participation, please refer to our previous legal updates.

As readers will be aware the key elements of the CPM are:

• Fixed price period of three years (2012-2014), with carbon units costing $23 per tonne in 2012-13, rising in real terms by 2.5 per cent per year to $24.15 in 2013-14 and to $25.40 in 2014-15.
• Flexible price period from 2015 onwards, with a price collar in place for the first three years. Price floor of $15 rising by four per cent in real terms per year and price ceiling set at $20 above the expected international price rising by five per cent in real terms per year.
• Liable entities include entities with operational control over a facility which has direct (Scope 1) emissions of 25,000 CO2-e and suppliers of natural gas
• Emissions sources covered include stationary energy, industrial processes, fugitive emissions (other than from decommissioned coal mines), and emissions from non-legacy (pre 1 July 2012) waste. Effective carbon price imposed on transport sector through changes to excise and fuel tax credits. Agriculture and land sector emissions (ie deforestation) not covered.
• Liability can be transferred through a liability transfer certificate (LTC) or an obligation transfer number (OTN) or shared through joint venture arrangements.
• Liability is satisfied through surrender of eligible emissions units, which include Australian carbon units (issued or sold by the Clean Energy Regulator), Australian carbon credit units (ACCUs) (issued under the CFI) and certain international carbon units. Various limits apply to the surrender of ACCUs and international units.
• Free carbon units will be issued to the trade-exposed emissions intensive sectors under the Jobs and Competitiveness Program.
• From 1 July 2013 large fuel users (eg airlines) can opt in to the CPM (taking them out of the fuel tax regime).

Since the Clean Energy Act 2011 (CE Act) and associated legislation passed on 8 November last year, there has been a constant drip feed of regulations and discussion papers setting out the detail underlying the CPM. The major developments which have occurred include:

• the passage of regulations implementing the Jobs and Competitiveness Program in late February, under which trade exposed industries that are highly emissions intensive will receive 94.5 per cent of carbon units for free and those that are moderately emissions intensive will receive 66 per cent for free (with these percentages to be slowly reduced each year);
• the commencement of operations of the Clean Energy Regulator on 2 April 2012, which is the new regulatory authority established to oversee the CPM, the CFI, the National Greenhouse and Energy Reporting System (NGERS) and the Renewable Energy Target;
• consultation conducted by the Department of Climate Change and Energy Efficiency on a range of options for implementing a price floor on eligible international emissions units surrendered for compliance under the CPM  and procedures for auctioning once the CPM¹ moves to the flexible period in 2015;
• the release and acceptance of recommendations by the Government of a key report on the Clean Energy Finance Corporation which will provide $2 billion per year over five years of targeted funding to stimulate private sector investment in renewable and clean energy generation, infrastructure and associated manufacturing industries, followed by the subsequent release of draft legislation in May to establish this entity;
• the passage of regulations providing detail to support the different liability transfer mechanisms, including Obligation Transfer Numbers (used to transfer liability in relation to natural gas), Liability Transfer Certificates (used to transfer liability within a corporate group or to the entity that has financial control of the facility) and Joint Venture arrangements. The forms are available here;
• the release of amending legislation to the CE Act which principally brings non-transport LPG and LNG suppliers within the ambit of the CPM from 1 July 2013 (rather than treating them separately by imposing an equivalent carbon price under amendments to fuel tax credit legislation as will occur in the first year of the CPM) and non-transport CNG suppliers within the ambit of the CPM from 1 July 2012; and
• the publication of the Liable Entities Public Information Database (LEPID), which contains the initial list of liable entities identified by the Regulator on the basis of NGERS information which can be found here.

¹It is intended that there should be a “top-up” payment made to the Regulator if liable entities acquire international units below the floor price and use these for compliance purposes. The Department has proposed a number of different approaches for how this “top-up” payment or surrender charge could work.

Legislation to amend the Clean Energy Act 2011 (CE Act) was tabled on 23 May and is currently before Parliament (Amending legislation). The primary amendments to the CE Act are:

• to change the criteria that a large fuel user must meet in order to opt-in to the CPM, and to impose notification and reporting requirements for persons who opt-in; and
• to introduce the changes applying to the non-transport CNG, LNG and LPG suppliers mentioned above.

The Amending legislation also amends the National Greenhouse and Energy Reporting Act 2007 to allow persons to nominate who has operational control of a facility when it is not clear who has operational control of that facility. In essence, the amendments will only require the nomination process to take place once, instead of twice during the fixed price years and once during the flexible price years, as currently provided for.

Important amendments are also proposed to the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act) by the Amending legislation. The CFI Act currently provides that it is only possible to backdate projects and generate credits from abatement or sequestration achieved since 1 July 2010, if the methodology determination is made before 30 June 2012.² To date, no methodology determinations have been made and therefore under the current requirements of the CFI Act, no projects could be backdated. The Amending legislation will amend the CFI Act to provide that projects can be backdated, if the methodology determination is made by 30 July 2013, provided that the application for approval of the methodology is submitted to the Domestic Offsets Integrity Committee by 30 June 2012.

The Amending legislation also clarifies that a CFI project cannot receive credits until it has received all necessary project approvals (e.g planning or environmental approvals).

In our last update, we provided an overview of draft exposure amending Regulations. These regulations have now been made with only two significant differences. First, it has been made clear that emissions abatement or carbon sequestration from transitional projects (ie GGAS or Greenhouse Friendly projects) can be credited post 1 July 2012, notwithstanding if that abatement or sequestration has been forward sold. Secondly, one new project type has been added to the ‘positive list’, namely diversion of legacy waste to an alternative waste treatment facility.

²The methodology determination is essentially the rules which govern a CFI project, and provide details of how emissions reduction/abatement or carbon sequestration must be estimated or measured.

Most companies, particularly those that will have a direct liability under the CPM, are well on their way to understanding their liability and their compliance options. Others will be waiting to see what carbon price increases will flow through to them.

Below are some useful tips for a final review of preparedness for the 1 July start date:

• check if you have any facilities within your business operations that have direct (Scope 1) emissions exceeding 25,000 tonnes CO2-e.
• if you have responsibility for or control of a such a facility, ensure that you are the entity that has “operational control” of the facility as defined under NGERS. This is particularly important if there are third party contractors involved with the running of the facility.
• if you want to transfer liability to another member of your corporate group or to another corporate entity which has financial control over the facility, complete and lodge an application for a LTC.
• if you are a recipient of natural gas or non-transport CNG, determine whether you must or would like to quote an OTN, and submit an application form to the Regulator.
• if your facility is operated by a joint venture, determine whether you need to notify the Clean Energy Regulator that you are a participant in a mandatory designated joint venture (required if there is no one entity with operational control of the facility) or submit an application for a declaration of the joint venture as a declared designated joint venture (if the operator is known but the joint venture participants want to share liability). In either case, you must also apply for a participating percentage determination
• make sure you have undertaken a review of all relevant contractual arrangements to determine whether you are able to pass on the costs of satisfying your carbon liability, or if you are a recipient of goods and services, check whether your contracts allow your supplier to pass on carbon costs to you. In particular, check to see whether both direct (the costs of purchasing eligible emissions units) and indirect (increased electricity and fuel costs) costs can be passed through under the contract and whether those costs may only be the net cost (taking into account any free permits or other assistance measures). Ensure that no “double-dipping” takes place if there is a CPI clause in place within the contract.³
• prepare new stand alone carbon cost pass-through clauses for new contractual arrangements, and consider whether both direct and indirect costs should be able to be passed through.
• if you are a liable entity, ensure you have an understanding of your likely emissions number for the first year of the scheme and determine a compliance strategy; consider whether to hedge your carbon liability by purchasing international units or ACCUs for use in the flexible price period; consider whether to invest directly in CFI projects to generate ACCUs for compliance use.
• if you intend to pass on carbon costs, ensure that your communication strategy will not breach the Australian Consumer Law and expose you to ACCC action. Claims about the carbon price must be truthful, accurate, capable of substantiation and made on reasonable grounds, and the ACCC has produced various guidance notes, which can be found here.
• if you need further assistance, or have any questions in connection with either the CPM or CFI, contact a member of our climate change team.

³Treasury has predicted that the CPI will increase by 0.7 per cent in 2012/13 as a result of the introduction of the carbon price. If the contract already has a CPI recovery clause, arguably no further indirect carbon costs should be passed on to the purchaser.