The policy announcement made on Sunday 10 July 2011 was a detailed exposition of government policy. How that policy position translates into the legislative detail of the scheme will be important for both business in its review of the implications of the package, and for the political mechanics of getting the deal through Parliament. Parliamentarians will wish to be assured that the agreement reached in the Multi-Party Climate Change Committee (MPCCC) is sufficiently reflected in the legislation to justify their continuing support. Business on the other hand will be keen to consider whether their expectations of future carbon liabilities and frameworks as set out in the policy documentation have been materially satisfied and whether particular areas of uncertainty have been dealt with.
The legislative framework broadly implements the policies outlined under the “Securing a Clean Energy Future” policy announcement on 10 July 2011. This of course is subject to the further release of legislation not released today, as noted above.
The key areas in which there have been changes in policy, new detail released or detail deferred until release in regulations, include:
- The setting of rolling five year caps in regulations.
- The setting of default caps.
- The operation of the “price collar” in the first three years of the fixed price period.
- The auctioning of carbon units.
- The Jobs and Competitiveness Program.
- Further regulations under the Mechanism.
- The imposition of an “equivalent carbon cost” on transportation fuels.
Carbon pollution caps
Pollution caps for flexible charge years will be set in regulations. These regulations need to be prepared having regard to a range of international and domestic considerations and will specify a pollution cap number for each financial year as a total quantity of GHG emissions. They will also be informed by the recommendations of the Climate Change Authority. The Minister must take all reasonable steps to ensure that regulations specifying the pollution cap numbers for the first five flexible years of the Mechanism are tabled in Parliament no later than 31 May 2014 (that is, for the financial years from 1 July 2015 through 2019). The regulations cannot be made or tabled if the May deadline for each year is not met.
As expected, the regulations for pollution caps will be subject to Parliamentary scrutiny and either House of the Parliament may disallow the regulations. This adds an additional political layer on top of the usual regulation making process which requires only that the government consult with “affected persons and organisations likely to be affected”.
If regulations setting pollution caps are not tabled in time or are disallowed, default pollution caps will take effect.
Default cap setting
Under the Securing a Clean Energy Future policy announcement, the default cap setting arrangements to be set out in primary legislation were to “ensure a five per cent reduction in emissions below 2000 levels by 2020”, and thereafter a reduction “consistent with the annual reduction in emissions implied by the five per cent emissions reduction target”. Sections 17 and 18 of the Clean Energy Bill implement this policy by setting out the default caps according to the following formulae:
- If no cap regulations are in place for the flexible charge year beginning 1 July 2015:
The total emissions numbers for the eligible financial year beginning on 1 July 2012 minus 38,000,000 (which will provide the “carbon pollution cap number”)
- If no cap regulations are in place for any subsequent flexible charge year:
The carbon pollution cap number for the previous flexible charge year minus 12,000,000
This legislative detail adds significant certainty to the policy position, which did not provide a clear framework for default cap setting, but rather provided the broad policy parameters under which the default caps would be set. It is important to note that if there has been a period of cap tightening under regulations, the default position will pick up from the previous year’s cap, and will not revert to some less onerous cap that is consistent with the five per cent by 2020 target. This will provide critical certainty for investors reviewing market parameters and noting that, without fail, caps will reduce by at least twelve million carbon units per year.
The price collar
The policy announcement on 10 July 2011 noted that from 1 July 2015 a price ceiling and price floor would be imposed for three years, in order to manage costs and create market certainty. The price ceiling would be set out in regulations by 31 May 2014 at AUD$20 above the expected international price for 2015-16, rising by five per cent in real terms per year, with a price floor starting at AUD$15 and rising by four per cent in real terms per year.
Section 111 of the Clean Energy Bill sets out the price floor arrangements for the auctioning of carbon units (supported in the Clean Energy (Charges—Excise) Bill 2011), and it remains expected that the procedure for setting the price ceiling will be set out in later regulations. The key area of uncertainty that remains however is in relation to how the price floor will operate upon the surrender of international carbon offsets for compliance. These provisions are to be regulated under the Clean Energy (International Unit Surrender Charge) Bill, which sets out in section 8(1) that a charge is to be applied to the surrender of international units in relation to compliance between 1 July 2015 and 30 June 2018. The amount of that charge however is to be “ascertained in accordance with the regulations in relation to the eligible financial year”.
Effectively this means that uncertainty surrounding the investments and arrangements to be made in relation to international offsetting projects and credits is likely to continue until further details are released in the regulations. Commercially this is not likely to be a significant issue because international offsetting investments in relation to compliance in the flexible price period are unlikely to be made in significant numbers until after the legislation is passed through Parliament and regulations tabled.
Auctioning carbon units
The Clean Energy Bill empowers the Regulator to issue carbon units through auctions and outlines some matters relevant for the design of an auctioning system for carbon credits. The detailed policies, procedures and rules for the conduct of auctions are left to be determined by the Minister through a subsequent legislative instrument. This will be a disallowable instrument for the purposes of the Legislative Instruments Act 2003 and will be finalised following consultation.
Given that the Government has announced its intention to have limited advance auctions of future vintage carbon units in the fixed price period (to assist the development of forward price signals), it is expected that the legislative instrument required for an auctioning system will be in introduced in the short term.
Jobs and Competitiveness Program
Under the Jobs and Competitiveness Program (Program) (the ‘rebadged’ Emissions-Intensive Trade-Exposed sector assistance program from the CPRS), assistance will be provided to entities that conduct emissions-intensive trade-exposed activities through the issuance of free carbon units by the Regulator early in each compliance period.
The Clean Energy Bill outlines in broad terms what the Program may cover and includes a range of reporting and compliance provisions as well as details of inquiries by the Productivity Commission into the Program. It also includes provisions relating to the cancellation or buyback of certain unused free-carbon units. However, the Bill leaves it to regulations to formulate the details of the Program, including what is to be considered an emissions-intensive trade-exposed activity (except that extraction of coal is explicitly excluded in the Bill) and the processes for allocating free carbon units. The Bill requires the Minister to take all reasonable steps to ensure that regulations are made before 1 March 2012.
The Clean Energy Bill leaves a number of specific issues to be defined or detailed in regulations. This is likely to create some uncertainty in the interim. For example, some of the details on attributing GHG emissions to waste accepted prior to 1 July 2012 for the purposes of calculating legacy emissions are to be detailed in regulations.
The majority of other regulation-making powers under the Clean Energy Bill relate to matters that one would ordinarily expect to be developed through regulations. These include a number of administrative matters and requirements relating to the Regulator, and a range of other operational and compliance aspects of the legislation such as forms, fees, application information and timeframes. These include, for example, regulations to outline record keeping requirements and to make further provisions in relation to infringement notices.
The Bill also contains a broad overarching regulation-making power allowing regulations to be made for matters “necessary or convenient” for giving effect to the legislation.
The treatment of transport and other fuels
The Fuel Tax Legislation Amendments (Clean Energy) Bill 2011 (FTLA Bill) confirms that the Mechanism will extend to most emissions from business transport and the non-transport use of liquid fuels. The only exclusions will be light vehicles, households and, in some circumstances, the agriculture, forestry and fishery industries.
The FTLA Bill amends the Fuel Tax Act 2006 so that a fuel tax credit entitlement under that Act is reduced by an amount equivalent to what the carbon price on the fuel emissions would be, if those emissions were subject to a carbon price. The “amount of carbon reduction” is worked out through the following equation:
Quantity of fuel x Carbon price x Carbon emission rate.
The carbon price will be the annual fixed price under the Clean Energy Bill until 30 June 2015 and then a flexible price from 1 July 2015 calculated every six months based on the average carbon unit auction price under the Clean Energy Bill.
The carbon emission rate of all fuels has been specified. The FTLA Bill confirms that ethanol, biodiesel or renewable diesel will not incur fuel tax credit reductions or changes to excise (these fuels are zero rated under international accounting rules).
The amount of the carbon reduction will be nil, however, to the extent that the fuel is acquired, manufactured or imported for use:
- In agriculture, fishing operations or forestry.
- In a vehicle with a gross vehicle mass of more than 4.5 tonnes and travelling on a public road.
- Otherwise than for combustion.
It should be noted that the inclusion of the words “to the extent that” will require operators to make an assessment of the actual use of the fuel that they acquire, manufacture or import in order to accurately claim an exemption. It is not clear at this stage what parameters may be applied to such an assessment.
The Government had previously signalled that it intended to pursue extending the Mechanism to heavy on-road transport from 1 July 2014 to ensure consistent treatment across the whole of the freight sector. The aim of this would be to maintain competition neutrality between the various forms of transport. The FTLA Bill does not, however, envisage this inclusion. It remains to be seen if it will be included and will presumably be dependent upon the MPCCC approving this change.
In relation to aviation fuels, combined together the Customs Tariff Amendment (Clean Energy) Bill and the Excise Tariff Legislation Amendment (Clean Energy) Bill provide for changed rates of duty for aircraft fuel and for compressed natural gas for certain uses, being generally (at least at this stage) compressed natural gas for non-motor vehicle use. The increase is effected by imposing a ”carbon component rate” on each litre of fuel or kilogram of natural gas. That rate is fixed until 30 June 2014 and is then a flexible rate from 1 July 2015 calculated every six months based on the average carbon unit auction price under the Clean Energy Bill.
The Commentary on Provisions for the Clean Energy Bill maintains that the Productivity Commission will be commissioned under the Productivity Act to undertake a review of fuel excise and taxation, with any changes to be implemented after three years, that is 2015-2016. It is expected that this review will include an examination of the merits of a regime based explicitly and precisely on the carbon and energy content of fuels. No provisions have been released, however, for this commissioning at this stage. This is to be compared with the detailed provisions set out in the Clean Energy Bill for the ongoing Productivity Commission inquiries into the Jobs and Competitiveness Program.