A process of fundamental economic reform around climate change issues is under way in Australia. It will have two broad legal consequences.
The first is that the likely legislative responses of Australian governments to climate change will include stringent carbon accounting and reporting requirements and progressively more stringent caps on greenhouse gas (GHG) emissions. These will affect all sectors of the economy, not just those with direct obligations, because of resultant higher costs for energy and commodity inputs. They will also present new opportunities in domestic and international markets.
The second consequence is that climate change issues will broadly affect existing corporate obligations under statute and contract. For example, existing long-term supply contract and joint venture contracts will be directly affected where they omit provisions allowing carbon-cost pass-through or allocating responsibility for carbon-related information gathering and reporting. It will also impact a variety of existing statutory reporting and disclosure obligations under general corporations laws, stock exchange listing rules, and relevant federal, state and territory fair trading legislation.
Summary of Australia’s present climate-change regulatory position
Ratification of the Kyoto Protocol
Australia’s commitment is bound in international law to increase its GHG emissions to no more than 108 per cent of 1990 levels during the period 2008–2012. Ratification also means that, subject to Australian law, Australian companies can now participate directly in the two ‘project-based mechanisms’ under the Protocol (the ‘clean development mechanism’ and ‘joint implementation’), and that ‘credits’ earned by Australian companies through those mechanisms may be acquitted in Australia and overseas.
Long-term reduction set
The Rudd Government has committed itself to a long-term target of 60 per cent reduction relative to 2000 levels by 2050, but has yet to set any shorter-term targets or any emissions budgets.
Comprehensive federal legislation
Comprehensive federal legislation (the National Greenhouse and Energy Reporting Act 2007 (Cth)) is now operating. A broad range of corporations are required to submit annual reports concerning their operations’ emissions of GHGs and their production and consumption of energy.
Emissions trading scheme
The Rudd Government is committed to the establishment of an emissions trading scheme in Australia.
Extended national renewable energy target
The federal, state and territory governments have agreed to an extended national renewable energy target which will underpin the Rudd Government’s election commitment to achieve 20 per cent of electricity generation from renewable sources by 2020. The existing Victorian and the proposed New South Wales renewable energy schemes will be folded into the expanded national scheme.
No commitment to a formal regulatory regime
Finally, the Rudd Government has yet to commit itself to a formal regulatory regime that would mandate, or reward, improved energy efficiency, particularly in buildings. However, there have been some calls for such a scheme. The New South Wales Government has now proposed the introduction of a state-based Energy Efficiency Trading Scheme which is expressly intended to be a stimulus to the development of a national version.
The present regulatory position in Australia reflects a broad commercial consensus that has been emerging in recent years, particularly since the publication in 2006 of the Stern Review on the Economics of Climate Change and in 2007 of the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. ‘Investor concern’ is chief among these important commercial developments. There are increasing calls from shareholders for reports from directors on the economic risks associated with the company’s past, present and future GHG emissions. In Australia section 299A of the Corporations Act 2001 (Cth) requires listed public companies to include in the annual directors report information that shareholders would reasonably require to make an informed assessment of the financial position of the company and the company’s business strategies and prospects for future financial years. This includes matters of environmental significance that could impact a company’s future financial prospects, and these matters would include the direct and indirect effects of climate change on the company’s activities and markets.
The Rudd Government is advancing its regulatory focuses by relying on two key mechanisms: the reporting system under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGERS), and the proposed Carbon Pollution Reduction Scheme (CPRS), a GHG emissions trading scheme. The NGERS imposes a reporting obligation and the CPRS imposes an obligation to purchase emissions permits at a cost.
The NGERS is a mandatory scheme for corporate reporting of significant energy consumption and production, and GHG emissions which exceed certain thresholds. Although data collection obligations commenced on 1 July 2008, registration is not required until August 2009 and reports are not required to be submitted until October 2009.
The proposed CPRS is a cap and trade scheme. It will place a cap on Australia’s economy-wide GHG emissions, and it will cover virtually all sectors implicated in the emission of GHGs within Australia, with the temporary exception of agriculture and the permanent exception of deforestation. From 2010 (probably 1 July 2010), entities covered by the CPRS will be required to purchase enough permits to match their annual GHG emissions where they emit more than 25,000 tonnes of GHGs per year (subject to certain exceptions) or where they are designated as a ‘proxy’ for downstream emitters. The number of permits in circulation will be equivalent to the government-determined ‘cap’ on emissions, plus any permits issued to Kyoto-compliant forestry. The short- and medium-term caps have not yet been set. The long-term cap is likely to be at least a 60 per cent reduction against 2000 GHG emissions levels by 2050.
Permits, which are personal property, will be able to be purchased at auction directly from the government or on the secondary trading market (including from Kyoto-compliant forestry) or may be allocated freely under the compensation arrangements. At the end of each year, a corporation will be liable to surrender to the government a permit for every tonne of its GHGs emitted that year.
An entity covered by the CPRS which does not surrender sufficient emissions permits to cover its emissions will be liable to a penalty and potentially a ‘make good’ obligation.
The purchase of emissions permits will result in direct costs at certain points in the economy, most commonly at the point of GHG emission but in other cases at a more convenient point in the supply chain. For example, upstream fuel suppliers will act as ‘proxies’ for the emissions of the users of their products, and no direct liability will arise in respect of small emissions points, such as vehicle fuel use.
Covered entities will look to ‘pass through’ their GHG emissions costs wherever they can. An entity’s ability to do so will be a matter of contractual negotiation as, unlike GST, the CPRS will not provide legal assistance to pass through emissions costs.
There will be compensation for emissions intensive trade exposed industries (for example, aluminium smelting), strongly affected industries (for example, coal-fired electricity) and other compensation for businesses, workers, regions and communities on which a ‘clear and sizable burden’ will be imposed by the introduction of the CPRS.
The CPRS will not rely on carbon offsets. However, special treatment will be given to Kyoto-compliant forestry (if it opts into the CPRS, it will be issued with free permits equal to the carbon it sequesters) and ‘carbon capture and storage’. Emitters will also have a limited ability to purchase emissions credits generated by offset projects in other countries. Domestic offsets will not be effective.
John Taberner is a consultant at Freehills’ Sydney office. John has extensive experience advising a wide range of clients on all aspects of environmental law, in particular planning and pollution control law. John also has extensive experience with the Kyoto Protocol as relevant to Australia, and analysis of Australian state-based carbon sequestration legislation and the various carbon accounting measures.
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