The Carbon Pollution Reduction Scheme and its impact on the mining industry

On 15 December 2008, the Federal Government released its white paper ‘Carbon Pollution Reduction Scheme: Australia’s Low-Pollution Future’ (White Paper). The White Paper contains the government’s finalised policy positions for the design of the Carbon Pollution Reduction Scheme (CPRS), a comprehensive cap-and-trade greenhouse gas emissions trading scheme which is due to commence on 1 July 2010. The White Paper also sets out the range of emissions targets which the government will take to the climate change conference in Copenhagen in late 2009.

This article reviews the design of the CPRS as proposed in the White Paper, with particular reference to its implications for the mining industry. Exposure draft legislation for the CPRS is expected to be made public in late February or early March and may (but is not expected to) differ in significant respects from the White Paper proposals.

At this stage it is quite unclear how far the exposure draft legislation will be amended in the ensuing consultation process or how the resulting Bill will fare in the Senate.

Key issues

Targets and carbon price

• The Federal Government has already committed itself to a long-term target of achieving a 60 per cent reduction against 2000 levels of greenhouse gas (GHG) emissions by 2050.
  
  The White Paper proposes an unconditional commitment to a medium-term target of a five per cent reduction against 2000 levels of GHG emissions by 2020.
  
  That target will rise to as high as 15 per cent in the context of a global agreement under which all major economies (including China) commit to substantially restrain emissions and advanced economies (including the United States) take on reductions comparable to Australia.
  
  The ‘carbon price’ per tonne of carbon-dioxide-equivalent emissions, according to the modelling performed by the Treasury and the Garnaut Review and reported in the White Paper, will be approximately as follows:
  
• in the 5 per cent reduction scenario:
  A$23 at the commencement of the CPRS,
  A$35 (in 2005 dollars) in 2020, and
• in the 15 per cent reduction scenario:
  A$32 at the commencement of the CPRS,
  A$50 (in 2005 dollars) in 2020.

Coverage

• The CPRS will cover all forms of mining where an individual facility achieves the threshold of 25,000 tonnes of carbon-dioxide-equivalent emissions per year. A ‘facility’ will in the general case be a mine, possibly including associated transportation and processing infrastructure.
• Coal miners will, additionally, serve as ‘proxies’ for domestic users of coal which fall below the 25,000 tonnes threshold. Larger-scale domestic users of coal will manage their own emissions. A system of netting out through ‘obligation transfer numbers’ (OTNs) will form the administrative basis of these arrangements.

Liability

• In general, liability for CPRS compliance will fall on the ‘controlling corporation’, or ultimate Australian-registered holding company, of an entity which has ‘operational control’ of a covered facility. With the approval of the scheme regulator, it will generally be possible to transfer that liability to a subsidiary which is more directly involved in the operations of the facility. Also, with the approval of the scheme regulator and the agreement of the other party, it will be possible to transfer liability to an entity having financial, rather than operational, control of a covered facility.
• In a joint venture, the legal entity with operational control over the facility will have the liability to surrender Australian Emissions Units (AEUs), although the joint venturers will be free to come to their own arrangements as to the task and cost of acquiring those AEUs. Where no single legal entity has operational control over the joint venture facility, the joint venturers will be required to nominate a single legal entity as the entity liable for CPRS compliance.

Emissions permits

• Liable parties under the CPRS will need to surrender in each year emissions permits to cover the whole of their direct or ‘Scope 1’ GHG emissions for that year. Indirect or  ‘Scope 2’ emissions from electricity usage will not be covered.
• Emissions permits, to be known as AEUs, will be auctioned monthly, beginning in April 2010. Each AEU will represent one tonne of carbon-dioxide-equivalent emissions and will be valid for an indefinite period starting with the first year for which it is ‘stamped’. That is, AEUs can be ‘banked’ or ‘hoarded’ indefinitely.
• AEUs, once acquired, will be personal property which can be freely traded. Thus, liable parties will also be able to purchase AEUs on the market.
• International carbon instruments generated under the Kyoto Protocol’s flexibility mechanisms, including Certified Emissions Reductions generated under the Clean Development Mechanism, will (with some minor restrictions) be able to be surrendered in place of AEUs.
• Firms in industries designated as ‘emission-intensive trade-exposed’ (EITE) will receive a proportion of the AEUs which they are required to surrender at no cost. In general, members of  the mining industry will not meet the thresholds for EITE assistance. The White Paper indicates that a ‘small number’ of coal miners, while not eligible for EITE assistance, will receive some one-off assistance from the Climate Change Action Fund to be established alongside the CPRS.

Impacts

• Apart from coal mining, it is not expected that mining operations will attract a significant direct liability under the CPRS. Coal miners will attract a direct liability chiefly in respect of fugitive emissions of methane.
• All miners, however, may experience significant additional operating costs due to the operation of the CPRS. These will come principally in the form of higher prices for electricity and fossil fuels, but may also impact the costs of labour and domestically produced machinery.
• Transport fuels will attract a CPRS liability. Although the White Paper proposes that the fuel excise and equivalent customs duty will be reduced ‘cent for cent’ to compensate for the increased carbon-price component of the cost of these fuels, this will not assist businesses who are eligible for fuel tax credits. However, as a special measure of assistance, vehicles with a gross vehicle mass in  excess of 4.5 tonnes will be eligible for a ‘CPRS fuel credit’ equal to the amount of the fuel tax cut. This measure will be reviewed after one year of the scheme’s operation. A partial CPRS fuel credit will also be applied for compressed natural gas and liquefied natural gas for one year, and for liquefied petroleum gas for three years, of the scheme’s operation.
• Where a single facility uses petroleum liquid fuels such that the emissions from combustion of a single fuel amount to 25,000 tonnes of carbon-dioxide equivalent per year or more, the entity responsible for that facility may use an OTN to manage its scheme obligations directly. Where a single facility uses any other fossil fuel that meets that threshold, the entity responsible for that facility must use an OTN to manage its scheme obligations directly.
• Miners will need to review supply contracts that continue into the CPRS compliance period to assess the degree to which they will be able to pass through the additional costs to them of the CPRS to the offtakers under those contracts. This may be a significant issue in relation to some contracts.

Interaction with greenhouse and energy reporting

• The CPRS will be closely aligned with the existing National Greenhouse and Energy Reporting System (NGERS). In general, any entity which has a liability to surrender AEUs under the CPRS will also have the liability to report under the NGERS. The report submitted annually to the NGERS regulator will also serve as the report that establishes the extent of CPRS liability.

Timetable

The next significant milestones in the introduction of the CPRS will be the following:

• Late February/early March 2009: Publication of the exposure draft legislation for the CPRS.
• March–April 2009: Consultation period on the exposure draft legislation.
• May 2009: CPRS Bill introduced into Parliament.
• June 2009: Intended passage commences of the CPRS Bill.
• 3rd Quarter 2009: CPRS legislation enters into force and CPRS regulator established.
• December 2009: Copenhagen Climate Change Conference—the post-2012 international landscape on GHG abatement will become clearer.
• Early 2010: CPRS emissions caps for the first five years of the scheme announced.
• April 2010: Auctions of AEUs commence.
• 1 July 2010: CPRS commences.

More information

For information regarding possible implications for your business, contact