The Carbon Pollution Reduction Scheme Bill 2009

 

12 March 2009


1 Introduction

On 10 March 2009, the Federal Government released exposure draft legislation for its proposed Australian greenhouse gas emissions trading scheme, the Carbon Pollution Reduction Scheme (CPRS), in the form of the Carbon Pollution Reduction Scheme Bill 2009 (Cth) (CPRS Bill) and five related Bills, one to establish the Australian Climate Change Regulatory Authority (ACCRA)1 and four others to effect amendments to a variety of Acts2 and to impose charges3 and customs and excise duties4.

The CPRS Bill closely follows the ‘policy positions’ set out in the White Paper Carbon Pollution Reduction Scheme: Australia’s Low Pollution Future of 15 December 2008 (White Paper). However, much of the detailed policy content foreshadowed by the White Paper is to be contained in regulations and is as yet unspecified.

The CPRS Bill would commit Australia to a cap-and trade emissions trading scheme (ETS) to commence on 1 July 2010 whose major design elements are described in detail in sections 2 to 11 below. Principally:

  1. The ETS which the CPRS Bill proposes is a thoroughgoing cap-and-trade system having no baseline-and-credit features and no carbon tax features.
  2. It will cover all six of the greenhouse gases which are widely recognised internationally (GHGs) with provision for regulations to specify further GHGs.
  3. In the White Paper, it was stated that the CPRS would cover most sectors of the economy which are implicated in the production of GHGs and would account for approximately 75 per cent of Australia’s GHG emissions, directly involving upwards of 1,000 firms (excluding forestry operators who may choose to opt-in to the system). The coverage of the CPRS Bill is discussed further in sections 4 and 5 below.
  4. The CPRS will not contain a statutory ‘costs pass-through mechanism’.
  5. The CPRS Bill states as an object:
    1. the Federal Government’s long-term target of a 60 per cent reduction in national GHG emissions from 2000 levels by 2050, and
    2. its mid-term target of a reduction by between 5 per cent and 15 per cent below 2000 levels by the end of 2020.

      Precise annual caps will be prescribed by regulation. That the CPRS Bill takes this approach to the specification of targets and caps is significant, particularly given the criticisms that have been leveled at the CPRS Bill and the targets and caps which it purportedly sets: in fact the CPRS Bill sets no targets or caps; it contemplates that they will be set later.
  6. The CPRS will have a price cap for the first five years of its operation. The price  cap will be A$40 per tonne of carbon dioxide equivalent (CO2e) at commencement of the CPRS, rising at roughly five per cent per annum.
  7. The CPRS will have linkages with international carbon markets. In particular, no quantitative restrictions will apply to the use of eligible international units5  for compliance in the CPRS.
  8. A central feature of the CPRS will be the National Registry of Emissions Units (Registry) which will be maintained by ACCRA.

The consultation period for the CPRS Bill continues until 14 April 2009.

The CPRS Bill contains much detail. The following summarises the main elements of the provisions of the CPRS Bill.

2 General outline of the CPRS

The general shape of the ETS to which the CPRS Bill would commit Australia is as follows:

  1. The Federal Government will set by regulation caps on emissions of covered GHGs by liable entities during successive compliance periods (annual, by reference to financial years). A range of ‘consideration factors’ is set out in the CPRS Bill, some of which must and others of which may be taken into account in formulating the regulations. The Federal Government will issue Australian emissions units (AEUs) (freely and by auction). An AEU will, effectively, give its holder the right to emit a certain quantity of GHGs during a compliance period, and the total of the quantities covered by the AEUs issued in respect of the compliance period will equal the cap for the compliance period. In this way, the quantity of allowable total emissions is limited to the amount of the cap.
  2. For any particular compliance period, a liable entity must avoid a unit shortfall by surrendering a suitable number of AEUs to cover its emissions of GHGs in that period. Once surrendered, an AEU cannot be re-used for any purpose. Liable entities will be able to trade AEUs among themselves and on secondary markets, so that a liable entity which does not hold sufficient AEUs to cover its emissions of GHGs in a compliance period may buy AEUs from another entity which holds more AEUs than that entity needs (because, for instance, it has managed to reduce its own GHG emissions) or from others. In theory, such an arrangement will mean that the market will ensure that the required emissions reductions are achieved at the lowest possible marginal cost.
  3. AEUs will be created as personal property and will be fully fungible (but only on the Registry). The CPRS Bill contains no power to extinguish AEUs (except in the case of fraud). Also, AEUs will be designated as ‘financial products’ for the purposes of the provisions in the Corporations Act 2001 (Cth) and the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) regulating such products, particularly the marketing of them, but a person providing services in relation to AEUs will not on that account alone be providing ‘financial services’ for the purposes of the ASIC Act. The Trade Practices Act 1974 (Cth) will also apply in respect of AEUs, particularly the marketing of them.
  4. The CPRS Bill indicates that a liable entity will be able to bank without limit AEUs which it does not require during a particular compliance period so that it can surrender them during a subsequent compliance period. It also indicates that a liable entity will be able to meet up to five per cent of its liabilities in any one compliance period by borrowing the following year's vintage permits.
  5. Liable entities which fail to avoid a unit shortfall for a compliance period will incur pecuniary penalties, including obligations to ‘make-good’ the shortfall in the subsequent compliance period.
  6. Under the CPRS Bill, no scheme of domestic offsets will form part of the CPRS.
  7. As mentioned, the CPRS will have linkages with international carbon markets. No quantitative restrictions will apply to the use of eligible international units6 for compliance in the CPRS. The White Paper contemplated that no exports of CPRS AEUs would be allowed, but would only be introduced with five years' notice. The White Paper also contemplated that this latter qualification may not apply if and when Australia enters into a bilateral linking arrangement with another country (such as New Zealand): in that case, exports would be enabled and such a link may be entered into with less than five years' notice where this was unlikely to lead to a significant change in carbon prices. The CPRS Bill provides no mechanism for these matters raised in the White Paper.
  8. ACCRA will have administrative responsibility for the performance of various functions under the CPRS Bill such as: allocating permits, recording transfers and surrenders of permits and enforcing compliance. ACCRA is discussed further at section 10 below. 

3 Targets, caps, trajectories and price

3.1 Targets

  1. The CPRS Bill states as an object:
    1. the Federal Government’s long-term target of a 60 per cent reduction in national GHG emissions from 2000 levels by 2050, and
    2. its mid-term target of a reduction by between five per cent and 15 per cent below 2000 levels by the end of 2020.
  2. Precise annual caps will be prescribed by regulation, most probably in early 2010 after the results of the Copenhagen meeting of the Parties to the United Nations Framework Convention on Climate Change and the Kyoto Protocol (Copenhagen Climate Change Conference) in November–December 2009 are known.

3.2 Caps and trajectories

The CPRS Bill commits the Federal Government to the ‘trajectories mechanism’ foreshadowed in the White Paper.

There are two elements to that mechanism: ‘caps’ and ‘gateways’ for future caps. ‘Caps’ will be determined by regulation annually for at least five years in advance. ‘Gateways' (or ranges within which future caps will lie up to a further 10 years in advance) will be determined by regulation every five years. The caps will be extended by one year every year. The ‘gateways’ will be extended by five years every five years.

The first five years of caps will be determined in 2010, before the CPRS commences and after the Copenhagen Climate Change Conference. The CPRS Bill will oblige the Federal Government to ‘take all reasonable steps to ensure’ that the first five years of caps are put in place in regulations by 1 July 2010, that the next five years of caps are put in place by regulation by 1 July 2011, and so on. The Federal Government will be obliged to ‘take all reasonable steps to ensure’ that caps are within relevant gateways.

The CPRS Bill does not otherwise contain the level of detail on likely caps and gateways that was contained in the White Paper. The White Paper indicated that the first caps in the first three financial years of the post-2010 trajectory would be as follows:

  1. in 2010–2011: 109 per cent of 2000 levels
  2. in 2011–2012: 108 per cent of 2000 levels, and
  3. in 2012–2013: 107 per cent of 2000 levels.

The White Paper also indicated that, in 2010, the government would announce a further two years of caps in the post-2010 trajectory in 2010 (for financial years 2013–14 and 2014-15) These things are not reflected in the CPRS Bill.

3.3 Price

The CPRS Bill contains no details as to likely prices of AEUs. The White Paper contained predictions of carbon prices under both 5 per cent and 15 per cent reduction targets mentioned in 3.1 above. The following table presents the White Paper’s predicted carbon price:

   Carbon price A$/tCO2e  
   5 per cent target

 15 per cent target

 Commencement in 2010  23  32

 Medium-term in 2020
(in 2005 prices)

  35  50

3.4 Price limits

The CPRS Bill states that the CPRS will contain an upper limit on the price of AEUs in respect of the first five years of operation of the CPRS. The price cap will be A$40 per tonne CO2e at commencement of the CPRS, rising to A$43 in 2011, A$46.23 in 2012, A$49.69 in 2013 and A$53.42 in 2014.

The price limitation mechanism will be as follows: in each period between 31 October (the emissions reporting deadline) and 15 December (the permit surrender deadline) in respect of the first five years of operation of the CPRS, an unlimited number of special (‘fixed price’) permits will be available (starting at A$40 per tonne CO2e in the first year and rising as described above) to parties having obligations under the CPRS. Unlike ‘ordinary’ permits, ‘fixed price’ permits will be incapable of being banked or traded. Indeed, automatic surrender of a ‘fixed price’ permit occurs on its acquisition.

The market for eligible international units7 will also operate as a ceiling on the carbon price in Australia if the price of AEUs rises above the price of these units.

4 Covered sectors

4.1 General

The CPRS Bill creates four general categories of entities who will be liable under the CPRS:

  1. direct emitters from landfill facilities
  2. direct emitters of GHGs from facilities other than from landfill facilities
  3. importers, producers and suppliers of an ‘eligible upstream fuel’8, and
  4. importers, manufacturers and suppliers of synthetic greenhouse gases (SGGs)9.

4.2 Direct emitters from landfill facilities

The White Paper indicated that emissions from landfill waste sites that closed prior to 1 July 2008 will not be included in the CPRS. This is reflected in the CPRS Bill. The White Paper also indicated that emissions from waste deposited at such sites prior to 1 January 2009 would be excluded from the CPRS until 2018. The CPRS Bill departs from this. Rather, a proportion (to be specified by regulation) of emissions between 1 July 2008 and 30 June 2018 will be attributed to emissions prior to 1 July 2008 (Legacy Emissions).

4.3 Direct emitters from non-landfill facilities

  1. The CPRS Bill does not itself specify non-landfill sectors which will face a liability for direct emissions under the CPRS.
  2. Rather, consequential amendments to be made to the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) will require the making of regulations that will:
    1. specify the ‘scope 1’ emissions which will be covered by the CPRS, and
    2. specify that all remaining ‘scope 1’ emissions will not be covered by the CPRS.
      In effect, then, the non-landfill sectors covered by the CPRS in relation to their direct emissions will be those whose ‘scope 1’ emissions are prescribed by regulation to be covered by the CPRS.
  3. The Commentary accompanying the CPRS Bill indicates that emissions from the following sources will attract direct emitter liability (non-landfill) under  the CPRS by the regulatory means described in (b):
    1. fugitive emissions (subject to (d)(3) below)
    2. industrial process emissions
    3. emissions from a waste source, and
    4. emissions from the combustion of energy sources.
  4. The Commentary indicates that the following emissions sources will not attract direct emitter liability under the CPRS by the regulatory means described in (b):
    1. agricultural sources10
    2. forestry sources11
    3. fugitive emissions from decommissioned underground coal mines
    4. emissions of synthetic greenhouse gases from certain uses, and
    5. emissions from the combustion of biomass.

4.4 Importers, producers and suppliers of ‘Eligible Upstream Fuels’ and SGGs

These other categories of entities liable under the CPRS are discussed further at 6.1(b) below.

5 Special sectors

5.1 General

Carbon capture and storage (CCS), sequestration by forestry, and the destruction of synthetic greenhouse gases (SGGs) receive special treatment under the CPRS Bill.

5.2 CCS

  1. Regimes for carbon capture and storage (CCS) have now been enacted at both Federal and state levels in Australia12. The Offshore Petroleum Amendment (Greenhouse Gas Storage) Act 2008 (Cth) commenced in November 2008, and the Rudd Government is currently consulting with stakeholders regarding the regulations which will be made under that Act. The first CCS acreage release is expected to occur at the end of March 2009. Onshore CCS legislation has also been passed in Victoria and Queensland.
  2. Consistent with these developments, the Carbon Pollution Reduction Scheme (Consequential Amendments) Bill 2009 will amend the NGER Act as follows:
    1. it will define ‘activity’ (and thereby a ‘facility’) as including a condition, circumstance or state of affairs relating to carbon capture and storage, and
    2. it will define carbon capture and storage (in a manner commensurate with the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth)) as: the storage of a GHG substance in a part of a geological formation; or the injection of a GHG substance into a part of a geological formation for the purposes of such storage; or the capture, compression, processing, offloading, transportation or piped conveyance of a GHG substance, where the compression, processing, offloading, transportation or piped conveyance is for the purposes of such storage. 
  3. There is no express treatment of CCS in the CPRS Bill.
  4. However:
    1. GHGs that are captured and permanently stored do not fit within the definition of ‘emission’ in the CPRS Bill  (because they are not ‘released into the atmosphere’ as required by the components of that definition), and
    2. in particular, GHGs that are captured and permanently stored in accordance with an injection licence granted under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) do not fit within that definition (for that reason), and
    3. so any GHGs which have been captured and stored are not ‘emissions’ from a facility for the purposes of the CPRS Bill.
  5. Nevertheless:
    1. the operator of a facility for the capture and storage of GHGs (CCS Facility) will be liable for any fugitive emissions from the operation of the CCS Facility,13 and
    2. it is not clear whether, and if so to what extent, GHGs which have been captured and stored at a CCS Facility but which subsequently leak from it are excluded from the definition of ‘emission’.

5.3 Reforestation

  1. The CPRS Bill provides that owners of Kyoto-compliant forests (that is, in short, forests  established from 1990 onwards on previously cleared land) who opt into the scheme will be able to receive free permits for those forests’ net removals of carbon dioxide from the atmosphere. They will also have to account for any actual or deemed emissions, for example when those forests are destroyed or cut down. According to current Kyoto principles, all of the carbon dioxide sequestered by a forest is deemed to have been returned to the atmosphere when that forest is destroyed (even if, in fact, the carbon dioxide continues to be sequestered in wood products).
  2. In order for an entity to be able to claim free AEUs in relation to reforestation projects, the following must be true:
    1. the entity must be recognised by ACCRA as a ‘reforestation entity’, in relation to which ACCRA is entitled to consider various ‘fit and proper person’ factors (including criminal convictions of the entity or, in the case of corporation, of the entity’s executive officers)
    2. the entity must be the holder of a ‘carbon sequestration right’, defined as a legal estate or interest in land which entitles its holder to the exclusive legal right to obtain the benefit of sequestration of carbon dioxide by trees on the land
    3. the relevant land must be Torrens Title land or Crown land, but may not be Old System Title land
    4. the project must have been declared by ACCRA to be an ‘eligible reforestation project’
    5. ACCRA must issue a ‘certificate of reforestation’ in relation to the project, and
    6. a ‘reforestation report’ must be given to ACCRA for a ‘reforestation reporting period’, which is a period between one and five years.
  3. AEUs granted in relation to reforestation projects may be required to be relinquished if the declaration of an ‘eligible reforestation project’ is revoked. If the entity to whom a notice requiring relinquishment of AEUs does not comply within 90 days, the entity incurs a ‘forest maintenance obligation’, in pursuance of which the entity will be required to maintain, or to establish and maintain, one or more forest stands such that it is reasonable to expect that the total GHGs removed by the forest stand or stands will equal or exceed the total GHGs represented by the AEUs allocated freely in relation to the former eligible reforestation project.

5.4 Destruction of SGGs

  1. The CPRS Bill provides for free AEUs to be issued to entities that arrange for the destruction of SGGs in accordance with scheme requirements14. As for reforestation, this will provide an incentive for such activities.
  2. In order for an entity to claim free AEUs, entities must:
    1. be eligible15
    2. apply to ACCRA for a Certificate of Eligible Synthetic Greenhouse Gas Destruction in the approved form within 4 months of the end of the financial year
    3. pay any application fee imposed by the regulations
    4. provide any additional information requested by ACCRA, and
    5. destroy or arrange for the destruction, of the SGGs in accordance with scheme requirements.

6 Point of liability

6.1 General position

  1. The CPRS Bill proposes to fix the point of liability for surrendering AEUs as follows:
    1. the point of liability for surrendering AEUs will generally be the point at which the emissions actually occur, and
    2. there will generally be an annual threshold of 25,000 tonnes of CO2e of emissions before any liability is imposed.
  2. In sectors where there are many small emitters, such that it would be inefficient and uneconomical to assign direct liability to those emitters, a ‘proxy’ will be chosen and that proxy will be directly liable for surrendering AEUs, the costs of which are expected to be passed downstream, ultimately to consumers. This will be the situation (for example) in relation to the supply of ‘eligible upstream fuels’16 and of SGGs17 In these cases, the point of liability lies with the upstream suppliers and there is no volumetric threshold for liability.
  3. The principles in the NGER Act will determine the ‘liable entity’ for any particular ‘point of liability’:
    1. In general, entities with operational control over covered facilities or activities will be liable under the CPRS.
    2. For corporations, obligations will be placed on the ‘controlling corporation’ of a corporate group where either the controlling corporation or a member of the group has operational control over a covered facility or activity.
    3. A joint venture is a member of the corporate group of a ‘controlling corporation’ if the controlling corporation or any subsidiary of that corporation participates in the joint venture.
  4. The Carbon Pollution Reduction Scheme (Consequential Amendments) Bill 2009 (Cth) proposes amending the NGER Act so that it will apply as from 1 July 2010 to a range of non-corporate entities. This is significant in itself but also because will mean that this range of entities will be liable entities under the CPRS Bill.

6.2 Departures from the general position

  1. The CPRS Bill foreshadows departure from the principles mentioned in 6.1 above as regards landfill facilities:
    1. In general, the point of liability for surrendering AEUs will be liable landfill facilities that emit 25,000 tonnes of CO2e annually of emissions.
    2. As an anti-avoidance measure, a lower threshold (10,000 tonnes of CO2e annually of emissions) will apply to any liable landfill facility that operates near another operating facility (within a distance to be prescribed by regulations).
    3. Also, until 2018, Legacy Emissions will be taken into account in determining whether a facility meets the relevant threshold, but will not need to be made the subject of the surrender of an AEU.
  2. The CPRS Bill also foreshadows an important departure from the principles mentioned in 6.1 above. An administrative mechanism—the Obligation Transfer Number (OTN)—will be established under the CPRS. The OTN mechanism will, in some cases, enable and, in other cases, require the obligation to surrender AEUs under the CPRS to be transferred from one ‘liable entity’ to another.
    1. The following entities must use an OTN and assume CPRS liability:
      • ‘large users’ of fossil fuels (other than petroleum liquids), namely: entities with operational control of any facility that emits 25,000 tonnes of CO2e per annum (or more) from combustion of a single fuel)
      • retailers of natural gas and other pipeline gases, and
      • LPG marketers.
    2. The following entities may use an OTN and assume CPRS liability:
      • entities that use fossil fuel as feedstock in a chemical transformation or consume fossil fuels other than by combustion 
      • entities undertaking solid fuel transformation (making coal char, coke, briquettes and by-products) 
      • upstream suppliers of natural gas, LNG, CNG, ethane, coal seam gas, underground coal gas and town gas that acquire gaseous fossil fuels from another entity to manufacture those gases
      • intermediate suppliers of fossil fuels
      • entities using fuel for international voyages or for other purposes that do not result in domestic emissions, and
      • large users of petroleum liquids.

        Whether these entities choose to assume direct responsibility for the CPRS liability of the fuels they use will depend on their particular circumstances.
  3. Also, by way of further departure from the principles mentioned in 6.1 above, certain entities will be able to seek a ‘liability transfer certificate’ in the following cases with the consequences mentioned:
    1. With the approval of the CPRS regulator, entities with financial control over a covered facility will have some flexibility to take on CPRS liabilities where specified criteria are met.
    2. With the approval of the CPRS regulator, controlling corporations will have some flexibility to shift CPRS obligations to another legal entity within their group where certain criteria are met, and with the caveat that CPRS obligations would revert to the controlling corporation if that other legal entity fails to meet its obligations under the CPRS.
    3. In cases where the CPRS regulator approves a transfer of liability for a covered facility to another entity within a controlling corporation’s group, the entity taking on liabilities under the Scheme will also be required to take on reporting obligations for that facility under the NGER Act.

7 Method of permit allocation

7.1 General

The CPRS Bill contains the following provisions concerning allocation of AEUs:

  1. AEUs will be ‘stamped’ (by means of an ‘identification number’) with the first year (known as a ‘vintage year’) in which they are capable of being surrendered (in fact, there will be no physical permits or certificates at all, but rather entries in the Registry).
  2. The White Paper foreshadowed that AEUs would be sold by monthly public auction, commencing (before the CPRS start date) in April 2010, and that one of the 12 auctions per year (namely, the one held in July) will include the sale of AEUs for future years (up to three years in advance). The CPRS Bill does not deal with these matters except to provide that the Minister and ACCRA may each, by legislative instrument, determine relevant procedures, policies and rules.

7.2 EITEs (1)

  1. The White Paper foreshadowed that special transitional assistance would be given to industries identified as emissions-intensive trade-exposed (EITE) industries18. The CPRS Bill does not deal with these matters except:
    1. to create special auctioning mechanisms for AEUs which have been allocated freely to EITE industries and which have not been transferred (expiring on 31 December 2011), and
    2. to enable the formulation by regulation of an ‘emissions-intensive trade-exposed assistance program’, some (but by no means all) of the characteristics of which are broadly described in the CPRS Bill (EITE Assistance Program).
  2. The White Paper also indicated that:
    1. approximately 25 per cent of AEUs would be allocated free of charge to certain EITE industries, in the following manner:
      • Activities that have an emissions intensity between 1,500 tonnes of CO2e per million dollars of revenue and 2,000 tonnes per million dollars of revenue will get a free allocation to cover 60 per cent of their emissions.
      • Activities that have an emissions intensity above 2,000 tCO2e per million dollars of revenue will receive a free allocation to cover 90 per cent of their emissions.
      • In calculating the emissions intensity of an EITE industry, both direct and indirect emissions will be taken into account.
    2. Assistance will be provided until 2020 unless broadly comparable carbon constraints in other countries, or sectoral agreements, are developed: after 2020, assistance will be phased out over five years, assuming an acceptable global agreement is in place.

      The CPRS Bill does not specify that these matters must form part of the EITE Assistance Program.
  3. The White Paper indicated that agriculture, if and when it is brought into the scheme, will receive comparable assistance and that the proportion of AEUs allocated free of charge will rise to approximately 35 per cent of the total.

    The CPRS Bill does not deal with these matters.

7.3 EITEs (2)

Table E.2 of Volume 1 of the White Paper summarised the proposals contained in it as regards EITEs as follows:

Feature Policy
Form of assistance Allocation of permits at the start of each compliance period
Based on individual entity’s previous year’s level of production
Upon closure, must relinquish permits for production that did not occur in that year
Basis of assistance  Provided to new and existing entities undertaking eligible EITE activity prescribed in regulations
Scope of assistance Direct emissions covered by the scheme
Scheme related cost increase for electricity and steam use
Scheme related cost increase for upstream emissions from natural gas and its components (for example, methane and ethane) used as feedback
Eligibility for assistance  Eligibility of activity based on an assessment of all entities conducting an activity
Trade exposure assessed through quantitative and qualitative tests
Emissions per million dollars of value added
Time period for assessment:
  • emissions data: 2006–0 to 2007–08
  • revenue/value added data: 2004–05 to the first half of 2008–09
Initial rates of assistance 90 per cent for activities with emissions intensity of at least 200ot CO2-3/$m revenue or 6000t CO2-3/$m value added
Carbon productivity contribution  Initial rates of assistance will be reduced by a carbon productivity contribution of 1.3 per cent per annum 
Allocative baselines   Allocative baseline for activity based on historic industry average level of emissions per unit of production for all entities conducting activity
Electricity allocation factor set at 1t CO2-3 per MWh nationwide, may be adjusted in respect of existing large electricity supply contracts
Natural gas feedstock allocation factor set state by state
New entrants New entities conducting an existing EITE activity will receive the same assistance as existing entities conducting the activity
Activities new to Australia will be able to apply for EITE eligibility – assessment and baselines made on the basis of international best practice
Allocations to existing entities conducting EITE activities will not be adjusted for allocations to new entrants
Quantum of assistance Government expects allocations to EITE sector to be around 25 per cent initially (35 per cent including agriculture), increasing to around 45 per cent by 2020
Review of assistance EITE Assistance Program to be reviewed by independent body at each five year review point, or at request of minister
Review would consider:
  • inclusion of additional activities in light of commodity price changes and expansions in scheme coverage
  • consistency of EITE program with overall rationale and principles
  • existence of broadly comparable carbon constraints applying internationally

Five years’ notice of any changes to EITE Assistance Program to be provided, unless required for compliance with Australia’s international trade obligations


The White Paper also indicated that the trade exposure of activities will be assessed on one or the other of the following bases: a trade share (defined as the ratio of the value of imports and exports to the value of domestic production) greater than 10 per cent in any one of the years 2004–05, 2005–06, 2006–07 or 2007–08; or a demonstrated lack of capacity to pass through costs due to the potential for international competition.

The White Paper also indicated that the assessment of emissions intensity for the purposes of determining eligibility of an activity will be based on either weighted average emissions per million dollars of revenue generated by entities conducting the activity, or entities may request to government that the eligibility assessment for an activity is made on the basis of the weighted average emissions per million dollars of value added generated by entities conducting the activity, in which case, the entity and government will need to agree on which input costs will be adjusted to calculate the proxy for value-added for the activity.

The CPRS Bill does not specify that these matters must form part of the EITE Assistance Program.

8 Penalties

8.1 Liable entity responsibility

The CPRS Bill indicates that ACCRA will have a range of compliance, investigative and enforcement powers and a range of mechanisms, including civil penalty and criminal provisions, to respond to non-compliance with the CPRS.

Principally, failure to avoid a unit shortfall for a compliance period by surrendering a suitable number of AEUs to cover emissions in that period will attract an administrative penalty. The rate of this penalty will be prescribed by regulation, to a maximum equal to 110 per cent of the benchmark average auction price for AEUs during the previous financial year. (This maximum will also be the actual rate if another amount is not prescribed.) In addition, failure to pay the administrative penalty when due will result in a further ‘late payment penalty’ of 20 per cent per annum (unless a lower rate is prescribed by regulation).

In addition to the administrative penalty, the obligation to surrender permits to meet any unit shortfall will continue under a ‘make-good’ requirement, with ‘make-good’ permits equivalent to the shortfall to be surrendered in the next compliance period.

Also, the CPRS Bill  contains ‘assurance’ provisions modelled on those in NGER Act. These include compulsory external auditing provisions. As well, ‘large emitters’ (with obligations under the CPRS 125,000t CO2e or more) will be required to have their annual emissions reports assured by an independent third-party prior to their submission.

ACCRA will also have the power to review an annual emissions report for up to four years after its submission, except in the case of fraud, in which case the period will be unlimited.

8.2 Personal liability

The CPRS Bill also imposes personal liability, in relation to its civil penalty provisions, on ‘executive officers of bodies corporate’, defined to include directors, chief executive officers, chief financial officers and secretaries of corporations. The personal liability is imposed if the corporation contravenes a civil penalty provision and the relevant officer:

  1. knew that, or was reckless or negligent as to whether, the contravention would occur
  2. was in a position to influence the conduct of the corporation in relation to the contravention, and
  3. failed to take all reasonable steps to prevent the contravention.

The CPRS Bill contains a non-exclusive list of matters to which the court must have regard in determining whether the officer failed to take all reasonable steps to prevent the contravention.

The civil penalty provisions of the CPRS Bill include failure to quote an OTN when so required, quotation of a false OTN, and failure to make certain required notifications. Notably, however, the administrative penalty described in section 8.1 above in relation to failure to avoid a unit shortfall is not a civil penalty provision.

9 Compensation arrangements

9.1 Coal

The White Paper indicated that there would be specific direct assistance, possibly in the form of free permits, for the coal-fuelled electricity generation sector. It also stated that only a limited amount of direct assistance would be provided, the quantum of that direct assistance to be determined only after the medium-term national emissions target range is established. That direct assistance would be given on an ‘up front’ and ‘once-and-for-all’ basis before the CPRS begins.

The CPRS Bill embodies in its Part 9, without so naming it, the Electricity Sector Adjustment Scheme foreshadowed in the White Paper. The principal features of Part 9 of the CPRS Bill are the following:

  1. assistance is limited to those assets which were in existence on 3 June 2007, the date when former Primer Minister John Howard announced the then Coalition Government’s support for an emissions trading scheme
  2. assistance is limited to the first five years of the CPRS
  3. assistance will be in the form of the issue of free AEUs, the number of which will be capped
  4. free AEUs will not be issued if generation assets do not pass the ‘power system reliability test’ for the relevant financial year, and
  5. free units may be withheld in the 2013-2014 and the 2014-2015 financial years if a ‘windfall gain declaration’ is in force in relation to a particular generation asset.

Further details of the operation of Part 9 of the CPRS Bill will be provided in a separate Freehills update to be published in the near future.

9.2 Other arrangements

The Federal Government has previously indicated that ‘every cent’ generated from the sale of permits will be used to assist Australian business and households to ‘adjust to the scheme and to invest in clean energy options’. Apart from EITE assistance and specific direct assistance for the coal-fuelled electricity generation sector (discussed above), the Federal Government has proposed the following specific forms of compensatory arrangements.

  1. Fuel taxes will be cut ‘on a cent by cent basis to offset the initial price impact of fuel associated with the introduction of’ the CPRS. The policy will be reviewed after three years.
  2. Households, particularly low-income households, will be compensated through the taxation and benefits systems and through assistance with energy efficiency measures and information. 
  3. A Climate Change Action Fund (CCAF) will be created to assist industries (other than coal-fuelled electricity generation) which do not qualify as EITE industries.

The CPRS Bill does not address any of these matters.

10 Administrative arrangements

As mentioned above, the regulator for the CPRS will be ACCRA.

ACCRA will be established by the Australian Climate Change Regulatory Authority Bill 2009 (Cth) (ACCRA Bill), and will have responsibility for administering the NGER Act (in place of the Greenhouse and Energy Data Officer) and the Renewable Energy Target, in addition to the CPRS.

ACCRA will be composed of a Chair and between two and four other members appointed by the minister for a five-year term and are eligible for re-appointment.

ACCRA will be subject to the direction of the Minister, but only as to general matters. The Commentary accompanying the ACCRA Bill states the that policy intent of this provision is to ensure that ACCRA acts consistently with Federal Government policy, while not empowering the Minister to intervene in particular cases, for example the issue of AEUs to a particular person.

11 Transitional arrangements

11.1 Other carbon-reduction schemes

The White Paper foreshadowed the removal of non-complementary state and territory carbon-reduction schemes, in particular the Queensland Gas Scheme and the New South Wales and ACT Greenhouse Gas Reduction Schemes.

The CPRS Bill does not address these matters.

11.2 ‘Early action’

The previous Coalition Federal government had committed to give credit for ‘early action’ on GHG abatement which occurred after 3 June 2007 but before the commencement of an Australian ETS and which met certain further requirements, in particular, a requirement for ‘additionality’ (essentially, that the ‘action’ went beyond ‘business as usual’ and would not have occurred without the prospect of generating credits).

The White Paper proposed not to proceed with that commitment, largely on the grounds of administrative complexity in the context of the short timeframe for the introduction of the CPRS.

This position is unchanged in the CPRS Bill.

11.3 Renewable energy targets

As a separate matter, the Federal Government, states and territories, acting through the Council of Australian Governments, have already committed to folding their various ‘renewable energy targets’ (which promote the development and commercialisation of renewable energy by obliging parties who buy wholesale electricity to source an increasing proportion of their electricity purchases from renewable sources) into an expanded, national, Renewable Energy Target (RET). The RET is expected to replace the existing Federal Mandatory Renewable Energy Target (MRET), the existing Victorian Renewable Energy Target (VRET) and the proposed New South Wales Renewable Energy Target (NRET). The progress of the RET is discussed in the next section.

12 Next steps

As mentioned above, the consultation period on the exposure draft CPRS legislation will end on 14 April 2009.

According to the Federal Government’s announced timetable19, the aim is to pass the legislation by June 2009.

However, the Federal Government does not control the Senate and will need the support there of either the Opposition Liberal and National Parties, the Green Party, or two independents from Victoria and South Australia. The initial reaction of the Green Party has been negative, and the Opposition, consistent with its policy to delay introduction of a carbon trading scheme until global economic conditions improve, announced on 15 December 2008 that it has commissioned an economic analysis of the proposed CPRS.

On 9 March 2009, the Opposition and Greens agreed terms of reference for a Senate inquiry into the CPRS, scheduled to report by 14 May 2009. The motion, by Senator Milne of the Greens, to establish the Select Committee on Climate Policy was successfully moved on 12 March 2009.

Also on 12 March 2009, Senator Stephens, on behalf of the Federal Government, successfully moved a motion in the Senate that the exposure draft CPRS legislation be referred to the Senate Standing Committee on Economics, to report by 14 April 2009.

Parliament is scheduled to rise for the winter recess on 25 June 2009.

Legislative and regulatory amendments to implement the design of the expanded Renewable Energy Target (requiring 20 per cent of Australia's electricity to be sourced from renewable generators by 2020) are expected to be in place by mid-2009, with the revised targets commencing from 2010.

Schedule 1

Timetable

 Year/Quarter  Date  Milestone
 2008  December  Release of the White Paper
 National registry operational with Kyoto Protocol functions and connected to International Transaction Log
 2009    
 1st quarter    Government releases guidance paper on data requirements of the EITE assistance program (‘guidance paper’)
 Workshops to follow up on guidance paper 
 Entities engaged in potential EITE activities submit data requested in guidance paper
   March  Public release of exposure draft legislation
 2nd quarter  April  Close of consultation period on exposure draft legislation
 Release of Tracking Towards the Kyoto Target 2008
   May  Bills to enact Scheme (including consequential amendments) introduced into parliament.
   June  Public release of key draft regulations
 Government aims to achieve passage of the Bill through parliament
 3rd quarter    Central provisions of the Act establishing Carbon Pollution Reduction Scheme in force 28 days after Royal Assent.
 Regulator formally established
 4th quarter    Stage I regulations and legislative instruments made and tabled in parliament following passage of Bill
     Private entities able to open national registry accounts for Kyoto units
   November/December  United Nations Climate Change Conference in Copenhagen, Denmark (COP 15)
 2010    
 1st quarter    Release of Tracking Towards the Kyoto Target 2009

 Government announces:
  • extension of national emissions trajectory up to 2014–15
  • Scheme caps for first five years of Scheme (2010–11 to 2014–15) 
  • 10 years of Scheme gateways after 2014–15 approach for expanding cap to accommodate increases in coverage
  • National registry operational with Carbon Pollution Reduction Scheme functions

Stage II regulations and legislative instruments made and tabled in parliament

 1st to 2nd quarter    First auction of permits
 3rd quarter  1 July  Start of first compliance year under the Scheme
     Applications under the EITE assistance program made to the regulator
 2011    
 2nd quarter  30 June  End of first compliance year under the Scheme
 4th quarter  31 October  Deadline for liable entities to submit emissions reports through the National Greenhouse and Energy Reporting System
   15 December  Deadline for surrender of eligible compliance permits for first compliance year
 2012    
 4th quarter  31 December  End of first commitment period under the Kyoto Protocol
 2013  

 Government announces final decisions on coverage of agriculture.
 A decision to allow for the sale and transfer of Australian carbon pollution permits internationally will not be made before 2013.

 2014    
 2nd quarter  June  Completion of the first public strategic review of the Scheme by an independent expert advisory committee
 4th quarter  December  Response by the Government to the report on the strategic review tabled in parliament (within six months of the report being delivered to the minister)
 2015    Possible inclusion of agriculture in the Scheme

Endnotes

1. Australian Climate Change Regulatory Authority Bill 2009 (Cth).
2. Carbon Pollution Reduction Scheme (Consequential Amendments) Bill 2009 (Cth). 
3. Carbon Pollution Reduction Scheme (Charges – General) Bill 2009 (Cth).
4. Carbon Pollution Reduction Scheme (Charges – Customs) Bill 2009 (Cth) and Carbon Pollution Reduction Scheme (Charges – Excise) Bill 2009 (Cth).
5. The three types of international units under the Kyoto Protocol (namely: ‘certified emissions reductions’ created under the Protocol’s Clean Development Mechanism; ‘emission reduction units’ created under the Protocol’s Joint Implementation Mechanism; and ‘removal units’ created by a country on the basis of land use change activities) will each be eligible international units. The CPRS Bill also makes provision for non-Kyoto units (units issued in accordance with international agreements other than the Kyoto Protocol) to be prescribed to be eligible international units.
6. See footnote 5.
7. See footnote 5.
8. The CPRS Bill defines ‘eligible upstream fuel’ very broadly in the CPRS Bill to include virtually all fossil fuels.
9. The CPRS Bill defines ‘synthetic greenhouse gas’ by reference to the NGER Act to mean: sulphur hexafluoride; various hydrofluorocarbons, and various perfluorocarbons.
10. The White Paper contemplated that emissions from agricultural sources would be brought into the scheme, but no earlier than 2015, with a firm decision expected to be made in 2013.
11. But see section 5.3 below.
12. Update: Offshore Petroleum Amendment (Greenhouse Gas Storage) Act 2008 (Cth).
13. See regulation 4.12 of the National Greenhouse and Energy Reporting Regulations 2008 (Cth).
14. The CPRS Bill anticipates amendments to the Ozone Protection and Synthetic Greenhouse Gas Management Regulations 1995 (Cth) which will require destruction facilities operating as approved synthetic GHG destruction facilities to destroy SGG in accordance with certain verification requirements.
15. I.e. A recognised customer of a synthetic GHG destruction facility, or an operator of an approved synthetic GHG destruction facility. There is a ‘fit and proper person’ test and ACCRA can take other considerations into account.
16. See 4.1(c) and 4.4 above.
17. See 4.1(d) and 4.4 above.
18. On 18 February 2009, the Federal Department of Climate Change released a guidance paper spelling out data requirements and deadlines for companies seeking permit allocations for their emissions-intensive, trade-exposed (EITE) activities. The assessment process will shape Government decisions about which activities are entitled to free permits and the amount of free permits companies engaged in EITE activities are entitled to receive. The paper sets out a preliminary assessment process to identify industries that will potentially meet the criteria for assistance and should therefore undergo formal assessment. However, the paper nominates 33 production processes that the department has already identified as having the potential for assistance and which will therefore be able to skip the preliminary assessment. These industries include alumina refining, aluminium smelting, cardboard manufacturing, carton-board manufacturing, clinker production, float glass production, lime production, LNG production, newsprint manufacturing, pig iron production, printing paper manufacturing, glass container production, iron and steel manufacturing, lead and zinc refining and smelting and tissue paper manufacturing.
19. An original timetable was announced by Senator Wong on 17 March 2008. A revised timetable was announced at the time of release of the CPRS Bill. A further revised timetable was released on 10 March 2009. Details of the most recent timetable are set out in Schedule 2.

More information

For information regarding possible implications for your business, contact

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John Taberner
Consultant, Sydney
Direct +61 2 9225 5427
john.taberner@freehills.com
 
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