Changes in climate change regulation in Australia

1  Introduction

A process of fundamental economic reform around climate change issues is underway in Australia.

In particular, policy towards an Australian Emissions Trading Scheme, to be known as the Carbon Pollution Reduction Scheme (CPRS), is well advanced. According to the Federal Government’s announced timetable, legislation for the CPRS will be passed by June 2009.

However, the Federal Government does not control the Upper House of Federal Parliament and, if it is to pass into legislation its policy initiatives for the CPRS and its related policy initiatives, the Federal Government 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 to the CPRS has been negative, and the Opposition, consistent with its policy to delay introduction of a carbon trading scheme until global economic conditions improve, has announced and confirmed that it will oppose the CPRS legislation in its current form.

May and June 2009 will therefore be crucial months in the development of Australian climate change legislative policy.

That policy is currently in an active state of play. There are two recent and clear indicators of this: the release on 30 April 2009 by the Council of Australian Governments (COAG)¹ of its communiqué on renewable energy and energy efficiency; and the announcement by the Federal Government on 4 May 2009 of significant departures from its CPRS policy as stated prior to that date. COAG has agreed to the Federal Government’s proposal to expand the current Mandatory Renewable Energy Target. The Federal Government has now dropped its commitments to a mid-2010 launch of the CPRS: it now proposes that the CPRS will come into operation on 1 July 2011, although it still aims to pass the legislation for the CPRS through the Senate by June this year. Simultaneously, the Federal Government has committed itself to deeper emission cuts by 2020 than previously proposed if an ambitious international agreement emerges at UN talks in Copenhagen later this year. The Federal Government is now also committed to a fixed price of $10 for emissions permits during the first year of the CPRS, and to providing trade-exposed, emissions-intensive industries temporarily with a ‘global recession buffer’ which would raise levels of assistance for these industries.

This paper gives an overview of the current state of play as at 4 May 2009 of the development of Australian climate change legislative policy.

2  Current position

In overview, the present position in Australia with respect to climate change legislative policy in Australia is as follows:

2.1  Kyoto Protocol

Australia ratified the Kyoto Protocol with effect from March 2008. Ratification makes binding in international law Australia’s commitment to increase its emissions of greenhouse gases (GHGs) to no more than 108 per cent of 1990 levels during the period 2008–12. Ratification also means that, subject to Australian law, Australian companies can now participate directly in the ‘flexibility mechanisms’ under the Kyoto Protocol.

2.2  Emissions reduction target

The Federal 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.

2.3  Emissions reporting legislation

The National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) is in operation and requires a broad range of corporations to submit annual reports concerning their operations’ emissions of greenhouse gases and their production and consumption of energy.

2.4  Emissions trading

The Federal Government is committed to the establishment of a cap-and-trade emissions trading scheme in Australia, in the form of the CPRS.

On 10 March 2009, the Federal Government introduced the first tranche of its exposure draft legislation for the CPRS (CPRS Draft Legislation).²

2.5  Expanded Renewable Energy Target

On 30 April 2009, the Federal Government and the states and territories agreed to an extended national Renewable Energy Target. The target will underpin the Federal 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.

2.6  Other complementary schemes?

The Federal Government has yet to commit itself to a formal regulatory regime that would mandate, or reward, improved energy efficiency, particularly in buildings. However, the Federal Government has recently agreed with the governments of the Australian states and territories to extended initiatives in relation to energy efficiency, and on 4 May 2009 it committed to the establishment of funds to assist energy efficiency in commercial buildings and businesses. In the meantime, calls continue from the private sector for a mandatory scheme, and 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.

3  Structure of this paper

The following sections (4, 5 and 6) contain overviews of the two principal features of the current legislative and policy landscape in Australia (namely: the NGER Act and the CRPS Draft Legislation) and a short summary of the current legislative and policy landscape concerning renewable energy in Australia.

4  National Greenhouse and Energy Reporting Act 2007 (Cth)

The NGER Act came fully into effect on 29 September 2007 under the previous Howard Government. On 24 June 2008, the current Federal Rudd Government proclaimed regulations giving operative content to the Act. The central feature of the NGER Act is its obligation on ‘controlling corporations’ to register and report where ‘group-wide’ or ‘facility-specific’ criteria are met (as regards the energy use, energy production or greenhouse emissions) in relation to facilities which are under the operational control of that corporation or any member of its corporate group. These obligations are supported by provisions requiring the keeping of relevant records, the exposure of those records to audit, the publication of emissions information, and personal CEO liability. The first information gathering period under the Act commenced on 1 July 2008. The first reports under the legislation are due to be submitted in October 2009.

One set of amendments has been made to the NGER Act since 29 September 2007. These were made by the National Greenhouse and Energy Reporting Amendment Act 2008 (Cth) and they came fully into force on 15 March 2009. The relevant amendments are mostly technical in nature, but include an amendment that will allow the Greenhouse and Energy Data Officer (GEDO) (the present administrator of the NGER Act) to publish information on the greenhouse gas emissions, energy consumption and energy production of a corporate group broken down by companies or business units.

A set of amendments has also been made to the regulations under the NGER Act since 29 September 2007. These were made by the National Greenhouse and Energy Amendment Regulations 2009 (No. 1) (Cth). Again, these all came into force on 15 March 2009.

Further amendments to the NGER Act are before Parliament. The National Greenhouse and Energy Reporting Amendment Bill 2009 (Cth) was introduced into Federal Parliament on 18 March 2009. The amendments proposed by this Bill are mostly of a minor nature³. However, one of the Bills forming part of the CPRS Draft Legislation—namely, the Carbon Pollution Reduction Scheme (Consequential Amendments) Bill 2009 (Cth)—proposes to make extensive amendments to the NGER Act so as to integrate its operation with that of the CPRS.

One set of amendments is to come into effect at the same time as the Carbon Pollution Reduction Scheme Bill 2009 (Cth). Those amendments are, for the most part, replacements of all references to the GEDO with references to the proposed new Australian Climate Change Regulatory Authority (ACCRA)⁴  as the common regulatory authority for the NGER Act and the CPRS.

Another set of amendments is to come into effect on 1 July 2010, the same date that the CPRS itself is due to commence. This set of amendments is extensive and includes the insertion of a new Part 3A ‘Reporting obligations of liable entities’ which will place a reporting obligation on all entities (and not only ‘controlling corporations’) which face a liability to surrender emissions permits under the CPRS.⁵

Another set of amendments to come into effect on 1 July 2010 is as follows. Prior to July 2010, a corporation’s ‘group’ consists of: the corporation itself; its subsidiaries; the joint ventures in which the corporation or any of its subsidiaries participate; and the partnerships in which the corporation or any of its subsidiaries participate; and these entities mentioned are the ‘members’ of the corporation’s group. After July 2010, a corporation’s ‘group’ will consist only of: the corporation itself; and its subsidiaries; and these entities are the ‘members’ of the corporation’s group. The amendments will make it obligatory (on pain of civil penalties), in a case where more than one person could be said to have operational control of a facility, for one such person to be nominated as bearing relevant liabilities under both the NGERS and the CPRS.⁶

5  Draft CPRS Legislation

5.1  Introduction

The Draft CPRS Legislation has been the subject of an inquiry by the Senate Standing Committee on Economics and is currently part of the subject of an inquiry by the Senate Select Committee on Climate Policy.

The report of the Senate Economics Committee was handed down on 16 April 2009 and is now available.⁷ In brief, the majority opinion of the committee was that the Bills should be passed in their current form. A dissenting report by the Coalition Senators urged that the Bills not be presented to Parliament, and that an alternative plan should await the outcomes of the Copenhagen meeting of the Parties to the United Nations Framework Convention on Climate Change and the Kyoto Protocol in November–December 2009 (Copenhagen Climate Change Conference). A minority report by the independent Senator Nick Xenophon considered the CPRS as set out in the draft Bills to be ‘ill equipped to initiate sustainable domestic reform in the realm of climate change policy’. A minority report by the Australian Greens withheld final comment but signalled that ‘the CPRS as currently proposed is not designed to drive the transition to a zero carbon economy, but rather is intended to maintain the profitability of existing fossil fuel based industries’.

The Senate Select Committee on Climate Policy was established on 11 March 2009 to look more broadly at Australia’s response to climate change, including ‘the choice of emissions trading as the central policy to reduce carbon pollution’. It is expected that the Committee’s inquiries will include close scrutiny of the draft CPRS Bills. Submissions have closed and the Committee is due to report by 14 May 2009.

5.2  Overview

The principal Bill in the Draft CPRS Legislation, the Carbon Pollution Reduction Scheme Bill 2009 (Cth) (CPRS Bill) would commit Australia to a cap-and trade emissions trading scheme (ETS) to commence on 1 July 2010. As mentioned, the announcements on 4 May 2009 have overtaken these provisions of the CPRS Bill—it is now proposed that the ETS will come into operation on 1 July 2011, although the CPRS Bill is to be passed by June 2009.

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.⁸ It will cover all six of the greenhouse gases which are widely recognised internationally (GHGs) with provision for regulations to specify further GHGs. In the policy paper which the Rudd Government released on 15 December 2008 in the lead-up to the CPRS Bill⁹ (White Paper), it was stated that the ETS 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 CPRS Bill creates two general categories (and two subcategories) of entities who will be liable under the CPRS:

1. direct emitters:
   1. from landfill facilities, and
   2. from facilities other than landfill facilities, and
      
2. importers, producers and suppliers of:
   1. ‘eligible upstream fuel’¹⁰, and
   2. ‘synthetic greenhouse gases’.¹¹

The CPRS Bill does not contain a statutory ‘costs pass-through mechanism’.

The CPRS Bill states as an object: the Federal Government’s long-term target of a 60 per cent reduction in national GHG emissions from 2000 levels by 2050, and its mid-term target of a reduction by between five per cent and 15 per cent below 2000 levels by the end of 2020. Precise annual caps will be prescribed under the CPRS Bill by regulation. That the CPRS Bill takes this approach to the specification of targets and caps is significant: in fact, the CPRS Bill sets no targets or caps; rather, it contemplates that they will be set later. The first caps will be prescribed most probably in early 2010 after the results of the Copenhagen Climate Change Conference are known. As mentioned, the announcements on 4 May 2009 have committed the Federal Government to deeper emission cuts by 2020 than previously proposed if an ambitious international agreement emerges at UN talks in Copenhagen later this year. The commitment is to reduce Australia’s carbon pollution by 25 per cent below 2000 levels by 2020 if the world agrees to an ambitious global deal to stabilise levels of CO2e at 450 parts per million by mid-century.

The CPRS Bill states that the CPRS will have a price cap for the first five years of its operation. The price cap will be $40 per tonne of carbon dioxide equivalent (CO2e) at commencement of the CPRS, rising at roughly five per cent per annum. As mentioned, the announcements on 4 May 2009 have overtaken these provisions of the CPRS Bill: there will be a ‘fixed price period’ for the first year of the CPRS when an unlimited number of AEUs will be issued to liable entities at $10; after 1 July 2012, liable entities under the CPRS will need to purchase permits at the prevailing market price. An upshot of these announcements is that, when the first caps are prescribed after the results of the Copenhagen Climate Change Conference, they will necessarily not relate to the ‘fixed price period’ of the first year of the CPRS.

The CPRS will have linkages with international carbon markets. In particular, no quantitative restrictions will apply to the use of eligible international units¹² for compliance in the CPRS. No quantitative restrictions will apply to the use of eligible international units¹³ for compliance in the CPRS.

5.3  General outline of the ETS

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) except, as mentioned, for the ‘fixed price period’ of the first year of the CPRS. 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 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 established under the CPRS Bill (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. The announcements of 4 May 2009 now make it clear that AEUs issued during the ‘fixed price period’ for the first year of the CPRS will not be capable of being banked. The CPS Bill 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.

5.4  Targets, caps and trajectories

1. The CPRS Bill commits the Federal Government to the ‘trajectories mechanism’ foreshadowed in the White Paper. There are two elements to that mechanism:
   1. ‘caps’, and
   2. ‘gateways’ for future caps.
      
2. ‘Caps’ will be determined by regulation annually 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.
3. The CPRS Bill obliges 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 announcements of 4 May 2009 now presumably mean that the first five years of caps are to be put in place in regulations by 1 July 2011, and that the next five years of caps are put in place by regulation by 1 July 2012. The CPRS Bill obliges the Federal Government to ‘take all reasonable steps to ensure’ that caps are within relevant gateways.
4. 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 2010–11: 109 per cent of 2000 levels
   2. in 2011–12: 108 per cent of 2000 levels, and
   3. in 2012–13: 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 nor in the announcements of 4 May 2009.

5.5  Price

The CPRS Bill contains no details as to likely prices of AEUs. The following table presents the White Paper’s predicted carbon price:

5.6  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 $40 per tonne CO₂e at commencement of the CPRS, rising to $43 in 2011, $46.23 in 2012, $49.69 in 2013 and $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 $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 units¹⁴ will also operate as a ceiling on the carbon price in Australia if the price of AEUs rises above the price of these units.

From the announcements of 4 May 2009, it now appears that the price limitation mechanism will be as follows: in the period between 31 October (the emissions reporting deadline) and 15 December (the permit surrender deadline) in respect of the first year of operation of the CPRS, an unlimited number of special (‘fixed price’) permits will be available at $10 per tonne CO2e 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. It also appears that no similar regime will apply for subsequent periods between 31 October (the emissions reporting deadline) and 15 December (the permit surrender deadline).

5.7  Fundamental obligation and process

The fundamental obligation which the CPRS Bill will impose on liable entities is contained in clause 132 of the CPRS Bill. It is an obligation to avoid a ‘unit shortfall’ by surrendering a suitable number of AEUs or eligible international emissions units. The obligation is underpinned by a requirement, in the case of a unit shortfall, to pay an administrative penalty whose maximum rate will be the number of units in the unit shortfall (that is, the number of emissions units that should have been surrendered but were not) times 110 per cent of the benchmark average auction price of an Australian emissions unit in the previous financial year. In addition, there will be a further penalty for late payment of the administrative penalty, at a maximum rate of 20 per cent of the unpaid amount per year. Relevant dates in each year in relation to this procedure are:

• 31 October – the date by which the report under the NGER Act is due
• 15 December – the date by which emissions units must be surrendered
• 31 January – the date by which any administrative penalty must be paid

Payment of the administrative penalty does not expunge the unit shortfall: sufficient emissions units to discharge the unit shortfall will still need to be surrendered in the succeeding financial year.

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 above in relation to failure to avoid a unit shortfall is not a civil penalty provision.

5.8  Liability of direct emitters (landfill)

The White Paper indicated that emissions from landfill waste sites that closed prior to I 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 I July 2008 (Legacy Emissions).

5.9  Liability of direct emitters (non-landfill)

1. The CPRS Bill does not itself specify non-landfill sectors which will face a liability for direct emissions under the CPRS. Rather, the consequential amendments to be made to the NGER Act as part of the Draft CPRS Legislation will require the making of regulations that will, in effect, make the non-landfill sectors covered by the CPRS in relation to their direct emissions liable in relation to their ‘scope 1’ emissions of GHGs. The Commentary accompanying the CPRS Bill indicates that emissions from the following sources will attract direct emitter liability (non-landfill) under the CPRS by this regulatory means:
   1. fugitive emissions
   2. industrial process emissions
   3. emissions from a waste source, and
   4. emissions from the combustion of energy sources.
      
2. The point of liability for surrendering AEUs will generally be the point at which the emissions actually occur, and there will generally be an annual threshold of 25,000 tonnes of CO₂e of emissions before any liability is imposed. Entities with operational control over covered facilities or activities will be liable. 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. Up to 1 July 2010, 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. 
3. The White Paper foreshadowed that, with the approval of ACCRA, controlling corporations would have ‘some flexibility to shift Scheme obligations to another legal entity within their group’ (emphasis added) on certain conditions. This proposal was stated to be in response to submissions which had identified contracts which would otherwise allow for carbon-cost pass-through but which would be ineffective because the contracting party, not being a controlling corporation, did not have any carbon costs to pass through. In a subtle difference of detail, the CPRS Bill proposes instead that a subsidiary will be enabled to apply to ACCRA for a ‘liability transfer certificate’ so as to have Scheme obligations transferred from its controlling corporation to itself. (A similar provision will allow an entity with ‘financial control’ to apply to have liability transferred from the controlling corporation of the entity with operational control of the facility to itself.) This proposal raises several issues:
   1. In at least some cases, it may be that directors of a subsidiary corporation which voluntarily seeks to have CPRS liabilities transferred to itself will be in breach of their fiduciary duties towards the (subsidiary) corporation.¹⁵
   2. In some contracts, a voluntary assumption of CPRS liabilities by a contracting party which wishes to pass through the resulting costs may be a breach of an express term of the contract.
   3. In some contracts, there may be effective provision for the pass-through of costs which are imposed on a contracting party but not of costs which are assumed voluntarily.
      The Federal Government has since recognised these matters as deficiencies in the liability transfer certificate mechanism as proposed in the CPRS Bill and has indicated that the mechanism will be amended to return it to the proposal as outlined in the White Paper.

5.10  Liability of importers, producers/manufacturers and suppliers

1. In certain sectors where there are many small emitters, such that it would be inefficient and uneconomical to assign direct liability to those emitters, the CPRS Bill identifies ‘proxies’ and makes them 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 ‘synthetic greenhouse gases’¹⁷. In these cases, the point of liability lies with the upstream suppliers and there is no volumetric threshold for liability.
2. The scheme of liability operates, in summary, by the allocation to the proxy of ‘potential greenhouse gas emissions’ in the relevant fuel. The potential greenhouse gas emissions of a quantity of fuel are the greenhouse gas emissions that would be released into the atmosphere as a result of the combustion of that quantity of the fuel. 
3. It is noteworthy that, even when the supplier is a corporation which is a member of a controlling corporation’s group, liability does not fall on the controlling corporation: liability falls on the supplier itself.
4. An important possible deviation in the CPRS Bill from the proposals of the White Paper relates to downstream emissions which occur outside Australia. The White Paper clearly contemplated that upstream fuel suppliers would be liable for emissions ‘from domestic combustion of fossil fuels for transport and stationary energy’ (emphasis added).However, the provisions of the CPRS Bill, together with the proposed amendments to the NGER Act, do not expressly embody that limitation. Again the Federal Government has since recognised these matters as deficiencies in the CPRS Bill and has indicated that the Bill will be amended to return it to the proposal as outlined in the White Paper.
5. The CPRS Bill also foreshadows an important administrative mechanism - the Obligation Transfer Number (OTN) mechanism. 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.

5.11  Method of permit allocation

1. 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.
2. 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).
3. 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.
   
4. The announcements of 4 May 2009 have given further indications, additional to those in sections b and c, of what the EITE Assistance Program will contain. An additional ‘Global Recession Buffer’ will be provided for (EITE) industries for the first five years of the CPRS. This Buffer will provide an additional five per cent free permits for EITE activities eligible for 90 per cent assistance, giving an effective rate of assistance of almost 95 per cent to these highly EITE activities in the first year of the scheme. The Buffer will provide an additional 10 per cent free permits for EITE activities eligible for 60 per cent assistance, giving an effective rate of assistance of 66 per cent to these moderately EITE activities in the first year of the scheme.
5. 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.

5.12  Coal compensation arrangements

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 2013–14 and the 2014–15 financial years if a ‘windfall gain declaration’ is in force in relation to a particular generation asset.

5.13  Climate Change Action Fund

The White Paper foreshadowed the establishment within Treasury of a Climate Change Action Fund (CCAF) 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.

The announcements of 4 May 2009 confirm that the Federal Government has allocated up to $200 million to the CCAF in 2009–10 to support businesses and community organisations to take action to reduce carbon pollution through energy efficiency before the CPRS starts. The announcements of 4 May 2009 commit the Federal Government to comprising the following in the $200 million tranche of the CCAF for 2009–10: $20 million for a business information package to provide advice to businesses on how the CPRS will work and what impacts and opportunities may arise; up to $100 million for Early Action Energy Efficiency Strategies for Business, including energy audits and capital investment; and $80 million for capital investment grants for businesses and community organisations.

6  Renewable energy and energy efficiency

6.1  Introduction

On 30 April 2009, COAG released a communiqué which outlined significant agreements between the governments of the Commonwealth, the states and the territories in relation to renewable energy and energy efficiency.

6.2  Agreement on single national expanded Renewable Energy Target

COAG agreed to the Federal Government’s proposal to expand the current Mandatory Renewable Energy Target (MRET), the principal features of which are as follows:

1. The expanded Renewable Energy Target (RET) will continue until 2030.
2. The RET will require a progressively greater proportion of Australia’s electricity to be generated from renewable sources, rising to 20 per cent (or approximately 45,000 gigawatt-hours (GWh), as contrasted with the currently applicable 9,500 GWh) in 2020 and maintaining that level until 2030.
3. The expanded targets will commence from 1 January 2010, with a target for that year of 12,500 GWh.
4. The shortfall charge payable by a liable entity which fails to meet its target will increase from the current $40 per megawatt-hour to $65 per megawatt-hour (unindexed).
5. All existing projects which are eligible to generate Renewable Energy Certificates (RECs) under the MRET will remain eligible to participate in the RET, and the same eligibility criteria for new projects will apply.
6. There will be additional transitional incentives for small-scale solar, wind and hydro-electricity systems in the form of a ‘multiplier’ by which such activities will be able to create (in relation to the first 1.5 kW of system capacity) a fixed multiple of the RECs to which they would otherwise be entitled. The multiplier would be 5 from 2009–10 to 2011–12, decreasing to zero in 2015–16.
7. There will be transitional assistance for activities which are identified as ‘emissions-intensive trade-exposed’ (EITE) under the proposed CPRS. Activities which will receive 90 per cent or 60 per cent EITE assistance under the CPRS will receive a 90 per cent or 60 per cent exemption respectively from liability under the MRET, but only in relation to the expanded RET (that is, the portion beyond the current 9,500 GWh target).
8. The RET will be reviewed in 2014 (at the same time as the CPRS will be due for review). That review will be extend to the transitional assistance measures for EITE activities.
9. The RET will absorb all existing and proposed State and Territory renewable energy schemes, including the existing Victorian Renewable Energy Target (VRET) and the proposed New South Wales Renewable Energy Target (NRET).

Implementation of the RET as agreed by COAG will require the substantial amendment or replacement of the Renewable Energy Amendment (Increased Mandatory Renewable Energy Target) Bill 2008, currently before the Senate, as well as legislative action by (at least) Victoria.

6.3  National Strategy for Energy Efficiency

COAG finalised a draft of the National Strategy for Energy Efficiency (the National Strategy, which COAG agreed in October 2008 to develop) and signed a Memorandum of Understanding for implementing the National Strategy, with a commitment to consider signing an Intergovernmental Agreement on the National Strategy at its next meeting in Darwin on 2 July 2009. As a first step, COAG agreed to five measures to improve the energy efficiency of commercial and residential buildings¹⁹. The measures are as follows:

1. An increase from the beginning of 2010 in the energy efficiency requirements for all classes of commercial buildings in the Building Code of Australia (BCA).
2. The phase-in in 2010 of mandatory disclosure of the energy efficiency of commercial buildings and tenancies.
3. An increase in the energy efficiency requirements for new residential buildings to 6 stars or equivalent nationally in the 2010 update of the BCA, to be implemented by May 2011.
4. New efficiency requirements for hot-water systems and lighting.
5. The phase-in of mandatory disclosure of residential building energy efficiency, greenhouse and water performance at the time of sale or lease, commencing with energy efficiency by May 2011.

6.4  Australian Carbon Trust

Neither the White Paper nor the CPRS Bill nor the COAG communiqué of 30 April 2009 foreshadowed the establishment, announced on 4 May 2009, of an Australian Carbon Trust (Carbon Trust).

The Carbon Trust will incorporate an Energy Efficiency Trust (EET) to promote energy efficiency in the business sector. The EET will work by putting proposals to businesses to undertake energy efficiency measures that will save money over time. The EET would cover the capital costs of undertaking energy efficiency investments and would put in place arrangements for business to repay the capital costs at a commercial rate as energy cost savings occur. For example, the EET could identify lighting improvements in a business that would cost $2 million to undertake. The EET would cover this $2 million cost, and the business would then pass the energy cost savings from the lighting improvements back to the EET at a commercial rate until the full $2 million with interest is paid back. The Federal Government will provide $50million in seed-funding for the EET.

The Carbon Trust will also incorporate an Energy Efficiency Savings Pledge Funds (EESPF). Under the EESPF, a new website will provide a one-stop shop for individuals and households to pledge funds which will be used by the EESPF to buy and retire AEUs under the CPRS.

7  Next steps

As mentioned above, 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.

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.

Amendments to the Draft CPRS Legislation incorporating the announcements on 4 May 2009, and the substantial amendment or replacement of the Renewable Energy Amendment (Increased Mandatory Renewable Energy Target) Bill 2008 (currently before the Senate) to reflect the COAG communiqué of 30 April 2009, are awaited.

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

This article was written by John Taberner, Consultant, Sydney.

Endnotes

1. COAG is the peak intergovernmental forum in Australia, comprising the Prime Minister, State Premiers and Territory Chief Ministers.
2. The CPRS Draft Legislation consists of the following 6 Bill: the Carbon Pollution Reduction Scheme Bill 2009 (Cth); the Carbon Pollution Reduction Scheme (Consequential Amendments) Bill 2009 (Cth); the Carbon Pollution Reduction Scheme (Charges–General) Bill 2009 (Cth); the Carbon Pollution Reduction Scheme (Charges–Customs) Bill 2009 (Cth); the Carbon Pollution Reduction Scheme (Charges–Excise) Bill 2009 (Cth); and the Australian Climate Change Regulatory Authority Bill 2009 (Cth). On 7 April 2009, the Federal Government released 4 further Bills dealing with the transitional fuel tax arrangements that are intended to complement the introduction of the CPRS, namely: the Customs Tariff Amendment (Carbon Pollution Reduction Scheme) Bill 2009 (Cth); the Excise Tariff Amendment (Carbon Pollution Reduction Scheme) Bill 2009 (Cth); the Carbon Pollution Reduction Scheme (CPRS Fuel Credits) Bill 2009 (Cth); and the Carbon Pollution Reduction Scheme (CPRS Fuel Credits) (Consequential Amendments) Bill 2009 (Cth).
3. They are intended: to clarify the definitions of a number of terms relating to greenhouse and energy audits to be conducted under the Act; to require results of greenhouse and energy audits to be included on the register established under section 16 of the Act; to extend the secrecy requirements to also cover audit information; to allow for decisions made by the GEDO not to register an auditor under the Act to be reviewed by the Administrative Appeals Tribunal; to give the GEDO authority to audit entities who report under section 20 of the Act; to expand the scope of the legislative instrument to be determined under section 75 of the Act to include requirements for the preparation, conduct and reporting of audits and allow for these requirements to be determined by the Minister rather than the GEDO; to require potential auditors under the Act to apply to the GEDO for registration and allow for detailed requirements on auditor registration to be provided in regulations and a legislative instrument determined by the GEDO; to make a number of administrative amendments consequential to the substantive amendments outlined above; and to repeal the requirement for the GEDO to publish corporate level energy production information.
4. Australian Climate Change Regulatory Authority Bill 2009 (Cth).
5. National Greenhouse and Reporting Act 2007 (Cth), Part 3A. 
6. One significance of this change is as follows. It concerns an incorporated joint venture in which no shareholder has greater than a 50 per cent shareholding (such as a 50:50 incorporated joint venture). Prior to July 2010, such a joint venture is both a ‘member’ of the various corporate groups of its ‘participating’ corporate shareholders and a ‘controlling corporation’ in its own right. If the joint venture has ‘operational control’ of a relevant facility, this will trigger both: the requirement for each of its various ‘controlling corporations’ to register and report under the NGER Act in relation to the facility (unless there has been an election of a relevant ‘responsible entity’ among the ‘participating’ corporate shareholders, in which case only the ‘corporate group’ of the responsible entity needs to register and report in relation to the facility): as well as the requirement for the joint venture itself to register and report in relation to the facility. After July 2010, the latter requirement will no longer arise. However, after July 2010, whenever one or more persons may have ‘operational control’ of a facility, there must be an election of a relevant ‘responsible entity’ among the ‘participating’ corporate shareholders.
7. Exposure draft of the legislation to implement the Carbon Pollution Reduction Scheme
8. The concepts of (on the one hand) a carbon tax and (on the other hand) an emissions trading scheme are distinct ones, and the distinction between them has been over several years (and continues to be) consistently made in policy debate in Australia. This is clear, for example, from the four discussion papers released in 1999 by the Australian Greenhouse Office (AGO) and particularly from the submission which the AGO made to the 2002 COAG Energy Market Capital Review. That submission is entitled Pathways and policies for the development of a national emissions trading system for Australia: A response to specific issues raised by the Secretariat to the Council of Australian Governments Energy Market Review, 2002. It specifically refers (at page 7) to the difficulties of ensuring contractual ‘pass-through’ in the following terms: ‘Contractual arrangements and jurisdictional legislation governing cost pass-through in long term supply contracts would need to be catered for in determining the most effective acquittal points for the electricity industry. The AGO understands that some long term electricity supply contracts would allow pass-through of costs associated with a newly imposed carbon tax, but may preclude pass through of costs associated with an emissions trading system, because this possibility had not been foreseen at the time the contracts were written’. These statements highlight the point that the term ‘carbon tax’, and general terms like ‘imposts’ or ‘levy’, where used without embellishment in contracts after 1999 are likely to be construed not to include costs associated with an emissions trading system.
9. White on the Paper Carbon Pollution Reduction Scheme: Australia’s Low Pollution Future 
10. The CPRS Bill defines ‘eligible upstream fuel’ very broadly in the CPRS Bill to include virtually all fossil fuels.
11. The CPRS Bill defines ‘synthetic greenhouse gas’ by reference to the NGER Act to mean: sulphur hexafluoride; various hydrofluorocarbons; and various perfluorocarbons.
12. 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.
13. See footnote 14.
14. See footnote 14.
15. Section 187 of the Corporations Act 2001 (Cth) provides for the limited circumstances in which a director of a subsidiary is taken to be acting in the best interests of the subsidiary if the director acts in the best interests of the subsidiary’s holding company. In brief, those circumstances include that the subsidiary is a wholly-owned one and that it has a constitution which expressly authorises the directors to act in the best interests of the subsidiary’s holding company.
16. See footnote 12 above.
17. See footnote 13 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. The draft National Strategy contains many other significant components, including: extending the application of the Federal Energy Efficiency Opportunities program to smaller energy users; accelerating and expanding the Minimum Energy Performance Standards (MEPS) and labelling program, and establishing national legislation for these matters; gradually implementing Greenhouse and Energy Minimum Standards (GEMS) to cover non-electrical appliances and system components (such as air conditioning ducts); phasing out inefficient lighting products and greenhouse-intensive hot-water systems; and providing a range of informational services to help address information-based market distortions and assist households and businesses to transition to a low-carbon future.

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