Climate change regulation in Australia

Australian climate change legislative policy continues to be in an active state of play. The two factors principally contributing to this are the lack of control by the Federal Government over the Upper House of Federal Parliament, and tensions on the issue of emissions trading within the Opposition Liberal and National Parties.

The first, and possibly also the second, of these factors will continue to be strongly influential into the new year. The central question during that time will not be whether, but rather how fundamentally, is economic reform to occur in Australia around climate change issues.

The mining sector will be affected both directly and indirectly by these issues as legislative policy around them matures. The most significant development is likely to be as follows: the sector will probably face liabilities to purchase emissions permits for its own direct emissions of greenhouse gases and, in the coal sector, as ‘proxies’ for the emissions of smaller scale users of coal for combustion. There will also be additional costs arising from the fact that upstream suppliers of goods and services which serve as inputs to the mining sector’s operations (for example, electricity, liquid fuels and machinery) will themselves pass on to the sector a proportion of their additional carbon costs. In almost all cases, the Federal Government expects that the mining sector (like every other affected sector) will wish, and will be able, to pass through those increased costs to its customers. However, the Federal Government has expressly ruled out providing any specific legal assistance to enable such pass through.

Not only is Australian climate change legislative policy in an active state of play, it is also developing across a very broad field. This article supplies a succinct but comprehensivesummary of that field and the developments within it.

Australia’s current position on climate change

Some things are clear despite the current policy uncertainty. Australia has had legislation for a Mandatory Renewable Energy Target since April 2001, for an Energy Efficiency Opportunities Program since April 2006, and for a National Greenhouse and Energy Reporting System since September 2007, and Australia ratified the Kyoto Protocol with effect from March 2009.¹

Renewable Energy Target

Primary legislation

The Mandatory Renewable Energy Target (MRET) was established by the Renewable Energy (Electricity) Act 2000 and commenced operation on 1 April 2001. The MRET required liable parties to source an additional 9500 gigawatt-hours of electricity per year from renewable sources by 2010, and was due to extend until 2020.

On 7 September 2009, the following Acts were passed to create the expanded Renewable Energy Target (RET): the Renewable Energy (Electricity) Amendment Act 2009 and the Renewable Energy (Electricity) (Charge) Amendment Act 2009.

The Renewable Energy (Electricity) (Charge) Amendment Act 2009 came into effect on 8 September 2009.

Different provisions of the Renewable Energy (Electricity) Amendment Act 2009 came into effect, or are to come into effect, at different times.

The effect of the amendments will be to:

• extend the RET (as successor to the MRET) to 2030
• require liable entities to source an increasing quantity of electricity from eligible sources, commencing in 2010 and peaking at 45,850 gigawatt-hours in 2020 and continuing at 45,000 gigawatt hours from 2021 to 2030
• allow a limited amount of electricity produced from waste coal mine gas at existing power stations until 2020
• provide for regulations to formulate a program of partial exemptions for emissions-intensive trade-exposed (EITE) industries, to be tied to the EITE program under the Federal Government’s proposed Carbon Pollution Reduction Scheme, discussed below, if and when that scheme is in place, and
• increase the shortfall charge (for failure to source the required quantity of electricity from renewable sources) from $40 to $65 per megawatt-hour, with effect from 1 January 2010.

Delegated legislation

On 7 September 2009, the following Regulations pertaining to the RET were made:

• The Renewable Energy (Electricity) Amendment Regulations 2009 (No 2) amend the Principal Regulations to implement the Solar Credits mechanism, under which the number of Renewable Energy Certificates able to be created in respect of eligible small generation units may be multiplied by a factor that varies over time. Solar Credits replace support for the deployment of household-scale solar photovoltaic systems under the Solar Homes and Communities Plan, and support deployment of small generation units by households, businesses and community groups.
• The Renewable Energy (Electricity) Amendment Regulations 2009 (No 3) (Draft RET-EITE Regulations) amend the Principal Regulations to deter the installation of inappropriately large commercial-scale solar and heat pump water heaters in domestic and small commercial premises.

Each of the above instruments commenced on 9 September 2009.

On 9 December 2009, the Federal Government released an exposure draft of the Renewable Energy (Electricity) Amendment Regulations 2009 (No 3), for the purpose of implementing the EITE assistance mentioned above. The Draft RET-EITE Regulations contain provisions which are relevantly parallel to those for EITE assistance under the Federal Government’s proposed Carbon Pollution Reduction Scheme, discussed below, together with specific provisions relating to the mechanics of applying for and issuing partial exemption certificates.

On 14 December 2009, the Federal Government made the Renewable Energy (Electricity) Amendment (Transitional Provisions) Regulations 2009, to prescribe matters dealing with the transitioning of liable entities and certificates from state-based schemes to the RET. The formal provisions came into effect on 17 December 2009, certain other provisions will come into effect on 1 February 2010, and the remainder will come into effect on the same day as specified provisions of the Renewable Energy (Electricity) Amendment Act 2009.

On 16 December 2009, the Renewable Energy (Electricity) Amendment Regulations 2009 (No 4) came into effect, prescribing matters which the regulator must take into account when considering whether a ‘gaming’ arrangement has taken place.

Energy Efficiency Opportunities Program

Primary legislation

The Energy Efficiency Opportunities Act 2006 came into effect on 6 April 2006. The Act was amended by the Energy Efficiency Opportunities Amendment Act 2007, most provisions of which were backdated to come into effect on the same date as the Principal Act.

Delegated legislation

The Energy Efficiency Opportunities Regulations 2006 came into effect on 27 June 2006. They have been amended a number of times, most recently by the Energy Efficiency Opportunities Amendment Regulations 2009 (No 2), which came into effect on 17 November 2009 and introduced provisions allowing liable entities to shift obligations under the Program to an entity holding a Reporting Transfer Certificate under Australia’s National Greenhouse and Energy Reporting System (see below).

National Greenhouse and Energy Reporting System

Australia’s National Greenhouse and Energy Reporting System (NGERS) has been in effect since late 2007.

Primary legislation

The National Greenhouse and Energy Reporting Act 2007 (NGER Act) came fully into effect on 29 September 2007. It has since been amended by the National Greenhouse and Energy Reporting Amendment Act 2008, which came fully into effect on 15 March 2009, and by the National Greenhouse and Energy Reporting Amendment Act 2009. This latter Act:

• introduces detailed provisions for auditing of reports and reporting entities
• removes the requirement for the regulator to publish totals of a corporate group’s energy production, and
• introduces the concept of a Reporting Transfer Certificate to allow the obligation to report on a facility to be transferred from the controlling corporation of the entity having operational control of the facility to a member of a different group having financial control of the facility.

The first two amendments commenced on 16 October 2009.

The third amendment commenced on 19 September 2009.

The Federal Government’s proposed Carbon Pollution Reduction Scheme, discussed below, if enacted, will amend the NGER Act further. The NGER Act is proposed to be extensively amended by the Carbon Pollution Reduction Scheme (Consequential Amendments) Bill 2009, and these proposed amendments are contingent on the scheme, as is the commencement of certain amendments to be made by the National Greenhouse and Energy Amendment Act 2009 which introduces references to the Australian Climate Change Regulatory Authority.

Delegated legislation

The National Greenhouse and Energy Reporting Regulations 2008 came into effect on 1 July 2008. They were amended with effect from 15 March 2009 by the National Greenhouse and Energy Reporting Amendment Regulations 2009 (No 1).

The National Greenhouse and Energy Reporting (Measurement) Determination 2008 came into effect on 1 July 2008. It was amended with formal effect from 27 June 2009 by the National Greenhouse and Energy Reporting (Measurement) Amendment Determination 2009 (No 1). However, the amendments made by that instrument apply only in relation to the 2009–2010 reporting year and later years.

On 17 December 2009, the National Greenhouse and Energy Reporting Amendment Regulations 2009 (No 2) came into effect. The amendments principally prescribe matters related to greenhouse and energy audits.

An exposure draft of the National Greenhouse and Energy Reporting (Audit) Determination 2009 was made available for comment during August 2009. The Determination is still under development.

The Department of Climate Change also invited submissions during August 2009 on a proposed NGER Auditor Registration Instrument.

Carbon Pollution Reduction Scheme

The primary focus remains on the Federal Government’s plans for its Carbon Pollution Reduction Scheme (CPRS). The Federal Government is committed to the establishment of a cap-and-trade emissions trading scheme in Australia in the form of the CPRS.

The story so far

First round

On 10 March 2009, the Federal Government published its exposure draft legislation for the CPRS. On 14 May 2009, the Federal Government introduced into the House of Representatives ten Bills connected with the proposed CPRS.² On 28 May 2009, the Federal Government introduced into the House of Representatives one further associated Bill.³ These eleven Bills (together, the CPRS Bills) were passed by the House of Representatives (with certain government-moved amendments to some of the Bills) on 4 June 2009, and were introduced into the Senate on 15 June 2009. The Senate considered the CPRS Bills (without voting on them) on 22 and 23 June 2009 before the Senate was adjourned for the winter recess on 25 June 2009. The Senate voted down each of the CPRS Bills on 13 August 2009.

Second round

On 22 October 2009, each of the eleven CPRS Bills (including where relevant the government-moved amendments referred to above) was reintroduced into the House of Representatives. The ‘new’ Bills were known as the Carbon Pollution Reduction Scheme Bill 2009 [No 2], etc. The CPRS Bills [No 2] were passed by the House of Representatives on 16 November 2009.

On 17 November 2009, the CPRS Bills [No 2] were reintroduced into the Senate.

On 24 November 2009, the Federal Government publicly released a series of proposed amendments to the legislation which had been negotiated over the preceding weeks between the Federal Government (Senator Penny Wong) and the Opposition (Senator Ian Macfarlane). The proposed amendments included, amongst other matters, the legislated exclusion of agriculture, the inclusion of a general mechanism for recognising offsets, increased assistance for EITE industries, and a greatly expanded compensation regime for coal-fired power generators.

Then-Opposition Leader Malcolm Turnbull supported the passage of the legislation with the agreed amendments. However, on 1 December 2009, he lost the leadership of the Liberal Party to Tony Abbott, who immediately announced that the Opposition in the Senate would seek to have consideration of the CPRS Bills [No 2] deferred, but if that proved impossible, would oppose the CPRS Bills [No 2] outright.

On 2 December 2009, the Senate rejected the CPRS Bills [No 2] outright.⁴

This action provided the Federal Government with a double-dissolution trigger, but only in relation to the CPRS Bills [No 2] as introduced into the Senate on 17 November 2009, and not in relation to the Amended CPRS which had since become Federal Government policy.

Third round

On 1 December 2009, Greg Combet for the Federal Government announced that the CPRS, including the amendments negotiated by Ian Macfarlane (Amended CPRS), would be the Federal Government’s future policy.

On 2 December 2009, shortly after the Senate’s rejection of the CPRS Bills [No 2], Acting Prime Minister Julia Gillard announced that legislation for the Amended CPRS would be introduced on the first sitting day of the Parliament after the summer recess, which will be 2 February 2010.

Overview of CPRS Bills [No 2]

The CPRS, as set out in the CPRS Bills [No 2], will cover virtually all corporations which are involved in the emission of greenhouse gases within Australia, with the exception of agriculture and deforestation. Greenhouse gases covered by the scheme are carbon dioxide, methane, sulphur hexafluoride, nitrous oxide, hydroflurocarbons and perfluorocarbons.

A corporation covered by the CPRS will be required to purchase enough emissions permits for its group’s greenhouse gas emissions from Australian territory where controlled facilities emit more than 25,000t (=25 Kt) carbon dioxide equivalent (CO₂e) per year, or where the corporation is designated by the CPRS as a ‘proxy’ for downstream emitters.

The number of permits in circulation will be equivalent to the government-determined ‘cap’ on emissions, plus any permits issued to Kyoto-compliant forestry. The short and medium term caps have been set at between five per cent and 25 per cent of 2000 levels by the end of 2020. The long term cap is at least a 60 per cent reduction against 2000 greenhouse gas emissions levels by 2050.

Permits, which are personal property, will be able to be purchased at auction directly from the government or on the secondary trading market (including from Kyoto-compliant forestry) or may be allocated freely under compensation arrangements proposed as part of the scheme. At the end of each year, a corporation covered by the CPRS will be liable to surrender to the government a permit for every tonne of its covered CO₂e emitted that year.

The purchase and surrender of emissions permits will result in the imposition of direct costs at certain points in the economy. Most commonly, this imposition will occur at the point of greenhouse gas emission: for example, in electricity generation and in industrial processes. In other cases, this imposition will occur at a different point in the supply chain: for example, upstream fuel suppliers will have direct costs imposed on them as ‘proxies’ for the emissions of the users of their products, and no direct liability will be imposed on those downstream users.

The legislation contemplates an administrative mechanism (known as the Obligation Transfer Number (OTN)) to enable, and in some cases require, permiting obligations to be transferred as regards certain fuels, and another administrative mechanism which, in other cases, enables permiting obligations to be transferred to subsidiaries or to financial controllers of relevant facilities.

While the direct liability will rest at these set points, corporations will look to ‘pass through’ their greenhouse gas emissions costs wherever they can. A corporation’s ability to do so will be a matter of contractual negotiation as, unlike GST, there is no proposal for legal assistance or a legal framework to pass through emissions costs. Consequently, a component of the price of all goods and services with a greenhouse gas emissions footprint will comprise an emissions cost, to a varying degree, as a result of the CPRS. A party covered by the scheme that does not surrender sufficient emissions permits to cover its emissions will be liable to a penalty and a ‘make good’ obligation.

There will be compensation for EITE industries (for example, aluminium smelting) and coalfired generators, as well as a range of other compensatory measures to be delivered through the taxation system.

The CPRS will not rely on carbon offsets. However, special treatment will be given to Kyoto-compliant forestry (which, on an ‘opt-in’ basis, will be issued with free permits equal to the CO₂e it sequesters) and ‘Carbon Capture and Storage’. Emitters will also be able to purchase emissions credits generated by offset projects accredited under the Kyoto Protocol in other countries, but domestic Australian offsets will not be effective.

Overview of Amended CPRS

As mentioned above, the Amended CPRS reflects amendments to the CPRS Bills [No 2] negotiated between the Federal Government and the Opposition in late-November 2009. A table which summarises in detail the Opposition’s requested amendments and the final proposals agreed to by the Coalition can be found at www.freehills.com/5569.aspx

In summary:

• the Federal Government has offered increased compensation to EITE industries, but not to the level requested by the Opposition or some industry groups such as the Minerals Council of Australia. LNG will receive special treatment ensuring it will be given
  compensation cover for 50 per cent of its emissions. Food processing will also have access to $150 million ofdedicated assistance
• the Federal Government has indefinitelyexempted agriculture from the CPRS. This means that a large part of Australian emissions are not covered by the CPRS. But it also removes a large part of the opposition to the CPRS. Agriculture interests have been vocal opponents of the proposed CPRS
• the Federal Government has opened the way for significant agricultural and other offsets to be recognised
• there will be substantially increased financial support for the coal mining sector
• there will also be increased support for the coal-fired power sector, significantly increasing the amount of free emissions units which will be given to coal-fired power stations and doubling the time over which they will receive them. The Federal Government has proposed other mechanisms targeted to address loan default and energy supply risks
• there will be substantially increased support for mining and manufacturing sectors affected by electricity price rises, and
• there will be measures to recognise voluntary action and energy efficiency.

Double dissolution?

As mentioned above, the Senate’s rejection of the CPRS Bills [No 2] on 2 December 2009 provided the Federal Government with a double dissolution trigger in relation to the CPRS Bills [No 2] as introduced into the Senate on 17 November 2009.

There has been speculation that a double dissolution trigger is also in the mind of the Federal Government in relation to the Bills for the Amended CPRS, which Acting Prime Minister Julia Gillard announced would be introduced into Parliament on 2 February 2010 (Amended CPRS Bills), assuming that the Amended CPRS Bills are passed in the House of Representatives and rejected in the Senate as were the CPRS Bills [No 2].

Double dissolution processes

If and when the double dissolution trigger under section 57 of the Commonwealth Constitution is engaged, there are time limits in the Federal Government’s ability to use it.

In particular, if the Federal Government is to call a double dissolution election, it must do so six calendar months before the date on which the current House of Representatives would otherwise complete its term. This date is calculated by reference to the date on which the current House of Representatives first met, namely 12 February 2008. In short, the double dissolution election can be called no later than 11 August 2010.

If the Federal Government calls a double dissolution election, the entire House of Representatives and the entire Senate are dissolved and every seat in both houses is the subject of the contested election.

Behind the double dissolution trigger in section 57 of the Commonwealth Constitution is the constitutional requirement that the House of Representatives must be (as nearly as practicable) double the numerical size of the Senate. It is therefore likely (but not certain) that, at a joint sitting of the two houses following a double dissolution, the numerical superiority of the House of Representatives would prevail.

However, the procedures leading to a joint sitting following the result of a double dissolution election can be complex.

If, following a double dissolution election the current Federal Government is returned with numbers sufficient to control both houses, there will be no joint sitting and it is reasonable to assume that bills for a CPRS (with or without amendments from the CPRS Bills [No 2]) will simply be introduced and passed in both houses.

If, following a double dissolution election the current Federal Government is returned with numbers sufficient to control the House of Representatives but not the Senate, there will need to be one further round of passage of, and failure to pass, the CPRS Bills [No 2] before a joint sitting can be convened. The CPRS Bills [No 2] must first be introduced and passed (with or without the amendments suggested by the Senate prior to the election). The CPRS Bills [No 2] as passed must then be introduced into the Senate. The Senate must then fail to pass them (as described above). Then, and only then, can the Prime Minister advise the Governor-General to convene a joint sitting of both houses to consider the CPRS Bills [No 2] as passed by the House of Representatives.

To date, there have been six double dissolution elections but there has only been one joint sitting of the two houses of Federal Parliament (in 1974). At that joint sitting, the relevant double dissolution bills were all passed.

Regulations

The CPRS Bills [No 2] rely heavily on proposed regulations to bring the CPRS fully into effect. In particular, the CPRS Bills [No 2] provide for regulations to determine (amongst many other things) the periodic ‘caps’ and ‘gateways’ that will underlie the scheme, the range of direct emitters that will be covered, and all details of the EITE assistance program.

Such regulations will be subject to disallowance by either house of Federal Parliament, in which case they will not be able to be remade for six months (and will then be liable to further disallowance).

The result is that a returned Federal Government which secures passage of the CPRS Bills [No 2] through a joint sitting against the wishes of a hostile Senate may nonetheless experience serious difficulties in actually implementing the CPRS.

Fundamental economic reform

Clearly a substantial process of economic reform is under way in Australia around climate change issues.

This process has two important and ongoing categories of consequences for corporations in Australia.

The first arises in the new climate change-related policy and legislative responses thatAustralian governments will implement. Those responses, it now seems clear, will include stringent carbon accounting and reporting requirements, and progressively more stringent caps on greenhouse gas emissions. They will affect corporations in all sectors of the economy, not just those sectors with direct obligations under the carbon regulatory schemes. This is because the changes will result in higher costs for all corporations for fuel and for energy and commodity inputs. The responses will also open new opportunities in domestic and international markets, particularly for non-carbon-based energy projects and secondary trading in permits and derivative products under the proposed regulatory responses.

The second arises in the impact that climate change issues will have on a wide variety of existing corporate obligations under statute and in contract. Particularly relevant are the reporting and disclosure obligations under the Corporations Act 2001 and the stock exchange listing rules under that Act. Also relevant are obligations under existing contractual arrangements such as long-term supply agreements (which may omit provisions sufficient to allow carbon cost pass through) and joint venture and other agreements (which may omit provisionsappropriately allocating responsibility for carbon-related matters such as information gathering and reporting).

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

Endnotes

1. Ratification makes binding in international law Australia’s commitment to increase its emissions of greenhouse gases to no more than 108 per cent of 1990 levels during the period 2008–2012. Ratification also means that, subject to Australian law, Australian companies can now participate directly in the ‘flexibility mechanisms’ under the Kyoto Protocol. The Federal Government has committed itself to a long term emissions reduction 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. Namely: the Carbon Pollution Reduction Scheme Bill 2009; the Carbon Pollution Reduction Scheme (Consequential Amendments) Bill 2009; the Carbon Pollution Reduction Scheme (Charges–Customs) Bill 2009; the Carbon Pollution Reduction Scheme (Charges–Excise) Bill 2009; the Carbon Pollution Reduction Scheme (Charges–General) Bill 2009; the Carbon Pollution Reduction Scheme (CPRS Fuel Credits) Bill 2009; the Carbon Pollution Reduction Scheme (CPRS Fuel Credits) (Consequential Amendments) Bill 2009; the Customs Tariff Amendment (Carbon Pollution Reduction Scheme) Bill 2009; the Excise Tariff Amendment (Carbon Pollution Reduction Scheme) Bill 2009; and the Australian Climate Change Regulatory Authority Bill 2009.
3. The Carbon Pollution Reduction Scheme Amendment (Household Assistance) Bill 2009.
4. With the defeat of the CPRS Bills [No 2], it is likely that regulations to the effect of the Draft RET-EITE Regulations (see above) will need to be made, at least for a transitional period.

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