25 May 2012

Confusion reigns over local government emissions under the Carbon Price Mechanism

Judging by recent press, local councils and Senate Estimates Committees are in a spin over councils' potential liability for emissions from landfill waste under the Carbon Price Mechanism (CPM), due to commence on 1 July 2012.

Some quick points of clarification are required:

  • merely because a local council has been reporting emissions from landfill waste under the National Greenhouse and Energy Reporting Scheme (NGERS), or will have an obligation to do so in the future, does not mean that the council has a liability equivalent to the emissions which it reports. Current reporting under the NGERS Scheme does not equate to financial accountability under the CPM; 
  • for persons with operational control of landfill facilities, financial accountability under the CPM is limited to the amount of covered emissions. Emissions from waste deposited in a landfill prior to 1 July 2012 (that is, the day that the commencement of the CPM), will not count towards a facility's covered emissions, now or in the future.

What is unclear: councils' future financial liability under the CPM

Where councils should have a concern is the quantification of their financial liability under the CPM going forward. While there are methodologies which enable councils to estimate the emissions from the types of waste received in a landfill facility, and consequently determine the emissions profile of waste deposited from 1 July 2012, those emissions will occur over an extended period, potentially 15 to 20 years.

The issue for councils is that in order to manage their future liability under the CPM they will need to start charging from 1 July 2012 an amount that will reflect the "carbon cost" for waste placed in landfill facilities. The challenge is that they do not know how much a carbon unit will cost when the actual emissions occur.

During the first three years of the CPM, the price for a carbon unit is fixed ($15 in 2012 rising 5% in real terms each year), transitioning to a floating price in 2015. Treasury modelling estimates that the price of a carbon unit will be approximately $29 at this time. Beyond that date, little is known as to what future carbon unit prices will be, since no caps on the number of carbon units available to be purchased have been announced.

Forward auction of carbon units will be limited in both quantity and the number of carbon units. It is likely that only four vintage years of carbon units will be auctioned in any compliance year and there will only be a small percentage of future vintages sold on a forward basis. So while prices for the next five years will be known or could be estimated, there will be nothing available which will enable councils to determine the likely carbon price at the time the emissions from waste deposited in July 2012 actually occur. Councils therefore run the risk of greatly underestimating or overestimating their future financial liability.

The problem could be alleviated if councils could purchase carbon units now which could be used to meet that future liability. The design of the CPM, with its initial fixed price period, however, prohibits "banking" of units purchased during the first three years. Instead, such units are generally automatically surrendered at the time of purchase. Further, while it is possible for councils to buy eligible emissions units (such as Australian Carbon Credit units under the Carbon Farming Initiative, or eligible international emissions credits), there are limits on how many can be used to meet liability at least during the initial use of the CPM, and also there is a risk of paying a surcharge for any international credit if its value is less than the floor price. Accordingly, councils will be assuming considerable risk in buying eligible credits now for potential use in 15 to 20 years' time when the regulatory environment could be quite different from what it is now.

 

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