Government assistance for emission-intensive, trade-exposed industries

By Simon Bowden.

Key Points:
Although the EITE scheme is part of the CPRS Scheme which is yet to be passed by Parliament, EITE industries should be getting ready now.

The Government recently released further details of assistance to emissions-intensive, trade-exposed (EITE) industries under the proposed Carbon Pollution Reduction Scheme and the increased Renewable Energy Target.

The release of draft regulations for EITE assistance is an indication of the Government's commitment to implementing the Carbon Pollution Reduction Scheme (CPRS), despite the bills for the scheme having twice been rejected by the Senate. The increased Renewable Energy Target (RET) was passed by Parliament in August 2009, including provisions for EITE assistance, but details of that assistance are only now being released for comment.

What are EITE industries?

The draft regulations expands the number of EITE activities from a list released earlier in 2009. Activities proposed to receive assistance are:

• Glass production
• Paper and cardboard manufacturing
• Methanol production
• Carbon black production
• White titanium dioxide pigment production
• Silicon production
• Zinc smelting
• Integrated production of lead and zinc
• Aluminium smelting
• Alumina refining
• High-purity ethanol production
• Magnesia production
• Newsprint production Dry pulp manufacturing
• LNG production (to be incorporated into the regulations at a later date).

Further criteria are specified in the draft regulations that will need to be met by participants in EITE industries in order to qualify for assistance.

What assistance is offered to EITE industries under the CPRS?

Under the CPRS generally, liable entities will be required to surrender a number of Australian emissions units (or other eligible units) each year. The units each represent a tonne of greenhouse gas emissions and liable entities will need to surrender the number of units equal to the number of tonnes of emissions.

Eligible participants in EITE industries will be entitled to receive free Australian emissions units under the CPRS. Those units can then be used to satisfy the participants' own obligations under the CPRS or can be traded with other CPRS-liable entities or intermediaries.

The amount of assistance available to participants in a particular industry will depend on whether the industry is considered to be highly emissions-intensive or moderately emissions-intensive. Highly emissions-intensive industries will receive assistance at the rate of 94.5% of their anticipated CPRS obligations and moderately emissions-intensive industries will receive assistance at the rate of 66% of their anticipated CPRS obligations. The Government previously incorporated a "global recession buffer" into the assistance programme which was to operate for five years from the start of the CPRS but this buffer has now been permanently included in the calculation of assistance.

The amount of assistance will reduce by 1.3% each year to encourage industries to become less emissions-intensive over time.

The amount of assistance will be calculated by reference to an EITE industry participant's direct CPRS obligations based on their anticipated level of production in a particular year. Where actual production differs from the anticipated production, there will be an true-up mechanism adjusting the following year's assistance. There will also be assistance for certain indirect costs such as the increased price of electricity under the CPRS. Some large electricity users with long-term electricity supply contracts will be required to demonstrate that they in fact bear a CPRS cost in order to qualify for this part of the assistance.

The new draft regulations also make specific provision for new entrants into an EITE industry and for significant expansions (of more than 20%) of existing facilities over the course of the programme.

What assistance is offered to EITE industries under the RET?

EITE industry participants will have direct liabilities under the CPRS. By contrast, only electricity retailers (and electricity generators selling directly to customers) will have obligations under the RET. Those entities are required to surrender a number of renewable energy certificates (RECs) each year. RECs represent 1 megawatt of electricity generated from renewable sources such as solar, hydro and wind and liable entities must surrender the number of RECs equal to a percentage of the total electricity they acquire in a year. A liable entity that fails to surrender the required number of permits is liable to pay a shortfall charge.

Unlike the CPRS assistance arrangements, EITE industries will not receive direct assistance by way of free RECs under the RET. Instead, they will be able to apply for a "partial exemption certificate" which will provide an exemption to the retailer (or other RET-liable entity) to a defined amount of electricity. The exemption will be specific to the retailer named on the certificate for the amount of electricity specified on the certificate. Retailers are then expected to pass on to the EITE the cost savings from their reduced RET obligations.

Exemption will be available of up to 90% for highly emissions-intensive industries and up to 60% for moderately emissions-intensive industries. However, the full amount of assistance in each case will only be available where the market price of RECs is above $40 over a certain period.

The amount of the exemption may be changed even once the certificate has been issued. This may occur where the relevant retailer is changed during the year, where the EITE activity ceases to be conducted or where the certificate is inaccurate.

How are applications for assistance made?

For assistance under the CPRS:

• generally only the person with the direct CPRS liability in respect of the relevant EITE activity will be entitled to make an application for assistance under the CPRS;
• applications will be required to be made by 31 October each year (which deadline may be extended to 31 December) for assistance for the financial year in which the application is made;
• applications will need to be made to the Australian Climate Change Regulatory Authority once this is established (the enabling legislation was rejected by the Senate with the other CPRS bills); and
• information demonstrating that the applicant is the appropriate person for receiving assistance, that the defined EITE activity is being carried out and the level of production in the previous financial year for the activity will need to be included in the application.

For assistance under the RET:

• generally only the person carrying out the EITE activity will be entitled to make an application (the Government expects that retailers and other RET-liable entities will not themselves make applications);
• applications must be made before 1 January in the year to which the application relates. However, for assistance in the 2010 year, applications may be made until 31 October 2010;
• applications will need to be made to the Office of the Renewable Energy Regulator until the Australian Climate Change Regulatory Authority is established;
• information demonstrating that the applicant is the appropriate person for receiving assistance, that the defined EITE activity is being carried out, that the level of production in the previous financial year for the activity and details of the electricity sources and usage for the EITE activity will need to be included in the application.

The application processes for assistance under the CPRS and the RET are intended to be as closely aligned as possible.

Where to from here?

EITE assistance programmes under both the CPRS and RET are currently only in draft form. Given the current uncertainty about enactment of the CPRS, it is not know when, or if, the regulations establishing the CPRS programme will be made.

It is anticipated that the RET assistance programme will be established even if the CPRS is not enacted but there is no guarantee that the scope and structure of the assistance will not change as a result of consultation on the draft regulations. Although it is currently proposed that applications can be made until 31 October 2010, entities carrying on EITE activities should start to consider the information they will be required to provide to the Office of the Renewable Energy Regulator to make applications for RET assistance.

EITEs and electricity retailers will need to consider their current contractual arrangements for passing on RET-related costs and how these may need to be amended to deal with the partial exemptions that may be granted and how the parties may deal with the risk of the amount of exemption being changed during a year.

For further information, please contact Brendan Bateman.