05 Feb 2009

Carbon Pollution Reduction Scheme - Impact on energy and resources sector

by Martin Aylward, Prudence Harvey

The Carbon Pollution Reduction Scheme, when implemented in July 2010, will irreversibly change the energy and resources industry.

The Carbon Pollution Reduction Scheme White Paper was released by Prime Minister Kevin Rudd on 15 December 2008, the final version of the Green Paper released earlier in 2008. Signposted by Prime Minister Rudd as "one of the largest and most important structural reforms to our economy in a generation", and proposed for commencement in 18 months time (1 July 2010) the scheme has a lot to live up to.

At this stage, there is no legislation to enact the Government's policy position though it is expected that the proposed Bill will be introduced into Parliament by May 2009. The Government's aim is to have the Bill passed by Parliament by June 2009. While the detail of the legislation will be necessary to assess the full impact of the scheme, the White Paper provides some detail of how the scheme is expected to work and allows a measure of advanced planning.

The scheme is proposed to change the way our economy works by putting a cost on carbon pollution and simultaneously reducing carbon levels by 5 percent-15 percent (compared to 2000) by 2020. The 5 percent reduction is the minimum commitment and 15 percent the maximum depending on the level of global commitment. This overall goal is to be achieved through a "cap and trade" scheme. That is, the total amount of carbon to be emitted is capped and a relative number of carbon permits released into the market. Entities then compete to purchase the number of permits required for their activities. The overall idea is that by putting a price on carbon - the incentive to reduce its emission becomes financial.

The scheme provides a link to external markets through unlimited access to eligible international Kyoto project credits. This means that credit offsets can be gained through investing in overseas projects.

The energy and resources industry will be one of the most affected areas by the scheme with the chief executive of the Minerals Council of Australia stating "This will impose the highest carbon costs in the world on industries severely constrained in their ability to adjust due to current economic circumstances and the rate of development of new low-emissions technologies". While certain participants in the industry are offered concessions by the scheme, many will have to bear the cost of the carbon they emit.

EITE (Emissions-intensive Trade-exposed) assistance

The scheme aims to avoid "carbon leakage" (when emissions-intensive trade-exposed (EITE) industries would simply relocate overseas to maintain profitability) by providing free permits for a significant percentage of their emissions. Activities must firstly demonstrate that they are trade-exposed, which means a lack of capacity to pass through costs due to international competition.

The compensation covers activities with an emissions intensity above 1,000t CO2e/$m revenue or 3,000t CO2e/$m value added (1000t / 3000t). An assistance rate of 60 percent will be applied for activities between 1000t/3000t and 2000t/6000t. Over 2000t/6000t, an assistance rate of 90 percent will apply. For example, LNG production and oil refining are expected to receive free permits for 60 percent of their emissions, and aluminium smelting to receive 90 percent.

By mid-2009 the Government plans to release regulations relating to the EITE assistance program. During the first quarter of 2009 the Government will assess the eligibility of entities for assistance. To do this, data will be required from all entities that want to be considered for assistance. A guidance paper on data requirements for this assessment will be released during the first quarter of 2009.

Electricity Sector Adjustment Scheme

Coal fired power generators may have difficulty passing on the additional costs of carbon to end-users. As a consequence their asset values could materially decrease. The Government has offered assistance to generators that have an emissions intensity of 0.86 tonnes of CO2 per Mwh. To qualify for this assistance the plant must have been in operation or committed to be constructed by 3 June 2007.

The total assistance package is forecast to be around $3.5b, over a five year period. To remain eligible for assistance a generator must produce at the same level as on 3 June 2007. In 2012-13 the Government will review the assistance provided to determine if any windfall gains have been made by generators, to the extent that any such gains have been made the compensation payable in the last two years of the program may be amended.

Coal Sector Adjustment Scheme

The variability of emissions from coal mines has been used as the reason for excluding them from EITE assistance. However transitional assistance is available in two programs.

The Coal Mining Transitional Assistance Fund is designed to help the most gassy mines reduce their emissions. The fund will provide $100m of cash payments per year over five years to the most eligible mines that have an intensity greater than 0.1t of CO2-e per tonne of output and establish and carry out an emissions reduction plan.

The Coal Mining Abatement Fund will be available to all coal mines and will provide $250m over five years to fund abatement activities. Funding will be provided on a competitive basis and recipients will be required to match the funding dollar for dollar.

Where to next

The White Paper is intended to be the foundation for the ongoing response to climate change. The key step for its enactment will be the drafting and enactment of related legislation. At this stage, the exposure draft is expected to be available for public comment from February 2009. The legislation is expected to be passed and the scheme commenced by 1 July 2010. However, energy and resources industry participants will need to keep their fingers to the pulse and constantly evaluate how this significant economic restructure will impact upon their legal position (particularly in terms of any prior contractual commitments that may already have been made) and long-term business viability.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.