23 Jun 2009

Emissions trading: Government releases details of EITE Assistance Program

On 19 June 2009, the Federal Government released important details of how the emissions-intensive trade-exposed (EITE) assistance program, established by Part 8 of the Carbon Pollution Reduction Scheme Bill 2009, will work in practice. The draft Carbon Pollution Reduction Scheme Regulations 2009 (released with a commentary paper) are open for public comment until 14 August 2009.

The Bill contains very little in the way of detail about the program, simply noting that regulations may formulate a program for the issue of free Australian emission units (AEUs) in respect of activities that, under the program, are taken to be emissions intensive trade exposed activities.

The draft regulations released last week contain the first eight activities that will be eligible for EITE assistance: carbon black production, bulk flat glass production, glass container production, methanol production, silicon production, white titanium dioxide pigment production, zinc smelting, and newsprint manufacturing. Further activities are intended to be added to the list of qualifying EITE activities in the draft regulations.

The Government also released an explanatory paper, "Establishing the eligibility of activities under the emissions-intensive trade-exposed assistance program", explaining the assessments that have been made under the program to date .

Allocation of free AEUs

The allocation of free AEUs is intended to provide assistance in relation to an EITE entity's increase in direct and certain indirect costs resulting from the commencement of the CPRS.

The general principle underlying the allocation of free AEUs is that they will be allocated on the basis of a portion of a baseline level of direct emissions, electricity use and the use of natural gas as a feedstock from an activity, calculated by using the applicant’s previous year’s production of the relevant product. Special provisions are made for new entrants and where there will be a significant expansion of a facility.

The method of calculating the number of free AEUs to be issued to an eligible person for a qualifying EITE activity is set out in Part 9 of the draft regulations, and involves the application of a complex formula. The proposed regulator, the Australian Climate Change Regulatory Authority, may only issue free AEUs to an applicant using this formula. The formula involves, among other things, the application of the assistance rate for an activity, which is determined by whether it is classified by the regulations as high or moderately emissions intensive activity. These rates are 90% and 60% respectively, or 94.5% and 66% allowing for the recently announced Global Recession Buffer.

The "X" factor for large electricity users

Division 6 of Part 9 of Schedule 1 to the draft regulations deals with large electricity users and pre-existing contracts, and requires applicants for assistance to submit legal opinions from senior counsel as to the consequences of the CPRS for pass-through of costs relating to electric power purchase agreements entered into before 3 June 2007.

The Authority is authorised to determine what is referred to as the "X" factor which represents its reasonable estimate of the carbon cost pass through in the relevant contracts. The "X" factor is then factored into the formula to determine the level of assistance in respect of increased electricity costs resulting from the CPRS.

What else is covered by the draft regulations?

The draft regulations also contain details of the assurance standard required for applications for assistance under the program, how applications will be assessed, details of relinquishment obligations triggered by closure of a facility and "true up" mechanisms where allocations have been made to new entrants and for significant facility expansions based on expected production.

Stakeholder responses to the draft regulations

The Government has indicated that it is interested in hearing from stakeholders on the practical implications of the draft regulations, and whether there is need for any additional clarity or certainty in relation to the program. It is particularly interested in receiving feedback on the compliance burden imposed by the program, and whether there are any unintended outcomes by the application of the rules based approach of the program. Industry stakeholders are invited to provide details of situations that have arisen in their industry over the past ten years, if necessary, in confidence, to demonstrate any unintended outcomes or implementation difficulties.

Public submissions on the draft regulations are invited before 14 August 2009. If you need help in formulating a submission to address any specific concerns about the program, and the way it is proposed to be implemented, or would like to know more about how the program affects your business, please contact us.

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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.