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05 May 2009

Carbon scheme delay means a chance to get it right

The Federal government's announcement that the start date of the Carbon Pollution Reduction Scheme (CPRS) will be delayed by one year should be welcomed as an opportunity to review the underlying legislation supporting the scheme and ensure it reflects best international practice, according to Clayton Utz partner Graeme Dennis.

Mr Dennis said the postponement of the scheme was a chance to hold the CPRS Bill up to closer scrutiny and fix some unintended drafting errors, as well as those provisions that would expose companies to liability for emissions over which they had no direct control or knowledge, or in which they did not have a full economic interest.

For example, he said the creation of a "parent trap" under the current Bill – which has the effect of imposing liability for emissions from facilities on the parent of the operator of the emitting facility – not only meant that the actual emitter avoided liability but would mean hundreds of millions of dollars of emissions liabilities could be "trapped" in the wrong corporate entity.

This was inconsistent with the way other schemes operated internationally and would create long-term problems for companies.

"All other domestic emissions trading schemes currently proposed or in operation throughout the world impose emissions liability at the entity or facility level.That is, the owner or operator of the emitting facility is the liable entity under the scheme," said Mr Dennis.

"The draft Bill for the Australian scheme does not impose liability at the entity or facility level, but instead imposes liability on the parent of the group of companies to which the operator of the facility belongs.

"This is problematic for several reasons, not least of which is that it moves the liability point away from the actual emitter – meaning that if the liable entity defaults the government does not have a right to shut down the facility."

Mr Dennis also said that under the current exposure draft of the Bill, the parent entity would be liable for emissions even where itmight have little or no knowledge of the facility's emissions or its operations or any way of influencing its operation.

"The controlling corporation or "parent" provisions alsomean that a small change in the ownership structure of a group could completely change the liable entity for the emissions, which could open up loopholes for avoidance," said Mr Dennis. "Under the current draft of the Bill, you need regulatory approval to make the actual operator of the facility liable, but no approval is required to move the liability from one parent entity to another through a change of share ownership. That seems contrary to the best interests of the scheme."

He added: "The draft Bill also relieves minority equity interests in the facility of any liability for emissions, so the parent of a group is liable for 100 per cent of emissions, even though its percentage ownership interest in the facility may be much less."

Mr Dennis said under the current exposure draft of the Bill, parent entities also had no mechanism for recovering or transferring all or part of the cost of their emissions liability to the appropriate party or parties under existing contracts, because the contracts were usually written at the facility level, not the parent level. This "trapped" emissions liability in entities that could not pass on the cost.

He said the scheme's delay was a good opportunity to properly address this issue.

"The provisions in the existing CPRS Bill for liability transfer are inadequate to deal with the issue. It is very much a problem for existing contracts, but will also require that future projects and contracting regimes be much more complex, to ensure that the economic consequences for emissions are properly shared between project participants. You could try to insert additional liability transfer mechanisms to deal with this, but the Bill would be much simpler if just the operator was made primarily liable in the first place, as with other emissions schemes throughout the world," he said.

Emissions reporting could still be implemented on a corporate group basis however. "There is already a requirement for operators of regulated facilities to be registered and hold an Obligation Transfer Number at the facility level, so imposing the emissions liability at the facility or operator level would not increase the number of entities directly involved in compliance."

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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.