14 May 2009

Emissions trading scheme bills introduced into Australian Parliament

The legislation to introduce a domestic emissions trading scheme into Australia, the "Carbon Pollution Reduction Scheme" (CPRS) Bill and associated bills, was introduced into the Australian Parliament today.

The CPRS Bill largely follows the exposure draft which was released by the Government for comment on 10March 2009, amended to cater for the Prime Minister's announcement on 4May 2009 that the scheme commencement date would be delayed for one year to 1 July 2011, and that compliance costs for the first year (2011-12) would be fixed at $10/tonne.

These are some of the important features of the CPRS Bill as tabled, and its departures from the exposure draft:

  • the objects of the Bill now include a national target to reduce emissions by 2020 by 25% if "a comprehensive international agreement" is reached which stabilises the atmospheric concentration of greenhouse gases at 450 ppm;
  • the first auctions of Australian Emission Units (AEUs) will take place in 2011-12, for AEUs that will be first able to be used for the 2012-13 compliance year, which is the second year of the scheme;
  • for the first compliance year, 2011-12, AEUs will not be auctioned but instead will be available for direct purchase from the Government at a fixed price of $10/tonne;
  • after the first compliance year, the price cap mechanism will continue for a further four years (total 5 years in all), but with the fixed price AEUs being available at $40, adjusted at CPI plus 5% over a March 2010 base;
  • there are new provisions in relation to the re-supply of natural gas and the quotation of OTNs - see sections 33A, 51A-51G, 64B, and 66A
  • the liability transfer provisions in respect of financial control have been clarified so that transfer of liability within joint ventures and partnerships is provided;
  • the provisions which allowed the Authority to adjust the ownership records in the Registry upon other proof of ownership (section156) have been deleted; and
  • credits for reforestation will still be able to be earned in respect of growth in carbon stocks from 1July 2010, notwithstanding that the scheme is now planned to commence one year later, however, AEUs issued in the year beginning 1 July 2011 will have a vintage year beginning 1 July 2012.

There are still a number of issues with the CPRS Bills that have not yet been addressed, and these include:

  • the Parliamentary Secretary's second reading speech flagged that there are likely to be further amendments introduced by the Government in respect of the reforestation provisions. For example, the commentary on the draft Bill released in March suggested that the requirement that eligible projects be on a single title would be removed. The Bill tabled today still contains this requirement. It also remains to be seen whether the Government proposes any amendments to those provisions of the Bill by which the forest rights owner can become subject to a forest management obligation where the holder of the AEUs defaults in its obligations;
  • the imposition of liability on the controlling corporation of an emitter, rather than the emitter itself, has caused several problems that we have previously referred to as the "Parent Trap", including that minority owners of a facility can escape altogether liability for its emissions, and problems as to how the controlling corporation can pass on the emissions cost to customers of an emitting facility when the controlling corporation does not itself operate the facility or contract with those customers - the Parliamentary Secretary has also flagged that this issue is still being reconsidered and may lead to further amendments;
  • the scheme for allocation of AEUs as compensation to Emission Intensive Trade Exposed industries is still not set out in the CPRS Bill, but is to be set out in regulations (and we expect that there is likely to be some adjustment in the regulations so that AEUs allocated for the first compliance year (for which year there is a $10 fixed price) will not be bankable into future compliance years);
  • in the fuel supply liability provisions, the definition of "supply" is overly broad and can create liability for mere transport of fuels where the fuel is physically delivered into a shared storage or transport facility and title to the fuel is exchanged for co-ownership of a greater commingled body of fuel, or where fuel is physically delivered into the injection point of a pipeline or network and title to that fuel is exchanged for title to a similar or equivalent fuel at the delivery point of a pipeline or network - the revisions to section 6 and an expanded concept of supply in section 5A do not rectify this issue;
  • the closing reconciliation date for surrender of AEUs, on 15December following the end of the compliance period, is just before rather than just after the settlement date for the most liquid forward international emissions trading contracts (the ECX December forward CER contract), meaning that this contract will not be readily available for use for hedging purposes by Australian liable entities;
  • the liability of an Australian corporation for emissions is not expressly confined to emissions occurring from a facility within Australia;
  • the rules for carry-over of Kyoto Units past the first commitment period are not yet available, as they are to be set out in regulations rather than in the CPRS Act; and
  • the rules which might prohibit the surrender of eligible international emissions units for certain future compliance periods are also not yet available, as they are to be set out in regulations rather than in the CPRS Act (section 129(7), and there is an enhanced discretion for the Minister to recommend such regulations - section 129(7A).

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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.