15 Jul 2011

The role of ACCC and risks of "price exploitation" with the carbon price

by Michael Corrigan

Price exploitation might be a complex issue with the carbon price, especially if the ACCC doesn't get any new legislative powers.

The Federal Government has announced that it will give new powers to the Australian Competition and Consumer Commission (ACCC) to investigate and monitor the impacts of carbon permits on prices for those companies which are required to buy permits under the Government's scheme.

The Government's concern will be to guard against any "price exploitation" by affected companies exaggerating the impact on their prices of the increase in costs caused by the obligation to purchase carbon permits.

The initial report suggests that the ACCC will not receive any new legislative powers in this area but will issue pricing guidelines and monitor the impact of the carbon permits on prices.

For the ACCC to have any real teeth in this area will require some legislative changes, as the old "price exploitation" provisions which accompanied the introduction of the GST in 2000 expired some years ago and were removed from the Competition and Consumer Act.

What's price exploitation? The experience with the GST

What will amount to "price exploitation" in this area will likely be a matter of degree and require some judgment, which may be complex in some cases.

When the GST was introduced, the concept of "price exploitation" was to ensure that affected traders did not increase prices by more than the amount required to comply with the new tax requirements (which saw some old taxes removed and the new GST introduced at a rate of 10%).

Under the carbon scheme, any price adjustments should only reflect the net cost to the trader of purchase of the required number of carbon permits.

With the GST, the ACCC was given power to investigate and take companies to court if prices, adjusted to reflect the GST, were found to be adjusted in a way that was "unreasonably high", having regard to the change in tax and the surrounding circumstances.

In 2000 the ACCC took an active role, issuing guidelines, monitoring pricing, naming and shaming some companies and publicising its powers – but did not take any trader to court.

Does the concept of price exploitation transfer easily to the carbon tax?

Applying this test to the purchase of carbon permits may be more complicated than it was to the introduction of the GST because the impact on prices will vary according to a number of factors, including:

  • the relative carbon intensity of particular goods and services - indeed even the same products may have a different carbon intensity depending on where and how they are produced;
  • the extent to which a liable entity receives compensation or assistance under the Carbon Price Mechanism - this compensation is intended to assist those activities which are emissions intensive and trade exposed, so that they remain competitive in the market;
  • the capacity of any particular producer to reduce emissions, and therefore liability under the Carbon Price Mechanism, or source potential credits to meet scheme obligations.

In 2000 the ACCC was successful, as few exploitation concerns arose with the GST. However the Act was toughened at that time and the ACCC was able to threaten fines of up to $10 million for price exploitation and to issue notices which required companies to prove that they were not unfairly exploiting the adjustment to prices.

Without these sorts of tough measures with the carbon permit scheme, it will be unclear how effective the ACCC's role may be in this area.

Nonetheless we expect the ACCC will issue detailed guidelines on how it expects companies to reflect the cost of carbon permits in their pricing and these guidelines will warrant careful attention when they are being drafted and considered by affected companies.

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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.