08 Nov 2011

Australia's carbon price - the end of the beginning

After several false starts, Australia's Parliament today passed the legislation which will introduce a carbon price for greenhouse emissions in Australia from 1 July 2012.

However, rule-wise this is just the beginning, because many of the details are still to be finalised.

The emissions cap

We do not know yet what will be the emissions cap to apply when the scheme moves from fixed price to capped emissions from 1July 2015. This cap will probably not be set until 2014. However, many businesses will not want to wait until 2014 to contract with carbon price certainty for their business for 2015, and will be looking to buy carbon units much earlier than that in order to firm up their carbon cost.

The international floor price

We do not know yet how the floor price on international carbon permits will be calculated and imposed. Although these units cannot be used in Australia until 1July 2015, many liable entities are likely to be buying them from now in order to minimise and hedge their liability, particularly since international permits are presently trading well below the Australian starting price of carbon ($23 per tonne).

Assistance levels and regulations

The government has drafted regulations for the allocation of free units to some emissions-intensive trade-exposed industries, such as the aluminium smelting and steel manufacturing sectors, but regulations for some other sectors have not been finalised. We do not know yet what will be the benchmark emission levels against which carbon units will be allocated to LNG producers, who are to receive a minimum allocation of 50% of the benchmark emissions, whatever that is.

Existing power contracts

Regulations for assessing the level of assistance to be provided for large trade-exposed consumers of electric power under existing power contracts are also still in the development stage. The exposure draft regulations have a problem with circularity, with large consumers of electric power able to receive free carbon units only if they have a carbon cost under their power contract, and those large consumers often having committed to pay a carbon cost under their power contract only if they receive free permits.

Contracts will need to be re-written

Since the prospect of a carbon price first emerged early in the last decade, many businesses have included a "change of law" clause in their contracts, allowing the adjustment of prices under the contracts should a carbon price law be introduced after the date of the contract. Now that the carbon price has come into law, those clauses will no longer work for new contracts, and businesses will need to introduce new pricing provisions to deal with the fluctuating value of carbon where their business is at all emissions or energy-intensive.

A soft start now looks hard

When details of the scheme were announced earlier this year, the Government probably thought that a fixed price scheme for the initial three years would be a "soft start". However, a few months later, and the fixed price of A$23 per tonne in Australia from 2012 is looking far more expensive than the price being paid by carbon emitters in Europe, where international carbon units are currently trading at about € 7 (under A$10). A market-based price from the start might have ensured that the Australian scheme stays consistent with carbon costs being incurred in other countries that have implemented carbon controls. The advantages of a flexible price market-based scheme rather than a fixed price or tax are already apparent.

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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.