Passing on the cost of the Carbon Pricing Scheme - What does your service agreement allow for?

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20 July 2011 | Helen Clarke

The most frequently used cost “pass-through” mechanisms in services agreements are change in tax and change in law provisions. However, these types of provisions may have limited application in service agreements between data centre service providers and their customers for a number of reasons.

Change in tax provisions

While the Carbon Price has uniformly been described as a “tax”, it is actually a “permit” regime operating through two phases – an initial three-year fixed price phase, and then a market based phase where the price of permits will float according to market forces.

Under the initial fixed price regime, permits will be issued at no cost to certain emissions-intensive industries that are exposed to international competition. Over and above these free permits, industries will be required to purchase permits at a fixed rate of AUD$23 per tonne of carbon released into the atmosphere. This is why the Carbon Price has been labelled a tax because it will, in effect, operate as a fixed impost on every tonne of carbon generated.

On this basis, a supplier that will become subject to the Carbon Price scheme should not assume that it can rely on a change in tax provision in its contracts to pass through the increased cost it will incur under the scheme to its customers. On the other hand, change in tax provisions regularly cover “imposts”, “charges” and “levies”, so the initial fixed Carbon Price regime at least may fall within the scope of some change in tax provisions.

In any event, in the context of electricity costs, the Carbon Price scheme will apply directly to coal and gas fired power stations who supply electricity, not to data centres – so a change in tax provision is unlikely to permit a data centre service provider to pass through its increased electricity costs that result from the Carbon Price scheme as a change in tax for the service provider, because the impost (or “tax”) is not levied directly on the service provider.

Change in law provisions

It is clear that enactment of legislation implementing the new Carbon Price scheme will be a change in law. However, the typical form of change in law provision may not easily allow the pass through of increased costs of the Carbon Price scheme by a supplier to its customers, particularly during the second phase where the Carbon Price will vary with market forces.

Change in law provisions generally lend themselves to once-off, fixed amount price adjustments that apply to and are allocated across the remainder of the term of an agreement. In the second, market-based phase of the Carbon Price scheme in particular, it will be difficult for a supplier to determine with any certainty what the permit price will be for any extended period of time.

As a consequence, a supplier will not be able to accurately determine the additional costs it will incur under the Carbon Price scheme for the purposes of a change in law provision.

Again however, unless the change in law provision is drafted broadly enough to allow a data centre service provider to increase its charges if its own costs of providing the service increase (whether as a direct or indirect result of a change in law or otherwise), it may be difficult to rely on a change in law provision to pass on such increased electricity costs to customers.



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Helen Clarke

Partner. Brisbane
+61 7 3228 9818

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