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Bev this carbon tax seems to have caused as much panic as the GST when it was introduced. Should business be panicking?

I don’t think there is any need for panic, I think a carbon price has been anticipated for quite some time and in many respects industry will welcome some greater certainty on the issue. The scheme actually won’t commence until 1st July 2012. That’s not a long way away, but it is the best part of a year. We will have some draft legislation later this month and there will be opportunity to comment on some of the detail. So, affected industries need to watch the evolution of this scheme carefully and its certainly a significant shift in the overall arrangements for our markets and energy market in particular but I don’t think there is any cause for panic.

So what exactly is the carbon tax?

Well technically and despite being described uniformly as a tax, its not a tax in the usual sense, it is actually a permitting regime which has two phases. First of all a fixed price phase for the first three years and then a market based phase where the price will float according to market forces and the permitting regime takes on the aspect of an emissions trading scheme. The point of transition from one to the other is 1st July 2015.

Under the fixed price regime, free permits will be issued for certain emissions intensive industries which are exposed to international competition. So-called trade exposed emissions intensive industries. Over and above those free permits industries will be required to purchase and then surrender permits at the fixed rate of $23 per tonne and that’s why it is like a tax because there is a fixed impost, if you like, on every tonne of greenhouse gas, eligible green house gas emissions generated.

Fixed price permits cannot be traded or banked, and they must be surrendered during or shortly after the end of the compliance year. While free permits can technically be traded, the government’s standing offer to buy back permits at market value makes it extremely unlikely that there will be any secondary market over this period. However, interestingly, the buy-back offer means that a facility which has received free permits and has above-average efficiency may in fact be able to achieve a financial benefit from the sale-back of the unwanted portion of its free permits.

From 1st July 2015, as I’ve said, the price of carbon permits will no longer be fixed and although there will be certain regulated ceilings and floors to control volatility during the first three years, the price will be market-determined through a flexible cap-and-trade emissions trading scheme. To get the market-based system up and running for 1st July 2015, it is almost certain that flexible-price 2015 vintage permits will begin to be auctioned during 2014. Each “vintage” of permits will authorise emissions only in respect of the particular “vintage” year. The pollution cap, which will determine the number of permits for each vintage, is to be set on a 5-year rolling basis to enable industry to predict and adjust to associated movements in carbon price. The lower the cap the higher the carbon price is likely to be.

Despite what is likely to be a high degree of regulation, there are significant uncertainties surrounding the transition to the cap-and-trade scheme. The regulations setting the 5-year caps won’t be tabled until the end of May 2014. In other words quite a long way away. From year to year a range of factors may influence the caps – including the context of international climate change policy and the recommendations of the government’s proposed independent Climate Change Authority.

In addition, a further Federal election between now and the proposed transitional period may have a significant impact on the ultimate shape of the regulatory regime.

Does it apply to everyone?

No, it applies to, it’s limited to what are called covered sectors and to emissions intensive activities within those covered sectors defined by reference to particular thresholds.

The covered sectors are: stationary energy (for example, power stations), industrial processes with high emissions intensity (such as smelting), fugitive emissions (from active coal mines or oil exploration activities) and emissions from non-legacy waste (from operating landfills and waste treatment plants).

The government’s statement that “about 500 or so companies will be affected” is its estimate of the number of companies in these covered sectors whose facilities emit more than the specified quantity of carbon dioxide equivalent emissions a year. With some exceptions, this threshold is generally 25,000 tonnes.

One important simplification from the current NGERs, that is the reporting regime under the National Greenhouse Energy Reporting Act and the previously proposed Carbon Pollution Reduction Scheme is the proposal to make operators liable to obtain the permits rather than controlling entities. This makes it unnecessary to undertake the sort of tracing exercise which has been one of the bug bears of the NGER’s reporting system.

There has also been a significant change in approach to emissions from transport and synthetic greenhouse gas emissions (from air conditioning and refrigeration and so on) in that neither of these will any longer be subject to the permits regime, or as it was before, the CPRS, but they will be subject to an equivalent carbon price through changes to fuel tax credits and excise or import levies.

The other, I suppose notable sector is agriculture which is a notable exclusion from the scheme, but there are incentives for farmers to reduce greenhouse gas emissions through the “Carbon Farming Initiative”. And in fact, liable companies will generally be eligible to use carbon credits issued under the Carbon Farming Initiative to satisfy their obligations under the scheme.

What’s the main focus?

The focus is a transition to clean energy future and at the heart of that package is the transition in electricity generation.

The clear winner in this context is the renewable sector, whose access to funding from research, development and commercialisation of renewable energy technologies will increase through the activities of the Australian Renewable Energy Agency and their access to around $10billion of investment monies through the Clean Energy Finance Corporation. That will provide a very significant incentive for a very significant shift in the character electricity generation.

At the opposite end of the spectrum the future of conventional coal technology is unclear. There are some, but only limited, transitional allocations of permits and cash to enable coal-fired generators to adjust to the carbon price. Quite innovatively a competitive process is going to be used to achieve agreement to close around 2000 MW of power-generation plant with an emissions intensity in excess of 1.2 tonnes of greenhouse gas equivalent CO2 per MW hour. In effect, the kind of big process that we are accustom to see with projects will be applied to expression of interest to enclosing plant. Interestingly the scheme does not contemplate a situation where no-one bids or no-one bids at an acceptable price.

Approximately $5.5 billion in free permits and cash over a five year period will be available to assist high emission intensive coal-fired generators to adjust. However, receipt of that assistance will be dependent on them meeting system security requirements – that is, agreeing to remain in the market to guarantee on-going security of electricity supply. There is actually concern in some quarters that the assistance package is not sufficient to offset loss of asset value in coal fired facilities and that this will rise to financing difficulties when these facilities are due for re-financing.

What about other sectors?

The effect on other sectors needs to be looked at on a quite industry specific basis and will be undertaking that investigation over the next few weeks and publishing things progressively on the website.

However, it is worth noting that certain sectors – such as the property industry – have complained of a lack of measures to address their impacts and they’ve called for a joint government-industry working group to deal specifically with that sector. The Property Council says that, despite the stimulation of a billion dollar green retrofit incentive, the overall effect of the carbon price as it flows through to construction and operational costs is likely to be adverse in the property sector.

Clearly there will be a lot of regulation around this and wherever there is regulation there is bound to be legal issues. Can you foreshadow any at this stage?

Well it is possible to foreshadow a number of issues and some of them are fairly obvious. There will of course be other issues which will emerge and which are obvious at the present time. Some of the issues it is possible to readily identify.

First of all, as with the current NGERS reporting scheme, in some circumstances there will be uncertainty about the entity that is in operational control for the purposes of defining liability.

Opportunities to transfer liability to an entity outside a corporate group will depend on the legal meaning of financial control, and although there is some precedent in relation to that meaning, it may prove complex in the present context.

The question of whether or not a business will be entitled to pass through any cost increases that occur as a result of the Carbon Price Mechanism (either directly or indirectly) will depend on the precise terms of individual contracts. Recent contracts are likely to have change in law clauses which contemplated and allocated carbon price risk since the issue has been on the table for some time. However in older contracts, change in law provisions may enable costs to be passed through simply as an aspect of change in law rather than a specifically allocated risk. However, depending on their terms, the relevance of tax clauses may be limited, since despite as I’ve said, the widespread use of the term, the carbon price is not technically a tax.

Some other issues, dealing, it is foreshadowed that permits may be used as security and in fact equitable interests may arise in relation to them. These things will presumably be subject to legal requirements on which business will need advice.

Depending on the extent of anticipated impacts in particular, on particular businesses, it may be necessary for them to make disclosures to the market under the Corporations Act.

Eligibility for compensation and/or grants and loans under the various newly established arrangements and bodies, may be quite technical, factually and legally and again some assistance may be needed.

There may be competition issues arising from proposed price increases which are attributed to the carbon price mechanism where in fact they may not be justified by reference to it or may be alleged not to be justified by reference to it.

Finally, if in the future, the scheme is linked to international trading schemes, to enable liable companies to use international permits to satisfy their obligations, there are likely to be eligibility and other issues at the interface between our scheme and those schemes.

Thank you Bev Kennedy. What should businesses do if they are worried?

Well, we have lots of people working on this and we are very happy to talk to anyone who has any concerns so we welcome enquiries and contacts.