A package of 19 Bills to implement the carbon pricing mechanism (CPM) was introduced into Parliament on 14 September 2011. The key piece of legislation in the package is the Clean Energy Bill 2011 (the Bill).
A number of significant changes have been made to the Bill since the exposure draft was released in July this year. This article highlights a number of key changes that impact on the operation of the CPM.
Previously, the carbon price was only imposed on liquid fuels indirectly through changes to fuel tax credits, fuel excise and tariffs. The Bill now also enables the Minister to introduce an ‘opt-in’ scheme through regulations to allow entities which acquire, manufacture or import significant quantities of fuel to take responsibility for their emissions by directly participating in the CPM. Under the opt-in scheme instead of paying an equivalent to the carbon price via reductions to fuel tax credits, an entity would be required to surrender eligible emission units for each tonne of CO2-e it emits from the use of fuel. An entity will be able to ‘opt-in’ to the scheme for some or all of the fuel it consumes.
If introduced, the opt-in scheme would start from 1 July 2013. The Bill contains very little detail about how the opt-in scheme would work and leaves most matters to be specified in regulations, including which fuels will be covered by the opt-in scheme.
The previous distinction between transmission and distribution gas pipelines has been removed. This means that the default position for natural gas is that the CPM liability for emissions from combusting natural gas falls on the gas supplier, unless the person receiving the gas agrees to accept a transfer of that liability.
However, if natural gas is supplied for use in a “large gas consuming facility” the entity that controls the facility must accept the transfer of CPM liability for any emissions from combusting the gas and will also become a liable entity under the CPM.
A “large gas consuming facility” is a facility that has, in a financial year after 1 July 2010, combusted natural gas with a CO2-e of more than 25,000 tonnes. This means that, once a facility becomes a “large gas consuming facility”, the entity that controls it will remain a liable entity even if emissions in any particular year are below the direct emissions threshold.
According to the Explanatory Memorandum this will “ensure that facilities do not move in and out of coverage from year to year” and therefore provide gas suppliers with certainty regarding their CPM liability. However, the regulations will provide that a facility may cease to be a “large gas consuming facility” if emissions from natural gas combustion are reduced to less than 25,000 tonnes of CO2-e per year on a constant basis. It is not clear whether some form of application will be required for a facility to cease being a “large gas consuming facility”.
The provisions allowing an entity to voluntarily accept a transfer of liability remain essentially unchanged, except that an entity must give a gas supplier at least 28 days notice (or less if agreed) of their intention to utilise a registered Obligations Transfer Certificate by quoting an Obligations Transfer Number (OTN) for the first time.
Emissions from the combustion of natural gas will still count in determining whether a facility is a ‘large gas consuming facility” but will not be included in an entities’ CPM liability unless it has accepted a transfer of that liability.
The proprietary status of a carbon unit has been clarified by the new section 103A of the Bill, which provides that the registered holder of a carbon unit is the legal owner in a similar manner to registration of title for real property.
Section 103A only protects a person who purchases carbon units in good faith for value and without notice of any defect in the title of the registered holder.
Further, under the new section 109A of the Bill the regulations may make provision for the registration of equitable interests in carbon units (except for security interests covered by the Personal Property Security Act 2009 (Cth)).
During the fixed charge period (1 July 2012 – 30 June 2015), liable entities must report all direct greenhouse gas emissions by 31 October of each year. They must also report their interim emissions by 15 June of each year to calculate their progressive surrender obligations. Liable entities can either report their interim emissions as 75% of the previous year’s emissions or provide an estimate of 75% of the current year’s actual emissions.
Changes to section 126 of the Bill will now allow regulations to specify that the reported interim emissions may be less than 75% of the previous financial year’s emissions if certain conditions set out in the regulation are satisfied.
The anti-avoidance provisions in the Bill allow the Regulator to ‘look-through’ schemes that have the purpose of avoiding CPM liability by taking advantage of an emissions threshold (for example, a scheme that artificially breaks up a large facility so that the emissions of each part are less than the direct emission threshold). The Regulator can make a determination that a scheme has such a purpose, which means the facility loses the benefit of any relevant emissions thresholds and the controlling entity will be liable under the CPM.
The new section 29(1)(b) in the Bill now sets out what matters the Regulator must consider in making such a determination. This provides more detail on what amounts to an avoidance scheme under the CPM.
Another important change is that the ‘sole or dominant’ purpose (rather than the ‘substantial’ purpose as set out in the Exposure Draft) of a scheme must be to avoid CPM liability. This limits the Regulator’s powers where a scheme has both a legitimate and illegitimate purpose.
The Bill provides that if an entity does not surrender enough eligible emissions units, it will be liable for a unit shortfall charge for units it has not surrendered (130% during the fixed charge period, increasing to 200% in the flexible charge period). A new section 134A allows the Regulator to remit a unit shortfall charge in certain circumstances if a person voluntarily discloses an incorrect emissions number before investigative action has been taken.
Emissions attributable to the combustion of biomass, biofuel and biogas are now explicitly not covered by the CPM.
Similarly, carbon emissions that are attributable to changes in the levels of carbon sequestered in living biomass, dead organic matter or soil that are also attributable to land use, changes in land use, or forestry activities are no longer covered.
However, this change does not affect landfills, which are still covered by the CPM as previously set out in the Exposure Draft.
The carbon pollution cap limits the number of carbon units that may be issued in any given year during the flexible charge period. The Bill allows a carbon pollution cap to be set by regulations and sets out what the Minister must take into account in formulating such regulations.
The Bill now provides that the Minister may have regard to undertakings relating to greenhouse gas emissions reductions that Australia has given under international climate change agreements, in addition to the legal obligations in such agreements. This change will allow the Minister to consider Australia’s undertakings in the Copenhagen Accord in setting the carbon pollution cap, even though the Copenhagen Accord is not legally binding.
The object of “supporting an effective global response to climate change” has been clarified by reference to Australia’s national interest in ensuring that average global temperatures do not increase by more than 2 degrees above pre-industrial levels.
A new object has also been added, namely, to put a price on greenhouse gas emissions in a way that encourages investment in clean energy, supports jobs and competitiveness in the economy and supports Australia’s economic growth at the same time as reducing pollution.
The Bill now explicitly specifies what must be taken into account when making regulations to amend the Jobs and Competitiveness Program. In making any such amendments, the Minister must have regard to:
The Government has set the timetable for debate and voting on the package of CPM legislation. A joint committee is expected to report on the CPM legislation by October 4, and a vote in the House of Representatives is expected on October 12.
The CPM legislation is expected to be debated and voted on in the Senate during November. The Senate will sit for an additional week from 7 November to facilitate the legislation being passed before the end of the year.
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