Mechanics of the Carbon Pricing Mechanism

10 August 2012


  • The Carbon Pricing Mechanism (CPM) commenced on 1 July 2012
  • Around 300 companies will be required to acquire and surrender “eligible emissions units”
  • Eligible emissions units include carbon units (issued by the Government) and certain other carbon permits and credits (from international or domestic offset projects or from other countries’ trading schemes)
  • One eligible emissions unit must be surrendered for each tonne of CO2-e emitted in a compliance year
  • The initial fixed price for a carbon unit is $23
  • From 1 July 2015, the price of carbon units will be set by the market
  • Transport fuels and synthetic greenhouse gases are not directly covered but in some cases an equivalent carbon price is applied through changes to fuel tax credits, excise and duties
  • Certain fuel users may choose to opt-in to the CPM from 2013
  • The Government intends to impose a carbon price on heavy on-road transport from 1 July 2014
  • Various emissions are not covered, for example agricultural emissions and emissions from legacy waste.


Generally, if an entity has “operational control” over a facility that emits 25,000 tCO2-e or more in a compliance year, it will be a “liable entity” and required to acquire and surrender an “eligible emissions unit” for each tCO2-e emitted.

The following types of facilities are potentially covered:

  • stationary energy (eg power stations);
  • industrial processes (eg manufacturing);
  • waste management/disposal (eg landfill or waste treatment); and
  • active coal mines and oil and gas projects.

A Liable Entities Public Information Database has been created by the regulator, and will be updated periodically. The current version of the Database can be accessed here.

Determining whether the threshold is exceeded

All ‘covered’ emissions count towards the emissions threshold.

Covered emissions are the direct greenhouse gas emissions from a facility, other than emissions from the following activities/sources:

  • the combustion of certain fuels that have been subject to customs or excise
  • the combustion of biofuels, biogas and biomass
  • agriculture and the land sector
  • closed landfills
  • decommissioned underground mines
  • certain synthetic greenhouse gases

Generally, if the threshold is met, eligible emissions units must be surrendered for all covered emissions from the facility.  However, there are some exceptions.  For example, emissions from waste deposited in landfills before 1 July 2012 and emissions from the combustion of natural gas count towards the emissions threshold but are excluded from the obligation to surrender eligible emissions units.

It is possible to transfer liability

A liable entity can apply to transfer its CPM liability to:

  • another member of its corporate group; or
  • a person outside its corporate group who has financial control over the relevant facility.

Natural gas is treated differently

Emissions from the use of natural gas are treated differently under the CPM, as the obligation to surrender eligible emissions units generally falls on the natural gas supplier rather than the user of the gas. Similarly, liability for the use of compressed natural gas (CNG) generally falls on the supplier of the natural gas that was used to manufacture the CNG, and not on the CNG manufacturer or user.

In these situations, the natural gas supplier will be a “liable entity” and the user of the gas will not be required to surrender eligible emissions units for the emissions from the gas (although these emissions will count towards their emissions threshold).

The general exception is where the natural gas is for use in the operation of a large gas consuming facility, in which case the liability must be transferred from the supplier to the recipient of the natural gas.  Liability may also be voluntarily transferred to the recipient of the natural gas in certain circumstances (e.g. use of natural gas for the production of CNG, LPG or LNG).

Who is in ‘operational control’ of a facility?

Generally, the person who has “operational control” of a liable facility will be required to surrender eligible emissions units for that facility.

A person has operational control if s/he has authority to introduce and implement any or all of the operating, health and safety and environmental policies for that facility. If that applies to two or more persons, the person with the greatest authority to introduce and implement operating and environmental policies has operational control.

Where a facility is operated by an unincorporated joint venture and two or more persons may satisfy the ‘operational control’ test, the CPM liability for that facility must be allocated between the joint venture participants in proportion to their respective interests in the facility.

On the other hand, where it is possible to identify the person in ‘operational control’ of a facility operated exclusively for a joint venture, the CPM liability may be voluntarily transferred to and allocated between the joint venture participants in proportion to their interest in the facility (subject to certain conditions).  


Eligible emissions units are:

  • Carbon units - Issued by the Government under the Clean Energy Act 2011 (Cth) and either sold, auctioned or given away.
  • Australian carbon credit units (ACCUs) - Issued by the Government under the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) for certain greenhouse gas abatement and sequestration activities in the agricultural, land use and legacy landfill sectors in Australia.
  • Certain international offsets and permits - The international offsets that will be eligible include certified emission reductions (CERs), emissions reduction units (ERUs), and removal units (RMUs), issued under the Kyoto Protocol. Also, the CPM has been linked to the EU Emissions Trading Scheme (click here for more information) and may be linked to other schemes in the future eg. the NZ Emissions Trading Scheme. This will enable liable entities to use international permits to meet their obligations under the CPM (subject to certain limitations).


A price on carbon has been introduced in two stages:

  • From 1 July 2012 to 30 June 2015 – the price of carbon units is fixed by Government (the fixed price period).
  • From 1 July 2015 onwards – the market will determine the price of carbon units (the flexible price period)

Fixed price period

Initially, the Government will sell carbon units for $23, and in some cases, issue free carbon units. The price of carbon units will increase to $24.15 in 2013–14 and $25.40 in 2014-15 (reflecting a 2.5% increase in real terms).

Liable entities are entitled to purchase as many carbon units as they need to satisfy their obligations under the CPM.

During this period, carbon units may not be banked (ie. kept for future years) and generally must be surrendered in two parts during a compliance year (in a similar way to payment arrangements for corporate taxes).

Although liable entities may surrender ACCUs during this period, they can only do so to acquit up to 5% of their obligation.[1]

International permits and offsets may not be used to meet CPM obligations during this period.

If a liable entity fails to surrender the required number of units during this period, a unit shortfall charge of 1.3 times the fixed carbon unit price will be imposed.

Flexible price period

During this period, the CPM will operate as a ‘cap and trade’ scheme.

The Government will set a cap on the amount of greenhouse gases that may be emitted from the facilities covered by the CPM during each compliance year. In setting the cap, the Government will consider Australia’s greenhouse gas reduction targets and international climate change obligations (amongst other things).

The Government will auction the number of carbon units that is consistent with achieving that cap (taking into account the allocation of free units under the industry assistance schemes). The Government's proposed policies, procedures and rules for auctioning are set out in the exposure draft of the Clean Energy (Auction of Carbon Units) Determination, which is open for public comment until 22 April 2013. The Government has confirmed that it will advance auction future vintage units and there will be advance auctions of flexible price units during the fixed price period. It is expected that the first auction will take place at the beginning of 2014.

Carbon units may also be traded on the secondary market.

As the price of carbon units will be heavily influenced by the number of units that will be available, the Government will announce each annual cap five years in advance, with the annual caps for the first 5 years of the scheme to be announced by 31 May 2014. Notably, there is no requirement to provide an indication of longer term caps.

In order to provide a safety valve against price spikes and plunges and provide more certainty for investors and liable entities, the Goverment initially introduced a price floor and a price ceiling for the first three years of this period. However, the price floor was removed when the CPM was linked to the EU Emissions Trading Scheme. The price ceiling is still in place and will be set at $20 above the expected international price for 2015-16 (rising by 5% in real terms each year).

There will be no limitation on banking carbon units during this period. However, liable entities will only be able to borrow carbon units from future years in limited circumstances.

During this period, there is no limit on the use of ACCUs to meet CPM obligations.

Eligible international offsets or permits can be used during this period subject to certain qualitative and quantitative restrictions.  In particular, until 2020 liable entities must meet at least 50% of their obligations under the CPM with domestic units or offsets.

If a liable entity fails to surrender the required number of eligible emissions units during this period, the emissions charge will be double the average price of carbon units for the relevant compliance year.


Although emissions from the combustion of fuels are generally excluded from the CPM, an equivalent carbon price has been imposed in certain circumstances through changes to the fuel tax regime.

This applies to:

  • certain transport activities, including domestic aviation and shipping, rail transport and some off-road transport use of liquid and gaseous fuels; and
  • the non-transport use of liquid fuels, and until 1 July 2013, of LPG and LNG (e.g. diesel generators).

Certain fuel users will be entitled to opt-in to the CPM from 1 July 2013 if they would prefer to manage their carbon liabilities through the acquisition and surrender of eligible emissions units rather than paying the carbon price through the fuel tax regime. Click here for more information on the opt-in scheme. 

Also, the non-transport use of LPG and LNG will be included in the CPM from 1 July 2013.

The Government intends to impose a carbon price on heavy on-road transport from 1 July 2014.


The income tax law has been amended to include specific provisions dealing with registered emissions units. These provisions provide for a rolling balance method of accounting, similar to trading stock, for income tax purposes.

The cost of acquiring a registered emissions unit is deductible and the proceeds from selling the unit are assessable. The deduction for the cost of acquiring units is, however, deferred until the unit is surrendered, sold or otherwise disposed of. The deferral is achieved by including in assessable income the difference between the value of units on hand at the start and end of the income year.

In the first year, taxpayers are able to elect to value their units at either actual cost, FIFO (first in, first out) or market value. If no election is made, the FIFO cost method will apply by default. There are limitations on changing methods.

Emissions units are deemed to have a market value in a number of situations including in non-arm’s length transactions, and where units are issued for free as part of an assistance arrangement. Special rules also apply to transfers of units to or from a foreign account (i.e. if they are on a foreign register).

Where an entity surrenders a unit for a purpose unrelated to producing assessable income, the deduction for the cost is effectively reversed by including in assessable income an amount equal to the amount deducted for its acquisition.

Regular transactions involving emissions units are GST-free. However GST rules apply to transactions involving financial derivatives of emissions units and the payment of grants of government assistance and other transactions under the CPM.


The Clean Energy Regulator administers and enforces the CPM as well as the National Greenhouse and Energy Reporting scheme, the Renewable Energy Target and the Carbon Farming Initiative.

The Clean Energy Regulator is lead by Chloe Munro, who was previously the Chair of the National Water Commission, and commenced operations on 2 April 2012.

The Regulator has published a series of guidelines, application forms and calculators relating to the CPM and associated schemes on its website.

The Climate Change Authority provides independent advice to the Government on carbon pollution caps, the performance of the carbon price and other initiatives. Former Reserve Bank Governor and Treasury Secretary Bernie Fraser is the Chairman of the Authority. The Authority’s nine-member Board includes experts from a variety of backgrounds including climate science, economics, emissions trading, public governance, business and investment.  

The Climate Change Authority began operation in July 2012 and will undertake a number of reviews going forward, including a review of the Renewable Energy Target (by 31 December 2012) and a review of the CPM (by 31 December 2016).  Its first recommendations on carbon pollution caps must be made by 28 February 2014.

The Productivity Commission will review industry assistance under the Jobs and Competitiveness Program and the Coal Sector Jobs Package, review the impact of carbon price on industry, review fuel excise arrangements and report on actions taken by other countries to reduce greenhouse gas emissions.

Companies or industry groups can also ask the Government to require the Productivity Commission to assess the impact of the CPM on their particular industry and make recommendations about whether industry assistance should be increased or reduced.

[1] Other than landfills, where up to 100% of the CPM obligations may be met through ACCUs.

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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