Upcoming Mallesons seminarsThe Carbon Pollution Reduction Scheme will affect all areas of the Australian economy, both as a significant new compliance cost and as an opportunity to pursue carbon abatement and trading. The draft bill outlines many important elements of the scheme.
What do you need to do?Consider the impact upon you and whether you wish to make a submission.
Kate Trumbull (沈沛琪)
Solicitor
Louis Chiam
Partner
T +61 3 9643 4086
Sydney
Vishal Ahuja
Dominic Bortoluzzi
Scott Farrell
Melbourne
Louis Chiam
Perth
Alan Murray
Tim Warman
Brisbane
Matthew Austin
Canberra
Adam Bartlett
Hot on the heels of its controversial policy paper, the Australian Government yesterday released the draft legislation for its proposed emissions trading scheme. The Carbon Pollution Reduction Scheme Bill, along with five other draft bills, will establish the Carbon Pollution Reduction Scheme (CPRS).
While the draft bill is generally in line with the policies set out in last December’s policy paper on the CPRS (White Paper), much of the detail necessary for implementing the scheme will be contained in regulations, which are yet to be drafted.
Scheme caps and issuance of AEUs
The CPRS will set a cap on the amount of greenhouse gases (GHGs) that may be emitted by covered facilities in a financial year. One Australian Emissions Unit (AEU) will be issued, by auction or free allocation, representing each tonne up to the cap. Importantly, the scheme cap will be set by regulation (rather than hard-wired into the legislation), leaving it within the discretion of the Government of the day.
AEUs can be issued:
- At an auction: the bulk of AEUs will be issued in this way. Details of the auction procedure will be set out in a separate legislative instrument.
- By free allocation to eligible emissions intensive, trade-exposed (EITE) entities or to coal-fired electricity generators.
- For a fixed charge, which will rise in real terms by 5% a year (from $40 for 2010-11 AEUs to $53.22 for 2014-15 AEUs.) This effectively provides a cap on the costs of compliance.
- For abatement in non-covered sectors, for example, reforestation or destruction of synthetic GHGs.
Eligible international units
Consistent with the White Paper position, only limited types of Kyoto units (CERs other than temporary or long-term CERs, ERUs and RMUs) will be accepted for compliance under the CPRS. There will be no limit on the number of eligible international units that can be submitted for compliance.
The draft bill provides for the possibility of accepting emissions units from other international agreements or foreign countries in future. This means that if, for example, a link were established with the New Zealand emissions trading scheme, units from that scheme could be added to the list of international units that could be surrendered for compliance purposes under the CPRS.
Liable entities
Consistent with the White Paper position, CPRS obligations will generally apply to operators of facilities that have annual direct GHG emissions greater than 25,000 tonnes or more of CO2-e. As a starting point, liable entities are legal persons who:
- are responsible for direct emissions from a facility
- import, produce or supply certain upstream fuels, or
- import, manufacture or supply synthetic GHGs.
The existing National Greenhouse and Energy Reporting Act (NGER Act) will be amended to provide that any legal person, and not just members of a controlling corporation’s group, may have ‘operational control’ over a facility.
Corporate groups
The draft bill provides further detail on the applicable tests for transferring liability between members of a corporate group or to a person with financial control. Importantly, despite any transfer of liability to another group member, the controlling corporation will be taken to have guaranteed the payment of any administrative penalty and late payment penalty by another member of its corporate group. This may complicate project financing and other limited recourse project structures.
Where the members of a controlling corporation’s group hold a total of 5% or more of the national scheme cap number for a particular vintage year, the Australian Climate Change Regulatory Authority (the “Authority”) must be notified.
Reporting, surrender and voluntary cancellation
AEUs and eligible international units (together, “emissions units”) will be cancelled (or, for Kyoto units, moved to a Commonwealth account) when they are surrendered to the Regulator by entities complying with their CPRS obligations. Emissions units may also be voluntarily cancelled - a move that would, at least after the end of the five years when additional AEUs can be purchased at the CPRS cap price, tighten the overall scheme cap.
Entities will calculate and report their own emissions, and will be liable to surrender eligible units to cover these emissions. However, if the Authority believes that an entity has submitted an incorrect assessment of its emissions, or if the entity does not submit an assessment, the Authority will be able to issue an assessment estimating that entity’s emissions for the year.
An entity that fails to surrender sufficient units to cover its annual emissions by the deadline (15 December following the financial year to which those emissions relate) will face an administrative penalty. The amount of the penalty will be specified in regulations, but will not exceed 110% of the benchmark average auction price. Late payment will incur a further penalty of 20% per annum. The liable entity will also have to surrender AEUs to cover the shortfall in the following year (the ‘make good obligation’).
As outlined in the White Paper, the draft bill allows for unlimited banking and limited borrowing of AEUs between compliance periods.
Carbon trading
In addition to the compliance market, the Government’s policy is to support an extensive secondary market. To encourage this, AEUs will be personal property, and fully transferable (except for those that are issued at the scheme cap charge, which will not be tradeable). They will be transmissible by assignment, by will and by devolution by operation of law. This is aimed at reducing uncertainty, and promoting confidence in and development of the carbon market. The draft bill is not intended to prevent the creation of equitable interests in AEUs, or the taking of security over them. Further consideration will be given to the mechanisms for taking security over AEUs.
In order to foster a fully informed market, the Authority will keep a Liable Entities Public Information Database on its website, and will publish information including auction results, AEUs issued for free, AEUs issued for a fixed charge, and borrowed and banked AEUs. The Information Database will contain details of unit shortfalls, unpaid administrative penalties and the number and type of units surrendered.
The Registry
The existing National Registry of Emissions Units will be used to record the issuance, holding, transfer and cancellation of AEUs. It will also track the import, holding, transfer and retirement of Kyoto units. The Registry will hold and track all types of Kyoto units; but only the specified types of Kyoto units may be surrendered for CPRS compliance.
Any person will be able to open one or more accounts in the Registry. Joint account holding will not be permitted. As expected, AEUs will take the form of a number recorded electronically in the Registry, and not a paper certificate. Communications in relation to the Registry’s functions, such as account opening and the issuance and transfer of AEUs and international units, will also be managed electronically. Any errors, omissions, or incorrect entries in the Registry may be corrected by application to the Federal Court.
Much of the detail of the Registry’s procedures, such as the fees applicable for opening accounts and making transfers, is to be specified in regulations.
Transitional assistance
Most of the detail with respect to the EITE assistance program will be contained in the Regulations. The transitional assistance available for coal-fired electricity generation assets is detailed in the draft bill and is generally in line with the White Paper. Free permits are to be issued on 1 September each year for five years subject to the windfall gains test (to be considered by the Authority before 1 April 2013). The draft bill introduces a new ‘power system reliability test’, the aim of which is to create an additional incentive for generation assets to maintain their registered capacity.
Compliance and enforcement: administrative, civil and criminal penalties
The draft bill provides a range of mechanisms to ensure compliance, including:
- powers for the Authority to gather information
- powers for inspectors from either the Authority or the AFP to enter premises to monitor compliance, and
- requirements for entities to keep auditable records relevant to CPRS compliance.
Civil penalties apply for a number of offences. The majority of the civil penalties are a maximum of $1,100,000, though a higher penalty is payable for quotation of a false OTN. A purchaser of fuel may do this, for example, to avoid paying a carbon price for the fuel. The maximum penalty for this offence is three times the total benefits that are reasonably attributable to the contravention.
Criminal offences will apply for contraventions of the law that have a higher degree of culpability: e.g. for falsifying documents and for entering into a scheme (such as asset-stripping) to avoid liability to pay a penalty under the CPRS.
If an entity is found to have entered into an artificial scheme after 15 December 2008 aimed at avoiding liability by bringing a facility or activity below the relevant thresholds, the Authority can determine that the entity is nevertheless subject to the CPRS.
Liability of executive officers
In a departure from conventional Australian laws (for example, tax legislation) directors, CEOs, CFOs or secretaries of a corporation will be subject to a civil penalty if they are aware that the corporation will contravene the law (for example, by quoting a false OTN and receiving fuel without a carbon price), are in a position to influence the corporation’s conduct, and fail to take all reasonable steps to prevent it.
Taxation of emissions units
The income tax law will be amended to establish a rolling balance treatment of emissions units for income tax purposes, similar to that which currently applies to trading stock. For example:
- expenditure incurred in becoming the holder of a registered emissions unit is generally deductible in the income year in which an entity starts to hold the unit
- a taxpayer's assessable income includes an amount the taxpayer is entitled to receive because they disposed of a registered emissions unit, and
- any difference in the value of registered emissions units held at the beginning of an income year and at the end of that year are reflected in taxable income (as an amount included in, or as amount deductible from, assessable income). The value of all units held by a taxpayer is their cost unless a choice is made at the end of the first income year they hold units to use their market value. Subject to a limited, one off right to change the valuation method, the choice of valuation method continues to apply for all later income years.
There are also special rules for when an international emissions unit is transferred from a foreign registry to the Australian National Registry and vice versa. These rules affect whether, and when, the general income tax or rolling balance rules apply.
The goods and services tax (“GST”) law will also be amended to provide certainty that the existing GST rules apply to buying and selling AEUs.
Financial services licensing
The Corporations Act will be amended to provide that emissions units are financial products. Appropriate adjustments will be made to the regime, after consultation, to fit the characteristics of emissions units and avoid unnecessary compliance costs.
Next steps
The Government’s aim is to have the CPRS legislation passed by June this year. Whether this will be possible will depend in part on the outcome of the Senate committee inquiry into the Government’s proposed emissions trading scheme. The Government is seeking written submissions to the draft bill. Submissions are due by 14 April 2009.
The Exposure Draft Legislation can be found here.