Carbon tax countdown begins - are you ready?

The start date of the carbon pricing mechanism (CPM) is rapidly approaching, with just around a week until the CPM formally commences. Norton Rose LP has been extremely busy helping clients prepare for the start date and keeping them up to date with the developments that have unfolded since the legislation passed in November last year. This article provides a snapshot of those developments and highlights some key areas to ensure you are ready for the start of the carbon price. It also covers some recent changes to the Carbon Farming Initiative (CFI).

As you will be aware, the key elements of the CPM are:

• Fixed price period of three years (2012-2014), with carbon units costing $23 per tonne in 2012-13, rising, in real terms, by 2.5% per year to $24.15 in 2013-14 and to $25.40 in 2014-15.
• Flexible price period from 2015 onwards, with a price collar in place for the first three years. Price floor of $15 rising by 4%, in real terms, per year and price ceiling set at $20 above the expected international price, rising by 5%, in real terms, per year.
• Liable entities include: entities with operational control over a facility which has direct (Scope 1) emissions of 25,000 CO2-e; and suppliers of natural gas.
• Emissions sources covered include: stationary energy, industrial processes, fugitive emissions (other than from decommissioned coal mines) and emissions from non-legacy (pre 1 July 2012) waste. Effective carbon price is imposed on transport sector through changes to excise and fuel tax credits. Agriculture and land sector emissions (ie, deforestation) are not covered.
• Liability can be transferred through a liability transfer certificate (LTC) or an obligation transfer number (OTN) or shared through joint venture arrangements.
• Liability is satisfied through surrender of eligible emissions units, which include Australian carbon units (issued or sold by the Clean Energy Regulator), Australian carbon credit units (ACCUs) (issued under the CFI) and certain international carbon units. Various limits apply to the surrender of ACCUs and international units.
• Free carbon units will be issued to the trade-exposed emissions intensive sectors under the Jobs and Competitiveness Program.
• From 1 July 2013, large fuel users (eg, airlines) can opt in to the CPM (taking them out of the fuel tax regime).

Last-minute preparations

Most companies, particularly those that will have a direct liability under the CPM, are well on their way to understanding their liability and their compliance options. Others will be waiting to see what carbon price increases will flow through to them.

Below are some useful tips for a final review of preparedness for the 1 July start date.

• Check if you have any facilities within your business operations that have direct (Scope 1) emissions exceeding 25,000 t CO2-e.
• If you have responsibility for, or control of, a such a facility, ensure that you are the entity that has “operational control” of the facility as defined under NGERS. This is particularly important if there are third-party contractors involved with the running of the facility.
• If you want to transfer liability to another member of your corporate group or to another corporate entity which has financial control over the facility, complete and lodge an application for an LTC.
• If you are a recipient of natural gas or non-transport CNG, determine whether you must, or would like to, quote an OTN and submit an application form to the Regulator.
• If your facility is operated by a joint venture, determine whether you need to notify the Clean Energy Regulator that you are a participant in a mandatory designated joint venture (required if there is no one entity with operational control of the facility) or submit an application for a declaration of the joint venture as a declared designated joint venture (if the operator is known, but the joint venture participants want to share liability). In either case, you must also apply for a participating percentage determination.
• Make sure you have undertaken a review of all relevant contractual arrangements to determine whether you are able to pass on the costs of satisfying your carbon liability or, if you are a recipient of goods and services, check whether your contracts allow your supplier to pass on carbon costs to you. In particular, check to see whether both direct (the costs of purchasing eligible emissions units) and indirect (increased electricity and fuel costs) costs can be passed through under the contract and whether those costs may only be the net cost (taking into account any free permits or other assistance measures). Ensure that no ‘double-dipping’ takes place if there is a CPI clause in place within the contract. (Treasury has predicted that the CPI will increase by 0.7% in 2012/13 as a result of the introduction of the carbon price. If the contract already has a CPI recovery clause, arguably, no further indirect carbon costs should be passed on to the purchaser.)
• Prepare new stand-alone carbon cost pass-through clauses for new contractual arrangements and consider whether both direct and indirect costs should be able to be passed through.
• If you are a liable entity, ensure you have an understanding of your likely emissions number for the first year of the scheme and determine a compliance strategy; ie, consider whether to: hedge your carbon liability by purchasing international units or ACCUs for use in the flexible price period and invest directly in CFI projects to generate ACCUs for compliance use.
• If you intend to pass on carbon costs, ensure that your communication strategy will not breach the Australian Consumer Law and expose you to ACCC action. Claims about the carbon price must be truthful, accurate, capable of substantiation and made on reasonable grounds. The ACCC has produced various guidance notes.
• If you need further assistance or have any questions in connection with either the CPM or CFI, contact a member of Norton Rose’s climate change team.

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Norton Rose
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