Change to the carbon pricing mechanism

On 19 September 2012 the Government introduced the Clean Energy Amendment (International Emissions Trading and Other Measures) Bill 2012 into Parliament. The Bill proposes changes to the design of the carbon pricing mechanism put in place by the Clean Energy Act 2011 (Cth). As announced by the Government in late August, the changes will remove the minimum floor price and allow the carbon pricing mechanism to be linked to the EU's emissions trading scheme. Other changes, which have received less publicity, will give the Government flexibility to fine tune the liability rules for gas suppliers and users over time.

The Bill creates the broad legislative framework for many of these changes and leaves the detail to be set out in regulations. In the case of international linking, this is a pragmatic approach. For other matters, such as cancellation of permits and gas supply liability, the approach creates uncertainty. The regulation-making powers are broad and the Explanatory Memorandum gives little guidance about what to expect.

In relation to gas supply, the new provisions allow regulations to be made that abandon the liability framework in the Act. This may affect the small number of gas users who both escape liability under the current gas supply liability rules and do not meet the facility threshold for liability as a direct emitter. For example, an earlier consultation process on regulations under the Clean Energy Act identified that users with emissions below the threshold who buy direct from the STTM (one of the gas markets operated by AEMO) would fall outside the scope of the Act. The Government may have others in mind.

The floor price and the auction reserve price

When put in place in 2011, the Clean Energy Act set a minimum price of around $15 for carbon units sold through the Clean Energy Regulator's auction process, for units with a vintage corresponding to the first three years of the flexible price period. The Act also provided for regulations to set a reserve price (called the "reserve charge amount") for later vintages.

Liable entities are able to surrender eligible international emissions units in the flexible price period. When put in place in 2011, the Act required an international unit surrender charge to be paid. The aim was to ensure that the effective price of eligible international emissions units would be equal at least to the floor price.

In practice, the international unit surrender charge was very difficult to implement. The floor price itself was the subject of much criticism.

The Bill removes the $15 floor price and the international unit surrender charge. The Minister will still have the power, by legislative instrument, to specify a "reserve charge amount" for auctions. According to the Information Memorandum, the reserve charge amount is aimed at enhancing price discovery in auctions and at ensuring that the auction clearing price does not significantly diverge from the secondary market price.

Unlike the auction reserve provisions put in place in 2011, the new reserve charge amount provisions will not be subject to review by the Climate Change Authority.

Linking to the EU Scheme

The link to the EU Emissions Trading Scheme is being created through amendments to the Australian National Registry of Emissions Units Act 2011 (Cth) (ANREU Act). Rather than having EU allowances transferred to the Australian registry, the Clean Energy Regulator will issue an "Australian-issued international unit" (or AIIU) when a corresponding foreign emissions unit has been withdrawn from circulation within the foreign registry. The detail is left to the regulations and may, for example, involve transferring foreign emissions units to an account of the Clean Energy Regulator in the foreign registry. The Bill does not expressly deal with reversing those transactions but there is a general power to make regulations about AIIUs and the new cancellation powers may also be available for that purpose.

In specifying the legal characteristics of AIIUs, the Government has followed the model for other eligible international emissions units (rather than carbon units) under which units are treated as personal property only for the purposes specified in the legislation and the question of whether the account holder is also the owner of the unit is left to the regulations. A new section will give the Government power to override these and related provisions by regulation. The Explanatory Memorandum indicates that the regulation-making power is intended to give the Government flexibility when linking to international schemes.

In addition, the Bill allows for AIIUs to be cancelled by the Regulator if the "conditions set out in the regulations are satisfied". The Explanatory Memorandum refers to voluntarily cancellation, and cancellation in connection with linking to a foreign registry. Given that the decision to cancel is a reviewable decision, it seems the cancellation power may also be available without the consent of the AIIU's owner.

Fraud has been a problem in the EU's emissions trading scheme. The amendments to the ANREU Act give a Court power to order a person to relinquish AIIUs where the issue of AIIUs is attributable to the commission of an offence relating to fraudulent conduct, whether under Australian or foreign law.

Sub-limits for eligible international emissions units

Eligible international emissions units can only be used for compliance from the 2015/2016 financial year. It is possible to buy EU emissions units now, although buyers are likely to take a cautious approach while the regulatory and tax frameworks are still being developed.

The 50% limit on surrender of eligible international units remains. The Bill introduces a new mechanism for creating sub-limits for categories of eligible international emissions units (excluding European allowance units or Australia-issued international units that were issued in relation to European allowance units). The sub-limit of 12.5% for Kyoto units is fixed in the Act. Other sub-limits can be set by regulation over time.

Gas supply amendments

One of the activities that attract liability under the Clean Energy Act is the supply of natural gas. As enacted in 2011, a number of conditions had to be met before liability arose. First, there had to be a "supply" within the meaning of the Act. In light of the Explanatory Memorandum, it was generally accepted that "supply" required there to be a transfer of title. Other conditions for liability included a requirement that the supply was for "use" and that the natural gas was "withdrawn" from a natural gas pipeline for the purposes of the use.

New provisions proposed by the Bill introduce powers to make regulations that will either exclude certain supplies from the scope of the Act (presumably to avoid double counting) or will tax supplies that would otherwise escape liability, as mentioned above. Regulations made for these purposes cannot come into effect until the start of the financial year after the financial year the regulations are registered (at the earliest), which prevents the rules changing part way through a financial year, though not at short notice.

The regulation-making powers will enable the Government to alter the meaning of "supply" by either including or excluding acts or circumstances from the scope of the definition. The Government will also be able to use regulations to modify the rules about when supply occurs.

New sections 35A and 35B will allow regulations to be made under which gas supplies that would not otherwise attract liability will be treated as taxable supplies for the purposes of the Act. Liability will fall either to the supplier (under section 35A) or the user (under section 35B).

The Bill also introduces two new concept, the "own use notification" and the "follow up notification". Again, the Bill relies on regulations to specify when these notifications are to be used.

Other changes

A number of other changes are proposed in the Bill, including those affecting auction design, the opt-in mechanism and consequential changes for the carbon pricing arrangements for transport fuels.