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Climate Change Alert: Managing Carbon Costs: How businesses can prepare for Australia’s carbon pricing scheme - 24 Mar 2011

It's still early days since the Federal Government announced its carbon pricing scheme. Although the latest update of the Garnaut Review released on Thursday 17 March 2011, Carbon Pricing and Reducing Australia's Emissions, provides some indication of what the scheme may look like, many of the precise design details are still unknown. The only certainty is that if a carbon pricing scheme is implemented in Australia, those businesses that are well prepared will be in the best position to manage any risk coming from the scheme's introduction.

Although the tight timeframe for the introduction of the scheme mean that some elements might be similar to, or even the same as, the carbon pollution reduction scheme proposed by the Rudd Government, subtle differences could mean that relying on preparations made for the former CPRS is not enough to manage carbon-related costs in the future.

Here, partner Michele Muscillo outlines how businesses can ensure they are in the best position to deal with any carbon costs that may be imposed, and explain why businesses need to stay informed of any assistance packages offered by the Government.

Managing contractual risk

The Government has proposed that the carbon pricing scheme will commence with a fixed price phase, before converting to a cap-and-trade emissions trading scheme. The latest Garnaut update has recommended that the starting price should be $20 to $30 per tonne of carbon dioxide emissions, increasing at four percent per annum plus inflation. This fixed price phase would last until mid-2015, unless the independent regulator deems this inappropriate due to international developments in carbon pricing.

When negotiating contracts that seek to pass on costs under the carbon pricing scheme, businesses should ensure that the language and terms used in their contracts adequately cover costs under both the fixed price phase, and the later cap-and-trade phase. This is particularly the case for longer-term contracts that may continue to be in place into the cap-and-trade phase.

The wording of existing contract terms may produce an unexpected cost outcome between parties, depending on how the carbon price is imposed under the law. The potential risk is that if clauses are drafted to specifically deal with carbon costs under a cap-and-trade system, they may not adequately pass on costs under the fixed price phase of the carbon pricing scheme. The only way to determine if this is the case is to review the relevant clauses to ensure they are cover off both elements of the new carbon pricing scheme.

If you are concerned about unexpected costs arising out of any contracts that are currently in place, it's preferable that you look at addressing and managing those risks at the earliest opportunity. Given the political uncertainties surrounding the law, it may be that the earlier the issues are put on the table, the stronger your negotiating position.

Ultimately, the point in the economic chain where the carbon-related costs imposed under the scheme will fall depends on factors unique to each particular business and industry, such as general market conditions and the ability to pass on prices to customers. Given this, the carbon price presents risk management issues to most, if not all, businesses.

Seeking government assistance

The latest Garnaut update recommends that assistance is provided to emissions intensive, trade exposed industries if they are disadvantaged compared to other countries that don't have comparable carbon restraints. The update also suggests that assistance to households should primarily take the form of personal income tax cuts to low and middle income earners.

The packages that will be put forward by the Federal Government are still to be agreed between the Labor party and the Greens. When details of these assistance packages become available, businesses should make sure they understand the details of the assistance packages, and what the qualifying criteria may be. It is likely that the eligibility criteria for these packages will, at least in some respects, be narrow (to manage the cost to the Federal Government's budget), in a similar vein to other assistance to industry, such as the tax breaks that were given out during the global financial crisis.

For more information on how to prepare for the carbon pricing scheme, please contact HopgoodGanim's Climate Change practice, who are also available to help channel your comments on the carbon pricing scheme to the Federal Government or relevant professional and industry bodies.