Services

HG Alert: Climate Change: Australian Emission Units Explained - Mar 2009

The Federal Government’s Carbon Pollution Reduction Scheme Bill 2009 released on 10 March 2009 outlines the government’s vision for its carbon pollution reduction scheme (CPRS).

In essence, the CPRS involves a cap and trade system whereby:

  • persons, generally emitters, will be liable for their emissions of carbon dioxide equivalence of greenhouse gasses; and
  • those liable persons will be required to surrender an Australian emissions unit for each tonne of carbon dioxide equivalence for which they are liable.

Our paper of 11 March 2009 outlined the key question of coverage; namely who would be liable for emissions under the scheme. Below we summarise the Bill’s vision for Australian emissions units – what are they, who will get them and what can be done with them?

Australian Emissions Units – General

Part 4 of the Bill deals with emissions units. There are three general forms of emissions units:

  • Australian emissions units (discussed below);
  • Kyoto units; and
  • Non Kyoto international emissions units.

The latter two elements arise as a function of the Bill being the government’s link into the international community’s response to global climate change, by allowing for international recognition of units. Australian emissions units however are expected to be the more common form of emission unit to be utilised in the discharge of liability for Australian emissions. These are discussed in more detail below.

Issue of units

Clause 83 of the Bill provides that Australian emissions units will be issued by the Australian Climate Change Regulatory Authority (Authority), on behalf of the Commonwealth. Importantly, clause 92 makes it clear that units are only able to be issued in the event that a national scheme cap has been set for the year the units are to be issued. As identified in our article or 11 March 2009, the Bill fundamentally requires that the Government must set a cap of emissions (clause 14) for particular years, which will correlate to the number of Australian emissions units able to be issued for that year.

Vintage

Australian emissions units must have a vintage (clause 85). The term “vintage” in relation to units refers to the emission liability for a financial year to which that unit will relate (that is, an Australian emissions unit with a vintage year ending on 30 June 2011 will relate to emissions during that same financial year only).

Australian emissions for a vintage year may be issued at any time before or during that vintage year, but must not be issued after 15 December after the end of that vintage year (clause 86). This means that for the proposed first vintage year of the Bill (the financial year ending 30 June 2011), Australian emissions units for that vintage year may be issued at any time up to 15 December 2011.

The requirement to assign a vintage for Australian emissions units ensures that liable persons are not able to save up emissions units for future financial years, or perhaps more likely, use future years emissions units in current years, as neither of these alternatives would be likely to result in a reduction in emissions.

How will Australian emissions units be acquired?

Australian emissions units are property (clause 94) and may either be issued by the Authority or subsequently transferred by private sale. The Bill provides that Australian emission units may only be issued in the following circumstances:

  • As the result of an auction undertaken by the Australian Climate Change Regulatory Authority (clause 101).
  • As a result of an issue of new units at a fixed price.
  • By way of a free issue of units (for example to emissions intensive trade exposed industries, coal fired power generators or through reforestation).

Clause 99 of the Bill empowers the Australian Climate Change Regulatory Authority to conduct auctions of Australian emissions units to be issued. The Bill also enables the authority to auction units which have been relinquished or issued for free and never transferred.

Limited detail has been provided as to the mechanics of the auction procedure however clause 103 of the Bill specifically contemplates that the detail will be determined later by regulation.

As part of the phase-in provisions for the Bill, clause 89 provides that for issues of new Australian emissions units by the Authority relating to vintage years between July 2010 and July 2014, units will be issued for a fixed charge as follows:

Vintage year beginning on Charge per unit
1 July 2010 $40.00
1 July 2011 $43.00
1 July 2012 $46.23
1 July 2013 $49.69
1 July 2014 $53.42

Once Australian emissions units have been issued by the Australian Climate Change Regulatory Authority, the Bill makes it clear that they are able to be transferred as personal property in the ordinary course (including by assignment, by will or by operation of law) subject only to certain procedural requirements.

As a consequence of being declared an item of “property”, logically this means that Australian emissions units would be assets in the hands of the registered holders from an accounting perspective and presumably, able to be used to secure a borrowing.

The Bill contains procedures for the registration of ownership of Australian emissions units. The Authority will maintain a register of Australian emissions units holders and, similarly to State based legislation dealing with land titles, the person registered in the Australian emissions units register as the holder of a unit will be deemed to be the legal owner of that unit (regardless as to whether any earlier sale has occurred which has not yet been registered). This element will need to be carefully considered in the context of commercial deals for the transfer of Australian emissions units to ensure that the purchaser does not carry undue transaction risk in the event that following completion of a sale of Australian emissions units (and payment of the consideration), the purchaser is unable to be registered as the holder and therefore unable to be recognised as the legal owner.

There has also been recent discussion in the press about the possibility of a formal trading platform being established by the Australian Securities Exchange to allow trading in Australian emissions units. Whilst the Bill does not expressly provide for this mechanism, it does not appear that there would be any particular restrictions imposed, other than to ensure that the trading system was linked to the registration process described in the Bill. In many respects, if the Australian Climate Change Regulatory Authority and ASX were able to agree upon a “T + X” trading system (that is, where completion and registration of trades occur a set number of days after the trade took place, similar to “T + 3” trading for shares on ASX), then transaction risk for a buyer whilst awaiting registration, would be significantly reduced.

Conclusion

Australian emissions units will be the central theme (assuming the Bill is passed) of the CPRS.

Liable entities will implement systems to ensure that they are constantly monitoring and matching the emissions for which they are liable (determined in the manner set out in our article of 11 March 2009) with the number of Australian emissions units which they have acquired. Entities who “overbuy” Australian emissions units and who do not dispose of those excess units in a timely fashion, will be disadvantaged, as those units will relate only to a vintage year and prices for such units may fall as demand for that particular vintage year dries up (on the assumption that total actual emissions reduce below the national scheme cap).

There will no doubt need to be serious consideration given by companies to appropriate strategies to plan for, acquire and dispose of an appropriate number of Australian emissions units, quite apart from strategies to reduce emissions and therefore reduce the number of Australian emissions units required. What these strategies will be, is no doubt a question for great debate and, considering the imperfections that may well exist in the emissions trading market (one needs only to look at our share market), there are sure to be winners and losers.

For more information regarding the Federal Government’s Carbon Pollution Reduction Scheme Bill 2009, please contact HopgoodGanim.