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HG Alert: How the Global Financial Crisis may well have saved you… for now! - 28 July 2009

With the tumultuous 2008/2009 financial year officially behind us, many businesses are taking the opportunity to draw a deep breath before embarking on what may well prove to be an equally challenging 12 months ahead.

The Global Financial Crisis has brought a reprieve to industry on certain key measures to be implemented by the Federal Government in its Carbon Pollution Reduction Scheme suite of legislation - perhaps more so than any lobbying or politicking has been able to achieve.

The Minister for Climate Change and Water, Penny Wong, announced on 14 May 2009 that the proposed start date for the Federal Government’s Carbon Pollution Reduction Scheme had been pushed back from 1 July 2010 to 1 July 2011. The Government described the deferral, along with a raft of other amendments, as necessary to "manage the impacts of the global recession".

What changes have been made to the Carbon Pollution Reduction Scheme?

The key amendments are as follows:

  • The new start date of the Scheme will be 1 July 2011.
  • There is a new commitment to reduce carbon pollution by 25 percent of 2000 levels by 2020, provided a global agreement on reductions can be reached.
  • An Australian Carbon Trust will be established to directly invest in carbon reduction initiatives.

Other key elements

Permit prices

To take into account concerns that market forces may lead to significant increases in the costs of Australian emissions units (or permits), the Government has announced a one-year fixed price period on permits.

Permits will cost $10 per tonne of carbon equivalent in for the first year of the Scheme. Full market trading will begin from 1 July 2012.

Fixed price units purchased in the first year of the scheme will not be able to be ‘banked’ to be used to offset emissions in the future.

Global recession buffer

The Government has also announced some key amendments to the assistance packages designed for Emissions Intensive-Trade Exposed (EITE) industries.

Under the previous proposals, businesses who were in designated EITE industries were eligible for varying degrees of assistance in the form of free-permit allocations.

The new initiatives in the revised Scheme now increase the free-permit allocations by a Global Recession Buffer of five or 10 percent.

The new buffer will simply be applied to the level of assistance currently being assessed by Government. This assessment process aims to determine a baseline to calculate free permits, known as the emissions per unit of output. This baseline will be calculated for every EITE activity.

Separately, the Government has determined which EITE activities will be eligible for the full 90 percent EITE assistance level, and which will be eligible for the lower 60 percent assistance level.

Free permit allocations are then determined by applying the assistance rate (60 or 90 percent) to the relevant baseline.

The new Global Recession Buffer increases that allocation as follows: 

  • By five percent for companies receiving EITE assistance at the 90 percent rate; and
  • By 10 percent for companies receiving EITE assistance at the 60 percent rate.

Importantly, the Global Recession Buffer will operate for five years, with its continuation beyond that point subject to assessment.

Landfill facilities

The Government has introduced some amendments to the qualifying threshold emissions level for landfill facilities.

As set out in our legislation outline, emitters will generally need to acquire permits where the facility emits more than 25,000 tonnes of carbon dioxide equivalence.

To ensure that waste is not diverted from a landfill facility that exceeds the threshold to one that doesn’t, a second open landfill facility which accepts the same classification of waste within a specified distance will have a lower ‘qualifying’ threshold of just 10,000 tonnes of carbon dioxide equivalence.

Reforestation

Although the Scheme will not come into effect until 1 July 2011, the ability to earn permits, which can either be used later to discharge emission liabilities or be sold, comes into effect on 1 July 2010, one year earlier.

Accordingly, where a project is declared an ‘eligible reforestation project’, operators of the project will be entitled to acquire permits ahead of the Scheme coming into effect.

This will no doubt allow those companies who will become ultimately liable to surrender permits when the scheme begins to potentially offset their future emissions, either by operating a reforestation facility themselves, or by entering into contracts to acquire those permits once the scheme begins.

Commercial opportunities also exist for landowners who may wish to lease or license their land to third parties for the purpose of operating reforestation projects.

What hasn’t changed?

While the Scheme has been delayed, the cap and trade system originally proposed fundamentally remains. For a detailed description of the original form of the Scheme, see our series of articles.

Emitters, producers and suppliers of fuels will still be required to surrender permits for every tonne of carbon dioxide equivalence of emissions where they exceed the general 25,000 tonne per annum qualifying emissions threshold.

The National Greenhouse and Energy Reporting Act 2007 is unaffected

The deferral of the Carbon Pollution Reduction Scheme has had a perhaps unintended negative consequence on the National Greenhouse and Energy Reporting Act 2007.

The Carbon Pollution Reduction Scheme Bill was to be passed by parliament, together with some key ancillary legislation which would have amended the National Greenhouse and Energy Reporting Act 2007.

These amendments would have not only brought the Act into line with the current approach and terminology under the Carbon Pollution Reduction Scheme Bill, but also clarified and updated some key concepts, such as what is meant by the terms ‘potential greenhouse gas’ and ‘operational control’.

With passing of the Bill deferred, these amendments have also been deferred. As the National Greenhouse and Energy Reporting Act 2007 was passed by parliament in 2007 and is therefore law, we are left with the strange situation of liable entities being required to report under the ‘old’ law, while the ‘new’ amendments are considered together with Bill later this year.

National Greenhouse and Energy Reporting Act 2007 deadlines

With the National Greenhouse and Energy Reporting Act 2007 unaffected by the Bill, the passing of 30 June 2009 means that the first ‘trigger year’ under the Act has ended.

This means that entities who meet or exceed one of the thresholds in Section 13 of the Act, one of which is where the facility emits more than 25,000 tonnes of carbon dioxide equivalence of greenhouse gas, must:

  • register under the National Greenhouse and Energy Reporting Act 2007 by 31 August 2009; and
  • report their emissions by 31 October 2009.

Conclusion

The draft Carbon Pollution Reduction Scheme Bill introduced into parliament in May 2009 contained some key changes to the document that was released as an exposure draft in March.

The 12-month deferral inspired by the Global Financial Crisis received significant press. However, the 12-month fixing of permit prices will help many companies to plan financially for permit costs, and provide some comfort that permit prices will not devalue, to the company’s financial detriment.

The detail provided on reforestation also holds possibilities for companies to acquire permits early, from 1 July 2010, and possibly facilitate commercial opportunities to create new reforestry projects.

All that remains is for the legislation to be debated and passed, which will no doubt prove a task in itself.

Although the start date has been delayed, companies have really only been provided a ‘stay of execution’ before the Scheme begins in earnest in July 2011. In the intervening period, companies must still make sure that they have appropriate systems in place to determine whether their emissions require them to surrender permits, to calculate likely future permit requirements and to ensure they have sufficient financial resources to purchase enough permits.

For more information on the Federal Government’s Carbon Pollution Reduction Scheme, please contact HopgoodGanim’s Climate Change specialists.