Jurisdiction - Australia
Reports and Analysis
Australia – Climate Change Outlook: Carbon Tax Repeal And Direct Action.

10 February, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Environment 

 

The new Coalition government has proposed to repeal the existing Clean Energy Act 2011 and related legislation (Carbon Legislation) and to pursue instead a ‘Direct Action’  approach to climate change. These matters are significant for the Australian economy and especially the energy industry. Uncertainty remains for many aspects of climate change regulation. Michael Voros, John Taberner,  and Robert Nicholson consider the outlook for climate change regulation under the new government in the short term and the long term policy framework dependent on international developments.

 

The 7 September 2013 election win by the Tony Abbott led Coalition parties marks a new chapter in Australia’s long-running, and often changing climate change regulation story. Mr Abbott had long campaigned against the previous Australian Labor Party (ALP) government on a platform of ‘scrapping the Carbon Tax’. The Coalition consists of long
time partners the Liberal Party (politically similar to USA Republican Party and UK Conservative Party), and the National Party, focused on rural and regional interests.

 

1. Climate Change Regulation: Repealing The Carbon Tax


Repeal Is The New Government’s First Priority


The Coalition went into the election promising to make the repeal of the Carbon Legislation its first priority, as well as closing the Clean Energy Finance Corporation (CEFC) and potentially closing the Australian Renewable Energy Agency (ARENA), or at a minimum ending some of its programmes. The government proposes to introduce repeal legislation to Parliament as its first item of legislative business, in the first sitting week after the election, starting on Tuesday 12 November 2013.


Draft repeal legislation was released by the Department of Environment on 15 October 2013 and called for submissions by 4 November (but encouraged submissions by 29 October).


Repeal Prior To 1 July 2014


With the government’s majority, the repeal legislation will promptly pass the lower House of Representatives. But it will likely be rejected in the upper house Senate by the ALP and Greens, who retain a majority in the Senate until the Senate composition changes on 1 July 2014 (when the recently elected Senators take their seats).


The ALP, under new leader Bill Shorten, has announced it will oppose the government’s repeal plans, unless it includes a move to an emissions trading scheme.


The Greens have long been known to oppose the repeal. It is possible that the legislation will first be subjected to a lengthy Senate committee consideration before being rejected.
If the repeal legislation is rejected by the Senate and rejected again after at least three months, the government can call a double dissolution election. At such an election, all members of the House of Representatives, and all the Senators (not just the usual half), would stand for re-election. If, following such an election (and assuming the Coalition wins it), the new Senate still did not pass the repeal legislation there could be a joint sitting of both the House of Representatives and Senate to pass the legislation. A double dissolution looks unlikely given that the government will likely have the numbers in the new Senate from 1 July 2014 with the support of the new minor party Senators and independent Senators. 


Double dissolutions commonly have not been kind to incumbent governments. Also, the government would run the risk of aggravating the electorate by holding another election so soon after September 2013, as well as the risk of increasing the number of minor party Senators and independent Senators.


Repeal After 1 July 2014


The Senators who were elected at the September 2013 election will take their seats in the Senate on 1 July 2014. The Senate has 76 members. The majority needed to pass legislation is 39 votes. The following chart shows what the Senate’s composition will be from 1 July 2014.

 

To pass legislation the Coalition will need the votes of at least six of the eight minor party Senators and independent Senators. The table above summarises what is known or expected of their positions on repeal of the Carbon Legislation, and on support for Direct Action (considered more in section 2 below).


Legislation repealing the Carbon Legislation is likely to be passed by the Senate with this composition. Nick Xenophon is the only Senator who has so far proposed conditions for his support, but the repeal would pass without his vote. The others have been clear in their support for a repeal, except Wayne Dropulich whose position is unknown. However, the minor party Senators and independent Senators, despite generally supporting the repeal, will likely seek to extract what publicity and political concessions they can from the repeal. Hence, passage of the repeal legislation may not occur until several months after 1 July 2014, particularly if the legislation is considered by a Senate committee.


The final outcome from Western Australian Senate voting is uncertain. Originally, the results were three Liberals, two ALP and one PUP Senator. On a re-count the results were three Liberals, one ALP, one Green and one Australian Sports Party. However, in the re-count 1,375 votes were misplaced, meaning a High Court appeal looks likely which may require the Western Australian Senate vote to be re-held. Ultimately it is not thought this would change the overall numbers so as to change the likely support for repeal, and the uncertainty regarding Direct Action.


The Draft Repeal Legislation


The draft repeal legislation is complex, comprising eight separate bills. The draft legislation would:

 

  • make the 2013/14 financial year the final year of the Carbon Legislation;
  • continue industry assistance for 2013/14 under the Jobs & Competitiveness Program for Emissions-Intensive Trade-Exposed industries, and the Energy Security Fund for emissions-intensive coal-fired generation;
  • give the Australian Competition & Consumer Commission (ACCC) new powers to police business practices following the repeal; and
  • abolish the Climate Change Authority, which had various review and recommendation roles in connection with the Carbon Tax and Renewable Energy Target.

Issues Arising From Repeal


The government has designed the draft repeal legislation so as to apply political pressure to the ALP. The government, while it should be able to pass the repeal legislation through the Senate after 1 July 2014, would prefer to pass it sooner to allow the Carbon Legislation to end cleanly on 30 June 2014 and to avoid the accounting and other uncertainties that would arise if the repeal occurred within the 2014/15 financial year.


The government has been and remains vocal that the September 2013 election gave it a mandate to effect repeal of the Carbon Legislation. It draws parallels with its ‘Work Choices’ industrial relations legislation which was repealed following the election of the ALP to government in 2007. Contrary parallels can be drawn with the 1975 ‘supply crisis’.
The ALP faces a difficult period and recognises that the carbon tax and its policy to replace it with an emissions trading scheme weighed heavily against it in the September election. Despite this, the ALP maintains it will oppose the government’s repeal plans, unless it includes a move to an emissions trading scheme.


The government has stated that, even if Parliament does not pass repeal legislation until after 1 July 2014, the last year of the Carbon Legislation would be the 2013/14 financial year. This would mean that the repeal would have retrospective effect. This would raise considerable uncertainty for how ‘liable entities’ should act in the interim period in 2014/15, while the Carbon Legislation remains in place. In that interim period, ‘liable entities’ would still need to comply with any obligations or processes arising under the Carbon Legislation and would need to consider how to deal with any liabilities accruing if the repeal does not occur or is delayed.


In the early stages of the 2014/15 financial year, entities eligible for industry assistance will need to follow application processes to obtain free carbon units as if there is 2014/15 liability. Businesses would need to consider whether to continue to pass through ‘carbon costs’ for liabilities that may apply for 2014/15, or to take the risk that repeal occurs removing such liabilities. If costs are passed through, there would then be pressure, including potentially from the ACCC, for businesses to refund any money taken in connection with liabilities that do not ultimately arise. These matters may not align well with existing contracts and cause administrative difficulties for accounting and invoicing systems.
The Carbon Legislation will, unless repealed, transition to an emissions trading scheme for the 2015/16 financial year, and EU and Kyoto Protocol units can be then used to satisfy liabilities. Repeal of the Carbon Legislation will cut across this transition and the resulting international linkages.


The draft repeal legislation does not make any provision regarding abolishing the CEFC or ARENA. These government agencies have been established under separate legislation which commits significant funding. Abolition of these agencies and curtailing their funding would require repeal or amendment to this separate legislation.


The government proposes to pursue a policy which it calls ‘Direct Action’. The government, with primary input from the new Minister for the Environment, Greg Hunt, has devised this approach as an alternative way to reduce Australia’s greenhouse gas emissions without using a direct price on emissions.

 

2. Direct Action


Emissions Reduction Target


The government has committed to the same minimum target of a 5% reduction in Australia’s emissions by 2020 against 2000 levels, as targeted by the ALP under the Carbon Tax and included in Australia’s international emissions reductions commitment.


Key Aspects Of Direct Action


Only limited detail is available regarding the Direct Action policy, primarily from a 2010 policy document.


The policy includes two key aspects:

 

  • an Emissions Reduction Fund, with AUD$2.55 billion of government funding proposed for its first four years, to purchase domestic Australian greenhouse gas emissions abatement in a reverse auction process; and

 

  • ‘business as usual’ baselines for industry, with penalties to potentially apply for businesses who emit above this baseline.

Only very limited detail is available on the second aspect of Direct Action.


The graph above indicates how purchasing abatement is intended to have the effect of reducing Australia’s overall emissions.


Uncertainties And Issues


Given the limited detail available regarding the Direct Action policy, a number of uncertainties and potential issues exist, including the following:


The intended life: The government has generally spoken about the policy as only continuing to 2020 to achieve the 5% target. It is therefore an interim approach only. There are advantages in this, primarily in that it allows greater clarity to emerge internationally before Australia makes more significant commitments. But a criticism is that it may not position Australia well to take further steps after 2020 or provide a long term policy framework to support business development.


Funding vs emissions reductions: The government has indicated that funding for the policy is capped, initially at AUD$2.55 bn for the first four years. It is uncertain whether any funding will be available after that. This leaves the possibility that the funding may not be sufficient to achieve the 5% target, and that achieving the target is dependent on what abatement projects are bid into the policy. There is ongoing controversy as to whether sufficient abatement can be purchased within the budget allocation. One option allows the use of international units, but this is not preferred by the government which wants to focus on domestic abatement.


Payment timing: Up-front funding runs the risk that benefits will not be delivered. The government has emphasised that payments will only be made when emissions reductions are effected. However, this presents challenges to securing financing which are increased by the regulatory uncertainty. It may also potentially constrain the programme to projects which will deliver all or most of their benefits by 2020 and may eliminate many projects of a longer term nature. Will the policy therefore favour contracts which provide progressive delivery based on verified actual results achieved? This could lead to parties entering into a contract when they are uncertain of implementing the relevant project or uncertain as to its exact impact on emissions or abatement. This may give a ‘free option’. It could jeopardise the programme’s ability to achieve the 5% target, if contracted projects do not deliver the abatement. Should there be consequences if abatement is not delivered? How does the government budget for Direct Action payments when actual payments for a particular year are not known until after the year has concluded and abatement is ‘delivered’? The framework and delivery structure will make actual total payments difficult to predict.


How do you assess ‘reverse auction’ bids?: How to compare (say) forestry with energy efficiency? Is it possible to develop objective criteria or must they have loose/subjective components? How to compare short period and longer period projects, including projects beyond 2020? How are different capital versus operating expenditure risks to be addressed?


‘Additionality’: How can the government be sure that it is not paying for actions that may have been taken anyway?


‘Leakage’: How to ensure that a person is not paid for emissions reductions in one project if that person has emissions increases elsewhere?


Integrity: What verification, audit and ongoing obligations should apply to ensure that any abatement paid for is real and lasting?


Baselines and penalties: This matter is of the greatest concern to industry. Is industry to incur costs under the scheme, for administration and compliance, making the scheme similar in this respect to the Carbon Legislation? Should baselines be assessed by industry or by an individual facility? The preference seems to be for material facilities to be subject to baselines, using data reported under the existing National Greenhouse and Energy Reporting System (NGERS). But the actual setting of baselines is problematic. The relationship between production and emissions is usually not linear: how to assess the actual impact of various capital and operating strategies on emissions per unit of production? Will industry be penalised if it reduces production due to the economy (eg, moving from three shifts to one shift with start-up and shut down) and consequently delivers higher emissions per unit of production? How will expansions and new entrants be treated?


Increased bureaucracy: The Coalition generally favours reduced bureaucracy and government oversight, but Direct Action, if fully implemented, may increase the complexity of policy decisions, rules, negotiation and oversight of contracts.


Banding/quotas?: Should the government be wary of too much concentration in particular sectors or technologies? Soil carbon is an example of an area which had been an early focus of the policy but has come under criticism for not being proven at scale and internationally recognised. Could bands or quotas be set for different types of abatement?
There is doubt as to whether all of these and other issues can be resolved in the short proposed consultation periods.


Consultation


The Coalition proposes to further develop and consult on the Direct Action policy as set out in the table above.


Passage


It is expected that the ALP will oppose legislation to implement Direct Action, as well as repeal of the Carbon Legislation. The Greens are clear in their opposition. Hence the passage of Direct Action legislation prior to 1 July 2014 is unlikely, threatening the government’s intended 1 July 2014 start date.


The table on page 3 shows that the government will also face a real challenge to obtain sufficient support from the minor party Senators and independent Senators to pass Direct Action legislation. Importantly their opposition is generally on ideological grounds rather than concerns with the specific details of Direct Action. Unless the government can persuade the ALP to work constructively on Direct Action, the government will need to achieve a political compromise with the minor party and independent Senators, presumably by making other concessions. Whether and when this can happen remains very uncertain.
The government has sought to separate the two processes of repealing the Carbon Legislation and implementing Direct Action. But they may become very intertwined, especially when the new Senate commences on 1 July 2014.


The government has recently suggested that Direct Action could be implemented by subsidiary legislation (by regulations made under existing legislation) rather than needing new legislation to be passed by Parliament and hence facing a potentially hostile Senate. It is unlikely that Direct Action could be implemented in full by regulations alone, without requiring new legislation passed by Parliament. Some aspects may be possible under existing legislation, such as establishing and funding the Emissions Reduction Fund. But various aspects could not, such as establishing a penalty regime. At the very least changes to existing legislation for greenhouse gas reporting and the Carbon Farming Initiative (expected to provide much of the eligibility and verification framework) would be required. To seek to establish a new climate change regime without passing it through Parliament would open the government to considerable criticism.

 

3. Outlook


The outlook is for considerable uncertainty regarding:

 

  • the timing and effect of a Carbon Tax repeal, especially for a potential interim period in 2014/15; and
  • the likelihood, timing and final detail and impact of the Direct Action policy.

Business faces the unenviable task of preparing for a range of possible outcomes.

 

herbert smith Freehills

 

For further information, please contact:

 

Michael Voros, Herbert Smith Freehills

michael.voros@hsf.com


John Taberner, Herbert Smith Frehills

john.taberner@hsf.com 


Robert Nicholson, Partner, Herbert Smith Freehills

robert.nicholson@hsf.com


Herbert Smith Freehills Environment Practice Profile in Australia 

Comments are closed.