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Australia – An Early Move To Emissions Trading?
12 August, 2013

Legal News & Analysis – Asia Pacific – Australia – Environment 

 

 WHAT YOU NEED TO KNOW

 

  • On 16 July, Prime Minister Kevin Rudd signalled that he would seek to bring forward the move from a fixed price to a cap and trade Emissions Trading Scheme by one year.
  • The change would mean that from 1 July 2014, the price of Australian carbon units would drop from the fixed price of A$25.40 to a floating price reflecting the lower price of European Union Allowances (currently around A$6).
  • The Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education (DIICSRTE) released a document on 18 July 2013 outlining further details on how emissions trading will work in 2014-5.
  • In the 2014-5 year, liable entities can meet up to 50% of their annual liability with eligible international units, of which a sub-limit of 6.25% will apply to eligible Kyoto units.

 

What was announced?


On 16 July 2013, Prime Minister Rudd announced that he will seek to bring forward the move from a fixed carbon price to a cap and trade emissions trading scheme by one year, starting on 1 July 2014, instead of 1 July 2015.


It is expected that this change will result in liable entities paying a significantly lower carbon price in the 2014-5 year. Under the fixed price, the price would have been set at A$25.40, whereas, it is now likely to be around A$7.


Following the Prime Minister's announcement, the DIICSRTE released further policy details on how emissions trading will work in the 2014-15 year. 


Clean Energy Finance Corporation and ARENA funding intact

 

Due to the decrease in expected revenue resulting from the change (estimated to be $3.8 billion), the Government announced it will reduce funding allocation to a number of complementary clean energy and environmental programs such as reducing the Coal Sector Jobs Package by A$186 million in 2014-5 to reflect lower carbon prices.


The Government confirmed however that funding allocations to the Clean Energy Finance Corporation and Australian Renewable Energy Agency (ARENA) will be unaffected as will the policy settings of the Mandatory Renewable Energy Target.


Industry and household assistance


Transitional assistance for Emissions Intensive Trade Exposed (EITES) delivered in the form of free permit allocation through the Jobs and Competitiveness Program will be left untouched. Household compensation will also not change, meaning that households will benefit significantly from the changes.

 

How will emissions trading work in 2014-5?


The key details of the change as outlined in the DIICCSRTE document are:


Single Compliance Point


For the 2014-2015 year, there will be a single compliance point of 1 February 2016.


Use of International Units


From 1 July 2014, liable entities may meet up to 50% of their annual liabilities with eligible international units. In the 2014-5 year, a 6.25% sub limit will  apply to eligible Kyoto units. From 1 July 2015 Australian carbon price should reflect the European Union price from the start of the new flexible price period ( 1 July 2014).

 

Link with the European Union Trading System


Under the current arrangements, the one way link is scheduled to commence on 1 July 2015. The Government has confirmed that Australian liable entities will be able to use European Allowances (EUAs) from 1 July 2014, but that the arrangements to facilitate surrender of EUAs in the Australian registry will be in place by 1 July 2015, seven months before the 2014-5 compliance date of 1 February 2016.


This means that in the meantime Australian liable entities will be required to either hold EUAs in a European union account or arrange for a delivery date into the Australian Government account in the EU registry after 1 July 2015.


Auctioning of Australian Carbon Units


It is proposed that the existing auctioning schedule will be revised for the 2014-5 year, so that there will be:

 

  • Two advance auctions, between February 2014 and June 2014;
  • Four auctions during 2014-5; and
  • One auction after 30 June 2014 and before the final surrender date for the 2014-5 year, which is 1 February 2016.


As the price of Australian units is intended to track the EUA price, the opening price at the auctions will be set at 80% of the European price for the duration of the interim link.


The timing: election promise or policy?


In order to effect the proposed changes, the Clean Energy Act (2011) Cth and associated legislation and regulations will need to be amended. This is principally because the fixed price period is defined in the legislation as including the 2014-2015 year.


If the election is held before Parliament sits again, then the proposed changes will at best be a promise that the Labor Party takes to the election.


If the election is later in the year, then there may be an opportunity for the Government to amend the legislation. However, this will require the support from the independents and the Greens and this is not guaranteed. The Greens Party currently does not support the change. This means that it is unlikely to become law before the election, and will be an election promise, to be implemented if Labor wins a clear majority in both houses of the Parliament.


A further complication is that even if Labor wins the election, the new Senate does not take effect until 1 July 2014. This means that the Greens will continue to hold the balance of power in the Senate until then, making it difficult for Labor to amend the legislation in time for its proposed start of flexible price period on 1 July 2014.


Implications for business


Carbon Pricing Mechanism now here to stay? Overall, the recent change of the Labor leadership makes it more likely that the Carbon Pricing Mechanism is here to stay in some form. Regardless of whether Labor or the Coalition win the election, the change of leadership makes it more difficult for the Coalition to take control of the Senate. This means that if the Coalition were to try and repeal the Clean Energy Act, they would be forced to go to a double dissolution. Increasingly polling is showing that the public and business support carbon pricing.


Uncertainty to continue


Although the prospects for carbon pricing in Australia look more positive, it is likely that uncertainty will continue for some time to come, given the difficulties in successfully amending the legislation. Without the support of the Greens and/or the Liberal Party, it will be difficult for Labor to amend the legislation before 1 July 2014.


Cheaper compliance costs for business


The move to early emissions trading, if implemented, is favourable to business in significantly reducing compliance costs in the 2014-15 year. There are a number of opportunities that liable entities can take advantage of in the international carbon market. It is expected that liable entities will use up to the 6.25% sub limit of CERs, given that these are trading at less than A$1.


Australian liable entities could also consider purchasing EUAs now for use in 2014 or beyond, given that these unit are also trading at historically low levels and the European Parliament is may take measures later in the year to prop up prices in theEuropean Union Trading System.

 

 

For further information, please contact:

 

John Briggs, Partner, Ashurst

john.briggs@ashurst.com

 

Tony Hill, Partner, Ashurst

tony.hill@ashurst.com

 

Jeff Lynn, Partner, Ashurst

jeff.lynn@ashurst.com

 

Katherine Lake, Ashurst

katherine.lake@ashurst.com

 

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