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Australia – Clean Energy Regulations: To Opt-In Or Not To Opt-In, That Is The Question.

30 December, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Energy & Project Finance

 

WHAT YOU NEED TO KNOW
 
  • The amendments to the Clean Energy Regulations 2011, introducing the Opt-in Scheme, have been made.
  • Since 1 July 2012, liquid petroleum fuel has been subject to an effective carbon price. Liquid petroleum fuel includes (but is not limited to) diesel, diesel blends, fuel oil as well as types of gasoline, crude petroleum oil and kerosene.
  • From 1 July 2013, users of large amounts of liquid petroleum fuels have the ability to choose to pay the carbon price under the Clean Energy Act 2011, through the Opt-in Scheme.
 
WHAT YOU NEED TO DO
 
  • If you are a large user of liquid petroleum fuels, consider whether there will be any economic benefit for utilising the Opt-in Scheme.
  • If you have decided to “opt-in”, prepare an application to be made on or before 31 March in the financial year before the financial year in which the declaration is to have effect.
 
In short
 
Since 1 July 2012, liquid petroleum fuel has been subject to an effective carbon price, generally applied by reducing the amount of fuel tax credits relevant businesses are eligible to receive under the fuel tax system.
 
However, in order to provide flexibility, the Government has introduced the ability for users of large amounts of liquid fuels to choose to pay the carbon price under the Clean Energy Act 2011 (“CE Act“) rather than through the fuel tax system. This is known as the Opt-in Scheme.
 
The Opt-in Scheme will begin on 1 July 2013, meaning that the 2013-14 financial year is the first year in which businesses can manage the liability for the potential emissions embodied in their liquid petroleum fuels under the CE Act.
 
The Clean Energy Regulator will be responsible for administering the Opt-in Scheme, with the assistance of the Australian Taxation Office and Australian Customs Service (as required).
 
How will the Opt-in Scheme work?
 
To opt-in to the carbon pricing mechanism, an eligible person may apply to the Clean Energy Regulator to be the designated opt-in person (“DOIP”) in respect of liquid petroleum fuel acquired, manufactured or imported. If declared to be a DOIP, the person will:
 
  • (a) become a liable entity under the CE Act in respect of the potential greenhouse gas emissions embodied in an amount of liquid petroleum fuel (the “Opt-in Amount”); or
  • (b) if the DOIP is already a liable entity under the CE Act – manage its liability in respect of the Opt-in Amount under the CE Act concurrently with its liability for other covered emissions.
 
Who can “opt-in”?
 
To be eligible to “opt-in” to the Opt-in Scheme, a person must pass the eligibility test and the threshold test.
 
Eligibility Test
 
A person passes the eligibility test in relation to an acquisition of liquid petroleum fuel during a financial year if it would have been entitled to fuel tax credit in respect of the acquisition of the liquid petroleum fuel:
 
  • (a) in its own right;
  • (b) as a member of a GST Group where the members are entitled to the fuel tax credit; or
  • (c) as a participant in the GST Joint Venture where the participants are entitled to the fuel tax credit.
 
The Clean Energy Regulations 2011 (“Regulations“) set out the details as to when an entity will be considered to be entitled to a fuel tax credit in respect of an acquisition, manufacture or import of an amount of liquid petroleum fuel, having regard to the Fuel Tax Act.
 
Threshold Test
 
The threshold test requires that either:
 
  • (a) the person, or its GST Group or GST Joint Venture:
    • (i) has used an amount of liquid petroleum fuel that embodies potential greenhouse gas emissions of 25,000 tonnes of carbon dioxide equivalence or more in either of the two previous financial years before the application is made; or
    • (ii) will likely use an amount of liquid petroleum fuel that embodies potential greenhouse gas emissions of 25,000 tonnes of carbon dioxide equivalence or more in the relevant financial year; or
  • (b) the person is or will be a “liable entity” under the CE Act for the relevant financial year.
 
Who is eligible to be a DOIP?
 
A person is eligible to be a DOIP under the Opt-in Scheme if:
 
  • (a) it is not a foreign person or an individual; and
  • (b) the person:
    • (i) is entitled to fuel tax credit in respect of the liquid petroleum fuel in its own right or as the member of a GST Group;
    • (ii) is the representative member of a GST Group that meets the eligibility test; or
    • (iii) is the Joint Venture Operator of a GST Joint Venture that meets the eligibility test.
 
Application process
 
The Regulations set out the process for making an application to the Clean Energy Regulator under the Opt-in Scheme and the information required to be included.
 
Applications must be made on or before 31 March in the financial year before the financial year in which the declaration is to have effect (ie March 2013 if the application is to take effect for the 2013-14 financial year).
 
Liability for emissions
 
The DOIP’s “preliminary emissions number” for the purposes of the Opt-in Scheme, for a financial year, is the potential greenhouse gas emissions embodied in the Opt in Amount (in CO2 e tonnes). The aggregate of the DOIP’s “preliminary emissions numbers” will then form the DOIP’s “provisional emissions number”.
 
Under the CE Act, the DOIP (as a liable entity) will be required to:
 
  • (a) acquire eligible emissions units; or
  • (b) pay a unit shortfall charge,
 
equivalent to its “provisional emissions number” for a financial year.
 
The CE Act contains the process for obtaining, transferring and surrendering eligible emissions units under the CE Act as well as the charges that will be imposed if a DOIP does not surrender sufficient eligible emissions units.
 
Reporting obligations
 
Reporting requirements under the Regulations The Regulations require that a DOIP provide a report to the Regulator by 14 July each financial year, which:
 
  • (a) demonstrates that the DOIP passes the eligibility test;
  • (b) states the entity entitled to the fuel tax credits; and
  • (c) where the DOIP is the representative of a GST Group or GST Joint Venture, identifies the members of the GST Group or participants in the GST Joint Venture (as relevant),
 
for the relevant financial year.
 
Reporting under the National Greenhouse and Energy Reporting Act 2007 (“NGER Act”)
 
The DOIP’s reporting obligations under the Regulations are in addition to the reporting obligations of the DOIP as a liable entity under the CE Act, which are detailed in the NGER Act.  
 
Can you opt out?
 
In certain circumstances, a DOIP may voluntarily opt-out. Further, the Clean Energy Regulator may remove a DOIP from the Opt-in Scheme if certain conditions are met.
 
Why would businesses want to “opt-in” to the carbon pricing mechanism?
 
By applying an effective carbon price through the fuel tax system, the Government has sought to minimise the administrative cost of compliance for large users of liquid petroleum fuel by utilising existing systems and processes.
 
However, through the introduction of the Opt-in Scheme, the Government has acknowledged that businesses may be attracted to the economic efficiency of an emissions trading scheme. This is because by opting into the CE Act, businesses will be able to access international carbon markets (from 1 July 2015 onwards) as well as domestic offsets created under the Carbon Farming Initiative (from the commencement of the Opt-in Scheme).
 
There may be little economic benefit for a person to utilise the Opt-in Scheme prior to 1 July 2015, unless that person is already a “liable entity” under the CE Act or is entitled to free eligible emissions units. However, from 1 July 2015 onwards, we consider that there will be economic incentives for all large users of liquid petroleum fuels to participate in the Opt-in Scheme as the CE Act will transition to a fully-fledged emissions trading scheme and users will be able to access international eligible emissions units.
 

 

 

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