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Australia – Climate Change Outlook: Carbon Tax Repeal, And Direct Action.

14 November, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Environment 

 

The new Coalition government has proposed to repeal the existing Clean Energy Act 2011 (Cth) and related legislation (Carbon Legislation) and to pursue instead a ‘Direct Action’ approach to climate change. This article considers the outlook for climate change regulation under the new government in the short term and the long term policy framework dependent on international developments.

 

Climate Change Regulation Repealing The Carbon Tax

 

(a) Repeal The New Government’s First Priority

 

The Coalition went to 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 programs. The government proposes to introduce repeal legislation to Parliament as its first item of legislative business in early November.

 

(b) Consultation

 

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

 

(c) Repeal Prior To 1 July 2014?

 

The repeal legislation will promptly pass the lower House of Representatives with the government’s majority. But it will likely be rejected in the upper house Senate by the ALP and Greens, who retain a majority in the Senate until 1 July 2014.

 

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.

 

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. However, 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.

 

(d) 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 will be the Senate’s composition from 1 July 2014.

 

PowerPoint Presentation

 

To pass legislation the Coalition will need the votes of at least six of the eight minor party Senators and independent Senators. The following table summarises what is known or expected of their positions.

 

 Senator  Support Carbon Tax repeal Support Direct Action
Nick Xenophon
Independent
Yes if Tony Abbott personally commits to 5% emissions cut & other changes to Direct Action Yes with modifications
Bob Day
Family First
 Yes  No
David Leyonhjelm
Liberal Democrats
 Yes  No
John Madigan
Democractic Labor Party
 Yes  Yes with modifications (similar to Xenophon)
Palmer United Party (PUP):
Glenn Lazarus & Jacqui Lambie
 Yes  No
Ricky Muir,
Australian Motoring Enthusiasts
 Yes (voting with PUP)  No (voting with PUP)
Wayne Dropulich. Australian Sports Party  Unknown  Unknown
Support 7 including Xenophon
6 excluding Xenophon
Dropulich unknown
 2

 

Legislation repealing the Carbon Legislation will likely pass a Senate with this composition. However, the minor party Senators and independent Senators 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.

 

The final outcome from WA Senate voting is uncertain. Originally, the results were 3 Liberals, 2 ALP and 1 PUP. On a recount the results were 3 Liberals, 1 ALP, 1 Green and 1 Australian Sports Party. However, in the recount 1,375 votes were misplaced, meaning a High Court appeal looks likely which may require the WA 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 uncertainty for Direct Action.

 

(e) The Draft Repeal Legislation

 

The draft repeal legislation would:

 

  • make the 2013/14 financial year the final year of the Carbon Legislation,
  • continue industry assistance for 2013/14  for Emissions-Intensive Trade-Exposed industries and 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.
 

(f) Issues Arising From Repeal

 

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 for a later repeal.

 

The government has been and remains vocal that the September 2013 election gave it a mandate to effect repeal of the Carbon Legislation.

 

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. However, 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 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 was still in place.

 

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. Abolition of these agencies and curtailing their funding would require repeal or amendment to their separate establishing legislation.

 

Direct Action

 

The government proposes to pursue a policy it calls ‘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 included in Australia’s international emissions reductions commitment.

 

Key Aspects

 

Only limited detail is available regarding the Direct Action policy, primarily from a 2010 policy document1.

 

The policy includes two key aspects:

 

  1. an Emissions Reduction Fund, with AUD$2.55 billion of government funding proposed for its first 4 years, to purchase domestic Australian greenhouse gas emissions abatement in a reverse auction process, and
  2. business as usual’ baselines for industry, with penalties to potentially apply for businesses emitting above their baselines.

 

Uncertainties And Issues

 

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.
  • Funding vs emissions reductions: The government has indicated that funding for the policy is capped, initially at $2.55 billion for the first 4 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. There is ongoing controversy as to whether sufficient abatement can be purchased within the budget allocation. One possibility allows the use of international units.
  • Payment timing: Up-front funding runs the risk that benefits will not be delivered. But payment only on delivery makes investments with longer term horizons difficult.
  • How do you assess ‘reverse auction’ bids?
  • ‘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 abatement paid for is real and lasting?
  • Baselines and penalties: Is industry to incur costs under the scheme, for administration and compliance, making the scheme similar in this respect to the Carbon Legislation? The setting of baselines is problematic. Including: Should baselines be assessed by industry or by individual facility and how will expansions and new entrants be treated?
  • Increased bureaucracy
  • 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 as follows:

 

Time Action
Within 30 days of being elected Call for submissions – Terms of Reference released 16 October 2013,
submissions due 18 November 2013
60-100 days Consult – Release of Green Paper set for December 2013
By day 100 Release White Paper and draft legislation – set for ‘Early 2014’
By day 150 Receive further feedback and release final legislation
Goal of 1 July 2014 Commence the system

 

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 intended 1 July 2014 start date.

 

The table above shows the government will also face a real challenge obtaining sufficient support from the minor party Senators and independent Senators to pass Direct Action legislation. 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 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. We expect it is unlikely that Direct Action could be implemented in full by regulations alone, without requiring new legislation passed by Parliament.

 

Outlook

 

The outlook is for considerable uncertainty regarding:

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

 

Endnotes

 

  1. 2010 policy document available here

 

herbert smith Freehills

 

For further information, please contact:

 

Michael Voros, Herbert Smith Freehills
[email protected]

 

John Taberner, Herbert Smith Freehills 
[email protected]

 

Robert Nicholson, Partner, Herbert Smith Freehills
[email protected]


Herbert Smith Freehills Environment Practice Profile in Australia

 

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