Save Search

Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Carbon Pollution Reduction Scheme Bill 2010

Bill home page  


Download WordDownload Word


Download PDFDownload PDF

 

2008-2009-2010

 

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

CARBON POLLUTION REDUCTION SCHEME bill 2010

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by the authority of the Minister for

Climate Change and Water, Senator the Honourable Penny Wong)

 

 

 

 



 



T able of contents

Glossary.............................................................................................................. 1

General outline of the Carbon Pollution Reduction Scheme Bill 2010.. 3

 Chapter 1 Liable entities and covered emissions.................................... 31

 Chapter 2 Scheme caps, gateways and emissions units...................... 83

 Chapter 3 Allocation of units — introduction, auction and fixed charge units        109

 Chapter 4 Emissions-intensive trade-exposed assistance program.. 119

 Chapter 5 Coal mining............................................................................... 135

 Chapter 6 Coal-fired electricity generation............................................. 147

 Chapter 7 Reforestation............................................................................. 191

 Chapter 8 Destruction of synthetic greenhouse gases........................ 223

 Chapter 9 Domestic Offsets Program...................................................... 231

 Chapter 10 Assessment, surrender, relinquishment and voluntary cancellation  247

 Chapter 11 Compliance and enforcement............................................. 261

 Chapter 12 The Australian National Registry of Emissions Units..... 279

 Chapter 13 Public information.................................................................. 287

 Chapter 14 Independent reviews............................................................. 293

 Chapter 15 Review of decisions and miscellaneous provisions........ 305

Index............................................................................................................... 313

 



The following abbreviations and acronyms are used in this explanatory memorandum.

Abbreviation

Definition

Authority

The Australian Climate Change Regulatory Authority

The bill

The Carbon Pollution Reduction Scheme Bill 2010

CO 2 -e

Carbon dioxide equivalence

The consequential amendments bill

The Carbon Pollution Reduction Scheme (Consequential Amendments) Bill 2010

CSAS

Coal Sector Adjustment Scheme

DOIC

Domestic Offsets Integrity Committee

ESAS

Electricity Sector Adjustment Scheme

Eligible emissions unit

An Australian emissions unit or an eligible international emissions unit

Eligible international emissions unit

A certified emission reduction (other than a temporary certified emission reduction or a long-term certified emission reduction), an emission reduction unit, a removal unit, a prescribed unit issued in accordance with the Kyoto rules

Garnaut Climate Change Review Final Report; Garnaut Final Report

R. Garnaut, The Garnaut Climate Change Review:  Final Report , Cambridge University Press, 2008

Green Paper

Carbon Pollution Reduction Scheme Green Paper , July 2008

IPCC

Intergovernmental Panel on Climate Change



 

Abbreviation

Definition

Kyoto units

An assigned amount unit, a certified emission reduction, an emission reduction unit, a removal unit or a prescribed unit issued in accordance with the Kyoto rules

Kyoto rules

This term is defined in section 5. In brief, it includes the Kyoto Protocol, decisions of the Meeting of the Kyoto Parties, certain standards adopted by such a Meeting and prescribed instruments

NCOS

National Carbon Offset Standard

NEMMCO

The National Electricity Market Management Company

Non-Kyoto international emissions units

A prescribed unit issued in accordance with an international agreement (other than the Kyoto Protocol) or a prescribed unit issued outside Australia under a law of a foreign country

OTN

Obligation transfer number

Registry

National Registry of Emissions Units

The Scheme

The Carbon Pollution Reduction Scheme

White Paper

Carbon Pollution Reduction Scheme: Australia’s Low Pollution Future , White Paper, December 2008

 



Rationale for the Carbon Pollution Reduction Scheme

Climate change is the greatest social, economic and environmental challenge of our time. Scientific evidence confirms that human activities, such as burning fossil fuels (coal, oil and natural gas), agriculture and land clearing, have increased the concentration of greenhouse gases in the atmosphere. As a consequence, the earth’s average temperature is rising and weather patterns are changing. This is affecting rainfall patterns, water availability, sea levels, storm activity, droughts and bushfire frequency, putting at risk Australian coastal communities, health outcomes, agriculture, tourism, heritage and biodiversity for current and future generations . [1]

The climate is already changing, with more frequent and severe droughts, rising sea levels and more extreme weather events. Globally, the decade of the 2000s (2000-2009) was warmer than the decade spanning the 1990s (1990-1999), which in turn was warmer than the 1980s (1980-1989) [2] .  Australia has experienced temperatures warmer than 1961-90 average mean annual temperature for 18 of the past 20 years. [3]  In Australia, each decade since the 1940s has been warmer than the preceding decade. [4] The latest report from the Intergovernmental Panel on Climate Change (IPCC), the 2007 Fourth Assessment Report, concludes that Australia has significant vulnerability to the changes in temperature and rainfall projected over the coming decades. [5]

The Garnaut Climate Change Review Final Report paints a bleak picture of Australia at the end of this century should greenhouse gas emissions continue unchecked. There would be major declines in agricultural production across much of the country. The Great Barrier Reef and other reef systems, such as Ningaloo, would be effectively destroyed, with serious ramifications for tourism industries and biodiversity. Coastal infrastructure would be at risk of damage from storm surges and flooding. Key Australian export markets would have significantly lower economic activity, feeding back into lower prices for Australian exports and poorer terms of trade.

The Garnaut Final Report also suggests that emissions are tracking at the upper bounds of the scenarios modelled by the IPCC in the Fourth Assessment Report. New data and scientific understanding, unavailable for the Fourth Assessment Report, suggest that the rate and magnitude of climate change over the next century may be at the high end of the range estimated by the IPCC. There is increasing concern about the stability of the Greenland and west Antarctic ice sheets, with major implications for sea-level rise. [6]

The costs of inaction on climate change

The IPCC’s Fourth Assessment Report suggests that, in a ‘business as usual’ world where world-wide economic growth continues based on fossil fuels, the best estimate of temperature rise by the end of the century would be 4 degrees Celsius. [7] The report says that climate change caused by this temperature rise is very likely to have widespread and severe consequences, including significant species extinctions around the globe, increased danger of wildfire, real threats to food production, and severe health impacts, with dramatic increases in morbidity and mortality from heatwaves, floods and droughts. [8]

The environmental impacts of climate change have flow-on effects for other aspects of human society, such as the economy, security and human health.

Small variations in climate are expected to be more damaging to Australia than to other developed countries. Climate change will also affect Australia’s neighbours.

Referring to Australia’s region, the Lowy Institute for International Policy has noted:

… even if not catastrophic in themselves, the cumulative impact of rising temperatures, sea levels and more mega droughts on agriculture, fresh water and energy could threaten the security of states in Australia’s neighbourhood by reducing their carrying capacity below a minimum threshold, thereby undermining the legitimacy and response capabilities of their governments and jeopardising the security of their citizens. Where climate change coincides with other transnational challenges to security, such as terrorism or pandemic diseases, or adds to pre-existing ethnic and social tensions, then the impact will be magnified. [9]

Australia’s economic growth in recent years has boosted domestic living standards and consumption. This growth has been supported by rapidly expanding developing economies, particularly in the Asia-Pacific region. Continued growth in developing economies could be threatened by the impacts of climate change as expenditure is diverted to cope with severe weather events, food crop failures, droughts and population displacement.

The findings of the Garnaut Final Report suggest that, in the long term, the costs of inaction will be greater than the costs of mitigation. The aggregate costs of action are modest, and the benefits of action (and the cost of inaction) increase over time, becoming more pronounced in the second half of this century and beyond.

Analysis presented in the Garnaut Final Report builds a strong case for responding to climate change with mitigation action. The Garnaut Final Report observes that ‘the overall cost to the Australian economy is manageable and in the order of one tenth of 1 per cent of annual economic growth’ [10] and concludes that ‘the costs of well-designed mitigation, substantial as they are, would not end economic growth in Australia, its developing country neighbours or the global economy; unmitigated climate change probably would’. [11]

The Garnaut Final Report also predicts that, in a world of unmitigated climate change, real wages will be 12 per cent lower by 2100 than in a world without climate change. This is due to the reduced demand for labour in the second half of the century as a result of climate change.

The Government accepts the key findings of the Garnaut Climate Change Review Final Report that:

•        a fair and effective global agreement delivering deep cuts in emissions consistent with stabilising concentrations of greenhouse gases at around 450 parts per million or lower would be in Australia’s interests

•        achieving global commitment to emissions reductions of this order appears unlikely in the next commitment period

•        the most prospective pathway to this goal is to embark on global action that reduces the risks of dangerous climate change and builds confidence that deep cuts in emissions are compatible with continuing economic growth and improved living standards.

Economies can respond more efficiently to new circumstances when businesses and individuals have certainty about long-term direction. Starting as soon as possible on a gradual adjustment to a low-carbon economy will give them the opportunity to plan their adjustment pathways and manage changes in technology, equipment and skills requirements, and will minimise the risk of stranding existing long-lived assets [12] . This will help to reduce the costs of mitigation.

The Australian community stands to gain from a comprehensive response to climate change. Modelling conducted by the CSIRO suggests that taking action to reduce Australia’s greenhouse gas emissions is consistent with strong jobs growth over the next 10 years — including in the relatively emissions-intensive the transport, construction, agriculture, manufacturing and mining sectors. [13]   A comparison can be drawn with the process of Australian tariff reform, whereby structural reform triggered growth in productivity, jobs and living standards.

While some climate change is unavoidable, the negative effects of warming can be substantially diminished by prompt and concerted action. The sooner we stabilise and then reduce atmospheric concentrations of greenhouse gases, the sooner we can reduce our impact on the climate and minimise the risk of dangerous change.

The Government’s climate change strategy

The Government’s climate change policy is built on three pillars —reducing Australia’s carbon pollution, adapting to the impacts of climate change that we cannot avoid, and helping to shape a global solution.

Reducing Australia’s carbon pollution

The Government is committed to a medium-term national target range of reducing emissions by between an unconditional 5 per cent of 2000 levels by 2020, with up to 15 per cent or 25 per cent of 2000 levels by 2020 conditional on the extent of action by other nations as set out in the Prime Minister’s announcement of 4 May 2009. [14] .  The Government is also committed to a long-term emissions reduction target of 60 per cent below 2000 levels by 2050.

In the event that there is a comprehensive global agreement capable of stabilising atmospheric concentrations of greenhouse gases at around 450 parts per million of carbon dioxide equivalence or lower, the Government has committed to a target of reducing emissions by 25 per cent of 2000 levels by 2020. Such an ambitious global agreement would be in Australia’s national interest.

While international developments have improved the prospects of achieving such an agreement, it will require a significant further shift in negotiating dynamics so that all advanced and major developing economies take serious action to restrain and then reduce emissions.

Achieving global commitment to such action in the near term will be very challenging. The Government is therefore pursuing responsible action now, to help move the economy to a low pollution future and position Australia to be part of a comprehensive 450 parts per million agreement in the future when that proves possible.

Should the world achieve this ambitious agreement, the Government would also seek a new election mandate for an increased target for 2050.

In December 2009, in Copenhagen, the world came together at the United Nations Climate Change Conference to agree to a path forward on climate change.  The Conference of the Parties noted the Copenhagen Accord. The Accord, strongly supported by both developed and developing countries, is the first time there has been agreement to hold the increase in global temperature below two degrees Celsius.   

The Government fully supports the Accord and submitted information on Australia’s 2020 quantified economy-wide emissions reduction target range, outlined above, to the UNFCCC secretariat on 27 January 2010. [15] .  The Government will continue to support negotiations under the United Nations Framework Convention on Climate Change (UNFCCC) to deliver further climate change actions. 

Meeting the emissions reductions targets will be challenging. Australia’s emissions have been growing rapidly since 1995. Monitoring and

reporting of Australia’s emissions by the Department of Climate Change [16] suggest that, while Australia is likely to meet its Kyoto Protocol target of limiting emissions in the 2008-2012 period to an average of 108 per cent of 1990 levels, emissions will increase to 120 per cent of 1990 levels by 2020 (even after the expanded Renewable Energy Target is taken into account) without additional policy measures. [17] This indicates considerable momentum in national emissions.

The Government will manage the transformation to a low-carbon economy through:

•        the implementation of the Carbon Pollution Reduction Scheme (the primary tool for driving reductions in greenhouse gas emissions)

•        an expanded national Renewable Energy Target

•        investment in renewable energy technologies and in the demonstration of carbon capture and storage

•        action on energy efficiency.

To avoid adverse income or distributional effects arising from the Scheme and ensure the most vulnerable households in society are protected, the Government is introducing changes to the tax and transfer systems and is introducing new, and accelerating existing, energy efficiency measures to help alleviate increases to the cost of living arising from the Scheme.

The Government has established the $1.97 billion Climate Change Action Fund to provide targeted assistance to business, community sector organisations, workers, regions and communities to smooth the transition to a low pollution economy. The Fund will help break down market barriers that may raise the cost of responding to a carbon price, and encourage investment in low-emissions technology. It will also provide targeted assistance for regions, communities and workers that may be disproportionately affected by the introduction of the Scheme because of their economic reliance on industries that are more exposed to a carbon price.

The Climate Change Action Fund will commence in 2009-10, with the first tranche of funding supporting businesses and community organisations to take early action in identifying energy efficiency opportunities and invest in energy improvements.

The Government will establish a Prime Minister’s Task Group on Energy Efficiency to consider and advise on economically and environmentally effective energy efficiency measures. The Task Group will report to the Government by mid-2010 on options for introducing new energy efficiency mechanisms to complement the Scheme and the Renewable Energy Target.

The Government has also committed $75.8 million over five years from 2009-10 to establish the Australian Carbon Trust to further support action on climate change by households and businesses. Of this, $50 million will be seed funding to an Energy Efficiency Trust to support energy efficiency investment in the business sector.  The Trust will demonstrate innovative approaches to energy efficiency investment with the aim of increasing business awareness of energy efficiency opportunities and facilitating the growth of private sector capacity in this area.

The Australian Carbon Trust will also deliver an Energy Efficiency Savings Pledge Fund, which will assist households to identify opportunities to reduce energy use, save money and directly contribute to achieving emission reductions beyond Australia’s targets.

In addition, the Council of Australian Governments agreed on 2 July 2009 to a National Strategy for Energy Efficiency.  The Strategy is designed to accelerate energy efficiency improvements across all sectors of the economy and help households and businesses prepare for the introduction of the Scheme. 

Adapting to unavoidable climate change

Even if global mitigation efforts are successful, scientific evidence indicates that some climate change is unavoidable. The National Climate Change Adaptation Framework has been developed by the Australian Government and all State and Territory governments to build Australia’s capacity to respond effectively to climate change, and outlines action to reduce regional and sectoral vulnerability.

Helping to shape a global solution

While Australia is responsible for only a relatively small proportion of global emissions, Australia’s climate and economy are likely to be strongly affected by climate change. Australia therefore has a strong and direct national interest in pursuing a global solution. Being one of the group of countries leading the global response means that Australia is in a position to positively shape an international agreement to address climate change beyond the first compliance period of the Kyoto Protocol, which ends in 2012. The Government supports the fast and full implementation of the Copenhagen Accord. Australia’s domestic action will also be a critical influence on our international credibility and capacity to help shape an effective global response.

Major steps to date

United Nations Framework Convention on Climate Change

The United Nations Framework Convention on Climate Change was ratified by Australia on 30 December 1992. The Convention is aimed at stabilising greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. It includes an obligation on Australia to ‘adopt national policies and take corresponding measures on the mitigation of climate change, by limiting anthropogenic emissions of greenhouse gases and protecting and enhancing its greenhouse gas sinks and reservoirs’ (Article 4.2(a)).  It provides an overall framework for intergovernmental efforts on climate change.

Ratification of the Kyoto Protocol

The Prime Minister handed over Australia’s instrument of ratification of the Kyoto Protocol on 3 December 2007. The ratification entered into force on 11 March 2008. Under the Kyoto Protocol, Australia is committed to restraining its national emissions to an average of 108 per cent of 1990 levels over the first commitment period (2008 to 2012).

The Garnaut Climate Change Review

The Garnaut Climate Change Review was an independent study conducted by Professor Ross Garnaut and commissioned by Australia's Commonwealth, state and territory Governments. The Review was established on 30 April 2007, and concluded on 30 September 2008. A number of forums were held around Australia to engage the public on various issues relating to the Review.

The Review examines the impacts of climate change on the Australian economy and the costs of adaptation and mitigation. It analyses the elements of an appropriate international policy response, and the challenges that face Australia in playing its proportionate part in that response. It recommends medium to long-term policies and policy frameworks to improve the prospects for sustainable prosperity. In making these recommendations, the Review considered policies, including the design of the Carbon Pollution Reduction Scheme that: mitigate climate change, reduce the costs of adjustment to climate change (including through the acceleration of technological change in supply and use of energy), and reduce any adverse effects of climate change and mitigating policy responses on Australian incomes.

Green Paper

On 16 July 2008, the Government released its Carbon Pollution Reduction Scheme Green Paper. This Paper reflected the Government’s preferred positions on issues relating to the Scheme.

After the publication of this paper, the Government received more than 1000 submissions relating to all aspects of climate change policy. More than 2400 people attended 18 public consultation sessions and workshops held in capital cities and regional areas. More than 260 companies attended technical workshops and meetings. Six industry and non-government roundtables were held with representatives from 45 organisations.

Treasury modelling

The Treasurer and the Minister for Climate Change and Water released Australia’s Low Pollution Future: The Economics of Climate Change Mitigation on 30 October 2008.

The report presents the results of the Treasury’s economic modelling of the potential economic impacts of reducing emissions over the medium and long term. It spans global, national and sectoral scales, and looks at distributional impacts, such as the implications of emission pricing for the goods and services that households consume.

The Treasury’s modelling demonstrates that early global action is less expensive than later action; that a market-based approach allows robust economic growth into the future even as emissions fall; and that many of Australia’s industries will maintain or improve their competitiveness under an international agreement to combat climate change.

White Paper

On 15 December 2008, the Government released its White Paper entitled Carbon Pollution Reduction Scheme: Australia’s Low Pollution Future .

This reflected the Government’s decisions on the Scheme. It addressed scheme design issues including scheme caps, emissions coverage, reporting and compliance, the nature of Australian emissions units, international linking, auctioning, assistance for emissions-intensive trade-exposed activities and coal-fired electricity generation, household assistance, tax and accounting issues, and complementary measures including the Climate Change Action Fund.

Public information sessions on the White Paper were held in capital cities in December 2008. On 26 February 2009, public information sessions were delivered through a Sky Channel broadcast to 37 regional centres.

The detailed policy positions in the White Paper and subsequent policy decisions taken by the Australian Government form the basis of the current package of bills.   

Exposure draft legislation

On 10 March 2009, the Government released the following draft bills for public comment:

•        Carbon Pollution Reduction Scheme Bill 2009

•        Carbon Pollution Reduction Scheme (Consequential Amendments) Bill 2009

•        Australian Climate Change Regulatory Authority Bill 2009

•        Carbon Pollution Reduction Scheme (Charges — General) Bill 2009

•        Carbon Pollution Reduction Scheme (Charges — Customs) Bill 2009

•        Carbon Pollution Reduction Scheme (Charges — Excise) Bill 2009.

Further industry and non-government organisation roundtables were conducted, as well as stress testing workshops. Workshops were also held on a wide range of emissions-intensive trade-exposed activities.

The exposure period ended on 14 April 2009. The Department received about 170 submissions and approximately 11,000 campaign emails. The comments received were taken into account in the preparation of the bills introduced into Parliament.

New measures announced on 4 May 2009

As a result of extensive consultation with the community, business and environmental advocates, the Government announced a package of new measures for the Scheme, including:

•        a delay in the start date of the Scheme of one year, to help Australian businesses to manage the impacts of the global recession

•        a one year fixed-price period in 2011-12, during which emissions units will cost $10 per tonne of carbon, with the transition to full market trading from 1 July 2012

•        eligible businesses will receive funding to undertake energy efficiency measures commencing in 2009-10

•        a commitment to reduce carbon pollution by 25 per cent of 2000 levels by 2020 if the world agrees to an ambitious global deal to stabilise levels of carbon dioxide equivalent (CO 2- e) in the atmosphere at 450 parts per million or less

•        up to five percentage points of the 25 per cent target could be achieved through Government purchase of international credits, such as avoided deforestation credits, using Scheme revenue and commencing no earlier than 2015

•        should the world achieve this ambitious agreement, the Government would seek a new election mandate for increased 2050 targets

•        the establishment of Australian Carbon Trust to allow households to do their bit by investing directly in reducing Australia’s emissions and to drive energy efficiency in commercial buildings and businesses.

These measures will allow the Australian economy more time to recover from the impacts of the global recession, while strengthening Australia’s 2020 carbon pollution target, assisting business to prepare for a low carbon future, and supporting individual households and businesses to reduce emissions.

Changes announced on 24 November 2009

The Government announced a number of further changes to the Scheme on 24 November 2009. These changes made adjustments to:

•        household assistance - modified to reflect the lower carbon price estimate ($26 per tonne) due to the appreciation of the Australian dollar.

•        emissions-intensive trade-exposed industries with regards to assistance rates, review of the carbon productivity contribution and liquefied natural gas production - includes incorporation of the Global Recession Buffer into base assistance rates which will not be removed after five years, assistance will decline at 1.3 per cent per annum, and liquefied natural gas is expected to be eligible for assistance.

•        food processing - assistance for the food processing sector under the Climate Change Action Fund (CCAF).

•        agriculture, including the exclusion of emissions and the inclusion of offsets - agriculture will be excluded indefinitely and offsets will be provided for abatement from agricultural emissions and other uncovered sectors.

•        coal mining - the coal sector will receive assistance through the Coal Sector Adjustment Scheme, in the form of permits, and the Coal Mining Abatement Fund through CCAF.

•        Electricity Sector Adjustment Scheme (ESAS) and the inclusion of the Low Emissions Transition Incentive - duration and quantum of assistance under ESAS to be increased and a Low Emissions Transition Incentive introduced to provide generators with credit for investment in replacement capacity.

•        a Transitional Electricity Cost Assistance Program - a transitional fund to reduce the impact of electricity prices on medium to large corporations in the manufacturing and mining sectors.

•        measures to further encourage voluntary action - potential for adjustment of targets to take voluntary action into account.

•        other issues - including removing liability for exported fossil fuel; providing that the forestry sector is eligible for CPRS fuel tax credits; consultation on operational subsidiary liability and joint venture liability; and minor amendments to procedural provisions.

These changes will ensure that the CPRS delivers for the environment and for households, while at the same time providing significant new assistance to industry to help make the transition to a low carbon future.  The final package is in the national interest and is both environmentally credible and economically responsible.

The 2009 legislative package

A package of 11 bills, including the Carbon Pollution Reduction Scheme Bill 2009, was introduced into the House of Representatives in May 2009 and, after passing through the House of Representatives, was introduced into the Senate on 15 June 2009.  The Senate negatived the second reading of bills on 13 August 2009.

The same bills were reintroduced in the House of Representatives on 22 October 2009.  After passing through the House of Representatives, they were introduced into the Senate on 17 November 2009.  The Senate negatived the third reading of the bills on 2 December 2009. 

The 2010 legislative package

The current legislative package follows the same structure as the legislative package rejected by the Senate on 2 December 2009.  It includes the Government-sponsored amendments moved and requested in the Senate between 25 November 2009 and 2 December 2009. 

The CPRS legislative package comprises the following eleven bills:

•        Carbon Pollution Reduction Scheme Bill 2010

•        Carbon Pollution Reduction Scheme (Consequential Amendments) Bill 2010

•        Carbon Pollution Reduction Scheme (Charges - General) Bill 2010

•        Carbon Pollution Reduction Scheme (Charges - Customs) Bill 2010

•        Carbon Pollution Reduction Scheme (Charges - Excise) Bill 2010

•        Australian Climate Change Regulatory Authority Bill 2010

•        Carbon Pollution Reduction Scheme Amendment (Household Assistance) Bill 2010

•        Carbon Pollution Reduction Scheme (CPRS Fuel Credits) Bill 2010

•        Carbon Pollution Reduction Scheme (CPRS Fuel Credits) (Consequential Amendments) Bill 2010

•        Customs Tariff Amendment (Carbon Pollution Reduction Scheme) Bill 2010

•        Excise Tariff Amendment (Carbon Pollution Reduction Scheme) Bill 2010.

The Carbon Pollution Reduction Scheme Bill 2010 is the main bill. It contains the detailed provisions relating to the emissions trading scheme. These include:

•        entities and emissions that are covered by the Scheme

•        liable entities’ obligation to surrender emissions units corresponding to their emissions

•        limits on the number of emissions units that will be issued

•        the nature of Australian emissions units

•        allocation of Australian emissions units, including by auction and the issue of free units

•        mechanisms to contain costs, including a fixed price period and a price cap

•        linking to other emissions trading schemes

•        assistance in relation to emissions-intensive trade-exposed activities, coal-fired electricity generators and coal mining;

•        voluntary inclusion of reforestation activities under the Scheme

•        the domestic offsets program

•        the Australian National Registry of Emissions Units

•        monitoring and enforcement.

The Carbon Pollution Reduction Scheme (Consequential Amendments) Bill 2010 includes the consequential amendments which will be necessary, in particular amendments to the taxation legislation and to the National Greenhouse and Energy Reporting Act 2007 , which will provide the basis for emissions reporting required under the Scheme. 

The Australian Climate Change Regulatory Authority Bill 2010 establishes the Australian Climate Change Regulatory Authority, which will administer the trading scheme, the reporting regime (the National Greenhouse and Energy Reporting Act 2007 ) and the renewable energy target ( Renewable Energy (Electricity) Act 2000 ).

Three of the bills are technical bills, in case the charge for Australian emissions units issued as the result of an auction or for a fixed charge is, at some time in the future, considered to be taxation:

•        Carbon Pollution Reduction Scheme (Charges — General) Bill 2010 will impose charges for the issue of Australian emissions units as the result of an auction or for a fixed charge if the charges are taxation within the meaning of section 55 of the Constitution but are neither duties of customs nor duties of excise.

•        Carbon Pollution Reduction Scheme (Charges — Customs) Bill 2010  will impose charges for the issue of Australian emissions units as the result of an auction or for a fixed charge if the charges are taxation and are duties of customs within the meaning of section 55 of the Constitution.

•        Carbon Pollution Reduction Scheme (Charges — Excise) Bill 2010 will impose charges for the issue of Australian emissions units as the result of an auction or for a fixed charge if the charges are taxation and are duties of excise within the meaning of section 55 of the Constitution

In addition to the above bills, the following related bills will be before the Parliament:

•        the Excise Tariff Amendment (Carbon Pollution Reduction Scheme) Bill 2010 and Customs Tariff Amendment (Carbon Pollution Reduction Scheme) Bill 2010, which deliver the Government’s ‘cent-for-cent’ fuel tax reductions to households and business

•        the Carbon Pollution Reduction Scheme (CPRS Fuel Credits) Bill 2010 and Carbon Pollution Reduction Scheme (CPRS Fuel Credits) (Consequential Amendments) Bill 2010, which provide fuel credits to offset the impact of the Scheme for the agriculture, fishing and heavy on-road transport industries and gaseous fuels

•        the Carbon Pollution Reduction Scheme Amendment (Household Assistance) Bill 2010, which amends relevant legislation to increase pensions, income support allowances and family payments.

Outline of the Scheme

The Carbon Pollution Reduction Scheme Bill 2010 (the bill) establishes a national emissions trading scheme.

The quantity of greenhouse gas emissions for which liable entities are responsible will be monitored, reported and audited.

At the end of each financial year, each liable entity will need to surrender an eligible emissions unit for every tonne of greenhouse gas emissions that they are responsible for in that year.

Eligible emissions units include Australian emissions units issued by the Australian Climate Change Regulatory Authority (the Authority) and eligible international emissions units. The number of Australian emissions units issued by the Authority in each year (apart from 2011-12) will be limited by a scheme cap, with further units being issued for additional abatement from reforestation, destruction of synthetic greenhouse gases and domestic offsets.

Liable entities will compete to purchase the number of units that they require, either at auctions arranged by the Authority or on the secondary trading market. Those that value the units most highly will be prepared to pay most for them. From 2012-13 onwards, liable entities will also be able to use eligible Kyoto units to meet their obligations.

Certain categories of entities will receive an administrative allocation of Australian emissions units as a transitional assistance measure. Those entities will be able to use the units to comply with obligations under the Scheme or sell them.

The ability to trade emissions units allows for the Scheme cap to be achieved at lowest cost to the economy.

Placing a price on greenhouse gas emissions will change the relative price of goods and services, making emissions-intensive goods more expensive relative to those that are less intensive. This provides incentives for consumers and businesses to adjust their behaviour to reduce emissions.

The objects

The objects of the Scheme are specified in clause 3 of the bill. The first object is to give effect to Australia’s obligations under the United Nations Framework Convention on Climate Change and the Kyoto Protocol. The Carbon Pollution Reduction Scheme is designed as the primary policy tool to meet Australia’s international obligations regarding greenhouse gas emissions reductions. Backing international commitments with the robust mechanism of the Scheme means that there is greater likelihood of these international targets being met. The strong focus on international obligations also has direct Scheme design implications, ranging from accounting methodologies to how the Scheme links with emissions trading schemes elsewhere in the world.

If Australia becomes a party to a new international agreement which does not comprise an amendment to the Climate Change Convention or the Kyoto Protocol, the Government considers it may be necessary to amend the bill to ensure that it reflects Australia’s new international obligations.  A review of the Scheme will be conducted as soon as practicable after Australia signs a new multilateral international agreement containing emissions reductions obligations, in accordance with clause 335A.

The Government accepts the key findings of the Garnaut Final Report that a fair and effective agreement delivering deep cuts in emissions consistent with stabilising concentrations of greenhouse gases at around 450 parts per million or lower would be in Australia’s interests. Therefore, the second object is to support the development of an effective global response to climate change. The Scheme will contribute to the development of a global carbon market and put Australia in a position to influence the shape of the post-2012 international legal framework for climate change.

The third object is to take action directed towards meeting Australia’s national emissions reduction targets.

The third object provides for a target of reducing greenhouse gas emissions by 25 per cent of 2000 levels by 2020 in the event that there is comprehensive international agreement to which Australia is a party, capable of stabilising atmospheric concentrations of greenhouse gases at around 450 parts per million of carbon dioxide equivalence or lower. The Australian Government’s conditions on becoming a party to an international agreement that entails a minus 25 per cent 2020 target are set out below and are designed to achieve a robust international agreement.

The third object also provides, in the event that the minus 25 per cent target does not apply, for a target of reducing greenhouse gas emissions to between 5 per cent and 15 per cent below 2000 levels by 2020, and 60 per cent by 2050, and to do this in a flexible and cost-effective way. The minus 5 to 15 range will ensure that Australia is positioned to make deeper and more rapid reductions in emissions if global momentum grows after 2020, including towards an agreement aimed at stabilisation of the concentration of greenhouse gases in the atmosphere at 450 parts per million.

In relation to the minus 25 per cent target, the Government considers that such an agreement requires a clear pathway to achieving an early global peak in total emissions, with major developing economies slowing the growth and then reducing their emissions, advanced economies taking on reductions and commitments comparable to Australia, and access to the full range of international abatement opportunities through a broad and functioning international market in carbon credits.

This would involve:

•        comprehensive coverage of gases, sources and sectors, with inclusion of forests (reducing emissions from deforestation and forest degradation in developing countries) and the land sector (including soil carbon initiatives (e.g. bio char) if scientifically demonstrated) in the agreement

•        a clear global trajectory, where the sum of all economies’ commitments is consistent with 450 parts per million  CO 2 -e or lower, and with a nominated early deadline year for peak global emissions not later than 2020

•        advanced economy reductions, in aggregate, of at least 25 per cent below 1990 levels by 2020

•        major developing economy commitments to slow growth and to then reduce their absolute level of emissions over time, with a collective reduction of at least 20 per cent below business-as-usual by 2020 and a nomination of a peaking year for individual major developing economies

•        global action which mobilises greater financial resources, including from major developing economies, and results in fully functional global carbon markets.

For the purposes of the above, ‘advanced economies’ refers to Annex 1 parties to the UNFCCC and at least some other high/middle income economies; ‘major developing economies’ refers to non-Annex 1 members of the Major Economies Forum.

A Ratification Review will be established in addition to the Joint Standing Committee on Treaties Process to assess whether the terms of any global agreement meet the conditions set out for Australia to adopt the 25 per cent target. The establishment of the Ratification Review is a policy commitment, and is not referred to in the legislative package.

For the Ratification Review, an independent review panel (with broad membership but including appropriate economic and scientific expertise) will be established and will conduct public hearings as to whether the conditionality set out by the Government is met. The Review will report its findings to Government, which is required to table its response along with the Review report in Parliament within 90 days. Consideration of a new international agreement is likely to follow the steps below:

•        Australia participates in negotiation and finalisation of a new international agreement

•        A Ratification Review is conducted prior to Government decision regarding ratification, in addition to consideration by Joint Standing Committee on Treaties

•        the Government makes final decision regarding ratification

•        assuming Australia proceeds to ratify the new agreement and it enters into force for Australia, subsequent scheme caps and gateways, which are made in regulations under the bill, would reflect Australia’s new targets   . In practice, this is likely to take the form of narrowing and/or extending scheme gateways, and extending scheme caps.

While not part of the Scheme, were the Government to decide to fund the purchase of international units from auction revenue, as a matter of policy, this would be taken into account in setting the Scheme caps.

If an ambitious international agreement is reached, the case for EITE assistance is significantly reduced and a scheme review, including the review of assistance measures, would be triggered immediately.

If the conditions relating to the minus 25 per cent target are not met, then the minus 5 to 15 per cent target range is relevant. The Government accepts the Garnaut Final Report’s finding that, in the event that an ambitious target is not achieved immediately, the most prospective pathway to this goal is to embark on global action that reduces the risks of dangerous climate change and builds confidence that deep cuts in emissions are compatible with continuing economic growth and improved living standards. In this way, even if conditions are not met for the minus 25 per cent commitment, Australia’s 2020 emissions reduction target can still contribute to stronger global reductions in emissions over time.

The minus 5 to 15 range represents:

•        A minimum (unconditional) commitment to reduce emissions to 5 per cent below 2000 levels by 2020

•        A commitment to reduce emissions by up to 15 per cent below 2000 levels by 2020 in the context of global agreement under which all major developing economies commit to substantially restrain emissions and advanced economies take on reductions comparable to Australia.

The minus 15 per cent target would involve an international agreement where major developing economies commit to substantially restrain emissions and advanced economies take on commitments comparable to Australia’s. In practice this implies:

•        global action on track to stabilisation between 510-540 ppm CO 2 -e

•        advanced economy reductions in aggregate, in the range of 15-25 per cent below 1990 levels

•        substantive measurable, reportable and verifiable commitments and actions by major developing economies, in the context of a strong international financing and technology cooperation framework, but which may not deliver significant emissions reductions until after 2020

•        progress toward inclusion of forests (reducing emissions from deforestation and forest degradation in developing countries) and the land sector, deeper and broader carbon markets, low carbon development pathways.

The minus 60 per cent target for national emissions by 2050 could be reconsidered should it become necessary in playing our part alongside commitments from both developed and developing countries in a truly ambitious global agreement around stabilisation at 450 parts per million. The Government would seek a new election mandate for an increased target for 2050.

When interpreting Australia’s emissions reduction targets, greenhouse gas emissions are calculated in accordance with the Kyoto rules, which provide an accounting framework and take a net approach that allows for the international trade of emissions units. That is, national targets for emissions reductions will comprise reductions in emissions in Australia and any abatement purchased overseas and cancelled by the Australian Government in respect of its international targets. Emissions units exported to other countries will not be counted towards the target. This approach is consistent with arrangements under the Kyoto Protocol, where Australia can increase its emissions above its target by purchasing and retiring additional Kyoto units from other countries. 

If there is a successor international agreement to the Kyoto Protocol to which Australia is a party, the targets would then be calculated in accordance with the accounting framework in that agreement. 

The objects clause states that these emissions reductions targets are to be achieved in a flexible and cost-effective way. The Scheme incorporates many elements, such as the ability to trade eligible emissions units, broad coverage, international links, and the ability to ‘bank’ and ‘borrow’ Australian emissions units, which contribute to this goal.

The scheme in brief

National targets and Scheme caps

The Government has announced national targets which are reflected in the objects of the Scheme quoted above.

The Scheme is a ‘cap and trade’ scheme. It involves setting a national scheme cap for a particular year and issuing units up to the level of that cap. The scheme cap for a particular year is a quantity of greenhouse gases that have a carbon dioxide equivalence of a specified number of tonnes.

Scheme caps generally will be lower than the emissions path required to meet the national targets because some emissions sources are not covered by the Scheme (primarily, agricultural and deforestation emissions) and some direct emissions from facilities are only covered if they exceed specified thresholds.

Detailed scheme cap numbers for each relevant financial year will be specified in regulations . The Government intends that these be consistent with the 2020 and 2050 targets. The Minister will be required to take all reasonable steps to ensure that regulations to specify the Scheme cap numbers for the four years commencing 1 July 2012 are made by 31 December 2011 at the latest. The purpose of this requirement is to provide market certainty. In a similar vein, for all subsequent financial years, the Minister is required to take all reasonable steps to ensure that regulations declaring the Scheme cap number are in place at least five years before the end of the relevant year. There is provision for a default scheme cap number in the event that there is no scheme cap number for a year beginning on or after 1 July 2016.

To provide further guidance to liable entities and participants in the carbon market more generally, national scheme gateways may be prescribed for years beginning on or after 1 July 2016. A gateway is a range, comprising an upper bound and a lower bound of emissions, expressed in terms of tonnes of carbon dioxide equivalent, for a particular year. The Minister is required to take all reasonable steps to ensure that the Scheme caps are within the range specified for the relevant year.

The same considerations that are relevant in making decisions about national targets and the national emissions trajectory are relevant for setting caps and gateways. In making a recommendation to the Governor-General about scheme cap and scheme gateway regulations, the Minister must have regard to Australia's international obligations under the United Nations Framework Convention on Climate Change and the Kyoto Protocol. Other matters that may be taken into account when setting the national scheme caps and gateways are specified in the bill and discussed in Chapter 2 of this explanatory memorandum.

The bill is designed to provide the maximum feasible level of certainty over future scheme caps consistent with retaining legitimate flexibility to adapt to changing international conditions.

Liable entities and covered emissions

The Scheme applies liability in two main ways. First, liability generally arises where the greenhouse gases emitted from the operation of a facility have a carbon dioxide equivalence of 25,000 tonnes or more per year. (One exception is in respect of landfill facilities, where the threshold is 10,000 tonnes for facilities within a prescribed distance of a landfill facility emitting more than 25,000 tonnes of carbon dioxide equivalence and accepting the same classification of waste). Where the entity that has operational control of the facility is a member of a controlling corporation’s group, liability attaches to the controlling corporation. The controlling corporation’s group consists of a controlling corporation and its subsidiaries, if any. To avoid doubt, a group may consist of the controlling corporation alone. Where the legal person with operational control of the facility is not a member of a controlling corporation’s group (a non-group entity), liability attaches to that person.

Secondly, where there are large numbers of small emitters, it is more practical to cover emissions by applying liability at another point along the supply chain. For example, to avoid imposing a compliance burden on many individual suppliers or users of fossil fuels and synthetic greenhouse gases, while sending the same price signal, the Scheme applies liability at the earliest point of the fuel supply chain within Australia, for example the importer or manufacturer of the fuel or synthetic greenhouse gas.

In some situations, entities that purchase fuel from that ‘upstream’ entity will be required to quote an ‘obligation transfer number’ and to take responsibility for emissions that would result from the combustion of the purchased fuel (referred to as ‘potential emissions’). Large users of fossil fuels (other than petroleum liquid fuels) will be required to do this.

In certain other situations the purchaser will be allowed, on a voluntary basis, to obtain and quote an ‘obligation transfer number’, acquire the fuel, gas or other substance and take responsibility for surrendering the units to meet the Scheme obligation. This mechanism allows entities to take on liability voluntarily or to avoid liability for emissions associated with exported substances, such as export of fuel and synthetic greenhouse gases, because the emissions will occur outside Australia. This is discussed in detail in Chapter 1.

Making upstream entities liable, while providing the ‘obligation transfer number’ mechanism, will assist in achieving a reduction of greenhouse gas emissions in a flexible and cost-effective way.

Issue of Australian emissions units

The Australian Climate Change Regulatory Authority will issue Australian emissions units up to the national scheme cap each year. These units will be issued:

•        following purchase through an auction (see Chapter 3)

•        in relation to emissions-intensive trade-exposed activities (see Chapter 4)

•        in relation to coal mining (see Chapter 5)

•        in relation to coal-fired electricity generators (see Chapter 6).

In addition, units will be issued:

•        for $10 in relation to the year commencing 1 July 2011 (see Chapter 3)

•        on application, for the four years commencing 1 July 2012, at a fixed charge (see Chapter 3)

•        for reforestation (see Chapter 7)

•        for the destruction of synthetic greenhouse gas (see Chapter 8)

•        for eligible domestic offsets activities (see Chapter 9).

Chapter 2 addresses Australian emissions units and eligible international emissions units.

Assessment and surrender

Liable entities under the Scheme will report the emissions for which they are liable through the National Greenhouse and Energy Reporting Act 2007 . This Act will be amended to require those liable entities which are not currently reporting under that Act to do so.

Liability may arise from several sources for which the one entity is liable. For example, controlling corporation A may be responsible for the emissions from one or more facilities and as a large user of fossil fuels. The emissions from each of these sources are ‘provisional emissions numbers’.

The sum of the provisional emissions numbers is reduced by any excess surrender number (that is, excess units surrendered in the previous year) and increased by the ‘make good’ number (if the entity failed to meet its obligations in a previous year). The result of this calculation is the entity’s emissions number.

Eligible emissions units representing this number must be surrendered by 15 December following the relevant financial year. If sufficient units are not surrendered, a penalty becomes due on 31 January and a late payment penalty will begin to accrue. The penalty is a pecuniary penalty and a ‘make good’ obligation. (A ‘make good’ obligation means that if a liable entity surrenders too few units in one year, the obligation to surrender the shortfall carries over into the following year.)

The arrangements differ slightly for the year commencing 1 July 2011.

This is explained in Chapter 10.

Compliance and enforcement

The powers relating to information gathering and monitoring are described in Chapter 11. The enforcement regime is also described in that Chapter.

The Australian National Registry

A National Registry, described in Chapter 12, will be established to track the legal title to eligible emissions units and to manage their surrender and cancellation. This includes opening of accounts, and correction and rectification.

Public information

Price-relevant information will be published regularly to enable Scheme participants to make informed decisions about the price of emissions units. In addition, information about liable entities, holders of Registry accounts and forestry projects will be available. This is described in Chapter 13.

Independent reviews

An independent expert advisory committee will be constituted to conduct public reviews of the Scheme. The committee and its operations are described in Chapter 14.

Review of decisions and miscellaneous

Chapter 15 addresses merits review of decisions by the Australian Climate Change Regulatory Authority and various miscellaneous matters.

Simplified outline

The bill includes a simplified outline of the Scheme (at clause 4) and each Part of the bill includes a simplified outline of that Part’s contents .

Date of effect and application

While the proposed Act will commence 28 days after Royal Assent , the first year in relation to which entities will be liable under the Scheme will commence on 1 July 2011. This is achieved by use of the phrase ‘eligible financial year’ which is defined to mean the financial year beginning on 1 July 2011 or a later financial year.

Early commencement will allow liable entities and the Authority to prepare for the Scheme and for the Authority to operate the National Registry in relation to Kyoto units. It will also provide time for liable entities to manage the impacts of the current global recession. The delayed start will also provide time for:

•        Education and assistance for entities which are likely to be liable and their representatives

•        Receipt and assessment of applications, for example, for certificates of eligibility for coal-fired generation assistance, registry accounts, obligation transfer numbers, emissions-intensive trade-exposed assistance and in relation to reforestation

Proposal announced

The measures are based on:

•         the positions included in the White Paper entitled Carbon Pollution Reduction Scheme: Australia’s Low Pollution Future , released by the Government on 15 December 2008;

•        changes announced by the Prime Minister, the Treasurer and Minister for Climate Change and Water on 4 May 2009, including managing the impacts of the global recession

•        additional measures negotiated with the Opposition and announced by the Prime Minister, the Treasurer and the Minister Assisting the Minister for Climate Change on 24 November 2009.

Transitional provisions and consequential amendments 

The transitional provisions and consequential amendments are included in the Carbon Pollution Reduction Scheme (Consequential Amendments) Bill. There is a separate explanatory memorandum for this bill.

Financial impact

Financial impact statement

The financial impact associated with the legislative proposals in the Carbon Pollution Reduction Scheme Bills and consequential amendments, is reflected in the table of key measures below. Further detail on the financial implications of these measures is provided with the Carbon Pollution Reduction Scheme Amendment (Household Assistance) Bill 2010.

The Government will use every cent it receives from the sale of emissions units to help households and businesses adjust and move Australia to the low pollution economy of the future.

Table 1: Key Measures — Carbon Pollution Reduction Scheme (and related Bills and appropriations) (fiscal balance)

 

2009

-10

$b

2010

-11

$b

2011

-12

$b

2012

-13

$b

Total

$b

Revenue from the issuing of permits

-

-

4.5

11.5

15.9

Households Assistance Measures

 

 

 

 

 

Assistance for Low and Middle Income Households

-

-

-1.5

-4.7

-6.2

Fuel Tax Adjustment

-

-

-1.0

-2.2

-3.3

Industry Assistance Measures

 

 

 

 

 

Assistance to Emissions Intensive Trade Exposed Industries (EITE)

-

-

-1.2

-3.2

-4.4

Electricity Sector Adjustment Scheme  (ESAS)

-

-

-0.3

-0.7

-0.9

Coal Sector Adjustment Scheme (CSAS)

-

-

-0.1

-0.3

-0.4

Climate Change Action Fund (CCAF)

-0.2

-0.3

-0.6

-0.3

-1.4

Transitional Electricity Cost Assistance Program (TECAP)

-

-

-

-0.7

-0.7

Agriculture Research Funding 1

-

-

-

-

 

Green Carbon Fund 2

-

-

-

-

 

Transitional assistance to firms participating in the Greenhouse Gas Reduction Scheme (GGAS)

-

-0.1

-

-

-0.1

Net Impact of Revenue and Assistance Measures 

-0.2

-0.4

-0.3

-0.7

-1.6

 

NB: Discrepancies in the table between totals and sums of components are due to rounding. 

Financial impacts are based on a -5 trajectory.

Voluntary Action - Green Power is not listed as fiscal impacts do not arise over the forward estimates.

1 Agriculture Research Funding will cost $20 million over the forward estimates however this is not listed in the table due to rounding.

2 Green Carbon Fund will cost $26 million over the forward estimates however this is not listed in the table due to rounding.

 



 

Regulation impact statement

The Regulation Impact Statement for the Carbon Pollution Reduction Scheme comprises the following:

•        The initial Regulation Impact Statement

•        Review of Input to Regulatory Impact Analysis on Administrative Costs of the Carbon Pollution Reduction Scheme by Ernst & Young by George Wilkenfeld and Associates

The initial Regulation Impact Statement was undertaken in consultation with the Office of Best Practice Regulation and assessed by the Office as adequate in December 2008. The compliance costs in the Regulation Impact Statement are based on two elements:

•        Hypothetical company cost estimates based on analysis in the report Input to Regulatory Impact Analysis on Administrative Costs of the Carbon Pollution Reduction Scheme by Ernst & Young which was undertaken in November 2008 for the Department of Climate Change

•        Total annual compliance cost estimates based on aggregation of the hypothetical company cost estimates drawing on analysis undertaken by the Department of Climate Change.

In April 2009, George Wilkenfeld and Associates was commissioned by the Department of Climate Change to undertake a review of the analysis which underpins the compliance costs for the Regulation Impact Statement.

The Regulation Impact Statement and the George Wilkenfeld and Associates review were published (as a separate document) with the Explanatory Memorandum prepared for the introduction of this Bill.

These documents reflect the administrative costs of compliance. They do not assess the business cost impacts of the Scheme associated with the purchase of emissions units for surrender nor the commercial opportunities presented to some businesses. This was outlined in the Treasury report entitled Australia’s Low Pollution Future: the economics of climate change mitigation.

The Regulation Impact Statement shows ongoing administrative compliance costs for business of around $107 million per annum. This represents less than 1 per cent of total scheme revenues (approximately $13 billion annually).

The effects of the new measures announced by the Prime Minister on 4 May 2009 and 24 November 2009 are not included in the Regulation Impact Statement. For example, for liable entities, the delayed start means more time to put appropriate compliance systems in place, procure audit and other business services, and will therefore lower initial costs.

The new measures will also have an effect on the cost for relevant entities to meet their surrender obligations.

The impact of the new measures on Government finances is outlined in Table 1 above.

 



 

 



1 C hapter 1

Liable entities and covered emissions

Outline of chapter

1.1                   This chapter defines the entities that will have obligations to surrender eligible emissions units for the various types of emissions covered under the Scheme. The chapter also introduces two mechanisms that enable entities to transfer obligations to surrender units, Obligation Transfer Numbers and Liability Transfer Certificates.

Context

1.2                   The Carbon Pollution Reduction Scheme covers a broad range of emission sources. This reduces the overall cost to the Australian economy of achieving emissions reductions, by increasing opportunities for low-cost abatement.

1.3                   The Scheme will cover the stationary energy, transport, fugitive emissions, industrial processes and waste sectors, and all of the six greenhouse gases that are included under the Kyoto Protocol.

1.4                   Clear rules for assigning and transferring responsibility for emissions are necessary to ensure that one eligible emissions unit is surrendered for each tonne of emissions covered under the Scheme.

Summary of new law

Liable entities 

1.5                   Liable entities are liable to surrender eligible emissions units. A person may be a liable entity during an eligible financial year if the person:

•        is responsible for greenhouse gases emitted directly from a facility; or

•        imports, produces or supplies certain fuels; or

•        imports, manufactures or supplies a synthetic greenhouse gas.

Greenhouse gases emitted from a facility

1.6                   The provisions relating to emissions of greenhouse gases from the operation of a facility are in Division 2 of Part 3. Subdivision A relates to emissions from non-landfill facilities, including emissions from any waste sources at these facilities. Subdivision B deals with emissions from landfill facilities.

1.7                   In broad terms, a person responsible for greenhouse gases emitted from the operation of a facility will have an obligation to surrender eligible emissions units if:

•        the total amount of greenhouse gases emitted from the operation of the facility was 25,000 tonnes or more of carbon dioxide equivalence (CO 2 -e); or

•        the facility was a landfill facility that emitted greenhouse gases of 10,000 tonnes or more of CO 2 -e, and was within a prescribed distance of a landfill facility that emitted greenhouse gases of 25,000 tonnes or more of CO 2 -e and accepts a similar classification of waste.

1.8                   However, to avoid double counting, a person responsible for greenhouse gases emitted from the operation of a facility will not be required to surrender eligible emissions units for emissions attributable to the combustion of fuel for which an importer, producer or re-supplier of that fuel has incurred Scheme obligations.

1.9                   A person can be responsible for greenhouse gases emitted from the operation of a facility because:

•        the person is a controlling corporation of a group, and a member of the group operates the facility; or

•         the person is not a member of a controlling corporation’s group, but operates the facility; or

•        the person is the holder of a liability transfer certificate in relation to a facility.

Liability transfer certificates

1.10               Liability transfer certificates allow for the liability for a particular facility to be transferred from one entity to another. Provisions relating to the transfer of liability for emissions under a liability transfer certificate are in Division 6 of Part 3.

1.11               There are two circumstances in which liability transfer certificates can be used.

1.12               The first circumstance applies to corporations only. Liability under the Scheme is placed on the controlling corporation for facilities that are operated by a member of its group (that is, the controlling corporation itself or one of its subsidiaries). However, Category A certificates allow a subsidiary to apply to take on liability from its controlling corporation with the consent of that corporation in certain circumstances. This transfer is intended to help resolve contract pass through issues for some corporations where possible. If the subsidiary fails to meet its obligations, liability will revert back to the controlling corporation.

1.13               The second circumstance applies when an entity with financial control over a facility is not the operator of that facility. In this instance, the operator and the entity with financial control may both have influence over emissions reductions. In line with the object of the Scheme — to reduce emissions — the entity that has financial control may take on liability in certain circumstances through a Category B liability transfer certificate. If more than one entity has financial control, it is intended that the entity with the greatest financial control would be permitted to apply for a liability transfer certificate.

1.14               All reporting obligations under the National Greenhouse and Energy Reporting Act 2007 , including reporting of greenhouse gas emissions, energy production and energy consumption data, in relation to the facility for which a liability transfer certificate is issued are transferred to the holder of the certificate.

Importers, producers and re-suppliers of eligible upstream fuel

1.15               Provisions relating to importers, producers and re-suppliers of ‘eligible upstream fuels’ are in Division 4 of Part 3. (A list of eligible upstream fuels is set out in clause 5.)

1.16               In the first instance, liability for eligible upstream fuels is applied at the top of the supply chain.

1.17               In the case of liquid petroleum fuels, the top of the supply chain is defined by reference to the requirement to pay excise duty or import duty on these fuels. For these fuels liability arises when the requirement to pay import duty or excise duty arises.

1.18               For eligible upstream fuels other than liquid petroleum fuels, the top of the supply chain is generally the point at which the fuel is manufactured or imported.  In broad terms, liability for these fuels arises when fuel that has been manufactured or entered for home consumption is first supplied to another person or applied to a person’s own use.

1.19               Obligations can be transferred from fuel suppliers to other persons using an Obligation Transfer Number (OTN, see below).

1.20               The quotation of an OTN relieves a supplier of liability in relation to that supply. The subsequent re-supply of that fuel will result in liability for the re-supplier unless the recipient of the fuel quotes an OTN in relation to the re-supply. A person that quotes an OTN in relation to a supply of fuel will also be liable for any emissions that arise from the application of that fuel to their own use.

1.21               However, the person will not incur a liability for uses that do not result in emissions (or that result in emissions outside Australia) such as the export of fuel or synthetic greenhouse gas and their use as a chemical feedstock.

Importers, manufacturers and re-suppliers of synthetic greenhouse gases

1.22               Provisions relating to importers, manufacturers and re-suppliers of synthetic greenhouse gases are outlined in Division 3 of Part 3. 

1.23               Scheme obligations for emissions from the use of synthetic greenhouse gases will apply to importers, manufacturers and in certain circumstances, re-suppliers of these gases. A person responsible for greenhouse gases emitted from a facility will not be required to surrender eligible emissions units for emissions of synthetic greenhouse gases from the operation of the facility unless those emissions are generated by an industrial process, for example, during the production of aluminium.

Excluding exported eligible upstream fuel

1.24               For the avoidance of doubt, the bill explicitly provides that no liability arises under the Scheme for exported eligible upstream fuel. [Part 3, Division 4, clause 37A]

Obligation transfer numbers

1.25               Provisions that establish Obligation Transfer Numbers (OTNs) and govern their use are outlined in Division 5 of Part 3. Quoting an OTN will generally relieve the supplier of liability in respect of the supply of fuel.

1.26               Liability for all eligible upstream fuels can be transferred down the supply chain to a re-supplier or end user of the fuel if the rules of the OTN mechanism require or permit this transfer of liability. The bill prescribes circumstances under which entities are permitted or required to quote an OTN. [Part 3, Division 5, clauses 52 -64AA]

1.27               The OTN mechanism allows the point of liability to move down the supply chain to an entity that has better information on the use of the fuel.  This allows certain entities to manage their own liability for their fuel use, to avoid a double liability or to avoid liability for a use of fuel that does not result in emissions.



 

Detailed explanation of new law

1.28               The bill includes a simplified outline of Part 3. [Part 3, Division 1, clause 16]

Key concepts

1.29               Key concepts and definitions referred to throughout this chapter are explained in this section.

Greenhouse gas

1.30               ‘Greenhouse gas’ has the same meaning as in the National Greenhouse and Energy Reporting Act 2007. [Part 1, clause 5, definition of ‘greenhouse gas’]   This definition will be amended by the consequential amendments bill to provide for additional gases to be included through regulations. (See the consequential amendments bill, Schedule 1, Part 2, item 146)  This will allow for the inclusion of any additional greenhouse gas which is recognised in a post-2012 international agreement.

1.31               The amended definition will cover

•        carbon dioxide

•        methane

•        nitrous oxide

•        a synthetic greenhouse gas

•        a prescribed greenhouse gas.

1.32               The following gases are synthetic greenhouse gases:

•        sulphur hexafluoride

•        a hydrofluorocarbon of a kind specified in the National Greenhouse and Energy Reporting Act 2007

•        a perfluorocarbon of a kind specified in the National Greenhouse and Energy Reporting Act 2007 .

Carbon dioxide equivalence

1.33               Paragraph (a) of the definition of carbon dioxide equivalence (CO 2 -e) has the same meaning as in the National Greenhouse and Energy Reporting Act 2007 in respect of an amount of a greenhouse gas. [Part 1, clause 5, definition of ‘carbon dioxide equivalence’] That is, the CO 2 -e of an amount of greenhouse gas (metric weight) means the amount of the gas multiplied by a value specified in the National Greenhouse and Energy Reporting Regulations 2008 in relation to that kind of greenhouse gas. This value is the internationally accepted global warming potential for that gas.

1.34               Paragraph (b) of the definition provides that calculating the carbon dioxide equivalence of an amount of potential greenhouse gas emissions embodied in an amount of an eligible upstream fuel also has the same meaning as in the National Greenhouse and Energy Reporting Act 2007 .  That is, the CO 2 -e of the potential greenhouse gas emissions is the total of the carbon dioxide equivalence of that amount of greenhouse gas or the amounts of one or more greenhouse gases embodied in an amount of eligible upstream fuel. (See the consequential amendments bill, Schedule 1, Part 2, items 112, 146)

Person

1.35               The coverage of legal entities is given effect through the definition of a ‘person’. The Scheme may apply obligations to any legal entity. Legal entities are captured as broadly as possible, ranging from an individual to a corporation, a trust (a trustee or trust estate), a body corporate, and Commonwealth, State, Territory and local governments. [Part 1, clause 5, definition of ‘person’]

1.36               Government bodies will be bound by the bill. Key financial penalties, such as penalties for failing to surrender sufficient emissions units, apply to government bodies. However, in line with usual practice this clause ensures that the Crown is not subject to a pecuniary or criminal penalty. This protection does not apply to an authority of the Crown. [Part 1, clause 9] 

1.37               These legal entities may be liable under the Scheme if they meet the criteria for liable entities under Part 3 of the bill.

1.38               The definition of a ‘non-group entity’ has the same meaning as in the National Greenhouse and Energy Reporting Act 2007.  This includes any person that is not a member of a controlling corporation’s group (essentially this is individuals and entities that are not constitutional corporations) [Part 1, clause 5, definition of ‘non-group entity’] . (See the consequential amendments bill, Schedule 1, Part 2, item 129)

Liable entity — direct emitters of greenhouse gases

1.39               In broad terms, a person is liable in respect of greenhouse gases emitted from the operation of a facility if:

•        the person operates a facility (other than a landfill facility that was closed prior to 1 July 2008); and

•        the facility had direct (scope 1) emissions of greenhouse gases covered by the Scheme; and

•         the amount of those greenhouse gases exceeds a threshold. [Part 3, Division 2, clauses 17(1)-(3), 18(1)-(3), 19(1)-(3), 20(1)-(3), 21(1)-(3), 22(1)-(3)]

1.40               A person’s liability for a facility will be for greenhouse gases emitted from that facility other than those from fuel for which an importer, producer or re-supplier of fuel has incurred a liability.

Facility and landfill facility

1.41               Facility has the same meaning as in the National Greenhouse and Energy Reporting Act 2007 . [Part 1, clause 5, definition of ‘facility’]

1.42               A ‘landfill facility’ is a specific type of facility that is defined separately in the bill. A landfill facility is defined as a facility for the disposal of solid waste as landfill, and includes a facility that is closed for the acceptance of waste. [Part 1, clause 5, definition of ‘landfill facility’]

1.43               The definitions lead to a distinction between facilities for which the main purpose is the disposal of solid waste and other facilities, including those for which disposal of solid waste is a secondary purpose. An example of a facility for which disposal of solid waste is a secondary purpose is a mine that disposes of mine-generated waste on-site.

Facilities included in the Scheme

Facilities that exceed a threshold

1.44               Thresholds are used to determine when a facility is included in the Scheme. That is; when the operator of a facility is a liable entity for a particular facility.

1.45               The operator of a facility will be a liable entity during a financial year if the facility emitted 25,000 tonnes or more of CO 2 -e of greenhouse gases during that year. [Part 3, Division 2, clauses 17, 18, 20 and 21]

1.46               The holder of a liability transfer certificate for a facility will be a liable entity during a financial year if the facility emitted 25,000 tonnes or more of CO 2 -e of greenhouse gases during that year. [Part 3, Division 2, clauses 19 and 22]

1.47               In the case of landfill facilities, an additional threshold of 10,000 tonnes of CO 2 -e   applies where a facility is within a specified distance of an open landfill facility which triggered the 25,000 tonnes of CO 2 -e   threshold in the previous financial year, and accepts a similar classification of waste. This distance will be set in the regulations and will be fixed for five years to provide certainty for industry. [Part 3, Division 2, clause 20(13)], [Part 3, Division 2, clause 21(13)], [Part 3, Division 2, clause 22(12)].

1.48               If a landfill facility triggered the 25,000 tonnes of CO 2 -e threshold in the previous eligible financial year it is considered to be a designated large landfill facility . The Authority may publish a list of designated large landfill facilities and their locations for the purpose of assisting landfill facilities in determining if the 10,000 tonnes of CO 2 -e threshold applies to them for an eligible financial year. [Part 1, clause 5, definition of ‘designated large landfill facility’], [Part 12, Division 7, clause 278G]

1.49               A lower threshold is used in these circumstances to prevent the movement of waste from a landfill facility that has Scheme obligations to one that does not.

Example 1.1 : Application of 25,000 tonnes of CO 2 -e threshold

During a financial year Company X operates a facility that emits 20,000 tonnes of CO 2 -e from the combustion o f fuel that another entity supplies to it, and 15,000 tonnes of CO 2 -e from an industrial process. The total emissions from the facility are 35,000 tonnes of CO 2 -e. Company X is a liable entity.

Example 1.2 : Application of 10,000 tonnes of CO 2 -e threshold for landfill facilities

Landfill facility A emits 14,000 tonnes of CO 2 -e in an eligible financial year. The landfill facility is within the specified distance of another open landfill facility, landfill facility B, which accepts a similar classification of waste and in the previous eligible financial year emitted 25,000 tonnes or more of CO 2 -e. Landfill facility A is therefore covered under the Scheme .

Closed landfill facilities

1.50               The definition of landfill facility includes a facility that is closed for the acceptance of waste. However landfill facilities which no longer accept waste and closed prior to 1 July 2008 are excluded from the Scheme. [Part 3, Division 2, clause 20(6)], [Part 3, Division 2, clause 21(6)], [Part 3, Division 2, clause 22(6)]

1.51               The operator of a landfill facility that closed after

30 June 2008 will be a liable entity for that facility if the facility meets one of the thresholds outlined above. In the event that operational control changes after the facility is closed, obligations transfer to the new entity with operational control. In many cases, this will be the land owner. The liable entity will be determined through the operational control definition.

1.52               In situations where gas capture technology, for example, is installed on a site that is closed, the liable entity will be the one who has authority over operating and environmental policies relating to that site.

Pro-rata thresholds

1.53               Pro-rata emissions thresholds will apply where:

•        a facility is under the operational control of a member of a controlling corporation’s group for part of a year

•        a facility is under the operational control of a non-group entity for part of a year

or

•        an entity is the holder of a liability transfer certificate for part of a year. [ Part 3, Division 2, clauses 17(1), 18(1), 19(1), 20(1), 21(1), 22(1)]

1.54               The pro-rata threshold is applied in recognition that there will always be a person that operates a facility, but that the entity that is liable for a facility may change during the course of a year. This would occur when operational control passes from one entity to another during a year, and when an entity holds a liability transfer certificate for a facility for part of a year. The pro-rata threshold ensures that facilities that would reach a threshold during an entire financial year continue to be covered under the Scheme for the full compliance year. This maintains consistent coverage under the Scheme and prevents entities from avoiding thresholds, deliberately or otherwise, by changes in operational control or the issue of a liability transfer certificate.

1.55               Pro-rata thresholds are calculated using a specified formula. [Part 3, Division 2, clause 17(5)] [Part 3, Division 2, clause 18(5)] [Part 3, Division 2, clause 19(5)] [Part 3, Division 2, clause 20(5)] [Part 3, Division 2, clause 21(5)] [Part 3, Division 2, clause 22(5)]

1.56               The calculation involves multiplying the relevant threshold by the number of control days for a facility, or the number of certificate days in the case of the holder of a liability transfer certificate, and dividing the product by the number of days in the year.

1.57               Control days are the days in the financial year, where this is less than the full year, that a facility was under the operational control of one or more members of a controlling corporation’s group. [Part 3, Division 2, clauses 17(1), 18(1), 20(1), 21(1)]

1.58               Certificate days are the days in the financial year, where this is less than the full year, that a person was the holder of a liability transfer certificate for a facility. [Part 3, Division 2, clauses 19(1), 22(1)]

Example 1.3 Pro rata threshold

If a non-group entity had operational control of a facility for 100 days of the year, the threshold for that facility would be worked out using the formula:

25,000 × 100 control days ÷ 365 = 6849 tonnes of CO 2 -e

If the emissions from that facility are 6849 tonnes CO 2 -e or more during the 100 control days then those emissions will count towards the entity’s liability as outlined above.

Anti-avoidance

1.59               Provisions which address schemes entered into with the substantial purpose of obtaining the advantage of a threshold are described in Chapter 11. In brief, the benefit of the threshold provision may be lost. [Part 3, Division 2, clauses 23 and 30]  

Scope 1 emissions covered by the Scheme

1.60                  In broad terms, emissions that count towards the facility thresholds and that determine a facility operator’s liability are scope 1 emissions of greenhouse gas, where:

•        the greenhouse gas is released into the atmosphere as a direct result of the operation of the facility; and

•        regulations made for the purposes of paragraph 10(2A)(a) of the National Greenhouse and Energy Reporting Act 2007 declare that the emission is a scope 1 emission covered by the Scheme. [Part 3, Division 2, clause 24]

1.61               The consequential amendments bill will amend the National Greenhouse and Energy Reporting Act 2007 to require that its regulations specify scope 1 emissions that are covered by the Scheme. (See the consequential amendments bill, Schedule 1, Part 2, item 159)

1.62               The broad categories of sources that will be declared in the National Greenhouse and Reporting Regulations 2008 as scope 1 emissions covered by the Scheme are:

•        fugitive emissions

•        industrial process emissions

•        emissions from a waste source

•        emissions from the combustion of energy sources.

1.63               For the purposes of landfill facilities, the bill categorises emissions from a solid waste disposal source into two components. The first component is ‘legacy emissions’, which are generated from waste deposited prior to 1 July 2011. The second component is emissions from new waste; that is, emissions from waste deposited from 1 July 2011 onwards.

1.64               The key sources that will not count as scope 1 emission covered by the Scheme are:

•        agriculture sources

•        forestry sources

•        fugitive emissions from decommissioned underground coal mines

•        emissions of synthetic greenhouse gases from the source ‘use of commercial air conditioning etc.’ as defined under the National Greenhouse and Energy Reporting  Regulations 2008

•        emissions from the combustion of biomass.

1.65               Agricultural emissions cannot be included within the meaning of ‘emission of greenhouse gas from the operation of a facility’ [Part 3, Division 2, clause 24(2)] .

1.66               Amendments in the consequential amendments bill also ensure that regulations made for the purpose of paragraph 10(2A)(a) of the National Greenhouse and Energy Reporting Act 2007 cannot declare agricultural emissions to be a scope 1 emission covered by the Scheme.

1.67               Together these two provisions ensure that direct obligations cannot be imposed for agricultural emissions.

1.68               The six types of emissions identified for exclusion by these two provisions correspond broadly to the agricultural emissions that countries are required to report under international accounting rules:

•        Emissions of methane from the digestive tract of livestock - these emissions arise from digestive processes whereby carbohydrates are broken down by microorganisms in the digestive system of herbivores.

•        Emissions of methane or nitrous oxide from the decomposition of livestock urine or livestock dung - these emissions result from the anaerobic decomposition of manure (livestock urine or livestock dung) or when manure nitrogen is converted to nitrous oxide.  Emissions that result from these biological processes may occur when manure is handled through management systems, such as a lagoon, or from processes that occur when manure is deposited or spread on soil. 

•        Emissions of methane from rice fields or rice plants - these emissions result from decomposition of organic matter in anaerobic conditions that exist in flooded or waterlogged rice fields. The methane created under these conditions may be emitted directly from rice fields or transported into the atmosphere by rice plants. 

•        Emissions of methane or nitrous oxide from burning savannas or grassland - these gases are produced when grassland or savanna biomass is combusted.

•        Emissions of methane or nitrous oxide from burning crop stubble in fields, crop residues in fields, or sugar cane before harvest.

•        Finally, emissions of carbon dioxide, methane or nitrous oxide from soil are excluded from the Scheme.  These emissions arise from biological processes in soil including decomposition, nitrification and denitrification.  Agricultural practices can influence these processes and give rise to emissions.  For example, practices which increase soil nitrogen, such as the application of fertilisers or planting of legumes, affect nitrification and denitrification processes and in turn influence nitrous oxide emissions.

1.69               In relation to the last dot point above, the exclusion of soil-related emissions is limited to emissions that arise from, or that are produced in, soil.  The exclusion does not cover an emission from soil where released greenhouse gas passes through soil but originates elsewhere, for example where the greenhouse gas originates in a geological formation used for carbon capture and storage.

1.70               Furthermore, the exclusion for soil-related emissions does not apply to emissions attributable to the operation of a landfill where, for example, a mixture of soil and organic matter gives rise to emissions at a landfill facility.

1.71               The term “soil” is intended to cover the upper portion of the earth’s surface in which plants generally grow that comprises a mixture of organic and inorganic matter. Soil does not include minerals or rock that lie below this upper portion.

1.72               Scope 2 emissions, such as those relating to electricity use, are not included in the definition of a facility’s emissions. Scope 3 emissions are also not included.

1.73               Under the Scheme, greenhouse gases emitted from the operation of a facility will be measured using methods to be determined under subsection 10(3) of the National Greenhouse and Energy Reporting Act 2007 , or methods which meet criteria under that subsection, where the use of those methods satisfies any conditions specified under that subsection. [Part 3, Division 2, clause 25]

1.74               The consequential amendments bill provides for subsection 10(3) of the National Greenhouse and Energy Reporting Act 2007 to allow the Minister to determine the methods and criteria for methods by which amounts of emissions are to be measured. A single determination will apply under the Carbon Pollution Reduction Scheme and the National Greenhouse and Energy Reporting Act 2007 . (See the consequential amendments bill, Schedule 1, Part 2, item 160-162)

Emissions that count towards thresholds

1.75               All scope 1 emissions covered by the Scheme will count towards thresholds for all facilities.

1.76               To avoid doubt, for facilities that are not landfill facilities, emissions from solid waste disposal count toward the threshold for that facility. Similarly, thresholds for landfill facilities include all scope 1 emissions from the facility; that is, all scope 1 emissions that are covered under the Scheme including emissions from combustion of energy sources at the facility, emissions from legacy waste and emissions from new waste — these are examples only and this is not intended as an exhaustive list.

Emissions that count towards liability

1.77               The provisional emissions number for an entity that is liable in respect of a facility is the amount of greenhouse gases emitted from the facility’s operation, in CO 2 -e, for which the entity must surrender eligible emissions units. [Part 3, Division 2]

Avoidance of double counting

1.78               To avoid double counting of emissions, certain emissions that count towards a facility’s threshold do not count towards the facility operator’s provisional emissions number. There are two circumstances where this occurs.

1.79               The first is where an amount of greenhouse gas emitted from the facility is attributable to the combustion of eligible upstream fuel that was supplied to a person who is not the operator of the facility or that is supplied to the operator of the facility without the operator quoting their OTN. [Part 3, Division 2, clauses 17(7)-(8,) 18(7)-(8), 19(6)-(7), 20(9)-(10), 21(9)-(10) and 22(8)-(9)]

1.80               If fuel was supplied to a person who is not the operator of the facility and that person did not quote an OTN in relation to the supply, liability will arise for an importer, producer or supplier of that fuel. If the person did quote an OTN for the supply, that person will be liable for emissions from the combustion of that fuel.

1.81               If the fuel was supplied to the operator of a facility and the operator did not quote an OTN, liability will arise for an importer, producer or supplier of that fuel.

1.82               The second circumstance where greenhouse gases emitted from a facility do not count towards the facility operator’s provisional emission number is where the emissions are attributable to the combustion of liquid petroleum fuel for which there is already a liability imposed on the facility operator under the import or production provisions by way of import duty or excise duty being payable by that person on that fuel. [Part 3, Division 2, clauses 17(9)-(10), 18(9)-(10), 19(8)-(9), 20(11)-(12), 21(11)-(12) and 22(10)-(11)] [Part 3, Division 4, clauses 31-32]

Example 1.4 : Avoidance of double counting

Company A has operational control of a black coal mine. During a particular financial year fugitive emissions of 23,000 tonnes of CO 2 -e are emitted from the mine. A further 3,000 tonnes of CO 2 -e are emitted from the combustion of diesel in equipment at the mine. Company A does not quote an OTN for the supply of the diesel.

Company A is a liable entity under the direct emitter provisions because total emissions from the mine are 26,000 tonnes of CO 2 -e.

Company A is only liable for the fugitive emissions of 23,000 tonnes of CO 2 -e. The supplier of the diesel is liable for the emissions from Company A’s combustion of the diesel.

Legacy emissions do not count towards liability

1.83               Emissions from legacy waste deposited prior to the commencement of Scheme obligations for landfill facilities on 1 July 2011 are not included in a landfill facility’s liability. Therefore, the operator of a landfill facility will be liable for annual total emissions, less

•        annual legacy emissions, and

•        any emissions that count towards the ‘OTN -no double counting’ provisions. [ Part 3, Division 2, clauses 20(8), 21(8), 22(8)]

1.84               Legacy waste emissions have been excluded from Scheme liabilities because in many cases there is little or no opportunity to recover the cost of emissions from waste that was deposited in the past.

1.85               Details on developing a legacy emissions profile to allow liable landfill facilities to determine the ongoing annual emissions from legacy waste will be outlined in regulations.

Example 1.5 : Thresholds and liability for landfill facilities

A landfill facility, which is under the operational control of Company S, emits 100,000 tonnes of CO 2 -e. This is made up of 20,000 tonnes of new emissions and 80,000 tonnes of legacy emissions. The following applies:

•        Company S is a liable entity under the Scheme. The total emissions from the landfill facility (100,000 tonnes of CO 2 -e per year) exceed the facility threshold of 25,000 tonnes of CO 2 -e.

•        Company S’s liability is equal to the total emissions from the landfill minus legacy emissions. Therefore, Company S would be liable for 20,000 tonnes of CO 2 -e from the landfill facility.

1.86               The Scheme will allocate methane that is captured, flared, combusted and transferred proportionally between legacy and new emissions. This allocation will be given effect by an amendment to the National Greenhouse and Energy (Measurement) Determination 2008 .

Example 1.6 : Allocating capture, flaring, combustion and transfer of methane

Company R has operational control over a landfill facility. Total emissions from that landfill facility (prior to accounting for methane capture, flaring, combustion and transfer) are 200,000 tonnes of CO 2 -e. This is made up of 150,000 tonnes of CO 2 -e of legacy emissions and 50,000 tonnes of CO 2 -e of new emissions (a ratio of 3:1).

The facility flares an amount of methane that reduces its net emissions to 100,000 tonnes of CO 2 -e. The following applies:

•        Company R is a liable entity under the Scheme as the total emissions from the facility (100,000 tonnes of CO 2 -e) exceed the facility threshold of 25,000 tonnes of CO 2 -e.

•        The reduced emissions (achieved through methane flaring) are allocated proportionally between legacy emissions and new emissions. Therefore, net legacy emissions are 75,000 tonnes of CO 2 -e and net new emissions are 25,000 tonnes of CO 2 -e (maintaining the ratio of 3:1).

•        Company R is liable for emissions of 25,000 tonnes of CO 2 -e.

Operational control

1.87                ‘Operational control’ is used to allocate emissions obligations for a facility. The operational control approach is adopted for the Scheme as it identifies the person that has the greatest ability to introduce and implement operational and environmental policies for a facility and therefore is likely to have the ability to give effect to emissions reductions. In addition many controlling corporations have already organised emissions reporting systems around the operational control approach as defined in the National Greenhouse and Reporting Act 2007 . Exceptions to the operational control approach relating to liability transfer certificates are outlined below.

Meaning of operational control

1.88               Operational control has the same meaning as in the National Greenhouse and Energy Reporting Act 2007 . [Part 1, clause 5, definition of ‘operational control’]  This definition is amended as discussed in the remainder of this section. (See the consequential amendments bill, Schedule 1, Part 2, items 131 and 163-172)

1.89               Any person may have operational control over (operate) a facility. The range of entities that can have operational control in the National Greenhouse and Reporting Act 2007 is broadened from a member of a controlling corporation’s group to a person. (See the consequential amendments bill, Schedule 1, Part 2, item 163-170)

1.90               In addition, the entities that the Authority may declare as having operational control will be expanded to include any person. This is provided for by amendments to the National Greenhouse and Energy Reporting Act 2007 . (See the consequential amendments bill, Schedule 1, Part 2, items 190-191 and 193)

1.91               The Government intends that wherever possible liability for a facility will always be attributable to a single person. This streamlines compliance and enforcement under the Scheme and assists in maintaining Scheme coverage and integrity by ensuring that the person responsible for a facility’s emissions is clearly identified.

Circumstances where authority is shared equally amongst persons

1.92               In many cases, if there is uncertainty about which person operates a facility, the person deemed to have operational control will be the one with the greatest authority to introduce and implement operating and environmental policies. (See the consequential amendments bill, Schedule 1, Part 2, item 172)

1.93               However, there may be instances where persons have equal authority to implement operational and environmental policies over a facility, for example in the case of a partnership, a joint venture or a trust. Amendments to the National Greenhouse and Energy Reporting Act 2007 which insert new sections 11B and 11C deal with these circumstances. (See the consequential amendments bill, Schedule 1, Part 2, item 172) In these instances the Authority will still have the ability to make a declaration regarding which person has operational control.

1.94               If the Authority has not made a declaration, then those persons with equal authority are required to nominate one of them to be the nominated person for that facility. Nomination has the effect of deeming the nominated person to have operational control and therefore obligations and liability under the Scheme and the National Greenhouse and Energy Reporting Act 2007. Nominations must be made by 31 August following the financial year in which the facility met or exceeded the facility threshold.

1.95               If the persons do not make a nomination, they are each subject to a civil penalty. In addition, where there is no nomination, liability is apportioned equally among the persons that have equal authority. For example, if there are two persons, each would be responsible for fifty per cent of total liability. If there are four persons each would be responsible for twenty-five percent of total liability. This is done by adjusting the provisional emissions number by way of the formula specified in sections 11B and 11C of the National Greenhouse and Energy Reporting Act 2007 . Each person will also have reporting obligations in relation to that facility.

1.96               The penalty discussed above is aimed at encouraging the nomination of a single liable entity under the Scheme. The application of equal liability applying in the absence of nomination ensures that there is no gap in liability at any time and as such maintains the integrity of the Scheme.  There is no requirement to nominate if the question of operational control of a facility is not relevant (directly or indirectly) to a requirement under the Scheme or the National Greenhouse and Energy Reporting Act 2007 .

1.97               Equally shared authority over operational and environmental policies is distinct from shared financial control under a partnership or joint venture, which is discussed below under liability transfer certificates.

Controlling corporations and liability for a facility

1.98               Persons may be liable, in relation to direct emissions from a facility if:

•        they are a controlling corporation of a group and a member of that group has operational control over a facility;

•        they are a non-group entity that has operational control over a facility; or

•        they are a holder of a liability transfer certificate for a given facility.

Controlling corporation and non-group entity will have the same meaning as in National Greenhouse and Energy Reporting Act 2007 . The consequential amendments bill introduces a definition of ‘non-group entity’ into the National Greenhouse and Energy Reporting Act 2007 . (See the consequential amendments bill, Schedule 1, Part 2, item 129)

1.99               As outlined above, the controlling corporation of a group will be the liable entity for facilities that are under the operational control of a member of its group. [Part 3, Division 2, clauses 17, 20]

1.100           This is consistent with the National Greenhouse and Energy Reporting Act 2007 , which imposes reporting obligations on controlling corporations of a corporate group, where a controlling corporation is generally the corporation at the top of the corporate hierarchy. Corporate grouping in this way also provides greater surety for the Scheme as the controlling corporation is likely to have greater access to funds than an individual corporation with a single facility. It will therefore have a greater ability to meet its Scheme liability. It also consistent with the fact that the controlling corporation should be in a position to exert control over the activities of the members of its group.

1.101           A controlling corporation’s group will consist of the controlling corporation and its subsidiaries, if any. Subsidiary has the meaning given by section 46 of the Corporations Act 2001 . To avoid doubt, a controlling corporation’s group may consist of the controlling corporation alone. The consequential amendments bill provides for this by amending the National Greenhouse and Energy Reporting Act 2007 , as discussed in Chapter 1 of the explanatory memorandum to the consequential amendments bill.

Non Group entities and liability for a facility

1.102           A non-group entity that has operational control over a facility is the liable entity in relation to that facility. [Part 3, Division 2, clause 18 and 21]

Holder of a liability transfer certificate and liability

1.103           A person that is the holder of a liability transfer certificate for a facility is the liable entity in relation to that facility. [Part 3, Division 2, clauses 19 and 22]

1.104           Where a member of a controlling corporation’s group takes on liability through a Category A liability transfer certificate under Part 3, Division 6, Subdivision A, the controlling corporation will not have liability for that facility. [Part 3, Division 2, clause 17(6)] [Part 3, Division 2, clause 20(7)]  However, the controlling corporation must give its consent to the transfer and provides a statutory guarantee for the payment of the penalty for a unit shortfall and any late payment penalty for that member. [Part 6, Division 4, clause 138]

1.105           Where liability has been transferred to a person with financial control of a facility, through a Category B liability transfer certificate, the facility is taken not to be under the operational control of its operator. This means that the operator’s controlling corporation (the transferor of liability) will therefore not have obligations or liability for the facility. [Part 3, Division 2, clauses 17(6) and clause 20(7)]

1.106                Liability transfer certificates are discussed in more detail in a separate section below.

Liable entities — importers, producers and re-suppliers of eligible upstream fuels

1.107           In order to achieve comprehensive and efficient coverage of emissions from the combustion of certain fuels, liability is imposed upstream on importers, producers and re-suppliers of these fuels. [Part 3, Division 4, clauses 31-33, 35]

1.108           Fuels for which there is an upstream point of liability are known as ‘eligible upstream fuels’. [Part 1, clause 5, definition of ‘eligible upstream fuels’]

1.109           Eligible upstream fuels are:

•        liquid petroleum fuel

•        liquid petroleum gas

•        black coal

•        brown coal

•        coking coal

•        brown coal briquettes

•        coke oven coke

•        coal-based char

•        natural gas that is distributed or transmitted in a pipeline

•        coal seam methane that is captured for combustion

•        coal mine waste gas that is captured for combustion

•        ethane

•        town gas

•        liquefied natural gas

•        compressed natural gas

•        syngas

•        refinery grade propene (propylene)

•        a fuel specified in the regulations.

1.110           Liquid petroleum fuels are excisable goods classified to item 10 of the Schedule to the Excise Tariff Act 1921 and equivalent imported goods, other than hydrocarbon solvents classified to sub-items 10.25 to 10.28 that are not combusted. [Part 1, clause 5, definitions of ‘liquid petroleum fuels’ and ‘exempt hydrocarbon solvent’]  

1.111           Other eligible upstream fuels are defined by reference to the National Greenhouse and Energy Reporting Regulations 2008 which will be amended to define fuel types not currently defined in these regulations, such as coal-based char and syngas.

1.112           The regulation-making power will enable an upstream point of liability to be applied wherever emissions from other fossil-based fuels, including new fuels, can be efficiently covered upstream.

1.113           In many circumstances the point of liability for eligible upstream fuel will be transferred to the end user of the fuel using the Obligation Transfer Number mechanism.

Potential greenhouse gas emissions

1.114           For eligible upstream fuels, liabilities arise for potential greenhouse gas emissions, rather than actual emissions. This is because the liability generally arises before the fuel is combusted and emissions are released. [Part 3, Division 4, clauses 31(1), 32(1), 33(1), 33A(1), 34(1), 35(1), 36(1), 37(1), 38(1), 39(1) and 40(1)]

1.115           The potential greenhouse gas emissions embodied in an amount of an eligible upstream fuel means the amounts of the greenhouse gas or gases that would be released into the atmosphere as a result of its combustion. This is defined by reference to the National Greenhouse and Energy Reporting Act 2007 , which will be amended to define this concept. [Part 1, clause 5, definition of ‘potential greenhouse gas emissions’]   (See the consequential amendments bill, Schedule 1, Part 2, items 135, 146)

1.116           The potential greenhouse gas emissions embodied in an amount of eligible upstream fuel will be able to be calculated in two ways. (See the consequential amendments bill, Schedule 1, Part 2, item 146)

•        Under the first method, known as the default method, the Minister may determine that the amount of a particular greenhouse gas that would be released into the atmosphere as a result of the combustion of an amount of eligible upstream fuel is taken, for the purposes of the Scheme, to be the amount of fuel multiplied by a value specified in the regulations in relation to that fuel.

•        Alternatively, a person may elect to use a prescribed alternative method to ascertain the potential greenhouse gas emissions embodied in an amount of eligible upstream fuel. This involves, amongst other things, using a method specified in the determination which involves testing one or more samples of the fuel.

Points of liability for eligible upstream fuels

1.117           In the first instance, liability for eligible upstream fuels is applied at the top of the supply chain. Different circumstances are used to define the top of the supply chain for liquid petroleum fuels and other eligible upstream fuels. Similarly, different events result in liability for entities at the top of those supply chains.

1.118           Liability for all eligible upstream fuels can be transferred down the supply chain to a re-supplier or end user of the fuel if the rules of the OTN mechanism require or permit this transfer of liability. The quotation of an OTN relieves a supplier of liability in relation to that supply. The subsequent re-supply of that fuel will result in liability for the re-supplier unless the recipient of the fuel quotes an OTN in relation to the re-supply. A person that quotes an OTN in relation to a supply of fuel will also be liable for any emissions that arise from the application of that fuel to their own use.

1.119           The entities that may have liability for eligible upstream fuels and the circumstances that result in liability are discussed in detail below.

Supply

1.120           As noted above a person may be liable for emissions from eligible upstream fuels if they supply those fuels. Supply means supply, including re-supply, by way of sale, exchange or gift. [Part 1, clause 5, definition of ‘supply’]

1.121           In most instances, supply occurs when a substance is physically delivered. If there is not a physical delivery but ownership of the substance changes then supply is taken to occur when property is transferred. [Part 1, clause 6]

1.122           In the case of natural gas that is transmitted or distributed in a pipeline, the bill provides for regulations to be made that over-ride this definition of when supply occurs. This will allow for the Government to intervene where it appears that entities are structuring gas supply contracts in order to undermine the working of the Scheme. If provided for in regulations, the supply of natural gas in a pipeline occurs when the gas passes a point ascertained in accordance with the regulations. [Part 1, clause 6(1)]

1.123           A supply is also taken to occur, where there would not otherwise be a supply, when a person makes an eligible upstream fuel available to another person for combustion at a facility. In this situation, supply occurs when the fuel is combusted. [Part 1, clause 5A]

Example 1.7 Fuel made available for combustion at a facility

Company K engages Company L, a gas-fired electricity generator, to generate electricity for it. Under the terms of the agreement, Company K purchases natural gas and makes it available to Company L. In return Company L provides electricity to Company K.

The gas that is made available by Company K is taken to be supplied to Company L when it is combusted.

1.124           A supply of fuel that does not occur within the geographical reach of the bill - which covers Australia, the external territories, the exclusive economic zone and the continental shelf - will not result in a liability under the Scheme.  This follows from a basic principle of legislative interpretation and section 21 of the Acts Interpretation Act 1901 .

Liable entity — importers and producers of liquid petroleum fuel

1.125           Importers and producers of liquid petroleum fuel are at the top of the supply chain for the purpose of applying Scheme obligations for emissions from the combustion of these fuels. A person is liable in respect of the import or production of liquid petroleum fuel if

•        the entity imports or manufactures / produces an amount of liquid petroleum fuel, and

•        import duty or excise duty is or was payable by the person on that amount. [Part 3, Division 4, clauses 31-32]

1.126           This aligns Scheme liability with fuel tax arrangements.

1.127           Scheme liability is not imposed where import duty or excise duty is or was payable by a person on an amount of fuel and:

•        the duty was remitted, rebated or refunded in accordance with section 163 of the Customs Act 1901 or section 178 of the Excise Act 1901 or a drawback of duty was allowed under regulations made for the purposes of sections 168(1) and 79 of those Acts respectively; and

•        the remission, rebate, refund or drawback was prescribed by regulations under the bill [Part 3, Division 4, clause 31(5)] [Part 3, Division 4, clause 32(5)]

1.128           This is to ensure that Scheme liability is not imposed in circumstances such as where excise duty or customs duty has been paid but that fuel is exported by the person or that fuel is returned to a warehouse or manufacturer.

1.129           Specific arrangements for the treatment of fuel emissions generated from the carriage of domestic cargo on ships engaged in an international voyage are not addressed in the bill. The Government is currently developing measures separate to the Scheme to address these emissions. There may be some interaction between these measures and the Scheme, and the Government will ensure that the measures are consistent and complementary.

Provisional emissions number

1.130           The provisional emissions number for a person that imports or manufactures liquid petroleum fuel equals the potential greenhouse gas emissions embodied in the fuel for which they have a liability to pay import or excise duty, minus any ‘netted-out’ number for the person. [Part 3, Division 4, clause 31(2)] [Part 3, Division 4, clause 32(2)] [Part 3, Division 4, clause 32A] .

1.131           The person’s ‘netted-out’ number refers to the potential greenhouse gas emissions embodied in liquid petroleum fuel that they supplied to another person who quoted an OTN in relation to that supply. [Part 3, Division 4, clause 32A]

1.132           This ensures that a manufacturer or importer of liquid petroleum fuel does not incur liability under the Scheme for an amount of liquid petroleum fuel for which another person has assumed Scheme liability.

Liable entity — supply of untransformed and transformed eligible upstream fuel (other than liquid petroleum fuel)

1.133           Eligible upstream fuels which are not liquid petroleum fuels are not subject to excise duty, therefore, liability for these fuels is applied to entities at the top of the supply chains in a different way. A supplier is liable in respect of the supply of eligible upstream fuel (other than liquid petroleum fuel) to another person who does not quote an OTN if:

•        for imported fuel, the supply is the first supply after the fuel was entered for home consumption

•        for fuel that is not imported, either:

-        the fuel is the result of the supplier carrying out a recognised transformation of another type of eligible upstream fuel  [Part 3, Division 4, clause 35]

-       the fuel was not supplied in Australia to the supplier and is not the result of the supplier carrying out a recognised transformation of another type of eligible upstream fuel; that is, the fuel was manufactured or produced by the supplier. [Part 3, Division 4, clause 33]

1.134           A list of recognised transformations is contained in [Part 1, clause 5, definition of ‘recognised transformation’] of the bill. The regulations may add to this list.

1.135           To avoid double counting, a person that carries out a recognised fuel transformation will be permitted to quote an OTN in respect of the supply to them of pre-transformed fuel. [Part 3, Division 5, clause 59]  

Example 1.8 : Manufacturer of compressed natural gas 

A company purchases natural gas and transforms it into compressed natural gas. The company quotes an OTN when purchasing the natural gas:

•        the company is liable for the potential emissions from any compressed natural gas that it supplies to a person who does not quote an OTN

•        the company is not liable for the potential emissions from any compressed natural gas it supplies to a person who quotes an OTN

•        the company is liable for any emissions from the application to its own use of the pre-transformed fuel or the transformed fuel. Application to own use is explained later in this chapter.

Provisional emissions number

1.136           The provisional emissions number for the supplier is equal to the potential greenhouse gas emissions embodied in fuel supplied to persons who do not quote an OTN, minus

•        where the fuel is natural gas, the potential greenhouse gas emissions embodied in any natural gas that was supplied into a prescribed wholesale gas market, and

•        any netted out number of the supplier. [Part 3, Division 4, clause 33(1)-(2)] [Part 3, Division 4, clause 35(1)-(2)] [Part 3, Division 4, clause 37A(2)-(3)]

1.137           The supplier’s ‘netted-out’ number accounts for emissions embodied in eligible upstream fuel that is exported. It ensures that there is no liability under the Scheme for exported fuel. For a netted-out number to arise, the supplier must have a provisional emissions number for that fuel type under clause 33 or 35. The fuel must have been entered for export within the meaning of section 113 of the Customs Act 1901 , the supplier or the recipient of the fuel must have exported the fuel, and the supplier must have documentary evidence of a kind prescribed in the regulations to show that the fuel was exported. [Part 3, Division 4, clause 37A(2)-(3)]

1.138           When a supplier exports fuel and does not supply the fuel prior to export, the supplier will simply not be liable for the potential greenhouse gas emissions embodied in the exported fuel. In this case the supplier will not have a ‘netted out’ number or a provisional emissions number for the fuel.   [Part 1, clause 5, definition of ‘supply’]

Liable entity — re-supplier of natural gas supplied out of a wholesale gas market

1.139           A person is a liable entity if they re-supply gas that they were supplied out of a prescribed wholesale gas market. This is because when natural gas is supplied into a prescribed wholesale gas market, there is no liability arising in relation to that supply. This provision effectively places the re-supplier at the top of a supply chain.

1.140           A person is liable in respect of the re-supply of natural gas that is supplied to them out of a prescribed wholesale gas market if they re-supply it to another person who does not quote an OTN in relation to the supply. [Part 3, Division 4, clause 33A]

1.141           However a liability does not arise when natural gas is supplied or re-supplied into a prescribed wholesale gas market. This is because a seller in a wholesale market is not able to determine who purchases their gas, which is instead determined by the market rules. [Part 3, Division 4, clauses 33(1), 33A(1), 35(1), 37(1)]

1.142           The purpose of these provisions is to ensure that entities such as gas retailers that purchase natural gas through wholesale gas markets are able to take on Scheme obligations when they re-supply this gas, and that the efficient operation of gas markets is not impeded by the Scheme.

1.143           Prescribed wholesale gas markets will be defined in the regulations [Part 1, clause 5, definition of ‘prescribed wholesale gas market’] . It is intended that the regulations will allow for the prescription of a gas market which has an arrangement where amounts of natural gas are supplied such that they are to be allocated to persons by the market operator in accordance with the rules of that market. In the short term, this is intended to cover the Victorian wholesale gas market currently regulated by Part 19 of the National Gas Rules under the National Gas Law. It is also intended to cover the trading of gas at hubs through the Short Term Trading Market currently being developed and any similar regulated trading mechanism.

Example 1.9 : Wholesale Gas Market Supplies 

The following supplies into a prescribed wholesa le gas market would not be supplies which attract a liability under the Scheme (assuming the relevant market is prescribed in the regulations):

•        where a market participant injects gas into the Victorian principal transmission system under and in accordance with the National Gas Rules (e.g. where an injection bid was scheduled under the National Gas Rules by the market operator); or

•        where a right to natural gas has been transferred between registered participants in the Short Term Trading Market because a bid under the National Gas Rules is scheduled at a hub under those rules by the market operator and settled under those rules.

The following supplies out of a prescribed whole sale gas market would not be supplies which may attract a liability under the Scheme or for which a person supplied is required or permitted to quote an OTN:

•        where a market participant withdraws natural gas from the Victorian principal transmission system under and in accordance with the National Gas Rules (e.g. as a result of the scheduling of a withdrawal bid or because of the participant's demand forecast); or

•        natural gas is obtained by a registered participant in the Short Term Trading Market because an offer was scheduled and settled at a hub under the National Gas Rules by the market operator.

However, bilateral contracts for the supply of gas which operate alongside the Victorian wholesale market or the hubs of the Short Term Trading Market would not be supplies into, or out of, a prescribed wholesale market and the normal liability and OTN quotation arrangements would apply.

Provisional emissions number

1.144           The provisional emissions number for a person that re-supplies natural gas supplied out of a prescribed wholesale gas market is equal to the potential greenhouse gas emissions embodied in fuel supplied to entities that do not quote an OTN, minus any fuel that was supplied into a prescribed wholesale gas market. [Part 3, Division 4, clause 33A(2)]

Liable entity — re-supply of eligible upstream fuel (including liquid petroleum fuel)

1.145           The quotation of an OTN to a person at the top of a supply chain or a person who is a re-supplier relieves that person of liability in relation to that supply. In this way, liability can transfer down a supply chain.

1.146           A re-supplier is liable in respect of the re-supply of eligible upstream fuel to another person if they:

•        quote their OTN in relation to the supply of an amount of eligible upstream fuel, and

•        re-supply this fuel to another person who does not quote an OTN in relation to the supply. [Part 3, Division 4, clause 37]

Provisional emissions number

1.147           The re-supplier’s provisional emissions number is equal to the potential greenhouse gas emissions embodied in fuel supplied to entities that do not quote an OTN, minus any netted out number of the re-supplier. [Part 3, Division 4, clause 37(2)] [Part 3, Division 4, clause 37A]

1.148           The re-supplier’s ‘netted-out’ number accounts for emissions embodied in fuel that is exported and ensures that there is no liability under the Scheme for exported fuel. For a netted-out number to arise, the re-supplier must have a provisional emissions number for that fuel type under clause 37. The fuel must have been entered for export within the meaning of section 113 of the Customs Act 1901 , the re-supplier or the recipient of the fuel must have exported the fuel, and the re-supplier must have documentary evidence of a kind prescribed in the regulations to show that the fuel was exported. [Part 3, Division 4, clause 37A (4)-(5)]

1.149           When a re-supplier exports fuel and does not supply the fuel prior to export, the re-supplier will simply not be liable for the potential greenhouse gas emissions embodies in the exported fuel. In this case the supplier will not have a ‘netted-out’ number or a provisional emissions number for the fuel . [Part 1, clause 5, definition of ‘supply’]

Example 1.10 : Re-supplier and exporter of black coal

Company G is a re-supplier and exporter of black coal. Company G purchases coal from several coal mines and quotes its OTN in relation to each supply. The potential greenhouse gas emissions embodied in that coal have a carbon dioxide equivalence of 100,000 tonnes. Company G:

•        exports half of this coal (50,000 tonnes of CO 2 -e)

•        re-supplies coal with potential emissions of 40,000 tonnes of CO 2 -e to a large coal user who quotes an OTN in relation to the supply

•        re-supplies the remaining coal, with potential emissions of 10,000 tonnes of CO 2 -e, to a number of small coal users who do not quote an OTN.

Company G is:

•        not liable for the emissions embodied in the export coal

•        not liable for the emissions embodied in the coal supplied to the large user

•        liable for 10,000 tonnes of CO 2 -e for the coal re-supplied to the small coal users.

Liable entity — application of eligible upstream fuel to own use

1.150           Where a person is at the top of a supply chain, or where a person quotes an OTN in relation to the supply of fuel they may incur Scheme obligations under the application for own use provisions. An entity may be liable in respect of the application to its own use of eligible upstream fuel if:

•        greenhouse gases are emitted from the application to own use; and

•        the emissions are not attributable to a facility for which the entity is liable. [Part 3, Division 4, clauses 34, 36, 38 and 39]

1.151           Application for own use includes making the fuel available to another person, where making the fuel available is not a supply of the fuel. [Part 1, clause 5, definition of ‘application to own use’]

1.152           The provisions relating to own use of fuel only apply where that use results in the release of greenhouse gas into the atmosphere. The intention of these provisions is to cover the combustion of fuels or other emissive uses that involve the release of greenhouse gas emissions embodied in the fuel. Uses that do not result in the release of greenhouse gas into the atmosphere, such as the use of fuels as feedstock, are not covered by these provisions. [Part 3, Division 4, clauses 34(1), 36(1), 38(1), 39(1)]

1.153           It is likely that many entities that apply fuel to their own use will be direct emitters . [Part 3, Division 2, clauses 17-19] Where this is the case, their application to own use will be covered under the direct emitter provisions (described above in ‘Liable entities — direct emitters of greenhouse gases’).

1.154           Application to own use provisions aim to ensure that emissions from combustion of eligible upstream fuels are covered at all points in the supply chain and not just imposed on entities that are liable for a facility. This is particularly important in the case of OTN holders that are not large direct emitters.

Provisional emissions number

1.155           The provisional emissions number for an entity that applies an amount of transformed or untransformed eligible upstream fuel to their own use is equal to the potential greenhouse gas emissions from the combustion of that fuel. [Part 3, Division 4, clauses 34, 36, 38-39].

1.156           If a particular use of an eligible upstream fuel does not result in the release of greenhouse gas into the atmosphere (such as feedstock), the use will not be covered by these provisions.  However, if a portion of the fuel used results in the release of greenhouse gas into the atmosphere, that portion will be covered. [Part 3, Division 4, clauses 38-39] .

Example 1.11 : Feedstock user of natural gas

A person receives an amount of natural gas and quotes their OTN in relation to the supply. The person uses a portion of the natural gas as a feedstock in a plastic manufacturing process that completely sequesters the natural gas into the plastic. The person also uses a portion of the natural gas for heating purposes.

The person will not be liable for the potential emissions from the portion of gas purchased with an OTN which is used as a feedstock. However, the person will be liable for greenhouse gas emissions released from the portion of fuel combusted for heating purposes.

Example 1.12 : Manufacturer of coke oven coke

Company T specialises in manufacturing coke oven coke from black coal. During a financial year Company T:

•        quotes an OTN for an annual supply of black coal that embodies potential greenhouse gas emissions of 100,000 tonnes of CO 2 -e

•        emits greenhouse gases of 20,000 tonnes of CO 2 -e from the use of this coal to manufacture coke oven coke, but has no other emissions from the facility

•        supplies coke oven coke to a number of small entities that do not quote an OTN — the potential greenhouse gas emissions embodied in this coke oven coke is 20,000 tonnes of CO 2 -e

•        supplies coke oven coke to one large facility that quotes an OTN — the potential greenhouse gas emissions embodied in this coke oven coke is 60,000 tonnes of CO 2 -e.

Company T :

•        is not liable under the direct emitter provisions because total emissions from the facility are less than 25,000 tonnes of CO 2 -e

•        is liable under the application to own use provisions for 20,000 tonnes of CO 2 -e of emissions from their own use of black coal

•        is liable for 20,000 tonnes of CO 2 -e for the coke oven coke it supplies to small entities that do not quote an OTN

•         is not liable for 60,000 tonnes of CO 2 -e for the coke oven coke  it supplies to the facility that quotes an OTN.

Liable entities — importers, manufacturers and re-suppliers of synthetic greenhouse gases

1.157           Part 2, Division 3 of the bill sets out the circumstances under which importers, manufacturers and re-suppliers of synthetic greenhouse gases — hydroflurocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF 6 ) — will be liable for the emissions from downstream users of these gases.

Liable entity — import or manufacture of synthetic greenhouse gas

1.158           In general terms, liability will arise where, during an eligible financial year, a person imports or manufactures synthetic greenhouse gas and the carbon dioxide equivalence of that gas is 25,000 tonnes or more. This threshold is based on gross imports or manufacture. [Part 3, Division 3, clauses 26, 27]

1.159           If a person imports or manufactures less than this amount they will not be a liable entity. [Part 3, Division 3, clause 26(4)] , [Part 3, Division 3, clauses 27(4)]

1.160           Certain synthetic greenhouse gases that are imported or manufactured do not count towards thresholds or liability.

1.161           Synthetic greenhouse gases imported in manufactured products that contain synthetic greenhouse gases only because they were used in the manufacturing process are excluded because it is difficult to consistently identify such products and estimate the amount of synthetic greenhouse gas they contain. These products include polyurethane foam insulation but do not include products such as air conditioners which use synthetic greenhouse gases in their operation. [Part 3, Division 3, clause 26(5)]  

1.162           Synthetic greenhouse gases that are imported on board ships or aircraft that are exclusively for use in meeting the ‘reasonable servicing requirements’ of air-conditioning or refrigeration equipment during international journeys will also not count towards thresholds or an importer’s provisional emissions number. [Part 3, Division 3, clause 26(6)] This is to avoid imposing liability on emissions that do not count towards Australia’s net national emissions.

1.163           To avoid double counting, recycled synthetic greenhouse gases are not considered to be manufactured. [Part 3, Division 3, clause 27(5)]

Anti avoidance

1.164           Provisions which address schemes entered into with the substantial purpose of obtaining the advantage of thresholds are described in Chapter 11 of the explanatory memorandum. In brief, the benefit of the threshold provision may be lost. [Part 3, Division 2, clauses 23, 30]  

Provisional emissions number

1.165           The provisional emissions number of an importer or manufacturer of synthetic greenhouse gas is equal to the gross amount, in CO 2 -e, of synthetic greenhouse gases imported or manufactured, minus any ‘netted-out’ numbers of the person for the relevant financial year [Part 3, Division 3, clause 26(2)] [Part 3, Division 3, clauses 27(2)] [Part 3, Division 3, clause 27A(1)] .

1.166           Netted-out numbers arise where a person exports certain synthetic greenhouse gases or supplies them to a person that quotes an OTN. [Part 3, Division 3, clause 27A]

1.167           Where an importer or manufacturer of a particular type of synthetic greenhouse gas also exports that type of synthetic greenhouse gas, and where the gas was not supplied to the importer or manufacturer in Australia, their netted-out number is equal to the lesser of:

•        the amount exported (in tonnes of  CO 2 -e), or

•        the amount imported or manufactured (in tonnes of CO 2 -e). [Part 3, Division 3, clause 27A(2)] 

1.168           Limiting the amount that can be netted-out to the lesser of imports/manufacture or exports prevents the provisional emissions number from having a negative value.

1.169           The purpose of allowing a ‘net-out’ for amounts exported is to ensure that gases that do not count towards Australia’s national emissions  (including gases re-exported as ‘heels’ in ISO tankers) do not count towards Scheme liabilities.

Example 1.13 : Manufacturer of synthetic greenhouse gas

The total amount of a particular synthetic greenhouse gas manufactured by a person has a carbon dioxide equivalence of 27,000 tonnes. The total amount of the same type of synthetic greenhouse gas exported by the person has a carbon dioxide equivalence of 2,000 tonnes.

•        The 2,000 tonnes of CO 2 -e is netted out from the person’s liability.

•        The person is liable for 25,000 tonnes of CO 2 -e (subject to any other relevant exclusion outlined below).

Example 1.14 : Importer of synthetic greenhouse gas

The total amount of a particular synthetic greenhouse gas imported by a person has a carbon dioxide equivalence of 27,000 tonnes. The total amount of the same type of synthetic greenhouse gas exported by that person has a carbon dioxide equivalence of 30,000 tonnes.

•        The 27,000 tonnes of CO 2 -e is netted out from the person’s liability.

•        The person is liable for 0 tonnes of CO 2 -e.

1.170           An importer or manufacturer of synthetic greenhouse gases may also net-out an amount of synthetic greenhouse gas supplied to another person who quotes their OTN in relation to the supply. [Part 3, Division 3, clause 27A(4)] This is consistent with the general principle that liability can be transferred to a person to whom an amount of synthetic greenhouse gas or eligible upstream fuel is supplied, where that person quotes an OTN in relation to the supply.

Liable entity — re-supplier of synthetic greenhouse gas

1.171           As outlined above, a person who is supplied an amount of synthetic greenhouse gas by an importer or manufacturer of synthetic greenhouse gas may assume liability in respect of the gas by quoting their OTN in relation to the supply. [Part 3, Division 3, clause 28]

1.172           Where the person then re-supplies an amount of the synthetic greenhouse gas to a third person who does not quote an OTN in relation to the supply, the re-supplier will incur a liability for that amount. [Part 3, Division 3, clause 28]

1.173           Only entities that re-supply synthetic greenhouse gases to another re-supplier of synthetic greenhouse gases or to exporters of synthetic greenhouse gases are permitted to quote an OTN for synthetic greenhouse gases. A re-supplier of synthetic greenhouse gases is not permitted to quote an OTN if they intend to re-supply that synthetic greenhouse gas to another person that will not quote an OTN for that re-supply.

1.174           The purpose of these provisions is to ensure that Scheme obligations are not imposed on synthetic greenhouse gases that are exported, where exporters obtain the gases by way of supply from another entity in Australia.

Obligation Transfer Numbers

1.175           In general, Scheme obligations for eligible upstream fuels arise for importers and producers when they supply fuel and for importers or manufacturers of synthetic greenhouse gases when they import or manufacture the gases. However in certain situations obligations for eligible upstream fuels and synthetic greenhouse gases can be transferred down the supply chain to re-suppliers or end users using the Obligation Transfer Number (OTN) mechanism. [Part 3, Division 5] . Division 4 of Part 3 sets out the ways in which liability to surrender eligible emissions units arises for a person who quotes an OTN.

1.176           Certain types of entities are required to quote an OTN while others are permitted to do so. This mix of voluntary and mandatory quotations achieves several objectives:

•        OTNs move liability for the combustion of fuels by large users to the facility level and allow certain people to assume liability for emissions from the combustion of particular fuels. [Part 3, Division 5, clauses 52, 56]

•        OTNs provide for the appropriate amount of liability to be applied when all or part of an amount of fuel or synthetic greenhouse gas is sequestered into a product (that is, used as feedstock) or used in a way that results in emissions that do not count towards Australia’s national inventory, such as export. [Part 3, Division 5, clauses 55, 58, 60-64AA]

•        In the case of natural gas and liquid petroleum gas, OTNs move the bulk of Scheme obligations from upstream suppliers (producers or importers) to re-suppliers who have access to accurate customer usage information. [Part 3, Division 5, clauses 53-54]

•        OTNs prevent double counting where entities transform one type of fuel into another type of fuel. [Part 3, Division 5, clause 59]

1.177           Entities are not required or permitted to quote an OTN in relation to natural gas that they are supplied out of a prescribed wholesale gas market. [Part 3, Division 5, clauses 52(1)(aa), 53(1)(aa), 56(1)(aa), 56(2)(aa), 58 (aa), 59 (aa), 60 (aa)] The operation of the Scheme in relation to natural gas traded through prescribed wholesale gas markets is discussed in more detail in the section above on liability for gas that is re-supplied out of a wholesale gas market.

1.178           The Government aims to move amendments directed to the objective of ensuring that fuel is treated as a ‘fungible’ substance — that is, one unit of fuel can be substituted by another unit of the same type of fuel. For example, a tonne of coal that is added to a stockpile should be fungible with a tonne of coal that is taken out of the stockpile, even though it is not the same tonne. This will enable the OTN mechanism to operate in situations where fuel is collected into a stockpile or pool and it is not practical or necessary to track the OTN status of particular molecules of fuel.

Issue of an OTN

1.179           An OTN is issued to a person, and is not transferable. [Part 3, Division 5, clause 48]

1.180           An OTN may be issued either as a result of an application, or on the Authority’s own initiative. [Part 3, Division 5, clause 41]

1.181           Allowing the Authority to issue OTNs without an application is intended to simplify the process for entities that the Authority can readily identify as requiring an OTN. For example, the Authority will be able to identify large fuel users from emissions data reported under the National Greenhouse and Energy Reporting Act 2007 .

1.182           Where the issue of an OTN is by application, the bill specifies procedures and requirements relating to that application. [Part 3, Division 5, clauses 42-43]

1.183           Before issuing an OTN, either as a result of an application or on the Authority's own initiative, the Authority must:

•        be satisfied that the person is, or is likely to be, required or permitted to quote an OTN; and

•        have carried out an identification procedure, the details of which will be set out in the regulations, that enables the Authority to verify the identity of the person. [Part 3, Division 5, clauses 44-45]

Cancellation or surrender of an OTN

1.184           OTN holders who are not currently required or permitted to quote their OTN may continue to hold their OTN if they wish, provided they are likely to be required or permitted to quote it in the future.

1.185           Where a person is unlikely to be required to quote an OTN in the future the person may surrender their OTN with the written consent of the Authority. The Authority must only consent if it is satisfied that the person is not required to quote the OTN and is unlikely to be required to do so in the future. [Part 3, Division 5, clause 46]

1.186           The Authority may, by written notice, cancel an OTN that is held by a person that is not permitted or required to quote it and is unlikely to be permitted or required to do so in the future.

1.187           The Authority may also cancel an OTN if a person has breached a provision of the bill or an associated provision. It is anticipated that the Authority may take this step where there is an unacceptably high risk of further breaches of the bill or associated provisions relating to the use of that OTN.

1.188           The Authority must cancel an OTN if the person to whom it was issued has ceased to exist. [Part 3, Division 5, clause 47]

The OTN register

1.189           The Authority must keep an electronic register known as the OTN register. The OTN register will enable suppliers to confirm that an OTN is valid, and that it belongs to the person that quotes it. This register will be available for public inspection on the Authority’s website. It will contain an entry for every current OTN. When an OTN is cancelled or surrendered the Authority must remove the entry from the register. [Part 3, Division 5, clause 49]

1.190           An entry in the OTN register will include an OTN, the identity of the person that was issued with that OTN, that person’s last known address, and their ABN if they have one. This information will assist a supplier in identifying and confirming an OTN holder, lowering compliance costs.

1.191           A person with an OTN who changes their name or address as set out in the register must within 14 days notify the Authority of the change. A person who fails to meet this requirement may incur a civil penalty. [Part 3, Division 5, clause 50A ]

Quoting an OTN

1.192           An OTN may only be quoted by the person to whom it was issued. [Part 3, Division 5, clause 51(1)]

1.193           A person may quote their OTN in relation to a particular supply (a one-off quotation) or a class of supplies (a standing quotation). A quotation remains in effect unless it is withdrawn before the supply occurs (see section on OTN withdrawal, below). [Part 3, Division 5, clause 51]

1.194             A person quotes their OTN in relation to a supply of eligible upstream fuel or synthetic greenhouse gas by making a statement in writing. The statement may be included in a contract, order or similar document and may be in electronic form. [Part 3, Division 5, clause 51A-51B]

1.195           A one off quotation and a standing quotation must both set out:

•        the words ‘quotation of OTN’ followed by the OTN,

•        the person’s name,

•        if the person has an ABN, the person’s ABN,

•        an indication of whether the quotation is voluntary or mandatory,

•        a description of the supply (in the case of a one-off quotation) or class of supplies (in the case of a standing quotation) to which the quotation relates. [Part 3, Division 5, clause 51A-51B]

1.196           A description of a class of supplies could, for example, relate to all supplies that occur during a specified period, a fixed number of consecutive supplies, or a volume of fuel to be supplied.

Acknowledgement of OTN quotation

1.197           An OTN quotation must be acknowledged by the supplier in order for the quotation to come into effect. Acknowledgement takes place when a supplier notifies the OTN holder in writing. Acknowledgement ensures that both the OTN holder and supplier understand when an OTN quotation comes into effect.

1.198           If an OTN holder makes a quotation and they are required to quote their OTN in relation to the supply, the supplier must acknowledge the quotation. This ensures that an OTN quotation is in effect when a person supplies eligible upstream fuel to a person who is required to quote an OTN for that supply.

1.199           Where the OTN holder makes a quotation and where they are permitted (but not required) to quote their OTN in relation to the supply, the supplier may acknowledge the quotation. If the supplier does not acknowledge the quotation the supplier may still choose to supply to the OTN holder, however the supply would take place as if the quotation had not been made. [Part 3, Division 5, clauses 64A-64B]

Withdrawal of OTN quotation

1.200           In certain circumstances an OTN quotation can be withdrawn. When withdrawn an OTN quotation ceases to be in place.

1.201           There are two situations in which an OTN holder may withdraw a standing OTN quotation by notifying the supplier in writing. The first situation is where an OTN holder ceases to be required or permitted to quote their OTN in relation to the classes of supplied to which the quotation relates. [Part 3, Division 5, clause 51C]

1.202           The second circumstance is where the supplier agrees to the withdrawal of a standing quotation. [Part 3, Division 5, clause 51D]

1.203           An OTN quotation is deemed to have been withdrawn if a person’s OTN is surrendered or cancelled and a quotation of that OTN was in effect immediately prior to the surrender or cancellation. [Part 3, Division 5, clause 51BA]

1.204           In these circumstances the supplier may not be aware of the withdrawal as it occurs without the OTN holder notifying the supplier. Therefore, where a supply occurs in the seven days from when the surrender or cancellation of an OTN takes effect and where the OTN holder has not notified the supplier of the cancellation or surrender, the Act will have effect as if the person held an OTN and the OTN had been quoted in relation to that supply. [Part 3, Division 5, clause 51F-51G]

Quotation of bogus OTN

1.205           A person must not purport to quote a number as their OTN if it is not their OTN. [Part 3, Division 5, clause 68]

1.206           If a person purports to quote a number as their OTN for a supply, and that number is not shown in the OTN register as the person’s OTN, the supplier must not supply eligible upstream fuel or synthetic greenhouse gas to the person. [Part 3, Division 5, clause 68]

1.207           Suppliers will therefore need to check the details in the OTN register at the time an OTN quotation is made and ensure that the person quoting it matches the identity details in the register against that OTN.

1.208           Upon application by the Authority, the Federal Court may order a person to pay the Commonwealth a civil penalty if it decides that the person has, for example, aided a contravention of the requirement that a person must not quote a bogus OTN or supply eligible upstream fuel and synthetic greenhouse gas to a person that quotes a bogus OTN. [Part 3, Division 5, clause 68(3)-(5)] [Part 21, clause 327]

1.209           For evidentiary purposes the Authority may supply a copy of or extract from the OTN register certified by an official of the Authority to be a true copy or true extract. This certified copy or extract will be admissible as evidence in all courts and proceedings without further proof or production of the original. [Part 3, Division 5, clause 50]

1.210           If an OTN holder purports to quote a number as their OTN in relation to a supply and the purported quotation is due to an honest mistake the Authority may determine that the Act has, and is taken to have had, effect as if the OTN holder had quoted the OTN holder’s OTN in relation to the supply. A determination by the Authority must be in writing and must be given to the OTN holder and the supplier. A determination of this kind is not a legislative instrument. [Part 3, Division 5, clause 51E]

Rejection of OTN quotation

1.211           In certain circumstances a supplier is required or permitted to reject an OTN quotation. These circumstances are outlined below.

Rejection of OTN — re-supply of eligible upstream fuel

1.212           If a person supplies eligible upstream fuel to a second person who does not quote an OTN for the supply, and the second person then re-supplies all or part of that fuel to a third person who quotes an OTN, the second person must reject the OTN quotation. [Part 3, Division 5, clause 65]

1.213           The purpose of this clause is to avoid double counting. In the absence of this provision, the third person or another person further down the supply chain could incur liability for an amount of fuel or synthetic greenhouse gas for which a liability has already been incurred.  

1.214           The effect of a supplier rejecting the quotation of a person's OTN under this clause is that, if the supply occurs, the supply is taken to have occurred as if the person did not quote their OTN for the supply. [Part 3, Division 5, clause 65(3)]

1.215           This clause contains ancillary provisions relating to contravention of the clause. [Part 3, Division 5, clause 65(4)-(5)]

1.216           The purpose of these ancillary provisions is to provide an incentive for suppliers and recipients of eligible upstream fuel to comply with the requirement that an OTN be rejected in the circumstance described. Upon application by the Authority, the Federal Court may, if it decides that a person has, for example, aided a contravention of the requirement to reject an OTN in relation to a particular supply, order the person to pay the Commonwealth a civil penalty. [Part 21, clause 327]

Rejection of voluntary quotation of OTN

1.217           A supplier may reject the quotation of a person's OTN for a supply of eligible upstream fuel if that quotation is not required. [Part 3, Division 5, clause 66] The regulations will specify a method for rejection.

1.218           The effect of a supplier rejecting the quotation of an OTN under this clause is that, if the supply occurs, it is taken to have occurred as if the person did not quote their OTN for the supply.

1.219           A supplier does not need any particular reason to reject the quotation of a voluntary OTN. However, circumstances under which a supplier may wish to reject a voluntary OTN quotation include:

•        the supplier does not have administrative arrangements that would allow the netting out of amounts of fuel supplied to OTN holders,

•        for reasons of administrative simplicity, the supplier wishes to manage Scheme obligations for all fuel that it supplies.

Misuse of OTN

1.220           The mere issue of an OTN does not permit a person to quote it. When a person quotes an OTN for a particular supply or class of supplies the person must, at the time of quotation, be required or permitted to do so. An OTN holder breaches the provisions in the bill if they quote an OTN in circumstances where they are not required or permitted to do so. [Part 3, Division 5, clause 67]

1.221           If a person quotes an OTN in circumstances where they are not required or permitted to do so, the validity of the transaction is not affected by the breach. That is, the quotation will relieve the supplier of liability in relation to that supply. However, unlike a quotation which is permitted or required, a person that misuses their OTN is liable for the potential greenhouse gases emissions embodied in the fuel supplied or where the supply relates to synthetic greenhouse gas the carbon dioxide equivalence of that gas. [Part 3, Division 3, clause 29] , [Part 3, Division 4, clause 40] , [Part 3, Division 5, clause 67(4)]

1.222           Upon application by the Authority, the Federal Court may order a person to pay the Commonwealth a civil penalty, if it decides that the person has, for example, aided a contravention of the requirement not to quote an OTN in circumstances where it is not required or permitted. [Part 3, Division 5, clause 67(2)-(3)] [Part 21, clause 327]

1.223           This provides an incentive for suppliers and recipients of eligible upstream fuel and synthetic greenhouse gas to comply with the requirement that an OTN must only be quoted in circumstances where a person is required or permitted to do so under the bill.

Mandatory quotation of an OTN

1.224           Four types of entities will be required to quote an OTN:

•        large users of eligible upstream fuels [Part 3, Division 5, clause 52]

•        re-suppliers of natural gas [Part 3, Division 5, clause 53]

•        re-suppliers of liquid petroleum gas [Part 3, Division 5, clause 54]

•        feedstock users of liquid petroleum gas, refinery grade propene and ethene. [Part 3, Division 5, clause 55]

1.225           Each provision that requires quotation of an OTN contains ancillary provisions relating to contravention of a requirement to quote an OTN. [Part 3, Division 5, clause 52(2)-(3)] [Part 3, Division 5, clause 53(2)-(3)] [Part 3, Division 5, clause 54(2)-(3)] [Part 3, Division 5, clause 55(2)-(3)]

1.226           The purpose of these provisions is to provide an incentive for suppliers and recipients of eligible upstream fuel to comply with the requirement that an OTN be quoted in relation to a particular supply. Upon application by the Authority, the Federal Court may, if it decides that a person aids, procures, induces etc. a contravention of the requirement to quote an OTN in relation to a particular supply, order the person to pay the Commonwealth a civil penalty. [Part 21, clause 327]

1.227           An OTN quotation made in circumstances where the quotation is mandatory must set out a statement to that effect within the quotation. A person must not, however include a statement to this effect unless the person is or will be required to quote an OTN in relation to the supply or class of supplies to which the quotation relates. A breach of this requirement may result in a civil penalty. [Part 3, Division 5, clause 66A]

Large users of eligible upstream fuels (excluding users of liquid petroleum fuel)

1.228           The operator of a facility will be required to quote an OTN in relation to a supply to the facility of an eligible upstream fuel (other than liquid petroleum fuel) if combustion of that type of fuel contributed 25,000 tonnes of CO 2 -e or more to the facility’s greenhouse gas emissions in the previous year. Pro-rata thresholds apply for facilities that an entity operates for part of a year. [Part 3, Division 5, clause 52(1)]

1.229           The holder of a liability transfer certificate for such a facility is considered to be its operator. [Part 3, Division 5, clause 52(4)]

1.230           Entities will be able to ascertain whether they meet the threshold for large fuel users on the basis of their previous year’s report made under the National Greenhouse and Energy Reporting Act 2007 .

1.231           Large fuel users will not be required to quote an OTN for fuels that contributed less than 25,000 tonnes of CO 2 -e to a facility’s emissions in the previous year. This is to ensure that suppliers are not required to net out small amounts of fuel.

1.232           However in certain circumstances large fuel users will be permitted to quote their OTN in relation to fuels that contribute less than 25,000 tonnes of CO 2 -e to a facility’s emissions, as explained in the section below on voluntary quotation of an OTN.

Re-suppliers of natural gas and marketers of liquid petroleum gas

1.233           Natural gas retailers, marketers of liquid petroleum gas and other entities that carry on a business of re-supplying natural gas, will be required to quote an OTN. [Part 3, Division 5, clauses 53-54] This will transfer the bulk of Scheme liabilities for these fuels to the entities that have customer usage information for these fuels and will ensure that these re-suppliers operate within equivalent market rules.

1.234           Marketers of liquid petroleum gas are those entities that re-supply liquid petroleum gas that is supplied to them from an import terminal bulk storage, petroleum refinery bulk storage or liquid petroleum gas separation plant bulk storage. [Part 3, Division 5, clause 54] Some entities that the liquid petroleum gas industry commonly considers to be marketers (those that run vertically integrated operations with bulk storage facilities) will not meet this definition as ‘supply’ does not include intra-company transfers. Nevertheless, these entities will have Scheme obligations for the liquid petroleum gas they supply by way of their status as producers or importers of this fuel. [Part 3, Division 4, clause 33]

Feedstock users of liquid petroleum gas, refinery grade propene or ethane

1.235           Feedstock users of liquid petroleum gas, refinery grade propene or ethane will also be required to quote an OTN to their suppliers of these fuels. [Part 3, Division 5, clause 55]

1.236           Users of these fuels as feedstocks often consume significant quantities of the fuels, and there are a limited number of suppliers to these industries. These circumstances present risks that significant Scheme liabilities could be imposed for large quantities of fuel that will not result in emissions. As such, feedstock users of these fuels will be required to quote an OTN.

Voluntary quotation of an OTN

1.237           Seven types of entities will be permitted, but not required, to quote an OTN in relation to a particular supply of eligible upstream fuel or synthetic greenhouse gas. [Part 3, Division 5, Subdivision D]   These are:

•        large users of eligible upstream fuels  (including liquid petroleum fuels) [Part 3, Division 5, clause 56]

•        entities that use eligible upstream fuels as feedstock to manufacture other products, or in ways that do not result in emissions of greenhouse gases to the atmosphere [Part 3, Division 5, clause 58]

•        entities that transform eligible upstream fuels from one type into another [Part 3, Division 5, clause 59]

•        exporters and intermediate suppliers of certain fuels [Part 3, Division 5, clauses 60]

•        intermediate suppliers of synthetic greenhouse gases [Part 3, Division 5, clause 63]

•        exporters of synthetic greenhouse gases  [Part 3, Division 5, clause 64]

•        feedstock users of synthetic greenhouse gases [Part 3, Division 5, clause 64AA]

Large users of eligible upstream fuels

1.238           A large user of eligible upstream fuel is permitted to make a voluntary quotation of an OTN for a supply of fuel. A large fuel user is the operator of a facility that in the previous financial year had greenhouse gas emissions from combustion of one type of eligible upstream fuel of at least the amount specified in the regulations. [Part 3, Division 5, clause 56(1)]

1.239           The holder of a liability transfer certificate for such a facility is considered to be its operator. [Part 3, Division 5, clause 56(9)]

1.240           The threshold that defines a large fuel user for the purposes of voluntary quotation of an OTN will be prescribed in regulations. [Part 3, Division 5, clause 56(1)] The Government’s intent is to set this threshold initially at 25,000 tonnes of CO 2 -e or less.

1.241           Setting the threshold at this level will enable large fuel users that are required to quote an OTN for one type of fuel supplied to a facility to quote an OTN for other fuels used at the facility. They will also be able to quote an OTN when purchasing fuel for other facilities that do not exceed the single fuel threshold. This will simplify billing arrangements where a large fuel user obtains more than one type of fuel from a supplier, or purchases fuel from one supplier for use at more than one facility.

1.242           The Authority may give approval for the quotation of an OTN by an entity that expects its emissions to exceed the threshold in a particular year, even though it does not satisfy the threshold test for the previous year. This may occur, for example, where an entity expects to increase production at an existing facility or establish a new facility.

1.243           Entities will be able to apply to the Authority to become an approved person under this provision. The bill specifies procedures and requirements relating to such an application. The Authority will only approve an application if satisfied that emissions are likely to exceed the threshold in the year to which the application relates. [Part 3, Division 5, clause 56(2)-(8)]   

1.244           The threshold may be lowered over time to allow a greater range of entities to manage their Scheme obligations.

Example 1.15 Large user of eligible upstream fuel with prior reporting history

Company X has operational control over a coal mine. In 2011 emissions from the coal mine comprise:

•        40,000 tonnes of CO 2 -e of fugitive emissions

•        30,000 tonnes of CO 2 -e from use of diesel

•        2,000 tonnes of CO 2 -e from use of petrol.

Company X also has operational control over another mine which is a facility in its own right. In 2011 emissions from this second mine comprise:

•        20,000 tonnes of CO 2 -e of fugitive emissions

•        15,000 tonnes of CO 2 -e from use of diesel

•        1,000 tonnes of CO 2 -e from use of petrol.

In 2012 Company X is permitted to quote an OTN for its diesel use at the first mine because, in 2011, its emissions from diesel use at that mine exceeded the single fuel threshold specified in the regulations. Because emissions from one fuel exceeded the threshold, Company X is also permitted to quote an OTN for its petrol use at that mine. Company X is also permitted to quote an OTN for its diesel and petrol use at the second mine, even though emissions attributable to any one type of fuel used at the second mine do not exceed the single fuel threshold specified in the regulations.

The company establishes a fuel supply contract with a fuel company for the diesel and petrol used at both mines. The company makes an OTN quotation in that contract which is acknowledged by the supplier. Company X must manage Scheme obligations for all fuel supplied under this contract.

Example 1.16 : Start-up company that expects to be a large user of eligible upstream fuel

A company is in the process of commissioning a gas fired electricity plant. It expects to emit 500,000 tonnes of CO 2 -e of greenhouse gases in its first year of operation. The company applies to the Authority for an OTN and submits all information and documents specified in the regulations. The Authority assesses the application and decides that it is likely that the company’s emissions from natural gas combustion will exceed the threshold value specified in the regulations. The Authority, by written notice, declares that the company is an approved person . The company is permitted to quote an OTN for the natural gas it purchases for its new electricity plant, and for any other fuel supplied to it.

Use of fuel in manufacturing other products etc

1.245           A person may quote an OTN if they use eligible upstream fuels to manufacture products in which all or part of that fuel is sequestered, such as where a fuel is used as a feedstock to make plastic. Entities that use fuels in other ways that do not result in emissions of greenhouse gases to the atmosphere may also quote an OTN. An example of this type of use is the use of diesel as a flocculent in minerals processing. [Part 3, Division 5, clause 58]

1.246           The circumstances under which these entities will be permitted to quote an OTN do not require that the fuel is to be used for a specific purpose. This recognises that entities permitted to quote an OTN under this provision commonly combust a portion of the fuel supplied to them.

1.247           To avoid doubt, exempt hydrocarbon solvents are not eligible upstream fuels. [Part 1, clause 5, definitions of ‘eligible upstream fuels’, ‘liquid petroleum fuels’ and ‘exempt hydrocarbon solvent’] As such, no liability will arise from their supply and the quotation of an OTN is not permitted in relation to such a supply.

1.248           Scheme obligations will apply for any greenhouse gas emissions from the use of that fuel. Liability for these emissions arises under the direct emitter provisions, or under the application to own use provisions where the direct emitter provisions do not apply . [Part 3, Division 2] [Part 3, Division 4]

Transformation of fuel

1.249           A person that transforms one type of eligible upstream fuel into another type of eligible upstream fuel, for example manufacturing coke oven coke from black coal, will be liable for the supply of the transformed fuel to entities that do not quote an OTN. [Part 3, Division 4, clause 35]   However, where a fuel transformer obtains pre-transformed fuel from another entity, liability will be imposed on that supply unless the fuel transformer is permitted to quote an OTN. [Part 3, Division 4, clause 33]

1.250           For this reason, entities that undertake recognised fuel transformations will be permitted to quote an OTN. [Part 3, Division 5, clause 59]   Recognised fuel transformation processes are defined in the bill. [Part 1, clause 5, definition of ‘recognised transformation’] Additional fuel transformations that involve transforming one type of eligible upstream fuel into another type of eligible upstream fuel can be added through the regulations.

Export or re-supply of eligible upstream fuels

1.251           Intermediaries are present in certain fuel supply chains, such as the supply chain for black coal. Entities that are permitted or required to quote an OTN and that are supplied fuel by an intermediary, would not be able to assume Scheme obligations for fuels unless their supplier is also permitted to quote an OTN. Furthermore, intermediaries that export fuels would incur the cost of Scheme obligations if they were unable to quote an OTN. For these reasons, re-suppliers or exporters of eligible upstream fuels will be permitted to quote an OTN. [Part 3, Division 5, clauses 60]

Re-supplier of synthetic greenhouse gases

1.252           Re-suppliers of synthetic greenhouse gases will be permitted to quote an OTN in a limited set of circumstances. This limited application of an OTN is intended to allow Scheme obligations to be transferred to exporters of synthetic greenhouse gases.

1.253           A person who carries on a business re-supplying synthetic greenhouse gases will only be permitted to quote an OTN where they intend to re-supply the synthetic greenhouse gas to another person and then only if that other person is either:

•         an exporter who quotes an OTN in relation to the re-supply, or

•        another re-supplier who quotes an OTN in relation to the re-supply. [Part 3, Division 5, clause 63]

1.254           The limited circumstances under which a re-supplier of synthetic greenhouse gas is permitted to quote an OTN does not provide for the re-supplier to quote an OTN in relation to an amount of synthetic greenhouse gas that will be re-supplied to another person who does not quote an OTN. They also do not permit the quotation of an OTN for an amount of synthetic greenhouse gas that will be used by the re-supplier.

Exporter of synthetic greenhouse gases

1.255           As noted above, a person who carries on a business exporting synthetic greenhouse gases may quote an OTN. For such persons quotation is permitted for an amount of synthetic greenhouse gas that will be re-supplied or exported. [Part 3, Division 5, clause 64] .

1.256            In practice, an entity that both exports synthetic greenhouse gases and supplies synthetic greenhouse gases within Australia will be able to quote an OTN when purchasing synthetic greenhouse gases from their supplier. However, the entity will only be liable for the portion of synthetic greenhouse gas re-supplied domestically. [Part 3, Division 3, clause 28]

Example 1.17 : Exporter of synthetic greenhouse gases

A company manufactures air conditioners that contain synthetic greenhouse gases. The company exports a portion of its product and supplies the other portion on the domestic market. When purchasing synthetic greenhouse gas refrigerants from its supplier (an importer of synthetic greenhouse gases) the company quotes its OTN. The importer will not be liable for the synthetic greenhouse gas supplied to the company. The company will be liable for the synthetic greenhouse gases (in CO 2 -e) within the air conditioning equipment it supplies to the domestic market.

Feedstock users of synthetic greenhouse gases

1.257           A person may also quote an OTN if they use synthetic greenhouse gases as a feedstock; that is, where the synthetic greenhouse gas is consumed in a chemical process to manufacture a product. [Part 3, Division 5, clause 64AA]

Reporting requirements

1.258           The National Greenhouse and Energy Reporting Act 2007 will be amended to allow regulations to specify reporting requirements for entities that either use or accept the quotation of an OTN. Examples of the type of information that may be required by regulations are quantities of different types of fuel supplied to a person under an OTN and re-supplied to another person including separate amounts supplied to different OTNs. (See the consequential amendments bill, Schedule 1, Part 2, item 181.) 

Liability transfer certificates

1.259           As outlined in the summary of new law section above provisions relating to the transfer of liability for emissions under a liability transfer certificates are in Division 6 of Part 3.

1.260           There are two circumstances in which the liability for a particular facility can be transferred from one entity to another using a liability transfer certificate.

1.261           The first circumstance applies under Division 6, Subdivision A which enables the transfer of Scheme liability from a controlling corporation to one of its subsidiaries. As such this subdivision applies to corporations only. The transfer of liability to a subsidiary is intended to allow the triggering of a change of law or carbon cost pass through clause in a contract that the subsidiary is a party to on the basis that such clauses would not be triggered if liability was placed on the controlling corporation. Accessing these clauses may enable a subsidiary to pass through carbon costs in existing contracts and convey efficient price signals to end users.

1.262           The second circumstance applies when an entity with financial control of a facility (for example the owner) is not also the operator of that facility. In this instance, the entity with financial control may have influence over emissions reductions in addition to the operator. In line with the object of the Scheme — to reduce emissions — the entity that has financial control may take on liability in certain circumstances through a Category B liability transfer certificate. If more than one entity has financial control, it is intended that the entity with the greatest financial control would be permitted to apply for a liability transfer certificate.

1.263           To apply for a liability transfer certificate an entity must pass either the Category A or Category B transfer test as outlined below.

1.264           A liability transfer certificate may only be issued for a single facility. If a person wants to transfer liability for multiple facilities they will have to apply for a certificate for each of those facilities. [Part 3, Division 6, clause 69] [Part 3, Division 6, clause 73]

1.265           A person taking on liability must have a significant connection to a facility that encompasses the ability to reduce emissions from that facility. For this reason a liability transfer certificate can only be issued by the Authority and is not transferable. [Part 3, Division 6, clause 80]

1.266           This section also outlines other matters relating to liability transfer certificates including Category A and Category B transfer tests, the issuance process, reporting obligations, application process, duration, surrender and cancellation. [Part 3, Division 6]

Transfer of liability to another member of a controlling corporation’s group — category A transfer test

1.267            As outlined above, Division 6, Subdivision A enables the transfer of Scheme liability from a controlling corporation to one of its subsidiaries. Under Subdivision A, a subsidiary can only apply for a liability transfer certificate if its controlling corporation gives its consent for that application to be made. [Part 3, Division 6, clause 70(3)] Where a certificate is issued the controlling corporation is taken to have given a statutory guarantee for the payment of any administrative penalty for a unit shortfall for the relevant financial year and any late payment penalty for that subsidiary, plus the controlling corporation has a make good number for the unit shortfall of the subsidiary. [Part 6, Division 4, clause 138 and 142(2)] This provision ensures that there is always a liable entity under the Scheme for a covered facility and prevents controlling corporations from avoiding liability by transferring liability to a subsidiary.

Diagram 1.1  

Organization Chart

Transfer of liability certificate is issued for Subsidiary Y in relation to Facility 2.

Subsidiary Y takes on all obligations and liability for Facility 2 under the Scheme and under the National Greenhouse and Energy Reporting Act 2007  — this includes reporting in relation to emissions, energy production and energy consumption.

Corporation A will not have obligations or liability for Facility 2 under the Scheme or under the National Greenhouse and Energy Reporting Act 2007 .

Corporation A will, however, have consented to the application for the transfer and in doing gives a statutory guarantee against liability incurred by Subsidiary Y.

Facility 2 will continue to form part of Corporation A’s group for the purposes of meeting the National Greenhouse and Energy Reporting Act 2007 group thresholds.

Transfer of liability to a company that has financial control over a facility — Category B transfer test

1.268           As outlined above a Category B liability transfer certificate (outlined in Division 6, Subdivision B) allows liability to be transferred from the operator of a facility to another person as long as that other person has financial control (defined below) over the facility.

1.269           However, transfers are not allowed to certain persons. First, the person cannot be an individual. This avoids complications that may arise when an individual is liable, such as death. Second, the person cannot be a foreign person. This prevents liability from being transferred to a person overseas to avoid compliance under the Scheme, recognising that it would be more difficult enforce obligations against a foreign person. Third, the person cannot be within the same controlling corporation’s group as the operator. This is because an application for a transfer in this instance is intended to be made under the Category A transfer test.

1.270           In the majority of circumstances liable persons are not expected to access these provisions. This is because the operator will also be the owner of a facility and would therefore have financial control of that facility. However, in some circumstances, for example contract mining and pipeline operations, the person with financial control of a facility contracts out the operation of a facility to another person. The operator will then generally have operational control over the facility and therefore liability for the facility under the Scheme. As the person with financial control of a facility may also have an influence over emissions arising from the facility, it is appropriate to allow that person to take on liability for the facility with the agreement of the operator of the facility.

1.271           Financial control is intended to encompass a person that has significant ability to control a facility through financial means only and therefore give effect to decisions relating to emissions reductions. It is not intended to include an agent or person acting on behalf of an entity that has financial or operational control of a facility who may not have any direct influence on emissions reductions. [Part 3, Division 6, clause 81]

1.272           The meaning of financial control recognises that more than one person may have financial control over a facility. For example several persons may be participants in a joint venture or partnership that collectively have financial control of a facility. In these circumstances, the person with the equal or greatest share in the economic benefits from a facility will have financial control for the purposes of the Act.

 

Diagram 1.2  

 

Organization Chart     

 

Subsidiary F, which is part of Controlling Corporation B’s group, has financial control over Facility 1. Subsidiary F (with consent from Corporation A and Corporation B) applies for a liability transfer certificate.

A certificate is issued and Subsidiary F takes on takes on all obligations and liability for Facility 1 under the Scheme and under the National Greenhouse and Energy Reporting Act 2007  — this includes reporting in relation to emissions, energy production and energy consumption.

Corporation A will not have obligations or liability for Facility 1 under the Scheme or under the National Greenhouse and Energy Reporting Act 2007 .

Criteria for the issue of a liability transfer certificate

1.273           An entity must also meet the criteria for the issue of a liability transfer certificate. [Part 3, Division 6, clause 72] [Part 3, Division 6, clause 76] Criteria have been included to maintain Scheme integrity by ensuring that an entity has the capacity, access to financial resources and information to comply with its obligations under the Carbon Pollution Reduction Scheme Act 2010 as well as the National Greenhouse and Energy Reporting Act 2007 .

1.274           The financial criterion ensures that a person does not transfer liability to a person that cannot meet Scheme obligations in order to avoid or delay liability. This test is not, however, intended to involve an exhaustive explanation by the applicant of its financial situation. [Part 3, Division 6, clause 72] [Part 3, Division 6, clause 76]

Reporting obligations and liability transfer certificates

1.275           Obligations for reporting under the National Greenhouse and Energy Reporting Act 2007 in relation to the facility for which a liability transfer certificate has been issued will be transferred to the holder of the certificate. This includes reporting obligations in relation to greenhouse gas emissions, energy production and energy consumption. This is given effect by the consequential amendments bill. (See the consequential amendments bill, Schedule 1, Part 2, items 175-181)

Application process for a liability transfer certificate

1.276           An application to obtain a liability transfer certificate must be made in writing in a form approved by the Authority. An application by a subsidiary must be accompanied by the written consent of its controlling corporation. The application must also include any information and documents that are specified in regulations. This is intended to include information and documents that support an entity’s application and demonstrate that the entity meets the criteria for the issue of a liability transfer certificate. [Part 3, Division 6, clause 70] [Part 3, Division 6, clause 74]

1.277           The Authority may request further information in relation to an application within a period specified in a notice given by the Authority. This is to assist the Authority in its decision-making capacity. The Authority must ensure that the information requested is relevant to its consideration of the application and must exercise this power reasonably. [Part 26, clause 374B] If the applicant does not meet this request within the time specified, the Authority may refuse to consider the application or refuse to take any action, or any further action, in relation to the application. [Part 3, Division 6, clause 71] [Part 3, Division 6, clause 75]

1.278           The Authority is required to take all reasonable steps to ensure that a decision is made on an application for a liability transfer certificate within 90 days of receiving an application or within 90 days of being given further information. The Authority must inform an applicant in writing if it decides to refuse to issue a liability transfer certificate. [Part 3, Division 6, clause 72] [Part 3, Division 6, clause 76]

1.279           A certificate may come into force on the start day specified in the certificate, which must be within the same financial year as the application for the certificate. This ensures that liability cannot be transferred from a financial year that has already passed and allows persons to obtain a certificate for an entire financial year regardless of when the application is made or the certificate is issued during a financial year. [Part 3, Division 6, clause 77]

1.280           The start date may only be earlier than the day on which the certificate is issued if the applicant and the relevant parties consent to the specification of that start day. This ensures that all persons that may be liable under the Scheme know who is liable for a given period. [Part 3, Division 6, clause 77]

Duration of a liability transfer certificate

1.281           Once made, a liability transfer certificate remains in force indefinitely subject to provisions relating to surrender and cancellation of a certificate. [Part 3, Division 6, clause 77]

Voluntary surrender of liability transfer certificate

1.282           If an entity wishes to surrender a liability transfer certificate it must obtain written consent from the Authority to do so. The Authority must not consent to the surrender unless:

•         where applicable, the controlling corporation(s) that agreed to the making of the application for the certificate agrees to the surrender, and

•         the certificate has been in force for at least four years, or

•         certificate has been in force for less than four years, but the Authority is satisfied that there are special circumstances that warrant the giving of its consent to the surrender.

1.283           It is envisaged that special circumstances is unlikely to include a change of operator or contract as these changes are considered to be normal business practice and are foreseeable by a person at the time of their application for a liability transfer certificate. The four year criterion supports the Scheme’s integrity by ensuring a consistent liable entity and prevents multiple transfers of liability that may be aimed at avoiding liability. [Part 3, Division 6, clause 78]

Consultation on cost pass through issues

1.284           The Government proposes to undertake public consultation post passage with a view to making amendments before July 2011 (the start of the Scheme) that enhance pass-through of carbon costs under existing contracts.

1.285           The Government recognises that the proposals relating to operational subsidiary liability and joint venture liability are aimed at enhancing pass-through of carbon costs by clarifying the point of liability and removing the scope for minority shareholders in a facility to veto investments to reduce emissions for which the controlling corporation is currently liable.

1.286           There are complex technical and legal issues surrounding cost pass-through and proposals to move the point of liability could affect a wide range of parties. Public consultation will ensure that any proposed amendments meet the needs of a broad range of stakeholders, avoid unintended consequences and maintain the integrity of the Scheme.

Cancellation of liability transfer certificate

1.287           The Authority must, by written notice, cancel a liability transfer certificate in the following circumstances:

•         if a company ceases to pass a Category A or B transfer test,

•         in the case of  Category A liability transfer certificate, the company is no longer a member of the group of the controlling corporation which consented to the application,

•         in the case of a Category B liability transfer certificate, the holder of the certificate ceases to be a member of the corporate group of the controlling corporation that consented to the application,

•         if a company has not paid an administrative penalty for a unit shortfall under clause 133 of the bill,

•         if the company has become an externally-administered body corporate (within the meaning of the Corporations Act 2001 ), or

•         if regulations specify one or more other grounds for cancellation and at least one of those grounds is applicable to the company. [Part 3, Division 6, clause 79]

1.288           The cancellation or surrender of a liability transfer certificate will result in future obligations and liability returning to the person that would have had obligations and liability in the absence of the liability transfer certificate. [ Part 3, Division 6, clauses 78-79]

Australian boundaries

1.289           The Scheme will extend to every external Territory. [Part 1, clause 10]. It will also extend to the coastal sea in accordance with section 15B of the Acts Interpretation Act 1901 .

1.290           It will extend to a matter relating to the exercise of Australia’s sovereign rights in the exclusive economic zone or the continental shelf. [Part 1, clause 11]

1.291           This means that those responsible for carbon capture and storage facilities in the exclusive economic zone or the continental shelf will be responsible under the general provisions of the bill for any emissions from these facilities.

1.292           However, the Scheme will not apply to the extent that its application would be inconsistent with the exercise of rights of foreign ships in the territorial sea, exclusive economic zone or waters of the continental shelf in accordance with the United Nations Convention on the Law of the Sea. [Part 1, clause 12]

1.293            The Act extends to the Joint Petroleum Development Area because Australia is responsible for a proportion of the emissions from this region under the United Nations Framework Convention on Climate Change and the Kyoto Protocol [Part 1, clause 11A]. The regulations will specify the percentage of the emissions from facilities in the Joint Petroleum Development Area and the Greater Sunrise Field which are subject to the Scheme. These regulations will specify percentages consistent with Australia’s responsibilities under international law [Part 3, Division 2, clauses 22A — 22C].

1.294           The express application of the Act to the Joint Petroleum Development Area — an agreed joint development area under the Timor Sea Treaty [2003] ATS 13 — is consistent with the obligations of Australia under article 4(1) of the Treaty between Australia and Timor-Leste on Certain Maritime Arrangements in the Timor Sea [2007] ATS 12.

1.295           Apart from these provisions, reliance is placed on the general presumption that legislation does not have extraterritorial effect plus section 21 of the Acts Interpretation Act 1901 to limit the scope of the legislation.



 

 



 



2 C hapter 2

Scheme caps, gateways and emissions units

Outline of chapter

2.1                   This chapter discusses the national scheme caps and national scheme gateways, and the nature of the various emissions units (domestic and international) recognised in the bill. It explains how these units can be issued and transferred. It also explains which can be surrendered.

2.2                   It relates particularly to Part 2 and some clauses in Part 4 of the bill.

Context

2.3                   The Carbon Pollution Reduction Scheme is a cap and trade scheme. It involves setting a national trajectory (which is referred to in the objects clause [Part 1, clause 3] ), and setting national scheme caps and gateways. The objects clause is discussed in the General Outline of this explanatory memorandum. A limited number of emissions units are issued and liable entities are required to surrender a number of units equal to their emissions to account for those emissions. The emissions units are tradable, establishing a carbon market that allows emissions units to be allocated to the most highly valued uses across the economy. Therefore, determining the emissions units that can be used for surrender is fundamental to the operation of the Scheme.

2.4                   The Kyoto Protocol is an international agreement on climate change, providing among other things a framework for an international cap and trade scheme. Australia has an obligation to retire emissions units, referred to as Kyoto units, to meet its Kyoto target. The Kyoto Protocol also establishes three ‘flexibility mechanisms’. These flexibility mechanisms result in the issue of Kyoto units which can be traded between Kyoto Parties and used towards meeting their emission reduction targets. Kyoto Parties can also allow for legal entities to participate in the trade of Kyoto units.

2.5                   Allowing for Kyoto units to be used for surrender in the Scheme creates a link between the Scheme and the international market for Kyoto units. This allows liable entities to access lower cost abatement opportunities wherever they occur in the world and allows for emission reduction targets to be achieved in a flexible and cost-effective way, without reducing the Scheme’s environmental integrity.

2.6                   The Kyoto Protocol includes a requirement that Australia’s use of the flexibility mechanisms be supplemental to its domestic actions. This means that Australia must take some meaningful domestic action to meet its emission reduction target, and cannot rely solely on the flexibility mechanisms. Projections of Australia’s greenhouse gas emissions for the first Kyoto commitment period (2008 — 2012) indicate Australia’s reliance on the flexibility mechanisms to meet the target is expected to be minimal. Australia has undertaken a range of measures to reduce domestic greenhouse gas emissions, in addition to the Carbon Pollution Reduction Scheme, and will continue to do so. The price on greenhouse gas emissions introduced as a result of the Scheme can also be expected to result in additional action on the part of households and industry to reduce Australia’s greenhouse gas emissions. Collectively, these measures represent significant domestic action.

Summary

2.7                   The national scheme caps and gateways will be set in regulations. The matters relevant to specifying the Scheme caps and gateways are listed and discussed in this Chapter.

2.8                   Australian emissions units will be created for the purpose of the Scheme. These will have a number of characteristics which ensure transparent and secure property rights.

2.9                   Australian emissions units will be issued by the Authority on behalf of the Commonwealth in the Registry. Generally, Australian emissions units can be transferred between Registry accounts and surrendered. Restrictions apply to Australian emissions units:

•        units issued for a fixed charge are automatically surrendered for the eligible financial year corresponding to their vintage year

•        units with a vintage year of 2011-12 issued in accordance with the emissions-intensive trade-exposed assistance program or in respect of coal-fired electricity generation assets can only be surrendered in relation to the 2011-12 eligible financial year and, if not surrendered, will be cancelled on 15 December 2012.

2.10               The bill recognises the emissions units created under the Kyoto Protocol and sets out how these units can be issued and transferred. Some types of Kyoto units can be surrendered for compliance purposes while others cannot. Nonetheless all Kyoto units can be held and transferred within the Registry.

Detailed explanation of new law

National targets and Scheme caps

2.11               Part 2 of the bill sets out arrangements for national scheme caps and national scheme gateways. It commences with a simplified outline [Part 2, clause 13]. The purpose of national scheme gateways is to provide guidance for longer term cap-setting, while still retaining some flexibility over where future scheme caps can be set. National scheme caps and national scheme gateways will exist within a broader policy framework in relation to national emissions targets, and Australia’s international obligations and objectives.

2.12               The Scheme involves setting a national scheme cap for a particular year (other than 2011-12) and issuing Australian emissions units equal to that cap, with further units issued for additional abatement from synthetic greenhouse gas destruction and reforestation. The scheme cap for a particular year is a quantity of greenhouse gases that has a carbon dioxide equivalence of a specified number of tonnes.

2.13               Scheme caps will generally be lower than the emissions path required to meet any national emissions targets because some emissions sources are not covered by the Scheme (primarily emissions from agriculture and deforestation, or some below-threshold emissions from waste, industrial processes or fugitive emissions). Therefore, the same factors that the Government takes into account in setting the national emissions trajectory need to be taken into account when setting caps, because of the wide coverage of the Scheme.

2.14               Scheme cap numbers for each financial year will be specified in regulations [Part 2, clause 14]. The Government intends that these be consistent with the 2020 and 2050 national emissions reduction targets. The Minister is required to take all reasonable steps to ensure that regulations specifying the Scheme cap numbers for the first four full-trading years of the Scheme (2012-13 to 2014-15) are made before 31 December 2011 [Part 2, clause 14(2)]. The purpose of this requirement is to provide market certainty. In a similar vein, for all subsequent financial years, the Minister is required to take all reasonable steps to ensure that regulations declaring the Scheme cap number are in place at least five years before the end of the relevant year [Part 2, clause 14(3)]. The phrase ‘take all reasonable steps’ has been adopted in these provisions because, despite his or her best endeavours, a Minister cannot guarantee that regulations are made by the Governor-General and not disallowed. 

2.15               Consistent with the principles outlined in the previous paragraph, it has been the Government’s intention to set scheme caps for the initial years of the Scheme before 1 July 2010. The Government still intends to reach conclusions on Australia’s national targets, and hence scheme caps, as soon as possible.  However, to allow for the possibility that international discussions on a comprehensive global agreement will take some time, and delays to date in the passage of the CPRS legislative package, it is the Government’s intention that initial scheme caps will be set no later than the end of 2011. If Australia’s international commitments have not been resolved by then, the Government intends to set initial scheme caps consistent with its unconditional commitment to reduce national emissions by 5 per cent compared with 2000 level emissions by 2020. This will provide business certainty for the commencement of the first year of full trading under the CPRS from 1 July 2012.

2.16               In the event that there is no scheme cap number for a year beginning on or after 1 July 2016, then the Scheme cap number will be 99 per cent of the Scheme cap number for the previous year, except:

•        where this number is greater than the upper bound of the gateway for the relevant year, the Scheme cap is equal to the upper bound of the gateway; or

•        where this number is less than the lower bound of the gateway, the Scheme cap is equal to the lower bound of the gateway [Part 2, clause 14(4)].

2.17               In the above arrangement, the Scheme caps that apply by default when scheme caps are not prescribed in regulations will always fall within the Scheme gateways (if any).

2.18               The Minister is required to take all reasonable steps to ensure that the Scheme caps are within the upper and lower bound of the gateway (if any) for the relevant year [Part 2, clause 15(3)].  Again, the phrase ‘all reasonable steps’ is to reflect that, despite his or her best endeavours, a Minister cannot guarantee that regulations are made by the Governor-General and not disallowed.

2.19               Further, in making a recommendation to the Governor-General about scheme cap regulations, the Minister must have regard to Australia’s international obligations under the United Nations Framework Convention on Climate Change and the Kyoto Protocol [Part 2, clause 14(5)(a)]. The Scheme will be the primary means through which Australia will aim to meet its international obligations, and so this is a mandatory criterion to take into account.

2.20               While taking into account Australia’s international obligations plays a central role in cap-setting, the Minister has discretion to also have regard to a number of other domestic and international factors. Specifically, the bill provides that the Minister may have regard to an additional seven factors.

2.21               The first factor is the most recent report from the independent reviews conducted under Part 25 of the bill. These reviews, by an expert advisory committee, will advise on whether national targets relating to emissions of greenhouse gases should be changed or extended [Part 25, Division 2, clause 353(1)(b)] and on regulations setting caps and gateways [Part 25, Division 2, clause 353(1)(c) and (d)].

2.22               The second factor is the principle that fair and effective global action to stabilise atmospheric concentrations of greenhouse gases at around 450 parts per million of carbon dioxide equivalence or lower is in Australia’s national interest [Part 2, clause 14(5)(c)(i)] . As discussed in the General Outline, if Australia has committed to a 2020 target of minus 25 per cent, it will have done so after an independent Ratification Review had found that the international agreement to which Australia was considering becoming a party was capable of delivering an outcome of 450 parts per million or lower. If the conditions for accepting a minus 25 per cent target have not been met, either because a new agreement to which Australia was a party did not meet the conditions for the minus 25 per cent target or because no further agreement was concluded at all, then the minus 5 to 15 target range is relevant. In this case the Minister could choose to consider the extent to which a particular target was consistent with the above principle. In doing so, the Minister may take into consideration the extent to which taking action within this target range will help build international confidence and co-operation, move the economy to a low pollution future and position Australia to support and participate in more ambitious global action over time, including a potential future agreement capable of achieving stabilisation at 450 parts per million or lower.

2.23               The third factor to which the Minister may have regard is progress towards, and development of, comprehensive global action under which all major economies commit to substantially restrain emissions and advanced economies take on reductions comparable to Australia [Part 2, clause 14(5)(c)(ii)].

2.24               As discussed above and in the General Outline, the Government has made national emissions reduction target offers that are conditional on the actions taken by others. Under this criterion, progress on international negotiations, and how they relate to the conditions associated with certain targets, can be taken into account.

2.25               The fourth factor to which the Minister may have regard is the economic implications associated with various levels of national scheme caps, including implications of the carbon price (that is, the price of Australian emissions units) [Part 2, clause 14(5)(c)(iii)]. The White Paper stated that all of the design elements of the Scheme were to take into account the criteria of minimising implementation risks and the implications for the competitiveness of traded and non-traded industries. The economic implications of scheme caps have a bearing on these factors. Different levels of scheme caps will have different economic implications, including on likely carbon prices and/or the flow of funds outside Australia to purchase eligible international emissions units. In addition, judgements about the appropriate level of the cap may take into account the carbon price and economic impacts arising from observing the actual operation of the cap in previous years. The carbon price may be higher or lower than expected as a result of a number of factors. For example, technological developments may mean that economic costs are lower than expected as new unanticipated abatement opportunities come into play. Conversely, some expected abatement opportunities may be more costly due to developments in other markets, such as the price of fuels. It may be appropriate to take these factors into account when judging where within the overall bounds set by the gateway caps should be set.

2.26               The fifth factor to which the Minister may have regard is the extent of actions voluntarily taken to reduce Australia’s greenhouse gas emissions [Part 2, clause 14(5)(c)(iv)] . Voluntary action, including by Australian households, to reduce greenhouse gas emissions can help ameliorate the economic implications associated with various levels of national scheme caps, increasing the likelihood that more stringent caps can be set over time.

2.27               The Government acknowledges that its target of reducing national emissions by 5 to 15 or 25 per cent below 2000 levels by 2020 is exclusive of voluntary action, meaning that the target could be adjusted beyond 15 or 25 per cent.

2.28               As a matter of policy, the Government is committed to taking account of the uptake of GreenPower in setting caps. Households and businesses that purchase accredited GreenPower increase the supply of renewable energy and assist in the transition to cleaner energy sources. To recognise individual action in purchasing more GreenPower, the Government will take all GreenPower purchases into account in setting future scheme caps.  GreenPower purchases will be measured annually and taken directly into account in setting scheme caps five years into the future, on a rolling basis.  For example, the 2016-17 cap (which will be prescribed in regulations by June 2012) will be set to reflect 2011 GreenPower purchases, multiplied by a factor to reflect the emissions saved. This measure will be backed by the cancellation of Kyoto units and will therefore achieve emissions reductions beyond Australia’s national targets.

2.29               The Government is also committed to taking into account voluntary reductions in overall household emissions when setting scheme caps.  Specifically, the Government will estimate annual emissions from household consumption of electricity, gas and transport fuels and compare it against a baseline of expected household emissions. If total household emissions are below the baseline, then the difference will be reflected in more stringent future scheme caps. As for GreenPower, household emissions will be estimated annually and taken into account in setting scheme caps five years into the future, on a rolling basis.  For example, the 2016-17 scheme cap will be set in 2012 to reflect the difference between the most recent household emissions figures and the relevant annual baseline.  This will be backed by the cancellation of Kyoto units, to ensure domestic cap reductions are matched by reductions in the availability of international emissions units.

2.30               The Government will consult on the methodology for estimating household emissions and establishing the baseline for expected household behaviour (in the presence of the Scheme and other measures) in 2010.

2.31               The sixth matter to which the Minister may have regard is estimates of emissions that are not covered (directly or indirectly) by the Scheme [Part 2, clause 14(5)(c)(v)] . In order to meet national emissions targets, account may need to be taken of the remainder of emissions that are not covered by the Scheme. In the White Paper, the Government stated that it would set Scheme caps based on the difference between the indicative national emissions trajectory (that is, its proposed path for national emissions) and the latest projection of emissions that are not covered by the Scheme. In this way, sufficient ‘room’ is left for uncovered emissions, and national targets can still be met. When considering uncovered sector emissions, the Government will need to be mindful of the extent to which reductions in uncovered sector emissions result in the creation of Australian emissions units under the offsets provisions in Part 11A.

2.32               Finally, when setting caps, the Minister may take into account such other matters (if any) as the Minister considers relevant [Part 2, clause 14(5)(c)(vi)].

2.33               Assuming a future agreement allows a proportion of the national target to be met with international purchases, as a matter of policy, the Government has stated that, as a matter of policy, if a target of minus 25 per cent compared with 2000 level emissions by 2020 is in place, up to five percentage points of this target could be met through Government purchases of international Kyoto units. This would imply setting caps broadly on the basis of a target of up to minus 20 per cent, and entail using part of the resulting auction revenue to fund the purchase of international Kyoto units.

2.34               When scheme cap regulations are tabled before a House of the Parliament under section 38 of the Legislative Instruments Act 2003 , the Minister must, as soon as practicable, cause to be tabled before that House a written statement setting out the Minister’s reasons for making the recommendation to the Governor-General about those regulations [Part 2, clause 14(7)]. The Government has indicated that it will, as a matter of policy, set out in such a statement how voluntary action has been taken into account.

2.35               To provide further guidance to liable entities and participants in the carbon market more generally, national scheme gateways may be prescribed for years beginning on or after 1 July 2016 [Part 2, clause 15]. A gateway is a range, comprising an upper bound and a lower bound of emissions, expressed in terms of tonnes of carbon dioxide equivalent, for a particular year. As noted above, the Minister is required to take all reasonable steps to ensure that the Scheme caps are within the range specified for the relevant year. The factors to which the Minister must and may have regard, and the tabling requirements for a written statement of reasons, are the same as those described above in relation to the setting of national scheme caps [Part 2, clause 15(4) and (6)].

2.36               Gateways can be used to indicate longer term possibilities for cap-setting. For example, they could be used to more formally signal a policy intention for Australia to play its full and fair part in ambitious global action, including  any international agreement capable of delivering global concentrations of greenhouse gases of 450 parts per million or lower (in carbon dioxide equivalent terms). The top of the gateway would define the maximum cap for a particular year, which in turn relates to the minimum amount of greenhouse gas abatement that would be required in that year.

Emissions units

2.37               Emissions units are addressed in Part 4 of the bill. It commences with a simplified outline [Part 4, Division 1, clause 82].

2.38               The units which can be used for surrender are ‘eligible emissions units’. This phrase is defined to mean Australian emissions units and eligible international emissions units [Part 1, clause 5, definition of ‘eligible emissions unit’].

2.39               The inclusion of eligible international emissions units provides for the Scheme to link to international markets. This is achieved by accepting international emissions units for surrender, referred to as importing. Eligible international emissions units cannot be surrendered during the fixed price transition phase period in 2011-12 [Part 6, Division 2, clause 129(6A)].

2.40               The bill does not include any provisions to limit the number of eligible international emissions units that can be used for surrender to meet obligations under the Scheme.

2.41               A unit is an eligible international emissions unit [Part 1, clause 5, definition of ‘eligible international emissions unit’] if it is:

•        A certified emission reduction other than a long-term or temporary certified emission reduction

•        An emission reduction unit

•        A removal unit

•        A prescribed unit issued in accordance with the Kyoto rules

•        A non-Kyoto international emissions unit (which must be prescribed in regulations).

2.42               Consistent with the Government’s policy, not all Kyoto units (explained below) will be able to be surrendered. For example, assigned amount units and temporary and long-term certified emission reductions are not included in the definition of an eligible international emissions unit. However, the definition of eligible international emissions unit allows for regulations to prescribe additional types of units that are issued in accordance with the Kyoto rules. For example, should the Kyoto Protocol rules include a new type of unit in the future, this provision will allow for any such unit to be prescribed as an eligible international emissions unit without an amendment to the Act.

2.43               The definition of eligible international emissions unit also includes a non-Kyoto international emissions unit (discussed below), which is defined as a prescribed unit issued in accordance with an international agreement (other than the Kyoto Protocol) or a prescribed unit issued outside Australia under a law of a foreign country [Part 1, clause 5, definition of ‘non-Kyoto international emissions unit’] . This allows for regulations to add to the types of international emissions units that can be surrendered without an amendment to the Act.

2.44               Provisions that allow for the future sale and transfer of Australian emissions units to foreign registries (export) are not included in the bill. The Government intends to move to full international trading over time, though any future decision to allow export will require an amendment to the Act. This is consistent with the Government’s policy, which is that export requires a specific decision of Government. Government policy is that export will not be provided for in the initial years of the Scheme and that it will give the market five years’ notice of a decision to allow for export. An exception to this general policy is to be made for bilateral links (for example, with the New Zealand emissions trading scheme) where an independent review finds that establishing the bilateral link will not have a significant impact on the unit charge, and the Minister decides to waive or shorten the notice period. When allowed, the outgoing transfer of Australian emissions units will be achieved either by:

•        allowing unit holders to convert the unit into an international emissions unit such as a Kyoto unit which could then be transferred to a foreign registry; or

•        the direct transfer of the unit to a foreign registry.

Australian emissions units

Issue, identification number and vintages

2.45               Australian emissions units will be issued by the Authority on behalf of the Commonwealth [Part 4, Division 2, clause 83]. To hold an Australian emissions unit, a person must have a Registry account. Units are issued by the Authority making an entry for the unit in the person’s Registry account [Part 4, Division 2, clause 87]. The unit will thus be represented by an electronic entry in the Registry, rather than by a paper certificate.

2.46               Each Australian emissions unit will have a unique number known as the identification number [Part 4, Division 2, clause 84]. The entry by the Authority in an account when issuing a unit consists of the identification number of the unit [Part 4, Division 2, clause 87(2)].

2.47               Each Australian emissions unit will have a certain vintage year. This will be the last four digits of the identification number. The vintage year of the unit is the financial year that ends on 30 June in that calendar year. For example, if the last four digits of an Australian emissions unit identification number are 2012, the vintage year of the unit is the financial year beginning 1 July 2011 and ending on 30 June 2012 [Part 4, Division 2, clause 85].

2.48               The Authority may issue an Australian emissions unit with a particular vintage year at any time before the end of 15 December following the vintage year [Part 4, Division 2, clause 86] . For example, the Authority may, at any time before the end of 15 December 2013, issue an Australian emissions unit with the vintage year that ends on 30 June 2013. This will allow for an auction of units in the interval between the end of the relevant financial year and 15 December, the final date for surrender.

2.49               Australian emissions units with a vintage year starting on or after 1 July 2012 do not have a ‘use by’ date. They can be used for surrender in their vintage year and thereafter. This is referred to as ‘banking’. There is limited capacity to surrender Australian emissions units which are of the following vintage year (‘borrowing’) [Part 6, Division 2, clause 129(4)]. The purpose of allowing banking and limited borrowing is to allow liable entities to shift the timing of their emissions and abatement activities to reduce their costs. It will also have the effect of smoothing the unit price over time. More details, the timetable and process for surrender are described in Chapter 10 of this explanatory memorandum.

2.50               For 2011-12 vintage units, as a transitional measure, an unlimited number of Australian emissions units will be available at a fixed charge of $10 per tonne. These units will not be able to be banked for use in future years. Units with a vintage year of 2011-12 issued in accordance with the emissions-intensive trade-exposed assistance program or in accordance with Part 9 can only be surrendered in relation to the 2011-12 eligible financial year and, if not surrendered, will be cancelled on 15 December 2012 [Part 4, Division 2, clause 103A] [Part 6, Division 2, clause 129(5A)] . ‘Borrowing’ will not be allowed during the fixed price transition period (2011-12) [Part 6, Division 2, clause 129(5AA)]. This means that a liable entity cannot surrender an Australian emissions unit of a later vintage to meet its obligations in relation to 2011-12.

2.51               As discussed in Chapter 3 of this explanatory memorandum, Australian emissions units issued for a fixed charge are automatically surrendered for the eligible financial year corresponding to their vintage year [Part 4, Division 2, clause 89(5)] . Accordingly, they cannot be banked.

Circumstances in which Australian emissions units can be issued

2.52               Australian emissions units can only be issued in the following circumstances:

•        As the result of an auction conducted by the Authority

•        In accordance with the provisions relating to the issue of units for a fixed charge

•        In accordance with the emissions-intensive trade-exposed assistance program

•        In accordance with Part 9 which relates to coal-fired electricity generation

•        In accordance with Part 10 which relates to reforestation

•        In accordance with Part 11 which relates to destruction of synthetic greenhouse gas.

[Part 4, Division 2, clause 88]

2.53               Details about the procedure for allocation in each of these circumstances are provided in Chapters 3 to 8 of this explanatory memorandum.

2.54               Australian emissions units with a particular vintage starting on or after 1 July 2012 cannot be issued unless there is a national scheme cap number for the vintage year [Part 4, Division 2, clause 92] . Also, the Authority must ensure that the sum of Australian emissions units with a particular vintage year starting on or after 1 July 2012:

•        offered at auction;

•        issued in accordance with the emissions-intensive trade-exposed assistance programme; and

•        issued in accordance with provisions for assistance to coal-fired electricity generators,

does not exceed the Scheme cap for that vintage year [Part 4, Division 2, clause 93]. These provisions do not apply to Australian emissions units with a vintage year corresponding to the fixed price transition period (2011-12) as there will be no scheme cap for that year.

Characteristics of Australian emissions units

2.55               An Australian emissions unit which has been issued by the Authority is personal property and, subject to the relevant provisions in the bill, transmissible by assignment, by will and by operation of law [Part 4, Division 2, clause 94].

2.56               The Government’s policy intent in adopting this approach in the bill is to reduce uncertainty for holders of Australian emissions units, and promote market confidence in and development of the carbon market.

2.57               Nonetheless, it is recognised that while an Australian emissions unit is always equivalent to one tonne of carbon dioxide equivalent emissions, the value of that unit is determined by the demand for that unit in the market.  It is envisaged that decisions under the Scheme, such as the setting of caps and allocation of free Australian emissions units, will affect the value of units.

2.58               The bill does not affect the creation or enforcement of, or any dealings with (including transfers of), equitable interests in Australian emissions units [Part 4, Division 2, clause 98A]. This provision has been included for the avoidance of doubt.  In addition, the bill is not intended to prevent the taking of security over Australian emissions units.

2.59               Once an Australian emissions unit is surrendered, it is cancelled [Part 6, Division 2, clause 129(10)] . It is also cancelled if it is offered for voluntary cancellation [Part 14, clause 282(3)]. Some units are cancelled following relinquishment [Part 15, Division 2, clause 286] . Surrender, relinquishment and voluntary cancellation are explained in greater detail in Chapter 10 of this explanatory memorandum.

Transfer and transmission of Australian emissions units

2.60               The concept of transfer of an Australian emissions unit is described in the bill. In general, it consists of the removal of an entry for the unit from the first account and making an entry for the unit in the second account [Part 4, Division 2, clause 95].

2.61               There is provision for:

•        The transfer of Australian emissions units between accounts within the Australian National Registry, in the name of the same person [Part 4, Division 2, clause 98]

•        Transmission of Australian emissions units by assignment [Part 4, Division 2, clause 96]

•        Transmission of Australian emissions units by operation of law [Part 4, Division 2, clause 97].

2.62               At its simplest, a transfer is initiated by an electronic instruction from the transferor transmitted to the Authority, which then removes the entry for the unit from one account and makes an entry for that unit in another account.

2.63               Transmissions by operation of law bring additional issues. An example is transmission of a unit to a person as the trustee of a deceased person’s estate. In this situation, it is the transferee who needs to establish evidence of transmission and, if necessary, open a Registry account [Part 4, Division 2, clause 97].

2.64               The timeframe for a person to provide the Authority with evidence of the transmission in these circumstances is 90 days, to ensure that the new owner of the emissions units has ample time to provide the proof of that ownership.  The Authority can also extend that period [Part 4, Division 2, Subdivision B, clauses 97(2) and (5)] [Part 4, Division 3, clauses 116C(2) and (5)] [Part 4, Division 3, clauses 112B(2) and (5)] .

Kyoto units

2.65               The bill provides for the recognition in Australian legislation of the emissions units created under the Kyoto Protocol, and sets out how these units can be issued and transferred [Part 4, Division 3]. The provisions relating to Kyoto units have been drafted to ensure the Australian legislation is consistent with the Kyoto Protocol rules.

The Kyoto rules

2.66               The bill defines the Kyoto rules, in summary, to mean:

•        the Kyoto Protocol

•        a decision of the Meeting of the Kyoto Parties

•        a standard or other instrument adopted by the Meeting of the Kyoto Parties for a purpose relating to:

-       the Kyoto Protocol

or

-       a decision of the Meeting of the Kyoto Parties

or

•        a prescribed instrument that relates to:

-       the Kyoto Protocol

or

-       a decision of the Meeting of the Kyoto Parties 

[Part 1, clause 5, definitions of ‘Kyoto rules’, ‘Kyoto Protocol’ and ‘decision of the Meeting of the Kyoto Parties’]

2.67               Defining the Kyoto rules in this way allows for all the relevant elements of the Kyoto Protocol framework to be adopted for various purposes in the bill. As the Kyoto Protocol itself only provides for the overarching framework with relevant decisions made by the Meeting of the Kyoto Parties providing the detail, the definition of Kyoto rules also encompasses those decisions. For some purposes the Meeting of the Kyoto Parties has adopted a standard or other instrument which governs the implementation of the Kyoto Protocol. For example, the data exchange standards contain the technical specifications for the operation of the international transaction log and Kyoto registries. Therefore, the definition of Kyoto rules also includes any such standards or instruments. The definition also allows for regulations to identify any other instruments that relate to the Kyoto Protocol or a decision of the Meeting of the Kyoto Parties to be considered part of the Kyoto rules.

2.68               The various elements of the definition of Kyoto rules are also intended to accommodate new and amended decisions, standards and instruments, as well as amendments to the Kyoto Protocol as in force for Australia. This is intended to allow the flexibility for the legislative framework to accommodate new changes to the Kyoto rules without necessarily requiring an amendment to the Act.

Kyoto units in the Australian Registry 

2.69               There is a distinction in the bill between the provisions relating to holding and transferring Kyoto units and those relating to surrender of eligible international units. While some types of Kyoto units are eligible international emissions units and can be surrendered, others such as assigned amount units and temporary and long-term certified emission reductions, are not eligible international emissions units and therefore cannot be surrendered. Regardless, all Kyoto units are able to be held and transferred in the Australian Registry.

2.70               A Kyoto unit is defined for the purposes of the bill to mean an assigned amount unit, a certified emission reduction, an emission reduction unit, a removal unit or a prescribed unit issued in accordance with the Kyoto rules [Part 1, clause 5, definition of ‘Kyoto unit’] . The last element of this definition allows for the recognition of a new type of Kyoto unit that could be adopted in the future without an amendment to the Act.

2.71               Each type of Kyoto unit is also defined for the purpose of the bill. The form of each definition refers to the relevant provisions of the Kyoto rules.

2.72               An assigned amount unit is defined to be an assigned amount unit issued in accordance with the relevant provisions of the Kyoto rules [Part 1, clause 5, definition of ‘assigned amount unit’]. By way of background, assigned amount units are issued by an Annex I Party (a developed country with a target) to the Kyoto Protocol on the basis of its assigned amount pursuant to Articles 3.7 and 3.8 of the Kyoto Protocol (for example, Australia will issue assigned amount units equal to its target — 108 per cent of 1990 emissions over the five year period, 2008-2012). As assigned amount units can be issued by any Annex I Party, the definition indicates that, for the purposes of the bill, it is immaterial whether the unit was issued in or out of Australia. This is included in the definition to make it clear that the general rule in s 21(1)(b) of the Acts Interpretation Act 1901 does not apply. That rule is that 'references to localities jurisdictions and other matters and things shall be construed as references to such localities jurisdictions and other matters and things in and of the Commonwealth…’

2.73               A certified emission reduction is defined to be a certified emission reduction issued outside Australia in accordance with the relevant provisions of the Kyoto rules [Part 1, clause 5, definition of ‘certified emission reduction’] . By way of background, certified emission reductions are generated from clean development mechanism projects under Article 12 of the Kyoto Protocol. The clean development mechanism allows Annex I Parties like Australia to implement emission reduction projects in developing countries to receive certified emission reductions and use these towards meeting their Kyoto target.

2.74               Unlike emission reductions from other types of clean development mechanism projects, those arising from afforestation or reforestation activities receive either a temporary certified emission reduction or a long-term certified emission reduction. These units have a limited life: fewer than two commitment periods for temporary certified emission reductions and between 20 and 60 years for long-term certified emission reductions. These Kyoto units are also defined in the bill by reference to the relevant provisions of the Kyoto rules [Part 1, clause 5, definition of ‘certified emission reduction’] .

2.75               A removal unit is defined to be a removal unit issued in accordance with the relevant provisions of the Kyoto rules. It is immaterial whether the unit was issued in or out of Australia [Part 1, clause 5, definition of ‘removal unit’] . Removal units are issued by an Annex I Party on the basis of land use, land-use change and forestry activities under Articles 3.3 and 3.4 of the Kyoto Protocol.

2.76               An emission reduction unit is defined to be an emission reduction unit issued in accordance with the relevant provisions of the Kyoto rules. It is immaterial whether the unit was issued in or out of Australia [Part 1, clause 5, definition of ‘emission reduction unit’]. By way of background, emission reduction units are generated by joint implementation projects under Article 6 of the Kyoto Protocol, where an Annex I Party like Australia implements a project in the territory of another Annex I Party and counts the resulting emission reduction units towards meeting its own Kyoto target. Emission reduction units can be generated either in another Annex I Party or in Australia. However, Australia will not host joint implementation projects in the first commitment period, so it is not expected that any emission reduction units will be issued in Australia during this period. A decision will be made in regards to any potential for joint implementation projects in 2013 when decisions are made about the scope for offsets more generally.

2.77               Kyoto units only exist within the international electronic registry system established by the Kyoto rules. Each Kyoto unit has a unique serial number within that electronic registry system that provides the relevant detail of the unit (such as its type, commitment period, country of origin and its sequence number) and allows for the unit to be tracked throughout the registry system. Consistent with the Kyoto rules, the entry for a Kyoto unit in a Registry account consists of its serial number [Part 4, Division 3, clause 104] .

Issue of Australia’s assigned amount units

2.78               As an Annex I Party under the Kyoto Protocol, Australia is allocated Kyoto units called ‘assigned amount units’ on the basis of its initial assigned amount, where each assigned amount unit signifies an allowance to emit one tonne of CO 2 -e. Australia’s calculation of its initial assigned amount, and the method by which it is calculated, is set out in Australia’s initial report under the Kyoto Protocol. After the initial report has been reviewed by the Kyoto Protocol expert review team and any questions of implementation have been resolved, Australia’s initial assigned amount will be recorded in the Climate Change Convention secretariat’s compilation and accounting database and provided to the international transaction log.

2.79               Australia must then, before any transaction takes place for the relevant commitment period, issue a quantity of assigned amount units equivalent to its initial assigned amount in its national registry.

2.80               The bill provides for the issue of Australia’s assigned amount units for a commitment period [Part 4, Division 3, clause 105] . Under this provision, the Minister may direct the Authority to issue to the Commonwealth, in accordance with the Kyoto rules, a specified number of assigned amount units for a specified commitment period. The Authority must comply where such a direction is given and will issue an assigned amount unit by making an entry for the unit in the Commonwealth holding account for the relevant commitment period in the Registry.

2.81               It is possible that Australia’s assigned amount units for the first commitment period will be issued under the Commonwealth’s executive power before the passing of the legislation. The bill is explicit that it does not affect the validity of the issue of any such units [Part 4, Division 3, clause 105(5)].

Issue of Australia’s removal units

2.82               Under the Kyoto Protocol, removal units are issued in relation to net removals of greenhouse gases by Article 3.3 activities (afforestation, reforestation and deforestation). Australia has elected to report and publish annual estimates of emissions and removals from activities identified under Article 3.3. This decision is fixed for the first commitment period and means that Australia must issue or cancel units (as appropriate) for the relevant activities on an annual basis. If net removals do occur, it is expected that Australia will issue a quantity of removal units in its national registry equivalent to those removals.

2.83               The bill provides for the issue of Australia’s removal units in the Registry [Part 4, Division 3, clause 106] . Under this provision, the Minister may direct the Authority to issue to the Commonwealth, in accordance with the Kyoto rules, a specified number of removal units. The Authority must comply with any such direction. The Authority will issue a removal unit by making an entry for the unit in the Commonwealth holding account for the relevant commitment period in the Registry.

Transfers of Kyoto units

2.84               The Kyoto rules allow for Kyoto units to be transferred within the international electronic registry system. The electronic registry system comprises: the various national registries of Kyoto Parties; the clean development mechanism registry in which certified emission reductions are issued; and the international transaction log that allows for inter-country transfers of units. Within each of the national registries, Kyoto units can be transferred between different accounts.

2.85               The bill provides for the meaning of ‘transfer’ in relation to different types of transfers of Kyoto units [Part 4, Division 3, clause 107] . There are several different types of transfers that have been identified. In each case a ‘transfer’ of a Kyoto unit will consist of the removal of the entry of the unit from the initial account and an entry for the unit in the receiving account.

2.86               The four different types of transfers allow for transfer between any of the account types in the national Registry (Chapter 12 of this explanatory memorandum discusses the different types of Registry accounts). For example, a transfer can be: between holding accounts including a Commonwealth holding account; between a holding account and a Commonwealth cancellation account; and between a Commonwealth holding account and a Commonwealth retirement account.

2.87               The Commonwealth will need to transfer Kyoto units between the Commonwealth accounts. The same transfer arrangements will apply where it is the Commonwealth that wishes to transfer Kyoto units. In this case the bill provides for the Minister to give a transfer instruction to the Authority [Part 4, Division 3, clauses 108(5) and 109(7)].

2.88               Regulations can be made for, or in relation to, giving effect to the Kyoto rules so far as the Kyoto rules relate to the issue of Kyoto units or the transfer of a Kyoto unit: from a Registry account to a foreign account; from a foreign account to a Registry account; or from a Registry account to a Commonwealth Registry account [Part 4, Division 3, clause 112(1)] . This is intended to give full effect to the relevant Kyoto rules (including as those rules change from time to time), with regulations providing the detail for the administration of the Registry as it relates to Kyoto units. The regulations may prevent, restrict or limit:

•        the transfer of Kyoto units from a Registry account to a foreign or voluntary cancellation account; or

•        the transfer of Kyoto units from a foreign account to a Registry account [Part 4, Division 3, clause 112(2)] .

Domestic transfers of Kyoto units

2.89               If a person is a holder of a Kyoto unit they may instruct the Authority to transfer the unit within the Australian Registry: this is considered a domestic transfer [Part 4, Division 3, clause 108] . The instruction to transfer will be by electronic notice and will set out the account number of the account where the Kyoto unit is held, the account number of the Registry account to which the unit is being transferred, and other information as specified in regulations. The regulations may specify additional information consistent with the administrative requirements of the Registry.

2.90               The Authority must give effect to the transfer instruction unless to do so would breach any regulations made to give effect to the Kyoto rules or the management of the commitment period reserve or regulations restricting transfers to Commonwealth Registry accounts [Part 4, Divisions 3 and 4, clauses 108(3), 112, 114, 116A].

2.91               Unlike Australian emissions units, the bill does not generally confer the status of ‘personal property’ on Kyoto units. Nonetheless, Kyoto units held in the Australian Registry are to be treated as personal property for the limited purposes of Bankruptcy Act 1966, Chapter 5 of the Corporations Act 2001 (which deals with external administration), the law relating to wills, intestacy and deceased estates and any other prescribed purpose. This is in order to facilitate the transmission (or disposition) of Kyoto units by operation of law in situations of bankruptcy, external administration and death. In these situations the transmission procedures are the same as for Australian emissions units [Part 4, Division 3, clauses 116B, 116C] .

2.92               The bill does not affect the creation or enforcement of, or any dealings with (including transfers of), equitable interests in Kyoto units [Part 4, Division 3, clause 116BA].  This provision has been included for the avoidance of doubt.

International transfers of Kyoto units

2.93               Under the Kyoto rules, Australia must satisfy a set of eligibility requirements in order to participate in international emissions trading. If Australia does not satisfy the set of eligibility requirements, no transfers of Kyoto units will be allowed between the Australian Registry and a foreign registry. The international transaction log will block any such transfers where Australia does not satisfy the eligibility requirements. Therefore, the ability to transfer Kyoto units from a foreign registry to an account within the Australian Registry and the ability to transfer Kyoto units from the Australian Registry to a foreign registry are dependent on Australia satisfying the eligibility requirements.

2.94               Under the bill, if satisfied that Australia is in compliance with those eligibility requirements, the Minister must make a written declaration to that effect. The Minister must, in writing, revoke such declaration if the Minister is no longer satisfied that Australia is in compliance with the requirements [Part 4, Division 3, clause 111] . Neither the instrument of declaration nor revocation is a legislative instrument [Part 4, Division 3, clause 111(3)] . The policy reason for this is that the Minister does not have discretion as to whether Australia is eligible or not, so the declaration should not be subject to potential disallowance. The enforcement branch of the compliance committee under the Kyoto Protocol framework is responsible for determining whether an Annex I Party is not in compliance with the eligibility requirements. In practice, the Climate Change Convention secretariat maintains a list of Parties that meet the eligibility requirements and of those Parties that have been suspended on its website.

2.95               Kyoto units can be transferred from an account in the Australian Registry to a foreign registry, referred to as an outgoing international transfer [Part 4, Division 3, clause 109] . A transfer is only possible where there is a declaration in force that Australia has met the emissions trading eligibility requirements discussed above [Part 4, Division 3, clauses 109(1) and 111] .

2.96               A holder of a Kyoto unit can initiate an outgoing international transfer by instructing the Authority by electronic notification to transfer the Kyoto unit from the holder’s Registry account to either a foreign account kept by another person or a foreign account kept by the holder. Similar to domestic transfers, the notification will need to specify the account number from which the units are to be transferred and any other information as specified in regulations.

2.97               The specific process for administering outgoing international transfers will be detailed in the regulations made to give effect to the Kyoto rules. The regulations may require the Authority to remove the entry for the unit from the relevant Registry account [Part 4, Division 3, clause 109(4)]. This would be consistent with the normal process of the international registry system which is designed to ensure that units can be appropriately transferred and tracked between different accounts and national registries.

2.98               The Authority will not give effect to an outgoing international transfer if the transfer would breach regulations made for the purposes of the Kyoto rules [Part 4, Division 3, clause 112 and 109(3)(a)(i)] (discussed above).

2.99               Similarly, the Authority will not give effect to an outgoing international transfer if the transfer would breach regulations made to manage the commitment period reserve [Part 4, Division 3, clause 114 and 109(3)(a)(ii)] . By way of background, in order to address concerns that Annex I Parties could oversell units and subsequently be unable to meet their own Kyoto target, each Kyoto Party is required to hold a minimum level of Kyoto units in its national registry. This minimum level is called the ‘commitment period reserve’. If the transfer of a Kyoto unit from the Registry would result in an infringement of the commitment period reserve, the international transaction log will reject the entire transfer and direct the Authority to terminate the transfer. It is intended that regulations will outline the procedures and measures to manage Australia’s commitment period reserve. Such regulations will only be necessary if and when the Scheme allows for the transfer of assigned amount units by private entities to other countries (for example, if any future export of Australian emissions units involves the transfer of assigned amount units). Until that time, the Commonwealth can manage the commitment period reserve directly as it will have control over Australia’s assigned amount units.

2.100           Kyoto units can be transferred from a foreign registry to an account in the Australian Registry, referred to as an incoming international transfer [Part 4, Division 3, clause 110] . A transfer is only possible where there is a declaration in force that Australia has met the emissions trading eligibility requirements [Part 4, Division 3, clauses 110(1) and 111] .

2.101           In practice, an incoming international transfer will be initiated by a foreign registry. The foreign registry will notify the international transaction log, which will verify the transaction. The international transaction log will then notify the Authority of the proposed incoming transfer. Accordingly, it is the receipt of an instruction from the international transaction log by the Authority which is the trigger for an incoming international transfer under the bill [Part 4, Division 3, clause 110(1)(b)] .

2.102           An incoming international transfer will only be allowed where the Kyoto unit is not specified in the regulations as a unit that cannot be transferred to a Registry account [Part 4, Division 3, clause 110(1)(c)] . In accordance with section 13(3) of the Legislative Instruments Act 2003 , the ability to ‘specify’ a Kyoto unit allows regulations to be made which identify a class or classes of Kyoto units. This means that regulations can exclude certain types of Kyoto units from being transferred into the Registry. These regulations will not affect units already in the Registry.

2.103           This gives effect to the Government’s policy position that it would retain the right to exclude any type of Kyoto unit from being transferred into the Registry. Currently there is no specific class of Kyoto unit that has been identified for exclusion by regulation. The regulation-making power provides flexibility to respond to future circumstances without the need for an amendment. For example, the White Paper stated that it is important to retain the right to disallow a certain type of international unit for compliance in the Scheme at any time to ensure the environmental integrity of the Scheme. To avoid disadvantaging liable entities who had bought those units in good faith, they would be able to use the units for compliance in the current financial year but not thereafter. This policy is addressed in the surrender provisions [Part 6, Division 2, clause 129(7)] . However, this potentially raises concerns that the Scheme could be open to a ‘flood’ of compromised units. Retaining the right to disallow a type of unit from entering the Australian registry by specifying it in regulations would stop such a scenario.

2.104           Another example where this regulation-making power may be used would be in the event that the Kyoto rules changed in a way that could potentially result in a liability on the Commonwealth associated with the treatment of Kyoto units held in its registry. The regulations could specify that such units could no longer enter the Registry.

2.105           An incoming international transfer will also only be allowed where the transfer would not breach regulations made to give effect to the Kyoto rules (discussed above) or regulations restricting transfers to Commonwealth Registry accounts [Part 4, Division 3, clauses 110(1), 112 and 116A] .

2.106           Provided these requirements are met, the Authority must make an entry for the Kyoto unit being transferred in the receiving Registry account. However, the Authority may refuse to make an entry if it has reasonable ground to suspect that the instruction forwarded from the international transaction log is fraudulent [Part 4, Division 3, clause 110(2)] .

Carry-over restrictions

2.107           Under the Kyoto Protocol, an Annex I Party may carry over to a subsequent commitment period (that is, it may bank) certain Kyoto units that have not been retired for that commitment period, cancelled or transferred to a Commonwealth replacement account. Under the current Kyoto rules, the extent to which a Party can carry over units differs depending on the kind of units involved:

•        Emission reduction units (not converted from removal units) can be carried over up to a maximum of 2.5 per cent of the Party’s initial assigned amount

•        Certified emission reductions can be carried over up to a maximum of 2.5 per cent of the Party’s initial assigned amount

•        Assigned amount units can be carried over without restriction

•        Removal units, emission reduction units converted from removal units, temporary certified emission reductions and long-term certified emission reductions cannot be carried over.

2.108           Any Kyoto units that are not carried-over must be transferred to the mandatory cancellation account. This is a strict requirement of the Kyoto rules and cannot be disregarded by Australia. All Kyoto Parties and holders of Kyoto units are subject to the same carry over restrictions.

2.109           The bill provides for regulations to be made detailing arrangements for the carry-over of Kyoto units [Part 4, Division 3, clause 113] . It is intended that the regulations will: identify the units that can be carried over and any limits or restrictions that are specified; identify the Kyoto units that cannot be carried over; set out the procedures for the carry-over; and set out any prohibition on surrender. The regulations will also provide for the Authority to transfer to the mandatory cancellation account those Kyoto units that are not carried over.

2.110           Consistent with the Government’s policy, those Kyoto units that are carried over and are eligible international emissions units will be eligible for surrender at that time. However, those units that are not carried over will be cancelled in accordance with the carry-over regulations and therefore will not be available for surrender after that time.

2.111           For the purposes of managing the Kyoto Protocol carry-over restrictions, the regulations may prohibit the surrender of certain Kyoto units during a period specified in the regulations. This is to prevent the carry-over risk (i.e. the risk that Kyoto units in excess of the Kyoto Protocol threshold cannot be carried over) transferring to the Government.

Temporary certified emission reductions and long-term certified emission reductions

2.112           As discussed above, temporary certified emission reductions and long-term emission reductions generated from forestry-based clean development mechanism projects have a limited life after which they expire. Hence these units are non-permanent.

2.113           Temporary certified emission reductions expire at the end of the commitment period after the one in which they were issued, while long-term certified emission reductions expire at the end of the crediting period of the project. While these certified emission reductions cannot be surrendered for compliance under the bill, account holders may transfer and hold these units within the Australian Registry.

2.114           Where either a temporary certified emission reduction or a long-term certified emission reduction is in a person’s Registry account when it expires, the Authority must, in accordance with the regulations, transfer the temporary or long-term certified emission reduction to a mandatory cancellation account. This is required under the Kyoto rules. The mechanical procedures for such cancellation will be contained in regulations [Part 4, Division 3, clause 115] .

2.115           The Kyoto rules require replacement of long-term certified emission reductions in certain circumstances. In brief, because long-term certified emission reductions are valid for long periods, the projects that generate them must be re-certified by an independent auditor every 5 years to demonstrate that the emission removals have occurred. When a certification report indicates that the greenhouse gas removals achieved by a project have been reversed since the last certification (for example where the trees are cut down), the Kyoto rules require replacement of the affected long-term certified emission reductions. Replacement is also required if the clean development mechanism executive board determines that the required certification report has not been submitted.

2.116           The bill provides for the making of regulations to specify the requirements for a person to replace long-term certified emission reductions in their Registry account. The Authority will be required to transfer long-term certified emission reductions to a mandatory cancellation account in the event that long-term certified emission reductions are not replaced in accordance with the regulations. The meaning of 'replacement' of a long-term certified emission reduction is set out in the bill [Part 4, Division 3, clause 116] .

Transfers to Commonwealth Registry accounts

2.117           Regulations made pursuant to the bill may prevent, restrict or limit the transfer of Kyoto units to a Commonwealth Registry account from either an Australian Registry account or a foreign account [Part 4, Division 3, clause 116A] .

2.118           Commonwealth Registry accounts include:

•        a retirement account for each commitment period into which Australia will transfer Kyoto units to comply with its emission reduction target;

•        voluntary and mandatory cancellation accounts for Kyoto units;

•        replacement accounts for replacing temporary and long-term certified emission reduction; and

•        a relinquished unit account, which is discussed in Chapter 3 of this explanatory memorandum [Part 7, Division 3, clause 148] .

2.119           There is no need for account holders other than the Commonwealth to transfer Kyoto units to certain Commonwealth accounts. Accordingly, the regulations will prevent account holders (for example, accidentally) transferring to the wrong account and being unable to recover their units. For example, Kyoto units may not be transferred to the Commonwealth relinquished units account, as this is only for certain relinquished Australian emissions units. Kyoto units also may not be transferred to certain cancellation accounts and replacement accounts.

Non-Kyoto international emissions units

2.120           As discussed above, a non-Kyoto international emissions unit is defined to mean: a prescribed unit issued in accordance with an international agreement (other than the Kyoto Protocol); or a prescribed unit issued outside Australia under a law of a foreign country [Part 1, clause 5, definition of ‘non-Kyoto international emissions unit’] . A unit would only be prescribed as a non-Kyoto international emissions unit where the intention is to add to the types of international units that can be used for surrender. That is, all non-Kyoto international emissions units will also come within the definition of ‘eligible international emissions units’ [Part 1, clause 5, definition of ‘eligible international emissions units’] .

2.121           This is consistent with the policy which allows for the addition to the types of international units that can be used for compliance where:

•        the addition does not compromise the environmental integrity of the Scheme;

•        the addition is consistent with the objective of the Scheme, including Australia’s international objectives; and

•        there has been consultation with stakeholders and analysis of the expected impact on the unit price by an independent review.

2.122           It is also consistent with the policy in relation to pursuing bilateral links with the Schemes of other countries, such as New Zealand. These will be considered on a case-by-case basis. For example, if a bilateral link were established, the New Zealand unit would be prescribed as a non-Kyoto international emissions unit and then Australian liable entities would be able to surrender those units.

2.123           Like Australian emissions units and Kyoto units, an entry for a non-Kyoto international emissions unit on the Registry will consist of the serial number of the unit [Part 4, Division 4, clause 117] .

2.124           As in the case for Kyoto units, the regulations may prohibit the surrender of non-Kyoto international emissions units [Part 4, Division 4, clause 122].

2.125           The bill provides a framework with the detailed arrangements for transfers of non-Kyoto international emissions units to be specified in regulations [Part 4, Division 4, clause 123] . This allows the transfer arrangements of such units to be in accordance with, for example, any associated treaty or agreement.

Transfers of non-Kyoto international emissions units

2.126           The bill provides for the meaning of ‘transfer’ in relation to different types of transfers of non-Kyoto international emissions units in the Registry [Part 4, Division 4, clause 118] . As with other emissions units, a transfer will involve the removal of the entry of the unit from the registry account of the person initiating the transfer and the making of an entry for the unit in the receiving registry account. Several different types of transfer have been identified. The unit can be transferred from: a registry account to a registry account of another person; a registry account to another registry account owned by the same person; a registry account to an account in a foreign registry owned by the same person; or an account in a foreign registry to an account in the Australian registry.

2.127           It is possible that the Commonwealth may wish to transfer non-Kyoto international emissions units. If so, the Minister has the power to instruct the Authority to undertake the transfer [Part 4, Division 4, clauses 119(5) and 120(7)] . Otherwise the general provisions for transfers would apply.

2.128           A person who holds a non-Kyoto international emissions unit can instruct the Authority to transfer the unit to an account kept by another person or to another account kept by the same person within the Registry [Part 4, Division 4, clause 119] . The instruction will be via electronic notification and will include the account number of the originating account and the account number of the receiving account and any other information that is specified in regulations governing the administration of the registry.

2.129           The bill allows for conditions relating to domestic transfer of non-Kyoto units to be provided for in regulations. If the Authority receives an instruction and any such conditions are satisfied then the Authority must give effect to the transfer [Part 4, Division 4, clause 119] .

2.130           The bill makes provision for non-Kyoto international emissions units to be personal property for limited purposes to facilitate their transmission in situations of bankruptcy, external administration and death [Part 4, Division 4, clause 122A, 122B]. (See para.2.89)

2.131           The bill does not affect the creation or enforcement of, or any dealings with (including transfers of), equitable interests in non-Kyoto international units [Part 4, Division 4, clause 122AA].  This provision has been included for the avoidance of doubt.

2.132            Non-Kyoto international emissions units can be transferred from an account in the Australian registry to an account in a foreign registry, referred to as an outgoing international transfer of non-Kyoto international emissions units [Part 4, Division 4, clause 120] . Again the transfer could be to an account kept by another person or kept by the same person, with the instruction via electronic notification and containing the relevant account details and other information.

2.133           Regulations may detail any conditions that may apply to outgoing international transfers of non-Kyoto international emissions units. The administrative arrangements for giving effect to the transfer would also be specified in regulations [Part 4, Division 4, clause 123] .

2.134            Non-Kyoto international emissions units can be transferred from a foreign account to an account in the Registry, referred to as an incoming international transfer of non-Kyoto international emissions unit [Part 4, Division 4, clause 121] . In this case the Authority would receive an instruction from a foreign account and, where the conditions as specified in the regulations are met, the Authority would make an entry for the non-Kyoto international emissions unit in the nominated account in the Australian registry.

2.135           However, the Authority may refuse to affect the transfer if it has reasonable grounds to suspect that the instruction is fraudulent [Part 4, Division 4, clause 121(2)] .

 

Do not remove section break.



3 C hapter 3

Allocation of units — introduction, auction and fixed charge units

Outline of chapter

3.1                   This chapter introduces the various ways in which Australian emissions units are to be allocated and describes two of these: auctions and the issue of units for a fixed charge.

National target and scheme caps

3.2                   As indicated in the General Outline, the Government has decided to take action towards meeting Australia’s targets of reducing greenhouse gas emissions to 60 per cent below 2000 levels by 2050 and reducing greenhouse gas emissions to between 5 per cent and 15 per cent below 2000 levels by 2020, and to do this in a flexible and cost-effective way. In the event that there is comprehensive international agreement to which Australia is a party that is capable of stabilising atmospheric concentrations of greenhouse gases at 450 parts per million CO 2 -e or lower, Australia is prepared to adopt a target to reduce greenhouse gas emissions to 25 per cent below 2000 levels by 2020.These national targets are set out in one of the objects of the Scheme specified in the bill [Part 1, clause 3] .

3.3                   Scheme caps will be set to support national emissions targets and Australia’s international obligations. Scheme caps will generally be lower than the emissions path required to meet the national targets because some emissions sources are not covered by the Scheme (primarily, agricultural and deforestation emissions) and some direct emissions from facilities are only covered if they exceed specified thresholds (usually 25,000 tonnes of carbon dioxide equivalence per year).

3.4                   Scheme cap numbers will be specified in regulations [Part 2, clause 14] .

3.5                   Further discussion about national scheme caps and gateways is included in Chapter 2 of this explanatory memorandum.

Issue of Australian emissions units

3.6                   The circumstances in which the Authority may issue Australian emissions units are described [Part 4, Division 2, clause 88] . They are:

•        as the result of an auction conducted by the Authority (described in more detail in this chapter)

•        in accordance with the provisions governing the issue of units at a fixed charge (described in more detail in this chapter)

•        in accordance with the emissions-intensive trade-exposed assistance program (see Chapter 4)

•        in accordance with the Coal Sector Adjustment Scheme (see Chapter 5)

•        in accordance with the provisions regarding coal-fired electricity generation assistance (see Chapter 6)

•        for reforestation (see Chapter 7)

•        for the destruction of synthetic greenhouse gas (see Chapter 8)

or

•        for the domestic offsets program (see Chapter 9).

3.7                   The Authority must not issue an Australian emissions unit with a particular vintage starting on or after 1 July 2012 unless there is a national scheme cap number for that vintage year [Part 4, Division 2, clause 92] . (Consistently, there is no obligation to surrender unless there is a national scheme cap number for the relevant financial year, apart from in the fixed price transition period (2011-12) [Part 6, Division 4, clause 132] .)

3.8                   The number of units with a particular vintage year starting on or after 1 July 2012 offered for issue at auctions and issued in accordance with the emissions-intensive trade-exposed assistance program, the provisions regarding coal-fired electricity generation assistance and in accordance with the Coal Sector Adjustment Scheme must equal the Scheme cap for the particular year [Part 4, Division 2, clause 93] .

Summary

Auctions

3.9                   The Government has decided that a large proportion of Australian emissions units will be auctioned. The primary policy objectives of the auction are to promote allocative efficiency and efficient price discovery. Auctions will also raise revenue that can be used for other policy objectives, such as providing assistance to households and business.

3.10               The provisions relating to auctions are in Part 4, Division 2 Subdivision C, clauses 99-103 of the bill.

3.11               It is the Government’s policy that allocations will, over the longer term, progressively move towards 100 per cent auctioning, subject to the provision of transitional assistance for emissions-intensive trade-exposed industries, compensation for coal-fired electricity generation and assistance under the Coal Sector Adjustment Scheme.

3.12               The Authority will be required to publish information about the auction results to assist Scheme participants and financial market analysts to identify and understand the overall supply and demand conditions for units, allowing efficient price discovery [Part 12, Division 4, clause 270] . This is discussed in Chapter 13 of this explanatory memorandum.

Fixed charge units

3.13               In 2011-12, as a transitional measure, an unlimited number of Australian emissions units will be available to liable entities at a fixed charge of $10 per unit. This will fix the cost of compliance under the Scheme, as these fixed price units will be used by liable entities to meet their Scheme obligations. Liable entities will be able to purchase these units after their emissions number is known and before the final surrender date for that particular financial year. These units cannot be traded or banked for future use. These units cannot create an excess surrender number.

3.14               Full trading will commence in 2012-13 with a price cap in place for four years. The price cap will take the form of access to an unlimited store of additional Australian emissions units, issued at a pre-specified fixed charge, for financial years 2012-13 to 2015-16. The purpose of the price cap is to set a maximum cost of compliance for liable entities. Liable entities will have the option of purchasing these units after their emissions number is known and before the final surrender date for a particular financial year. These units cannot be traded or banked for future use.

3.15               From 2012-13, a price cap will be in place for four years, rising at five per cent a year in real terms (calculated using actual changes in the Consumer Price Index for the previous 12 month period). The level of the price cap in the first year of operation will be calculated using the original White Paper commencement figure of $40 as the base for calculations. It will be calculated as $40 plus 5 per cent real growth for each of the years 2010-11 and 2011-12. The price cap will continue to rise by 5 per cent in real terms after this (using the Consumer Price Index). The Government’s intention is that the charge is set high enough so that its probability of use is low, while providing protection against major price shocks.

3.16               The provisions relating to the issue of Australian emissions units for a fixed charge are described in Part 4, Division 2, clauses 89-91.

Detailed explanation of new law

Auctions — issue

3.17               The Authority is empowered to issue Australian emissions units through auctions [Part 4, Division 2, clause 99] .

3.18               It is intended that the detailed policies, procedures and rules for the conduct of auctions will be included in a legislative instrument to be made by the Minister [Part 4, Division 2, clause 103] .

3.19               If made by the Minister, the determination will be a legislative instrument for the purposes of the Legislative Instruments Act 2003 and will be finalised following consultation with stakeholders. 

3.20               The legislative instrument may deal with a range of matters. These include but are not limited to the types of auction, their timing, participants, entry fees, minimum number of units in bids, deposits, guarantees, and the timing and method of payment [Part 4, Division 2, clause 103(2)] .

3.21               The instrument can address the detailed policies, procedures and rules for auctions of units which are to be issued, units which have been relinquished and units issued without charge which have not been transferred by the original recipient to another person (see below for a discussion about secondary market auctions).

3.22               The initial instrument is expected to reflect the policy positions in the White Paper. These include that:

•        auctions will be held 12 times in a financial year

•        at least one auction of a year’s vintage will be held after the end of the financial year in the lead-up to the final surrender date (15 December)

•        four years of vintages will be auctioned in each year (the current vintage plus advance auctions of three future vintages)

•        an ascending clock auction will be the preferred auction type. In an ascending clock auction, the auctioneer announces a price for a particular quantity of each vintage and bidders reveal the amount they wish to buy at that price. The auctioneer continues to increase the price until the total demand is equal to or lower than the amount on offer. The process may be carried out simultaneously with different vintages of units (simultaneous ascending clock auction)

•        bidders will have the option to submit proxy bids in ‘sealed bid format’ for convenience. Proxy bidding allows bidders to submit in advance their demand schedule for units at various prices. The bid is therefore ‘sealed’ before the auction has even commenced.

3.23               It is the Government’s policy that auctions for Australian emissions units for the vintage years of 2012-13 and onwards will commence late in 2010-11.

3.24               It is also Government policy that deferred payment arrangements will be established to provide a transitional measure to address the working capital costs of participants.  Deferred payment will apply to the advance auction of future vintages of emissions units (but not current vintages) sold between 1 January 2011 and 31 December 2013 only, and require a 10 per cent deposit at auction to secure rights to units.  Permits will only be received once the final payment is made.

3.25               Should an instrument not be made, the Authority would determine the arrangements for auctions and auction Australian emissions units consistently with the concept of an auction as defined by section 5.

3.26               The Authority must not issue a unit as the result of an auction unless the person pays the charge to the Authority on behalf of the Commonwealth [Part 4, Division 2, clause 90] . This avoids the need for the Authority to collect debt owing on units issued following an auction, and lowers the cost of administering the Scheme.

3.27               If the charge is taxation within the meaning of section 55 of the Constitution, the charge is not imposed by the bill but by the relevant charges bill [Part 4, Division 2, clause 91] .

3.28               The relevant charges bills are the Carbon Pollution Reduction Scheme (Charges — Excise) Bill 2010, the Carbon Pollution Reduction Scheme (Charges — Customs) Bill 2010 and the Carbon Pollution Reduction Scheme (Charges — General) Bill 2010. There is a separate explanatory memorandum for each of these bills.

3.29               The Commonwealth does not consider that the charges for the auction of Australian emissions units are taxes for constitutional purposes. However, the Government has taken an approach of abundant caution, in case a court reaches a different view on this question.

3.30               The bill also contains a technical provision to ensure that if the charges for the auction of Australian emissions units are taxes, those charges do not contravene the constitutional requirement that taxation must not be arbitrary [Part 4, Division 2, clause 99] .

Auctions — secondary

3.31               The Authority is also empowered to auction:

•        Australian emissions units which have been relinquished in certain situations [Part 4, Division 2, clause 100]

•        On behalf of the holder, Australian emissions units issued without charge which have not been transferred by the original recipient to another person [Part 4, Division 2, clause 101] .

3.32               Each of these powers is examined in further detail below.

Auctions of units which have been relinquished

3.33               In certain situations where excess units have been issued, a person can be required to relinquish units; that is, return them to the Commonwealth. These situations are described in Chapter 10 of the explanatory memorandum. They include situations relating to reforestation, such as the voluntary withdrawal of reforestation projects from the Scheme; the issue of excess units for emissions-intensive trade-exposed activities that have ceased; and the issue of units as a result of fraudulent conduct by the recipient.

3.34               Where units (with a vintage year other than 2011-12) are relinquished in response to a requirement which is not connected with reforestation or destruction of synthetic greenhouse gases, the units are transferred into the Commonwealth relinquished units account [Part 15, Division 2, clause 286(4)] . These units are then auctioned by the Authority [Part 4, Division 2, clause 100] .

3.35               Units with a vintage year of 2011-12 and units relinquished under the reforestation provisions or in connection with destruction of synthetic greenhouse gases are cancelled [Part 15, Division 2, clause 286 (2A) and (3)] . This is because the units originally issued to the person who relinquished these units were issued above or outside the Scheme cap: cancellation ensures that the Scheme cap is not artificially inflated.

Auctions of units issued without charge

3.36               Until 31 December 2013, the Authority is empowered to auction units with a vintage year commencing on 1 July 2012 or later  on behalf of persons who had received them without charge in connection with:

•        The emissions-intensive trade-exposed assistance program

•        The Coal Sector Adjustment Scheme

•        Coal-fired electricity generation assistance

•        Reforestation

•        The domestic offsets program

•        The destruction of synthetic greenhouse gas.

[Part 4, Division 2, clause 101].

3.37               As a transitional mechanism, this will provide a low-risk, low-cost and transparent mechanism that encourages entities receiving a free allocation of units to sell them on the carbon market. This may increase the size of the auction and reduce hoarding of units. Auctions of these units can be combined with auctions of units to be issued for a charge and of certain relinquished units [Part 4, Division 2, clause 102] .

Fixed charge units

3.38               A person with a Registry account can apply to acquire from the Authority units at a fixed charge from the time when the person’s emissions number for the eligible financial year is entered on the Information Database until 15 December following each of the five financial years commencing on 1 July 2011 [Part 4, Division 2, clause 89] .

3.39               The bill includes safeguards to prevent liable entities from acquiring more fixed charge units than they need for compliance purposes. This is important because, as discussed below, fixed charge units are automatically surrendered. A person would not be able to recover such units if it, for example, accidentally applied for more units than it needed. Accordingly, to avoid the excess surrender of these units, the fixed charge can only be accessed once the person’s emissions number for the eligible financial year is entered on the Information Database. This is the point at which the person’s liability is known. The Authority must enter a person’s emissions number in the Information Database as soon as practicable after receiving the person’s report under the National Greenhouse and Energy Reporting Act 2007 , which is due on 31 October [Part 12, Division 2, clause 263] .

3.40               Also to prevent excess surrender, the number of units which can be acquired using the fixed charge mechanism  is limited by the formula:

The person’s emissions number for the vintage year, less the total number of eligible emissions units surrendered by the person in relation to the vintage year [Part 4, Division 2, clause 89(2)] .

3.41               The final date for acquiring units in this way, 15 December, is the date by which surrender is required.

3.42               For 2011-12, units issued for a fixed charge of $10 cannot create an excess surrender number if more of these units are surrendered in relation to compliance for the first year of the Scheme than the person’s emission number [Part 6, Division 4, clause 143(3)]. This will ensure that units issued for a fixed charge of $10 are not, in effect, carried over for use against a future liability, and is consistent with not allowing banking for this period.

3.43               The Authority must not issue a unit for a fixed charge unless the person pays the charge to the Authority on behalf of the Commonwealth [Part 4, Division 2, clause 90] .

3.44               The amount of the fixed charge in 2011-12 will be $10. For 2012-13, the fixed charge will be calculated as $40 plus 5 per cent real growth for each of the years 2010-11 and 2011-12 (calculated using the proportional changes in the Consumer Price Index for the period March 2010 to March 2012) [Part 4, Division 2, clause 89] .

3.45               From 2013-14, the price cap will continue to rise by 5 per cent in real terms (calculated using the proportional change in the Consumer Price Index for the previous 12 month period). For example, in calculating the fixed charge in 2013-14, the charge per unit from 2012-13 would be used as a base. This would then be multiplied by 1.05 (i.e. 5 per cent growth) plus the proportional change in the Consumer Price Index from March 2012 to March 2013 (i.e. this takes account of inflation) [Part 4, Division 2, clause 89(7)] .

3.46               The relevant Consumer Price Index number for these purposes is the All Groups Consumer Price Index number (excluding volatile items), being the weighted average of the 8 capital cities published by the Australian Statistician for each quarter [Part 4, Division 2, clause 89(10)] .

3.47               To provide liable entities with certainty over the fixed charge, it is important to publish its exact value in advance of each compliance year [Part 4, Division 2, clause 89(11)]. This will allow liable entities to determine the maximum cost of compliance.

3.48               The commentary above, which discusses the provisions included to address the possibility that the charge is taxation, applies equally to the fixed charge for units described in this segment.

3.49               Units acquired in this way are taken to have been surrendered immediately after issue [Part 4, Division 2, clause 89(5)] . Units issued for a fixed charge cannot be held over (‘banked’) for use in compliance in future years. They cannot be transferred or relinquished [Part 4, Division 2, clause 89(6)] .

Special arrangements for Australian emissions units with a vintage year beginning on 1 July 2011

3.50               Australian emissions units with a vintage year beginning on 1 July 2011 are generally available to liable entities for a charge of $10 per unit [Part 4, Division 2, clause 89] .

3.51               However, special rules apply to those Australian emissions units with a vintage year beginning on 1 July 2011 issued under the emissions-intensive trade-exposed assistance program, in accordance with Part 9, (which deals with coal-fired generation assistance), or in accordance with Part 8A (which deals with assistance under the Coal Sector Adjustment Scheme). The rules in respect of these units ensure the integrity of future scheme caps. These units:

•        can only be surrendered in relation to the eligible financial year beginning on 1 July 2011 [Part 6, Division 2, clause 129(5A)]

•        do not create an excess surrender number if more of these units are surrendered in relation to compliance for the first year of the Scheme than the person’s emissions number [Part 6, Division 4, clause 143(3)]

•        must be cancelled by the Authority if they have not been surrendered at the end of 15 December 2012 [Part 4, Division 2, clause 103A]

•        cannot be voluntarily surrendered [Part 14, clause 282(2A)]

•        may, on request, be bought-back and cancelled by the Authority before 1 December 2012 at $10 discounted by a factor in the regulations which is intended to broadly represent the present value of those units at the date they are bought-back [Part 4, Division 2, clause 103B]

•        are cancelled if they are relinquished, rather than transferring to the Commonwealth relinquished units account [Part 15, Division 2, clause 286(2A)] .

3.52               Given that units with a vintage year beginning on 1 July 2011 are available to liable entities for a fixed charge of $10, it is unlikely that an active market for units of this vintage will develop. However, some persons will be issued Australian emissions units with a vintage year beginning on 1 July 2011 through the emissions-intensive trade-exposed assistance program, or in accordance with Part 9, and who may not wish to surrender these units against a liability for the eligible financial year beginning on 1 July 2011. For example, a person may receive units in respect of the cost increase it faces from its use of electricity in an emissions-intensive trade-exposed activity, or from the cost increase it faces that is related to the upstream emissions from the extraction, processing and transportation of natural gas and its components used as feedstock in an emissions-intensive trade-exposed activity. This person may wish to sell these units to receive cash, which can then be used to offset the increase in monetary costs it faces due to its use of electricity or natural gas and its components as a feedstock, rather than hold these units for surrender.

3.53               To ensure that persons who are issued with Australian emissions units can sell these units when they do not wish to surrender them, the bill provides for the ‘buy-back’ of these units by the Authority [Part 4, Division 2, clause 103B(2)] . This facility will be open to requests from 15 July 2011 until 1 December 2012, and allows persons to receive $10 for each unit they wish to sell back to the Authority, discounted by a factor specified in the regulations. The factor used to discount the buy-back amount will broadly reflect the present value of the units at the time they are sold back.  If a person makes a request, the Authority must cancel the unit on a day specified in the regulations and, as soon as practicable after that day, pay the relevant amount to the person.

3.54               The Consolidated Revenue Fund is appropriated for the purpose of making payments for the buy-back of units under this provision [Part 4, Division 2, clause 103B(5)] . The appropriation is limited in the sense that the buy-back facility will, at most, apply to the number of units that can be issued through the emissions-intensive trade-exposed assistance program, in accordance with Part 9, or in accordance with Part 8A for the vintage year beginning on 1 July 2011.



4 C hapter 4

Emissions-intensive trade-exposed assistance program

Outline of chapter

4.1                   This chapter outlines the effect of the provisions of Part 8 of the Carbon Pollution Reduction Scheme Bill 2010 which provide for the emissions-intensive trade-exposed assistance program to be created by the regulations and other provisions associated with that program. Part 8 of the bill allows the Government to make regulations which administratively allocate Australian emissions units to persons who conduct emissions-intensive trade-exposed activities. This chapter sets out:

•        the context of the policy framework surrounding the emissions-intensive trade-exposed assistance program

•        a summary of the core provisions in Part 8

•        a detailed description of the individual provisions.

Context

4.2                   Australia’s adoption of a carbon constraint before some other countries may have a significant impact on the international competitiveness of its emissions-intensive trade-exposed industries. In Chapter 12 of the White Paper the Government outlined its commitment to providing assistance to these industries to reduce the risk of ‘carbon leakage’ and provide them with some transitional assistance. It committed to do so in a manner that ensures that these industries contribute to the national effort to reduce carbon emissions.

4.3                   The Government's proposed emissions-intensive trade-exposed assistance program has been designed to target assistance in as practical and effective a fashion as possible, to allow for the continued growth in emissions-intensive trade-exposed industries and to provide a transparent assistance framework to ensure industry has the clarity and certainty it needs. It will accommodate growth in these industries by directly linking allocations to the production levels of existing and new entities conducting emissions-intensive trade-exposed activities. The program is based on the expectation that all industries should contribute to the national emissions reduction effort and provides strong incentives for all entities to pursue abatement opportunities.

4.4                   Accordingly, the Government’s support for emissions-intensive trade-exposed industries will be:

•        targeted towards industries that conduct trade-exposed activities and have the most significant exposure to a carbon price

•        linked to production levels and provided on the basis that production continues in Australia

•        balanced against its objectives for non-assisted sectors and households

•        consistent with Australia’s international trade obligations.

4.5                   The assistance will be designed to preserve the incentives for entities conducting emissions-intensive trade-exposed activities to adjust to a carbon constrained future by:

•        providing assistance only in relation to the most emissions intensive activities carried out by an entity

•        providing assistance on the same basis to all entities, new and existing, conducting a given activity

•        providing assistance on the basis of historical information on the emissions from these activities to ensure that entities have an ongoing incentive to reduce their emissions relative to historical performance.

4.6                   The linking of assistance to production levels, and not emissions levels, means that the administrative allocation of free Australian emissions unitswill maintain the financial incentives for firms to reduce their emissions intensity — that is, the number of emissions generated per unit of output produced. The proposed assistance framework does not reduce the number of Australian emissions units a firm needs to surrender each year in relation to its emissions until an entity receives 100% of its direct and indirect electricity and steam emissions costs relating to an EITE activity. Entities conducting emissions-intensive trade-exposed activities, like all other entities in the economy, will therefore retain the incentive to pursue abatement opportunities that are cost effective at the carbon price.

4.7                   Assistance will be provided to entities that conduct emissions-intensive trade-exposed activities through the issuance of free Australian emissions units by the Authority at the beginning of each compliance period. The assistance will be provided on an activity basis to ensure that it is well targeted and is equitably distributed within and across industries. The assistance will be provided in relation to the following:

•        the direct emissions associated with an activity for which a Carbon Pollution Reduction Scheme (the Scheme) obligation will be incurred

•        the emissions associated with the use of steam by an activity

•        the cost increase associated with the use of electricity by an activity, which is assessed as resulting from the introduction of the Scheme

•        the cost increase related to the upstream emissions from the extraction, processing and transportation of natural gas and its components, such as ethane and methane, used as feedstock by an activity.

4.8                   The Government will target assistance to activities that are trade-exposed and emissions-intensive. As outlined in the White Paper:

•        Trade-exposure is to be assessed in relation to trade shares being greater than 10 per cent in any one of the years 2004-05, 2005-06, 2006-07 or 2007-08 or there being a demonstrated lack of capacity to pass through costs due to the potential for international competition.

•        Emissions-intensity is to be assessed in relation to whether the industry-wide weighted average emissions intensity of an activity is above a threshold of:

-       1000 tonnes of carbon dioxide equivalent (CO 2 -e) per million dollars of revenue

or

-       3000 tonnes of carbon dioxide equivalent (CO 2 -e) per million dollars of value added.

4.9                   To determine which activities are eligible for assistance under the emissions-intensive trade-exposed assistance program and should be listed in the regulations, on 18 February 2009 the Government released a call for a range of industry information in its Guidance Paper: Assessment of Activities for the Purposes of Emissions-Intensive Trade-Exposed Assistance Program . This requires entities to have this information independently audited. This information will help the Government make an informed decision on the eligibility of an activity for emission-intensive trade-exposed assistance and the rate of assistance provided to the activity.

4.10               In making its decision on the eligibility of activities and the allocative baselines for eligible activities (that is, the number of free Australian emissions units that will be issued for each unit of production of an emissions-intensive trade-exposed activity), the Government will consider, in addition to data supplied by entities, publicly available information on pricing, trade and emissions intensity from Australian and international sources. An expert advisory committee has been established to provide advice on the definition of activities and the assessment of eligibility for the emissions-intensive trade-exposed assistance program.

4.11               The emissions-intensive trade-exposed assistance program will require all entities conducting activities to bear a proportion of the carbon cost they face and provide assistance at two different rates, reflecting the need to provide relatively more assistance to relatively more emissions-intensive activities in order to reduce the likelihood of carbon leakage.

4.12               Initial assistance to eligible activities will be set in the regulations at:

•        94.5 per cent of the allocative baseline for activities that have an emissions intensity above 2000 tonnes of CO 2 -e/million dollars of revenue or 6000 tonnes of CO 2 -e/million dollars of value added in the specified assessment period

•        66 per cent of the allocative baseline for activities that have an emissions intensity between 1000 tonnes CO 2 -e/million dollars of revenue and 1999 tonnes of CO 2 -e/million dollars of revenue or between 3000 tonnes of CO 2 -e/million dollars of value added and 5999 tonnes of CO 2 -e/million dollars of value added in the specified assessment period.

4.13               However, in situations where a given output is produced from eligible emissions-intensive trade-exposed activities using either primary materials or recovered/recycled material as inputs, the same rate of assistance will be applied to both activities.

4.14               The emissions-intensive trade-exposed assistance program will deliver Australian emissions units for the first year of the Scheme in the same manner as subsequent years of the Scheme. However, the units issued in respect of the first year cannot be banked for use in future years of the Scheme. In recognition that firms receiving assistance are likely to want to use the units to meet increased electricity costs, the units are transferable and the Authority will operate a buy-back mechanism for these units.

4.15               The regulations will reduce the rates of assistance accorded each emissions-intensive trade-exposed activity at a pre-announced rate, the carbon productivity contribution, of 1.3 per cent a year, to broadly ensure that entities conducting emissions-intensive trade-exposed activities share in the national improvement of carbon productivity. The application of the carbon productivity contribution to an activity will be reviewed as part of the reviews of the Scheme.  This is further outlined in Chapter 14.

 

4.16               The allocative baselines for each activity will be set in the regulations taking into account historic emissions and production information submitted to the Department of Climate Change in 2009 and 2010. Baselines for allocations will not be updated over time for changes in the emissions intensity of entities conducting emissions-intensive trade-exposed activities in order to maximise abatement incentives, and will be used to determine allocations to new and existing entities conducting a given activity.

4.17               Allocations of assistance to entities conducting emissions-intensive trade-exposed activities will be directly linked to the level of production of individual entities conducting an activity. In any given year, the number of free Australian emissions units to be issued to an entity will be determined using the previous financial year’s production of the activity by that entity adjusted for any over or under allocation in the previous year, with the following exceptions:

•        with regard to new entrants and significant expansions, the Authority will be afforded the discretion to determine an allocation for the expected production in a given year

•        entities whose allocation exceeds 100% of their direct and indirect electricity and steam costs relating to an EITE activity will only be assisted up to that level

•        LNG projects will receive a supplementary allocation to ensure that they receive an effective rate of assistance at or above 50 per cent.

4.18               If an entity ceases conducting an emissions-intensive trade-exposed activity, it will be required to relinquish Australian emissions units that had been issued to it in respect of production that did not occur.

4.19               Where an emissions-intensive trade-exposed activity is conducted at a single facility, the entity which has, or would have, liability under the Scheme for direct emissions from the facility may apply for assistance. Where more than one entity has liability or potential liability under the Scheme (such as where more than one facility is involved), there must be a joint application from those entities, and that joint application must specify how they want the assistance allocated.

4.20               The emissions-intensive trade-exposed assistance program will be reviewed by an expert advisory committee at each five-year review point under Part 25 of the bill, or at another date at the request of the Minister. The Government has announced that when conducting their five-yearly EITE reviews, the expert advisory committee will consider a number of issues. The commitments made by the Government and their translation into specific legislative provisions are detailed in Chapter 14 of the explanatory memorandum.

4.21               The Government also announced in the White Paper a process for affected firms to request the Government to commission further advice from the Productivity Commission pertaining to how the Scheme may be impacting their industry. Such advice would be sought through the provisions of the Productivity Commission Act 1998 .

4.22               The Government has committed to providing five years’ notice of any modifications to the emissions-intensive trade-exposed assistance program, unless the modifications were required for compliance with Australia’s international trade obligations. The Government may also reduce or remove the carbon productivity contribution for an activity immediately after a review.

4.23               The Government has published draft regulations to establish the program in June and December 2009 and consulted with stakeholders on their contents. In the December regulations 18 activities were found to be eligible in accordance with the criteria and process outlined above.

Summary of Part 8

4.24               A simplified outline of Part 8 is included in the bill [Part 8, Division 1, clause 166].

Introduction

4.25               Division 1 sets out the aims and objects of the Part and consequently the emissions-intensive trade-exposed assistance program. As set out in the White Paper, the program recognises the impact that the Scheme may have on the international competitiveness of emissions-intensive trade-exposed activities, and its object is to reduce the risk of carbon leakage and provide transitional assistance to entities conducting emissions-intensive trade-exposed activities.

Formulation of the program

4.26               Division 2 sets out the core components of the emissions-intensive trade-exposed assistance program. In particular it provides for:

•        the creation of a program in regulations which involves the issuance of free Australian emissions units in respect of activities which are taken to be emissions-intensive trade-exposed activities and are carried on in Australia during a particular financial year

•        the program to require the persons issued free Australian emissions units under the program to relinquish units in specified circumstances. This is intended to be used to provide for relinquishment of units on the closure of a facility

•        the imposition of reporting and record-keeping requirements for persons issued free Australian emissions units under the program. This is intended to be used to ensure the Authority is aware of potential closures and whether production levels claimed in assistance applications were actually produced

•        the program to set out comprehensive application and assessment requirements.

Compliance

4.27               Division 3 requires that persons comply with reporting and record-keeping requirements under the emissions-intensive trade-exposed assistance program. Failure to comply will incur a civil penalty.

Special information-gathering powers

4.28               Division 4 allows the Minister to request information relevant to decisions about the formulation of the emissions-intensive trade-exposed assistance program from constitutional corporations. This information gathering power is limited to the circumstances where an activity is not yet listed as an emissions-intensive trade-exposed activity and a party has requested that the activity be added to the regulations.

Other aspects of the program outside of Part 8

4.29               Part 15 Division 2 sets up the legal architecture around compliance with the relinquishment requirements which will operate on the closure of a facility. Accordingly, if a person does not relinquish Australian emissions units as necessary they will be required to pay a penalty, in respect of any units not relinquished, of 200 per cent of the benchmark average auction price of the previous financial year or another amount specified in regulations. If this is not paid, a penalty of 20 per cent per annum is payable or another lower rate specified in regulations.

4.30               There are also provisions requiring the Authority to disclose information about the emissions-intensive trade-exposed assistance program in Part 12 of the bill. The general enforcement and accountability framework for the Authority is also relevant to the program.

Detailed explanation of provisions

Division 1 — Introduction

Aims and objects

4.31               The aim of the Part is set out in the bill [Part 8, Division 1, clause 165(1)]. It is to recognise issues relating to the impact of the Scheme on the international competitiveness of emissions-intensive trade-exposed activities carried on in Australia. As set out above, unless an effective emissions-intensive trade-exposed assistance program is implemented, the costs associated with the Scheme may adversely impact the competitiveness of entities conducting emissions-intensive trade-exposed activities in Australia in the period before broadly comparable carbon constraints are applying in other countries at an industry or economy wide level. This is because these activities would be constrained in their ability to pass on the costs of the Scheme while competitors do not face similar costs which may be imposed through market based or regulatory mechanisms.

4.32               The objects of the Part are set out in the bill [Part 8, Division 1, clause 165(2)].

4.33               The objects provision outlines the activity focus of the assistance as the Part is intended to allow the delivery of assistance in respect of emissions-intensive trade-exposed activities [Part 8, Division 1, clause 165(2)(a)] . Accordingly, it is the carrying out of defined activities which creates eligibility for assistance rather than a firm's historic or future emissions.

4.34               Assistance is provided to reduce the risks of ‘carbon leakage’, understood in terms of the incentives on businesses to move production to foreign countries or locate new investment in a foreign country rather than Australia [Part 8, Division 1, clause 165(2)(b)]. Such incentives may be created by the treatment of emissions and level of regulation to reduce emissions in foreign countries.

4.35               Assistance is also to provide transitional support to such activities when they are carried out in Australia [Part 8, Division 1, clause 165(2)(c)] . Given the significant differences between the emissions profiles of industries, the impact of the carbon price will be greater for some than for others. Transitional assistance is provided through the administrative allocation of free Australian emissions units under the emissions-intensive trade-exposed assistance program.

4.36               The objects provision recognises that circumstances may change such that assistance may no longer be warranted. In particular, it outlines two distinct circumstances where this may be the case:

•        whether sufficient measures to reduce emissions of carbon dioxide and other greenhouse gases have been implemented in respect of the markets in which entities conducting  emissions-intensive trade-exposed activities in Australia compete [Part 8, Division 1, clause 165(2)(d)]

or

•        where foreign countries responsible for a substantial majority of the world's emissions have implemented sufficient measures to reduce those emissions [Part 8, Division 1, clause 165(2)(e)]

4.37               The Government will determine whether the assistance is no longer warranted based on advice from the expert advisory committee review on the efficacy and appropriate level of coverage of such measures. It should be noted that measures to reduce emissions do not necessarily need to consist of a cap on emissions and other approaches to reduce emissions are also intended to be considered in the analysis. Industry-wide emissions could also be controlled through international sectoral agreements outside the direct control of governments. It will be important to consider whether all relevant market-based and regulatory measures, taken together, impose broadly comparable carbon constraints on either the particular industry or in respect of measures introduced in the world’s major economies. Box 12.16 of the White Paper provides further explanation of the nature of global carbon constraints which are relevant to this analysis.

4.38               It is acknowledged that other factors may also come into play which render the assistance unwarranted in terms of its aim and primary objective of addressing carbon leakage and providing transitional assistance [Part 8, Division 1, clause 165(2)(f)] . However, the Government's intention is that the factors listed in the legislation are the primary circumstances where assistance may no longer be warranted.

4.39               The five-yearly and special reviews of the Scheme will play an important role in advising the Government on the consistency of the emissions-intensive trade-exposed assistance program with these aims and objects and the likelihood of the assistance becoming unwarranted because of international developments. When circumstances are arising which may render the assistance unwarranted, the Government has committed to providing five years’ notice of any modifications to the emissions-intensive trade-exposed assistance program, unless the modifications were required for compliance with Australia’s international trade obligations.

4.40               The reviews and policy regarding changes to the carbon productivity contribution are further set out in Chapter 14.

Division 2 — Formulation of the emissions-intensive trade-exposed assistance program

4.41               This Division allows for the creation of the emissions-intensive trade-exposed assistance program in regulations. The technical aspects of precisely defining emissions-intensive trade-exposed activities, the eligibility criteria and relevant production units, and the need for flexibility to include new activities, make the program appropriate to locate within regulations rather than the bill itself. After the detail on emissions, electricity use, revenue and/or valued added has been assessed for a given activity, the regulations will be able to provide a relatively simple allocation methodology per unit of production which provides investment certainty, minimises ongoing compliance costs and reduces the risk of assistance decisions being subject to lengthy appeal and review process which may divert resources from more important issues for business.

Creating the emissions-intensive trade-exposed assistance program

4.42               The central feature of the Part is the ability for the regulations to create a program which allows the issuance of free Australian emissions units in respect of emissions-intensive trade-exposed activities as defined by the program [Part 8, Division 2, clause 167(1)(a)] . Such activities must be carried on in Australia during an eligible financial year [Part 8, Division 2, clause 167(1)(b)] . For this purpose, Australia includes external territories, the exclusive economic zone, the continental shelf and the Joint Petroleum Development Area. Assistance may be delivered before an activity is carried on so long as the activity does actually get carried out in the relevant eligible financial year.

4.43               While the eligibility of activities will be determined by the Government in decisions on whether or not to list activities in the regulations, the individual eligibility requirements for the assistance will be specified in the program [Part 8, Division 2, clause 167(2)(a)] . A registry account is one prerequisite [Part 8, Division 2, clause 167(2)(b)] . Without a registry account, it would not be possible for the Authority to issue the free Australian emissions units. It is intended that eligibility will essentially rest upon whether a defined emissions-intensive trade-exposed activity is being carried out, what relevant levels of production have been achieved and that the person applying is the one ordinarily liable for the emissions from the relevant activity under the Scheme.

4.44               The Minister must take all reasonable steps to establish the program before 1 July 2010 [Part 8, Division 2, clause 167(3)] . Activities found eligible after this point will be added to the program through amendments to the regulations.

4.45               It is made clear that coal mining is not an emissions-intensive trade-exposed activity for the first five years of the Scheme, to ensure that coal mines are not allocated free Australian emissions units under both Part 8A and Part 8 [Part 8, Division 2, clause 167] .

Relinquishment requirement

4.46               The program may provide for the relinquishment of Australian emissions units [Part 8, Division 2, clause 168] . This is intended to be utilised in respect of the closure of an activity. Accordingly, where Australian emissions units are issued early in a financial year attributable to production that is to take place in that year, and production ceases during the year (other than for maintenance or similar temporary closures), units attributable to the production which did not take place will be required to be relinquished. As a result, such a requirement may be defined in relation to events, circumstances or a decision of the Authority according to criteria in the program [Part 8, Division 2, clause 168(1)(b)] . This provision will ensure that the assistance is contingent upon continued production by the activity and will avoid the potential for an entity to receive a windfall gain from being issued free Australian emissions units in respect of production which is then closed or moved offshore.

4.47               Relinquishment requirements only apply to persons issued units under the program [Part 8, Division 2, clause 168(1)(a)] and cannot exceed the number of units issued to the person under the program [Part 8, Division 2, clause 168(2)] .

4.48               The relinquishment of units to comply with the program can be done by submitting an electronic notice to the Authority [Part 15, Division 2 clause 286] .

Reporting requirements

4.49               The emissions-intensive trade-exposed assistance program can impose reporting requirements on those persons issued units in accordance with the program. Such requirements will allow the Authority to adequately monitor situations where a closure may have occurred and be alerted to situations where it may need to trigger a relinquishment requirement [Part 8, Division 2, clause 169] .

4.50               Compliance with a reporting requirement is mandatory [Part 8, Division 3, clause 173(1)] .

Record-keeping requirements

4.51               The program can impose record-keeping requirements on those persons issued units in accordance with the program [Part 8, Division 2, clause 170] . Such requirements will facilitate monitoring of the closure of an activity and ensure that the production records which determined assistance levels are kept for subsequent validation or investigation. As production levels will be the central factor which determines the levels of assistance and these levels will not be collected and reported under the National Greenhouse and Energy Reporting Act 2007 , this additional provision is necessary. The provisions of Part 18 of the bill would also not be applicable because the program is contained within the regulations rather than the bill itself. However, it is not intended that the provision be used to duplicate other reporting mechanisms or significantly increase the regulatory burden on business.

4.52               Compliance with a record-keeping requirement is mandatory [Part 8, Division 3, clause 173(2)] .

Other matters and ancillary or incidental provisions

4.53                Further details of the emissions-intensive trade-exposed assistance program will be specified in the regulations [Part 8, Division 2, clause 171] and [Part 8, Division 2, clause 172] . In particular, the regulations can contain extensive provisions regarding the applications for assistance. Given the value of the free Australian emissions units to be issued, it will be important for the Authority to have sufficient verified information to support the relevant production levels which determine the level of number of free Australian emissions units assistance to be issued to a particular person in a particular year [Part 8, Division 2, clauses 171(1)-(3)] .

4.54               These requirements may include that the information be verified by statutory declaration by a relevant company officer or accompanied by particular documents or reports such as an assurance report as to whether the production was actually undertaken in the previous financial year or engineering reports to demonstrate that a particular activity is in fact conducted. It is intended that the Authority will establish a single online portal for these applications.

4.55               The provisions allow the regulations to prescribe in full the process and procedural requirements for the Authority to deal with applications. It is anticipated that applications will be made between 1 July and 31 October each year and assessed by the Authority on a case by case basis. Entities will be able to apply for an extension of this timeline to allow them to have until 31 December to apply. The Authority will be able to issue units to applicants as soon as it is sufficiently satisfied in relation to each application.

4.56               The program can also include ancillary or incidental provisions [Part 8, Division 2, clause 172] .

4.57               It is also intended that the emissions-intensive trade-exposed assistance program will, where necessary, adopt various industry standards and confer administrative decision making functions on the Authority [Part 26, clause 384] and [Part 26, clause 385] .

Division 3 — Compliance with reporting and record-keeping requirements under the emissions-intensive trade-exposed assistance program

Compliance with record-keeping and reporting requirements

4.58               There is a direct obligation to comply with any record-keeping or reporting requirements. Those persons with a direct obligation to comply with reporting and record-keeping requirements and others involved in a breach or potential breach of reporting or record-keeping requirements are liable for their behaviour [Part 8, Division 3, clause 173] .

4.59               Breaches of these requirements are all civil penalty provisions and can accordingly be enforced under Part 21 of the bill discussed in Chapter 11 below [Part 8, Division 3, clause 173(4)] .

Division 4 — Special information-gathering powers

4.60               The simplicity, effectiveness, fairness and timely implementation of the emissions-intensive trade-exposed assistance program is significantly facilitated when Government has the necessary audited information in relation to particular activities to determine that activity’s eligibility and allocative baseline per unit of product.  The Department of Climate Change has already received audited information with regard to a number of potential activities which is sufficient to make these decisions.  There remain, however, a number of EITE activities which will still need to be formally assessed.  It will be important for the Government to be certain that all participants in an industry which are likely to materially impact this assessment have provided information to the Government so that historical information can be the primary input into the decision making process.  Quality historical information will reduce the necessity for detailed comparison of international information to assist in the determination of eligibility and baselines which may disadvantage parties who have fully complied with the information request.

4.61               Accordingly, Division 4 deals with the circumstance where an entity has come forward and requested an assessment of an emissions-intensive trade-exposed activity and the Government is not able to make a decision to include that activity in the regulations without formally requesting information of particular companies who have information relevant to that assessment. The Minister may accordingly issue notices to a constitutional corporation to provide information and audit reports relevant to the policy in the emissions-intensive trade-exposed assistance program [Part 8, Division 4, clause 173A] . Such a power is limited to the circumstances where an emissions-intensive trade-exposed activity is not yet listed in the regulations. It is intended that such a power would only be exercised as a last resort in circumstances where a potential recipient of assistance is unwilling to provide the necessary information.

4.62               The Minister’s information requests must give at least 30 days for compliance if only information is requested and 60 days if a report is also requested to accompany that information [Part 8, Division 4, clauses 173A(3) and 173A(5)] .

4.63               Refusal or failure to comply with such a notice will render that constitutional corporation ineligible for assistance for the first two eligible financial years which begin after the date of the notice if they were capable of complying with the notice and the Minister informs the Authority that the non-compliance was significant [Part 8, Division 4, clause 173B] . This is proportionate to the potential for the withholding of such information to result in windfall gains for a particular entity over the course of the emissions-intensive trade-exposed assistance program. The Minister may also disclose this information to the Authority to assist them with their functions and powers [Part 8, Division 4, clause 173C] .

Part 15, Division 3 — Compliance with relinquishment requirements

4.64               A financial penalty will be imposed when Australian emissions units are not relinquished as required under the emissions-intensive trade-exposed assistance program [Part 15, Division 3, clause 287] . Division 3 of Part 15 of the bill contains a number of provisions relating to the calculation of the financial penalty, late payment of penalties, recovery of penalties, set offs and refunds of overpayments. These are similar to the provisions of Division 4 of Part 6 and are explained in Chapters 10 and 11 below.

Public disclosures relating to emissions-intensive trade-exposed assistance program

4.65               The public will be informed about Australian emissions units issued under the emissions-intensive trade-exposed assistance program [Part 12, Division 4, clause 273] and [Part 12, Division 4, clause 274] . This will inform the market as to how many units are available for auctioning and will provide public accountability for the application of the emissions-intensive trade-exposed assistance program. In particular, the Authority is required to publish on its website a notice when Australian emissions units are issued to a person under the program which includes the number of units issued to that person and the activity for which they were issued [Part 12, Division 4, clause 273(1)] .

4.66               The total number of Australian emissions units issued during a particular quarter must be published on the Authority's website [Part 12, Division 4, clause 274] . This information must also be published in respect of each activity [Part 12, Division 4, clause 274(b)] .

4.67               The total number of Australian emissions units claimed under the program but for which no decision has been made must also be disclosed. This will give the market an idea about the potential number of units which may not be available for auctioning [Part 12, Division 4, clause 274(c)] .

Administration, enforcement and monitoring of the program

4.68               The emissions-intensive trade-exposed assistance program will be administered by the Australian Climate Change Regulatory Authority referred to as the Authority for the purposes of the bill. It will be subject to the governance arrangements in its establishment Act and this bill. These include the secrecy provisions to protect confidential information submitted in relation to the program set out in the clause 43 of the Australian Climate Change Regulatory Authority Bill 2010.

4.69               The Authority's decisions on eligibility and delivery of Australian emissions units under the program will be subject to the review procedure outlined in Part 24 of this bill. This includes merits review in the Administrative Appeals Tribunal.

4.70               The Authority will be able to draw upon its enforcement powers in Parts 17 to 23 of this bill to enforce the requirements of the program. The intention is to provide clear application requirements so that the Authority has clear, audited and comprehensive information upfront to make decisions upon allocations. This should allow a light-handed risk-based approach to monitoring and enforcement issues associated with the program.

First-year Australian emissions units

4.71               Persons who are issued units under the emissions-intensive trade-exposed assistance program for the first year of the Scheme should note the special nature of the Australian emissions units issued with a vintage year beginning on 1 July 2011. In particular, they cannot be used for subsequent years of the Scheme. The limited nature of the carbon market during the first year of the Scheme means that it is necessary to implement a buy-back arrangement for Australian emissions units issued for the first year of the Scheme [Part 4, Division 2, clause 103B] . This will operate until 1 December 2012 to allow persons to receive $10 for each unit they wish to sell back to the Authority, discounted by a factor specified in the regulations. This factor used to discount the buy-back price will broadly reflect the present value of the units at the time they are sold back to the Authority.

Review

4.72               As set out in Part 25, the Government may choose to initiate special reviews on the emissions-intensive trade-exposed assistance program and the program must be reviewed every five years by the expert advisory committee [Part 25, Division 2, clause 353(1)(h)] . Details of the review are described in Chapter 14.





5 C hapter 5

Coal mining

Outline of chapter

5.1                   This chapter implements the Coal Sector Adjustment Scheme (CSAS) to provide limited transitional assistance in respect of coal mining which has significant fugitive emissions of greenhouse gases.

5.2                   Certain coal mines will be eligible under the CSAS to receive an allocation of free Australian emissions units [Part 8A, Division 4] .

5.3                   The Authority will determine the number of free Australian emissions units to issue to eligible coal mines and the method for allocating these units [Part 8A, Division 2] [Part 8A, Division 3] .

5.4                   The Authority will also make decisions upon emissions intensities, production levels and other variables required for determining eligibility under the Scheme [Part 8A, Division 2] [Part 8A, Division 3] .

Context of amendments

5.5                   The introduction of the Scheme will place a new cost on the coal mining sector.  Mines will incur carbon liability for fugitive methane emissions released during mining operations. 

5.6                   To allow operators of highly emissions-intensive mines time to investigate and implement abatement opportunities, and to ease their transition to the introduction of the carbon price, the amendments provide for transitional assistance to the operators of the most emissions-intensive gassy underground mines.

Summary of new law

5.7                   The CSAS is a transitional assistance measure designed to provide assistance to operators of existing emissions-intensive underground mines over the first five years of the Scheme.  The CSAS limits eligibility for assistance to those mines that were in operation during the two year period from 1 July 2007 to 30 June 2009. 

5.8                   Mines which commenced operations after 30 June 2009 will not be eligible for assistance.

5.9                   The assistance package will be offered to all mines with a fugitive emissions intensity greater than 0.1 tonnes of CO 2 -e per tonne of saleable coal produced. 

5.10               Any mine with an emissions intensity lower than this will not be considered for assistance.

5.11               The total number of free Australian emissions units available to be provided to eligible emissions-intensive mines under this Part will be the lesser of 9.72 million Australian emissions units per year or 60 per cent of fugitive emissions from eligible mines in the 2008-09 financial year.

5.12               The distribution of this assistance will be based on an above threshold allocation methodology, where the most emissions-intensive mines receive proportionally more assistance than less emissions-intensive mines.  This allocation methodology has the effect of ‘flattening’ the distribution of emissions liabilities across the industry.  The most emissions-intensive mines will still face the highest liability per tonne of coal after the distribution of assistance.  The threshold to be used for this calculation is 0.1 tonnes of CO 2 -e per tonne of saleable coal produced.

5.13               Assistance will be directly linked to production with each mine’s allocation capped at the level of their capped base period production. Capped base period production is the greater of 2007-08 or 2008-09 saleable coal production levels for a given mine. 

5.14               The maximum allocation for an individual mine under an above threshold allocation methodology is equal to that mine’s proportion of all above threshold emissions in the base year multiplied by the quantum of assistance available for all mines.  The assistance rate per tonne of coal for a given mine is the total allocation of assistance to that mine divided by total saleable coal production in 2007-08 or 2008-09 (whichever is greater).  This assistance rate per tonne is then applied to the mine each year for which assistance is available based on the lesser of the capped base year production or the previous years’ production from that mine.  The effect of the formula will mean that a common rate of assistance is provided to each mine for their emissions above 0.1 tonnes of CO 2 -e per tonne of saleable coal produced.

5.15               Assistance will be provided for the first five years of the Scheme.  The expert advisory committee will examine the impact of the Scheme on the coal mining sector in the first scheduled review in 2014, drawing on analysis by the Productivity Commission, and taking into account advice from the CSIRO on the availability of cost-effective abatement technology.

5.16               The issue of free Australian emissions units under Part 8A is expected to have a fiscal impact of $1.23 billion over the five year period.  This replaces the $500 million previously allocated to the Climate Change Action Fund. 

Detailed explanation of new law

5.17               Part 8A provides limited transitional assistance in respect of coal mining which has significant fugitive emissions of greenhouse gases. [Part 8A, Division 1, clause 173D] .

Issue of free Australian emissions units in respect of coal mining

5.18               The number of free Australian emissions units issued by the Authority will be based on the unit entitlement specified in the certificate of entitlement for coal mine assistance in respect of that coal mining area [Part 8A, Division 2] . Only persons with a registry account may be issued units [Part 8A, Division 2, clause 173F(4)] .

5.19               A certificate of entitlement must be issued each year [Part 8A, Division 2, clause 173F(1)] and the certificate will be dated for the financial year during which the units are issued [Part 8A, Division 2, clause 173F(3)]. 

5.20               Mines which have been issued with a certificate of entitlement will be allocated their units as soon as possible after the certificate has been issued [Part 8A, Division 2, clause 173F(2)]

Certificate of entitlement to coal mining assistance

Application for certificate of entitlement to coal mining assistance

5.21               A person who wishes to apply to the Authority for coal mine assistance for an eligible coal mining area must do so within 4 months of the beginning of each financial year in the five year period [Part 8A, Division 3, clause 173G(1)]. The application must state that the eligible coal mining area is not intended to close within 12 months [Part 8A, Division 3, subclause 173G(2)]   and must also contain the total production (in tonnes of saleable coal produced) from that area in the previous financial year [Part 8A, Division 3, clause 173G(3)].

5.22               The application must be in a form determined by the Authority and be accompanied by relevant information and documents specified in the regulations [Part 8A, Division 3, clause 173H(1)].   The application may also need to be accompanied by a statutory declaration or an audit report [Part 8A, Division 3, clause 173H(2)] [Part 8A, Division 3, clause 173H(1)(e)].  The Authority may request further information [Part 8A, Division 3, clause 173J(1)] .  The Authority must ensure that the information requested is relevant to its consideration of the application and must exercise this power reasonably. [Part 26, clause 374B]  If this information is not provided, the Authority may refuse to consider the application [Part 8A, Division 3, clause 173J(2)].   This application process is consistent with other application provisions in the bill.

Issue of certificate of entitlement to coal mining assistance

5.23               The Authority must issue a certificate of entitlement to coal mining assistance in respect of an area for the current eligible financial year if the entity applying meets the eligibility criteria set out in the bill and regulations [Part 8A, Division 3, clause 173K] .

5.24               An applicant is eligible in relation to a coal mining area if:

•        the coal mining area is an ‘eligible coal mining area’ [Part 8A, Division 4, clause 173R] ; and

•        the applicant is the person ordinarily liable under the Scheme for the emissions of the mine as assessed at 30 June of the previous financial year; and

•        the eligible area was covered by a coal mining title; and

•        coal mining operations occurred in the previous year; and

•        they have not breached subsections 11B(2) and 11C(2) of the National Greenhouse and Energy Reporting Act 2007 relating to operational control.

5.25               The Authority must take all reasonable steps to make its decision within 90 days of the application being made.  If the Authority requests further information, the decision must be made within 90 days of the information being received [Part 8A, Division 3, clause 173K(5)] .  It must notify the applicant if the application is refused [Part 8A, Division 3, clause 173K(6)] and must publish a copy of the certificate of entitlement on its website once one has been issued to the applicant [Part 8A, Division 3, clause 173K(7)] .

Unit entitlement

5.26               The number of Australian emissions units distributed in respect of a mine equals that mine’s eligible proportion of available assistance (its ‘assistance factor’ calculated in subclause 173L(2)) multiplied by the available quantum of assistance.  Where the available assistance is 0.6 multiplied by the ‘total base period emissions numbers’ [Part 8A, Division 3, clause 173L(1)] .

5.27               The ‘total base period emissions numbers’ is equal to the lesser of all fugitive emissions from eligible mines in the base period [Part 8A, Division 3, clause 173L(1)(a)] or 16,200,000 Australian emissions units [Part 8A, Division 3, clause 173L(1)(b)] , where 16,200,000 equals the Government’s pre-application estimate of all fugitive emissions from eligible mines in the base period [Part 8A, Division 3, clause 173L(2)] .

5.28               The assistance factor [Part 8A, Division 3, clause 173L(2)] for a mine is calculated using the following formula  

Where:

the ‘adjusted base period fugitive emissions intensity number’ for a mine is its fugitive emissions per tonne of coal above the threshold. For example, if the mine had a fugitive emission intensity in the base period of 0.5t CO 2 -e per tonne of saleable coal, its above threshold emissions intensity would be 0.4t CO 2 -e per tonne of saleable coal (0.5-0.1); 

the ‘relevant saleable coal number for the eligible coal mining area’ is the lesser of the capped base period production (the higher of the 2007-08 and 2008-09 financial year) or production in the previous year, which effectively caps assistance to production levels in the base period; and

the ‘total adjusted base period fugitive emissions intensity numbers’ is the sum of ‘total above threshold emissions’ from all eligible mines in the base period.

5.29               The effect of this calculation is that if production from all eligible mines is equal to or greater than production in the base period, then the full quantum of assistance will be allocated with each mine receiving an allocation proportional to its production and emissions intensity in the base period, with the most emissions-intensive mines (those with the most above threshold emissions) receiving the greatest share. However, as each mine has their individual allocations capped at base period levels, if a mine does not reach its base period production levels in a given year, the Australian emissions units not allocated to that mine will not be redistributed to other mines.

Certificate of entitlement to coal mining assistance is not transferable

5.30               A certificate of entitlement to coal mining assistance is not transferable [Part 8A, Division 3, clause 173M] .

Division 4 - Eligible coal mining area

Application for declaration of eligible coal mining area

5.31               A person who wishes to apply to the Authority for a declaration that a particular coal mining area is an eligible coal mining area must do so within 180 days after commencement of the section [Part 8A, Division 4, clause 173N] . Where an application is submitted after the time limit, it is not a valid application and the Authority will not be able to issue a certificate of eligibility for coal mining assistance in relation to the coal mining area in question.

5.32               An application must:

•        be in writing; and

•        be in a form approved, in writing, by the Authority; and

•        be accompanied by such information as is specified in the regulations; and

•        be accompanied by such documents (if any) as are specified in the regulations; and

•        be accompanied by a prescribed report.

5.33               The application must be in a form determined by the Authority and be accompanied by relevant information and documents specified in the regulations and a prescribed report [Part 8A, Division 4, subclause 173P(1)].   The application may also need to be accompanied by a statutory declaration or an audit report [Part 8A, Division 4, clause 173P(2)].  This is consistent with other application provisions in the bill.

5.34               It will be important that applications are accompanied by direct measurement information on the mine’s fugitive emissions to allow the Authority to properly assess each mine’s fugitive emissions.  As outlined in the White Paper, underground coal mines will be required to use direct measurement for liability under the Scheme.

5.35               The Authority may require further information relating to the application [Part 8A, Division 4, clause 173Q] . The Authority must ensure that the information requested is relevant to its consideration of the application and must exercise this power reasonably. [Part 26, clause 374B] If the applicant breaches the requirement, the Authority may refuse to consider the application or refuse to take any action, or any further action, in relation to the application.

Declaration of eligible coal mining area

5.36               The Authority may, by writing, declare that the area of land is an eligible coal mining area for the purposes of this bill [Part 8A, Division 4, clause 173R(2)] and must identify, in accordance with the regulations, the coal mining area, the base period fugitive emissions from the mine, the base period saleable coal production for the mine, the capped base period saleable coal production for the mine (the higher of 2007-08 or 2008-09 production), the adjusted base period fugitive emissions intensity number for the mine and the adjusted base period fugitive emissions number for the mine [Part 8A, Division 4, clause 173R(3)] .

5.37               The calculation methodologies for the relevant numbers to be included in the declaration are detailed in clauses 173S - 173V [Part 8A, Division 5, clauses 173S - 173V] .

5.38               The Authority must not declare that the area of land is an eligible coal mining area unless the Authority is satisfied that the mine was operating as a coal mine for all or some of the 2007-08 and 2008-09 financial years, that the applicant had operational control of the mine for the 2008-09 financial year and any other requirements to be outlined in regulations are met [Part 8A, Division 4, clause 173R(4)] .

5.39               The intention of this structure is that it is the Authority which determines the final boundaries around a coal mining area in accordance with the regulations, rather than the applicant. Accordingly, the Authority’s final definition of the relevant coal mining area may differ from that originally proposed by an applicant if what is proposed is inconsistent with the requirements of the regulations. This will ensure the coal mining area is not drawn too narrowly or broadly in a manner which would undermine the intent of the assistance.

5.40               The Authority must take all reasonable steps to make its decision within 90 days after the application was made.  If the Authority requests further information, the decision must be made within 90 days after the applicant provided information requested under clause 173Q(1) [Part 8A, Division 4, clause 173R(1)] .

5.41               A declaration takes effect immediately after it is made and the Authority must give a copy of the declaration to the applicant and publish a copy on its website as soon as practicable. [Part 8A, Division 4, clause 173R(2)] .

5.42               If the Authority decides to refuse to declare the area of land as an eligible coal mining area, the Authority must give written notice of the decision to the applicant [Part 8A, Division 4, clause 173R(9)] .

Division 5 - Miscellaneous

5.43               Part 8A, Division 5 defines the calculations required to determine the emissions and production baselines used in the determination of the eligibility and unit entitlement of a coal mine in Part 8A. 

5.44               The base period fugitive emissions number [Part 8A, Division 5, clause 173S] for an eligible coal mining area is equal to the Authority’s reasonable estimate of the total fugitive emissions from coal mining operations on the eligible area for the financial year beginning 1 July 2008.  This year is the base period for calculating the emissions intensity of the mine area.

5.45               The base period saleable coal number [Part 8A, Division 5, clause 173T] for an eligible coal mining area is the production of saleable coal from the eligible area during the financial year beginning 1 July 2008.  This year is the base period for calculating the emissions intensity of the mine area.

5.46               The capped base period saleable coal number [Part 8A, Division 5, clause 173TA] in relation to an eligible coal mining area is the greater of saleable coal production from the financial years 2007-08 or 2008-09.  This number is used to calculate the adjusted base period fugitive emissions number and to cap the amount of saleable coal that may be used each year under the Part 8A.

5.47               The adjusted base period fugitive emissions intensity number  [Part 8A, Division 5, clause 173U] , which is a mines above threshold emissions intensity for a mine, is calculated using the following formula

 

where the threshold is 0.1t CO 2 -e per tonne of saleable coal produced.

5.48               The adjusted base period fugitive emissions number for the mine is calculated using the following formula:

 

where the adjusted base period fugitive emissions number represents the sum of all above threshold emissions from all eligible mines.  The allocation factor for each mine represents its proportion of this total in each given year.

Coal mining control test

5.49               The coal mining control test is the mechanism by which one person is identified as eligible for assistance.  It ensures that the person liable under the bill for the direct emissions of the coal mine, as assessed on 30 June of the previous financial year, is the person eligible to receive the free Australian emissions units. It mirrors subclause 176(6) [Part 9, Division 2, clause 176] which applies in relation to coal-fired electricity generation.  Accordingly, the relevant person will be either the controlling corporation with a member of their group having operational control of the facility, the non-group entity with operational control or a person with a liability transfer certificate in respect of the facility.

Example of how Part 8A applies

The following stylised example sets out the operation of the program if three mines were the only eligible mines in Australia.

Mine A is the smallest mine but has the highest emissions intensity (0.76 tonnes of fugitive emissions per tonne of saleable coal). Its production in 2008-09 was 8.5m tonnes but it produced 9.5m in 2007-08. It had 6.5m tonnes of fugitive emissions in 2008-09.

Mine B is a medium sized mine with an average emissions intensity for a gassy mine (0.35 fugitive emissions per tonne of saleable coal). Its production in 2008-09 was 16m tonnes and it produced 15m tonnes in 2007-08.  It had 5.6m tonnes of fugitive emissions in 2008-09.

Mine C is the largest mine with the lowest emissions intensity (0.2 fugitive emissions per tonne of saleable coal). Its production in both 2008-09 and 2007-08 was 20m tonnes.  It had 4m tonnes of fugitive emissions in 2008-09.

All three mines apply for assistance and the following amounts are listed in their clause 173R declarations.

•        Mine A has:

-       Base period fugitive emissions number of 6.5m

-       Base period saleable coal number of 8.5m

-       Capped base period saleable coal number of 9.5m (using 2007-08 as it is the highest)

-       Adjusted base period fugitive emissions intensity number of 0.66 (calculated by 6.5/8.5 - 0.1)

-       Adjusted base period fugitive emission number of 6.3m (calculated by 0.66 x 9.5m)

•        Mine B has:

-       Base period fugitive emissions number of 5.6m

-       Base period saleable coal number of 16m

-       Capped base period saleable coal number of 16m (using 2008-09 as it is the highest)

-       Adjusted base period fugitive emissions intensity number of 0.25 (calculated by 5.6/16 - 0.1)

-       Adjusted base period fugitive emission number of 4m (calculated by 0.25 x 16m)

•        Mine C has:

-       Base period fugitive emissions number of 4m

-       Base period saleable coal number of 20m

-       Capped base period saleable coal number of 20m

-       Adjusted base period fugitive emissions intensity number of 0.1 (calculated by 4/20 - 0.1)

-       Adjusted base period fugitive emission number of 2m (calculated by 0.1 x 20m)

At that point the total base period fugitive emissions numbers under subclause 173L(1) can be calculated. The total of the base period fugitive emissions numbers is 16.1m which is lesser than 16.2m. Therefore, 16.1m is the total base period fugitive emissions number for subclause 173L(1).

The total adjusted base period fugitive emissions numbers for subclause 173L(2) can also be worked out. The total is 12.3m (6.3 + 4 + 2).

Each mine can then work out an amount of assistance per tonne of saleable coal they produce each year up to the amount of their cap.

Mine A is assisted at 0.52 free Australian emissions units per tonne of saleable coal (0.6 x 16.1m x 0.66/12.3)

Mine B is assisted at 0.19 free Australian emissions units per tonne of saleable coal (0.6 x 16.1m x 0.25/12.3)

Mine C is assisted at 0.08 free Australian emissions units per tonne of saleable coal (0.6 x 16.1m x 0.1/12.3)

In this scenario the distribution of production and emissions means that each mine is assisted at 78% of their emissions above 0.1 tonnes of CO 2 -e per tonne of saleable coal.

Accordingly, if Mine A produces 9m tonnes of saleable coal in the 2010-11 financial year, it will use this number to apply to the Authority by 31 October 2011 for the issue of free Australian emissions units under Part 8A. Its allocation for that year will be 0.6 x 16.1m x 0.66 x 9m/12.3 = 4.67m free Australian emissions units. If it went on to produce 9m tonnes of coal in 2011-12 at its current emissions intensity, it would have a liability for 6.84m tonnes of emissions. In this scenario, 68% of the mine’s fugitive emissions CPRS liability would be provided for under Part 8A.

Administration, enforcement and monitoring of Part 8A

5.50               The CSAS will be administered by the Authority, which will be subject to governance arrangements including secrecy provisions to protect confidential information submitted in relation to the program set out in clause 43 of the Australian Climate Change Regulatory Authority Bill 2010.

5.51               Specified decisions in Part 8A will be reviewable decisions under Part 24 of the main bill.  The objective of this approach is to ensure fair treatment of all persons affected by a decision, and to encourage high quality, consistency, openness and accountability in decisions made by the Authority [Part 24, clause 346, Table, items 27A to 27H] .

Matters related to Part 8A

5.52               The following definitions in section 5 of the main bill are used in Part 8A:

•        Adjusted base period fugitive emissions intensity number

•        Adjusted base period fugitive emissions number

•        Base period fugitive emissions number

•        Capped base period saleable coal number

•        Certificate of entitlement to coal mining assistance

•        Coal mining control test

•        Coal mining title

•        Eligible coal mining area

•        Fugitive emissions

•        Saleable coal

•        Coal mining title [Part 1, clause 5] .

5.53               Apart from ‘coal mining title’, ‘saleable coal’ and ‘fugitive emissions’, these are explained above. 

•        ‘Coal mining title’ is defined in relation to any lease, licence or authority that permits the extraction of coal.  These would include leases under the Mining Act 1992 (NSW) and Mineral Resources Act 1989 (Qld)

•        ‘Saleable coal’ and ‘fugitive emissions’ are to be defined by the regulations.

5.54               The Australian emissions units issued under Part 8A (freely issued units) are treated in the same manner as Australian emissions units issued under the emissions-intensive trade-exposed assistance program [Part 2, clause 13, note] [Part 4, Division 1, clause 82] [Part 4, Division 2, Subdivision A, clause 88] [Part 4, Division 2, Subdivision A, clause 93] [Part 4, Division 2, Subdivision C, clause 101] [Part 4, Division 2, Subdivision D, clauses 103A and 103B] [Part 6, Division 2, clause 129] .

5.55               In relation to Part 8A, the Authority is required to publish on its website the name of the person to whom the Australian emissions units were issued, the number of Australian emissions units issued and the vintage year of those Australian emissions units and the total number of Australian emissions units issued each quarter must also be published .   These are the same requirements which exist for other free Australian emissions units [Part 12, Division 4, clauses 273 and 274] .

5.56               Definitions needed from revisions to the National Greenhouse and Energy Reporting Act 2007 can be referred to before those amendments commence [Part 26, clause 382] .



 

 



6 C hapter 6

Coal-fired electricity generation

Outline of chapter

6.1                   This chapter outlines the effect of the provisions of Part 9 of the Carbon Pollution Reduction Scheme Bill 2010, which implement the Government’s Electricity Sector Adjustment Scheme. Part 9, Division 2 and Part 9, Division 3 set out the provisions by which the Authority will determine the number of free Australian emissions units to issue to eligible coal-fired electricity generators under the Electricity Sector Adjustment Scheme.

6.2                   Part 9, Division 4 provides that a portion of the Australian emissions units available to be issued to an eligible coal-fired electricity generator can be withheld in the event that this asset may be likely to receive a ‘windfall gain’ under the Electricity Sector Adjustment Scheme, that is, where the value of assistance a generator receives exceeds the likely loss in asset value it faces under the Carbon Pollution Reduction Scheme (the Scheme).

6.3                   Part 9, Division 5 requires that no Australian emissions units be issued to generators that do not comply with the power system reliability test, to support the reliability of supply in Australia’s electricity markets during Australia’s transition to a low carbon economy.

Context and object of Part 9

6.4                   The object of Part 9 is to contribute to the maintenance of investor confidence in the Australian electricity generation sector by implementing the Electricity Sector Adjustment Scheme. Investor confidence is central to the continued investment in energy infrastructure. In turn, ongoing investment in lower emissions generation capacity is essential to maintain energy security in a carbon constrained future.

6.5                   The introduction of the Scheme will impose a new cost on fossil fuel-fired electricity generators. The general level of electricity prices will rise as generators include this cost into their offers to supply electricity to customers.

6.6                   However, relatively emissions-intensive generators are likely to face a greater increase in their operating costs than the general increase in the level of electricity prices. Competition from relatively less emissions-intensive generators, which face lower costs under the Scheme, may cause more emissions-intensive generators to lose profitability.

6.7                   The generation of electricity is a capital-intensive process. Investors in this sector purchase or construct complex and expensive machinery that can generate large amounts of electricity in a cost-effective way. To finance the purchase or construction of a generator, investors will generally borrow money from creditors. Ongoing investment in the electricity generation sector requires investors to deploy capital based on their assessment of the risk and return of that investment, with creditors supplementing this capital with debt finance.

6.8                   The risk premium charged by investors and creditors to make an investment reflects their perceptions of its risk in comparison with alternative investments. The Scheme will change the relative risk and return of particular investments based on the amount of greenhouse gas emissions they produce. However, if investors consider that the regulatory environment is riskier as a result of the Government having introduced the Scheme, all investments in the sector could face an increased risk premium irrespective of the amount of greenhouse gas emissions they produce, which in turn could affect their cost or timing.

6.9                   The Government considers that investors’ perceptions of the risk of investing in the Australian electricity generation sector are likely to be affected by the extent of any extreme losses in this sector that may arise under the Scheme. Targeted allocations of free Australian emissions units to the most affected generators can partially offset these losses of asset value and thereby reduce the potential impact of the Scheme on investor confidence.

6.10               Investors who purchase or construct generation assets after the Commonwealth Government’s announcement of its support for a scheme to reduce pollution caused by emissions of carbon dioxide and other greenhouse gases are able to factor the impact of such a scheme on their investments. Providing assistance to these investors would not address a loss of asset value resulting from Government policy, but would instead address a loss of asset value resulting from an incomplete risk assessment by the investor.

6.11               However, the Government considers it appropriate to partially recognise losses of asset value experienced by investors that were committed to such investments prior to a clear announcement by the Commonwealth Government of its support for such a scheme.

6.12               On 3 June 2007, the then Prime Minister announced that ‘Australia will move towards a domestic emissions trading scheme, that’s a cap and trade system beginning no later than 2012’. The Electricity Sector Adjustment Scheme limits eligibility for assistance to those generation assets that were in operation, or committed to be constructed, by 3 June 2007.

6.13               In this way, the Electricity Sector Adjustment Scheme supports investor confidence in the electricity generation sector, which will encourage the investment necessary to support energy security during the transition to a lower carbon electricity generation sector.

6.14               Further, due to the operation of the power system reliability test, the Electricity Sector Adjustment Scheme provides a period of ten years during which the transition to a lower carbon electricity sector can occur with reduced risk of premature retirement of emissions-intensive generation capacity, protecting energy security.

6.15               The objective of maintaining investor confidence is captured in the object of Part 9 [Part 9, Division 1, clause 174] . The Government also recognises the importance of the proper regulation of electricity markets for continued efficient investment in electricity generation. The Government is confident that the Electricity Sector Adjustment Scheme embodied in Part 9 of the bill complements the continued reform of energy market regulatory frameworks in promoting efficient investment and reliable supply in Australia’s electricity markets.

Summary

6.16               Part 9, Division 1 sets out an objects clause [Part 9, Division 1, clause 174] and a simplified outline for the Part [Part 9, Division 1, clause 175] .

6.17               Part 9, Division 2 requires the Authority to issue a number of free Australian emissions units in respect of particular generation assets based on the annual assistance factors specified in various certificates of eligibility for coal-fired generation assistance in force in respect of those assets, and clarifies the persons to whom the Authority should provide these free Australian emissions units.

6.18               Part 9, Division 3 sets out the circumstances under which the Authority should issue a certificate of eligibility for coal-fired generation assistance, and determines how the Authority should determine an annual assistance factor in each of those certificates.

6.19               Part 9, Division 4 provides that the issuing of some free Australian emissions units available under this Part is subject to the Minister’s power to make a determination withholding those units, in the event that the Authority finds that the provision of assistance under this Part is likely to deliver a ‘windfall gain’ in respect of a particular generation asset.

6.20               Part 9, Division 5 provides that generation assets in respect of which certificates of eligibility for coal-fired generation assistance are issued must comply with the power system reliability test in order to be issued with free Australian emissions units under this Part.

Detailed explanation of new law

Important definitions used in this Part

6.21               Part 9 is based upon some key concepts defined in the bill. Assistance under Part 9 is not provided in respect of a particular person, such as the person making an application for assistance, but rather is provided in respect of a collection of equipment used for the generation of electricity known as a ‘generation asset’. The definition of a generation asset [Part 1, clause 5, definition of ‘generation asset’] , and the subsidiary concepts of ‘generation unit’ [Part 1, clause 5, definition of ‘generation unit’] , ‘generation complex’ [Part 1, clause 5, definition of ‘generation complex’] and ‘generation complex project’ [Part 1, clause 5, definition of ‘generation complex project’] , is essential to understanding the scope of the operation of Part 9.

6.22               The concept of a generation asset [Part 1, clause 5, definition of ‘generation asset’] is not the same as the concept of a ‘facility’, which takes its definition from the National Greenhouse and Energy Reporting Act 2007 . Assistance under Part 9 is focused on coal-fired electricity generators, which must meet certain eligibility criteria. However, a facility under the National Greenhouse and Energy Reporting Act 2007 could include, for example, the activities of a co-located coal-fired generator and coal mine. For this reason, the separate definition of a ‘generation asset’ is used to capture those elements of a facility that may be eligible for coal-fired generation assistance.

6.23               For operational reasons, equipment used for the generation of electricity is often engineered such that, at a given location, there are multiple sets of equipment that can generate electricity independently of one another (although they may share some common infrastructure, such as cooling systems or coal conveyor belts). Under the bill, each independent set of equipment for the generation of equipment is known as a ‘generation unit’ [Part 1, clause 5, definition of ‘generation unit’] , whilst one or more generation units at the same location are known as a ‘generation complex’ [Part 1, clause 5, definition of ‘generation complex’] . Assistance under this Part is provided in respect of generation complexes rather than generation units. There is no requirement on persons applying for assistance under Part 9 to aggregate multiple generation units at the same location together to form a single generation complex, although this may be practical for various reasons. However, a person applying for assistance under Part 9 should take into account the fact that each generation unit in a generation complex must satisfy the eligibility criteria in order for it to pass the generation asset assistance eligibility test in any decision to aggregate multiple generation units to form a single generation complex [Part 9, Division 3, clause 181(2)(a)] .

6.24               Further, assistance under Part 9 is available to projects to construct and commission new generation complexes that were fully committed by their proponents as of 3 June 2007 (see 6.34 below). Accordingly, the bill provides the concept of a ‘generation complex project’ [Part 1, clause 5, definition of ‘generation complex project’] , which is a project to construct and commission a new generation complex. The definition of a generation asset includes both generation complexes and generation complex projects.

Applying for assistance

6.25               A person who wishes to apply to the Authority so that a certificate of eligibility for coal-fired generation assistance is issued in respect of a particular generation asset must do so within 180 days of the commencement of the provision [Part 9, Division 3, clause 177(1)] . However, the Authority may choose to extend the time limit for some applications by up to an additional 30 days, provided the application submitted under the extended time limit is mutually exclusive in its coverage of generation units in comparison with all other applications [Part 9, Division 3, clause 177(8)] . Where an application is submitted after the time limit (whether extended or not), it is not a valid application and the Authority will not be able to issue a certificate of eligibility for coal-fired generation assistance in relation to the generation asset in question.

6.26               Applications are made in respect of a generation asset, rather than in respect of the person making the application [Part 9, Division 3, clause 177(1)] . This means that the act of applying for assistance does not entitle the applicant to receive free Australian emissions units issued in respect of a given generation asset. Instead, the recipient of assistance is defined by reference to the relationship of a person to a generation asset, not by reference to the person who applied for assistance, as provided for by [Part 9, Division 2, clause 176(6)] .

6.27               Spurious applications from persons that do not own, operate or control the generation asset in respect of which the application is made are prevented [Part 9, Division 3, clauses 177(2)-(3)]. The concept of ‘owning, controlling or operating’ a generation asset is intended to have the same meaning as the equivalent terms in laws relating to the regulation of energy markets that require the registration of electricity generators. The primary laws (and subordinate instruments) relating to the regulation of energy markets that are likely to be relevant to the application of this Part are:

•        in relation to the National Electricity Market, the National Electricity Rules as made and amended under Part 7 of the Schedule to the National Electricity (South Australia) Act 1996 of South Australia and given force of law in other jurisdictions through application legislation

•        in relation to the Western Australian Wholesale Electricity Market, the Wholesale Electricity Market Rules provided for under section 123 of the Electricity Industry Act 2004 of Western Australia and the Electricity Industry (Wholesale Electricity Market) Regulations 2004 .

6.28               Multiple applications cannot be made in respect of all or part of a generation asset [Part 9, Division 3, clause 177(4)] . The recognition and consideration of overlapping applications by the Authority could result in an excessive issuance of certificates of eligibility for coal-fired generation assistance and of annual assistance factors, and thereby deliver additional, unwarranted assistance in respect of some generation assets.

6.29               An application for the issuance of free Australian emissions units must satisfy a number of requirements [Part 9, Division 3, clause 178] . In particular, applications in respect of a generation asset that entered service after 1 July 2004 are required to provide an independent engineering report [Part 9, Division 3, clauses 178(1)(f) and 178(3)] . This information is required to assist in the Authority’s assessment of the emissions intensity of such an asset under [Part 9, Division 3, clause 182(4)] .

6.30               Regulations may require particular information, documents or prescribed reports to be provided with an application for coal-fired generation assistance [Part 9, Division 3, clauses 178(1)(c)-(e)] . The Government intends to make regulations requiring this information, and these documents and prescribed reports, to include, amongst other things, an assurance of the application by an appropriate audit firm and, where applicable, particular documents relating to the generation asset’s emissions intensity as calculated for the purpose of policies such as the Commonwealth Government’s ‘Generator Efficiency Standards’ program and the New South Wales Government’s Greenhouse Gas Reduction Scheme. Information may also need to be verified by statutory declaration [Part 9, Division 3, clause 178(2)] . This upfront provision of information will assist the Authority in making timely and appropriate decisions on applications.

6.31               Having received an application, the Authority may consider that it requires additional information to properly assess it. The Authority is able to require further information to assist its assessment [Part 9, Division 3, clause 179]. The Authority must ensure that the information requested is relevant to its consideration of the application and must exercise this power reasonably [Part 26, clause 374B] .

The Authority’s assessment

6.32               Ordinarily, the Authority will use its best endeavours to make an assessment within a 90 day period from the date of the application [Part 9, Division 3, clause 180(4)(b)(i)] . However, the Authority is not required to make any decision until after 210 days after the commencement of the relevant legislation [Part 9, Division 3, clause 180(4)(b)(ii)] . This is because the Authority cannot reasonably ensure that a given application is mutually exclusive in its coverage of generation units until all valid applications have been received, which may not have occurred until 210 days after commencement of the relevant legislation. Further, to ensure that the Authority has sufficient time to make a decision, it can take an additional 90 days to make its decision on an application where additional information has been requested [Part 9, Division 3, clause 180(4)(a)] . This may be an iterative process where the Authority requests information more than once to clarify the issues involved and the timeframe for the decision is accordingly extended multiple times. Where more than one request for information is made, this applies to the latest of those requests. However, nothing prevents the Authority from making a decision before the end of the standard or extended period where it is able to do so.

6.33               The Authority’s assessment of an application involves two key elements:

•        determining the eligibility of the generation asset in respect of which the application is made

•        determining an annual assistance factor in respect of that generation asset.

The annual assistance factor is crucial to determining the total number of free Australian emissions units that will be issued in respect of that generation asset in accordance with this Part.

Determining eligibility

6.34               The Authority must apply the generation asset assistance eligibility test to decide whether to issue a certificate of eligibility for coal-fired generation assistance [Part 9, Division 3, clauses 181(1) and 180(2)] . In order to issue such a certificate, the Authority must be satisfied that a generation asset passes this test in one of two ways:

•        a generation complex must pass the test by demonstrating that it was, broadly, ‘in operation’ in June 2007 [Part 9, Division 3, clause 181(2)]

•        a generation complex project must pass the test by demonstrating, broadly, that it was fully committed as of 3 June 2007 [Part 9, Division 3, clause 181(3)] .

6.35               Assistance for coal-fired electricity generators under this Part is provided to partially address significant declines in the asset values of generation assets that were invested in before the Commonwealth Government announcement of support for a scheme to reduce pollution caused by emissions of carbon dioxide and other greenhouse gases [Part 9, Division 1, clause 174]. As explained in 6.9 above, this point in time was 3 June 2007.

6.36               Therefore, the generation asset assistance eligibility test seeks to determine whether a generation complex was ‘in operation’ in June 2007, or whether a generation complex project was ‘committed’ to be constructed as of 3 June 2007. The use of the month of June 2007 for generation complexes, in contrast to the date of 3 June 2007 for generation complex projects, simply reflects the practicality of determining whether a generation unit was in operation at any time during that month, given that generation units that are ‘in operation’ may be offline for a period of time for various operational reasons.

6.37               Generation complex projects may receive assistance if, as of 3 June 2007, they were sufficiently committed that the project could not have been substantially altered in response to the new information about the Commonwealth Government’s climate change policies that emerged at that time. The Government considers that the definition of a ‘committed project’ from Rule 11.10A.1 of the National Electricity Rules, which sets out criteria as to whether a generation project should be considered to be fully committed by its proponent, is appropriate to replicate here for a similar purpose [Part 9, Division 3, clause 181(3)(b)] .

6.38               Some generation assets are capable of reducing emissions at relatively low cost by substituting coal in their generation process with an alternative lower-emissions fuel, such as natural gas. Accordingly, the Government decided that these assets are not eligible for assistance. To pass the generation asset assistance eligibility test, generation complexes must use coal as their primary energy supply, as indicated by 95 per cent of the electricity it generated in financial year 2006-07 having been attributable to the combustion of coal [Part 9, Division 3, clause 181(2)(b)] .

6.39               The Government has also determined that generation assets must be connected to an electricity grid of a sufficient size that the asset could be considered to be exposed to significant competition in order to warrant assistance under the Electricity Sector Adjustment Scheme. Accordingly, generation assets must be connected to a grid with a capacity of at least 100 megawatts in order to pass the generation asset assistance eligibility test [Part 9, Division 3, clause 181(2)(c)] . The capacity of the grid used in the bill is the same as the threshold size of an electricity grid used in the Renewable Energy (Electricity) Act 2000 to determine those sales of electricity that will be liable to the provisions of that Act. The method for calculating the capacity of a grid used in the bill is also the same as under the Renewable Energy (Electricity) Act 2000 and regulations made under that Act, in that it excludes standby and privately-owned domestic generation sources [Part 9, Division 3, clause 181(4)] .

6.40               In relation to generation complex projects, the Authority must make assessments of whether a particular generation asset proposed to use coal as its primary energy supply as of 3 June 2007, and whether it was proposed to be connected to an electricity grid of a sufficient size that it is exposed to significant competition as of 3 June 2007 [Part 9, Division 3, clauses 181(3)(c)-(d)] .

6.41               If the Authority refuses to issue a certificate of eligibility for coal-fired generation assistance, the Authority must notify the applicant of this decision [Part 9, Division 3, clause 180(5)] .

Determining the annual assistance factor

6.42               A certificate of eligibility for coal-fired generation assistance must include an annual assistance factor [Part 9, Division 3, clause 180(3)] . This factor is used to determine the correct number of Australian emissions units to issue in respect of a particular generation asset [Part 9, Division 2, clause 176(2)] . The annual assistance factor can be zero, in which case no Australian emissions units would be issued in respect of that generation asset, even though it passed the generation asset assistance eligibility test.

6.43               The determination of an appropriate annual assistance factor involves some estimation and uncertainty. Therefore, the bill specifies that the annual assistance factor is the Authority’s reasonable estimate of the number calculated in accordance with this clause, rather than a precise calculation of such a number [Part 9, Division 3, clause 182(1)] .

6.44               The two key elements used in the formula to determine the annual assistance factor for a generation asset are:

•        its historical energy

•        its emissions intensity.

[Part 9, Division 3, clause 182]

These elements are combined such that the annual assistance factor for a generation asset is the product of its historical energy and the difference between its emissions intensity in kilotonnes of carbon dioxide equivalence of emissions per gigawatt hour of electricity and a ‘threshold’ level of emissions intensity of 0.86 kilotonnes of CO 2 -e per gigawatt hour of electricity generated. The manner in which the figure of 0.86 kilotonnes of CO 2 -e per gigawatt hour of electricity generated was reached was described at pages 13-24 to 13-26 of the White Paper.

Historical energy

6.45               Ideally, the measure of historical energy used for a generation asset would be its actual output over the three year period from 1 July 2004 to 30 June 2007. This measure is used for generation complexes that entered service on or before 1 July 2004 [Part 9, Division 3, clause 182(1)(a)] . However, using this measure for generation assets that entered service after 1 July 2004 would unfairly reduce their annual assistance factor, and consequently the number of free Australian emissions units they receive. Therefore, for generation complexes or generation complex projects that entered service after 1 July 2004, the ‘nameplate rating’ of the generation asset is used to calculate a proxy for its likely energy output over a notional three year period [Part 9, Division 3, clauses 182(1)(b)-(c)] .

6.46               The nameplate rating of a generation asset is its maximum continuous electrical generation capacity as registered with the appropriate energy market operator [Part 1, clause 5, definition of ‘nameplate rating’] . Accordingly, the output of the asset can be estimated by considering the likely ‘capacity factor’ of the asset, that is, the percentage of its maximum output that an asset produces on average over a period of time. Multiplying the nameplate rating of the generation asset in megawatts by 21.024 approximates the energy output (in gigawatt hours) of such a generation asset over a notional three year period if it operates at an 80 per cent capacity factor over that period, that is, if its average output over the period is 80 per cent of its maximum output. The number 21.024 has been worked out by firstly calculating the number of hours in a three year period, which is the number of days in a year (assuming it is not a leap year), 365, multiplied by the number of hours in a day, 24, multiplied by the number of years in the period, three. This number is then multiplied by 0.8 to reflect the assumed 80 per cent capacity factor of the generation asset. Lastly, this number is divided by 1000 to convert a number that approximates the generation asset’s output in megawatt hours to a number that approximates its output in gigawatt hours, as required by the formula.

Emissions intensity

6.47               Broadly, the emissions intensity of a generation asset is the emissions produced by the asset divided by the amount of electricity it generates. These two elements of emissions intensity could be either estimated from the historical performance of an asset or from its likely future performance. Therefore, as for historical energy, the bill uses different methods to estimate a generation asset’s emissions intensity depending on whether or not it had entered service on or before 1 July 2004.

6.48               For a generation asset that entered service on or before 1 July 2004, the emissions intensity is estimated by reference to the actual emissions and actual energy output of the asset over the three year period from 1 July 2004 to 30 June 2007 [Part 9, Division 3, clause 182(2)]. Importantly, these emissions must be ‘emitted from the combustion of fuel in the generation complex’ and therefore do not include, for example, emissions from the combustion of fuel to operate mining equipment. Further, the combustion of fuel must be for ‘the purposes of the generation of electricity’ and therefore does not include, for example, emissions created for the purposes of the production of steam in a cogeneration plant. The energy output of the generation asset, described as the gigawatt hours of electricity generated, is exactly the same number as in [Part 9, Division 3, clause 182(1)(a)].

6.49               For a generation asset (whether a generation complex or a generation complex project) that entered service after 1 July 2004, the Authority has a broad discretion to estimate its emissions intensity [Part 9, Division 3, clause 182(4)] . For example, the Authority might use design documents to estimate the thermal efficiency of the generation asset, that is, how efficiently it turns a quantity of fuel into electricity, and fuel contracts to estimate the emissions released from the combustion of a given quantity of the fuel used or intended to be used in the generation asset. These two elements could allow the Authority to estimate the theoretical emissions intensity of a generation asset, whether or not it has yet entered service. These estimates should be supported by the independent engineering report that is required to be provided with an application in respect of a generation asset that entered service after 1 July 2004 [Part 9, Division 3, clause 178(1)(f)] .

6.50               The Authority may have regard to an estimate of the emissions intensity of the generation asset based on its actual performance during the period it has been in service, but the Authority is not required to adopt this estimate as the emissions intensity of the asset [Part 9, Division 3, clause 182(4)(c) and 182(5)]. If the period the asset has been in service is short, estimates of emissions intensity based on this period may be misleading due to the small sample size of measurements of, for example, coal quality. Further, the initial period of operation of a new generation asset can involve activities that might cause estimates of the asset’s emissions intensity over this period to be unrepresentative of its likely general level of performance. For example, a generation asset’s early period of operation might involve testing the asset’s ability to operate at output levels above or below its most efficient level of operation, or starting and stopping the asset an unusually high number of times. These uncertainties support the high level of discretion afforded the Authority in estimating emissions intensity in this circumstance. The Authority will weigh up the strength and veracity of the information presented in the application and its own analysis in making its decision.

6.51               The definition of emissions intensity used for generation assets that entered service after 1 July 2004 differs from that used for generation assets that entered service on or before 1 July 2004 in being non-specific in the period of time over which the estimate is made [Part 9, Division 3, clause 182(5)] . For example, if a generation asset entered service on 1 July 2005, the Authority may be able to estimate the emissions intensity of the asset over a period of operation spanning from 1 July 2005 to around 1 January 2010. However, for a generation asset that did not enter service until 1 July 2008, the Authority may only have a period from 1 July 2008 to around 1 January 2010 from which to consider performance data.

6.52               Where the Authority’s estimate of emissions intensity is less than 0.86, the emissions intensity used in the annual assistance factor formula is taken to be 0.86 [Part 9, Division 3, clauses 182(3) and 182(6)] . This means that the annual assistance factor for such a generation asset will be zero and, in turn, that no free Australian emissions units will be issued to such an asset under [Part 9, Division 2, clause 176(2)]. These provisions prevent the calculation of an annual assistance factor that is below zero, which would distort the allocation methodology applied under [Part 9, Division 2, clause 176(2)].

How annual assistance factors are calculated

Example 6.1 : A generation asset that entered service on or before 1 July 2004

To estimate the historical energy of a generation asset that entered service on or before 1 July 2004, the applicant should provide, and the Authority should assess, historical data relating to the generation of electricity by that generation asset over the period from 1 July 2004 to 30 June 2007. The Authority could verify this data through comparison with data publicly available from independent bodies such as the market operator in the market in which the generation asset operates. For example, this investigation might find that the historical energy of the generation asset over the three year period in question was 22,950 gigawatt hours.

To estimate the emissions intensity of a generation asset that entered service on or before 1 July 2004, the applicant should provide, and the Authority should assess, historical information relating to the coal usage and coal quality of the generation asset over the period from 1 July 2004 to 30 June 2007. For example, this investigation might find that the generation asset used approximately 28,500,000 tonnes of coal, with an average energy content of 11 gigajoules per tonne. Historical analyses of coal quality might indicate that the combustion of the coal produced, on average, 0.093 tonnes of CO 2 -e per gigajoule of fuel combusted. These estimates indicate that the generation asset produced approximately (28 500,000 × 0.093 × 11) tonnes of CO 2 -e, or 29,155.5 kilotonnes of CO 2 -e, over the three year period in question.

Based on these estimates, the Authority’s reasonable estimate of the generation asset’s emissions intensity would be 29,155.5 ÷ 22,950 kilotonnes of CO 2 -e per gigawatt hour, or 1.270 kilotonnes of

CO 2 -e per gigawatt hour.

Accordingly, the Authority would find the generation asset’s annual assistance factor to be 22,950 × (1.270 — 0.86), or 9,409.500.

Example 6.2 : A generation asset that entered service after 1 July 2004

To estimate the historical energy of a generation asset that entered service after 1 July 2004, the applicant should provide the Authority with the nameplate rating of the generation asset as registered with the relevant market operator. For example, the generation asset’s nameplate rating might be 500 megawatts. This being the case, the Authority would estimate the historical energy of the generation asset over a notional three year period to be (500 × 21.024), or 10,512 gigawatt hours.

To assist the Authority to estimate the emissions intensity of a generation asset that entered service after 1 July 2004, the applicant should provide an independent engineering report setting out an estimate of the emissions intensity of the generation asset. This report might show, and the Authority might verify, facts such as:

•        the thermal efficiency of the generation asset, for example, that the generation asset is, on average, capable of converting 11.5 gigajoules of fuel into 1 megawatt hour of electricity

•        analyses of the quality of the coal that have been or will be supplied to the generation asset under its established fuel contracts, for example, that the combustion of this coal produces approximately 0.089 tonnes of CO 2 -e per gigajoule of fuel combusted.

The Authority can use estimates to calculate an estimated emissions intensity of the generation asset. For example, the estimates above would indicate that the generation asset in question would release (11.5 Ã— 0.089), or 1.024, tonnes of CO 2 -e per megawatt hour of electricity generated. This is also equivalent to 1.024 kilotonnes of CO 2 -e per gigawatt hour of electricity generated.

The Authority could verify these estimates by comparison with the actual performance of the generation asset over its period of operation, if this data is available over a sufficient period of time to offer reliable and representative additional information.

Based on these estimates, the Authority would find the generation asset’s annual assistance factor to be 10,512 × (1.024 — 0.86), or 1,723.968.

Issuing assistance

6.53               The Authority must decide whether or not to issue a certificate of eligibility for coal-fired generation assistance in relation to each individual application it receives and, if so, what the annual assistance factor in the certificate should be [Part 9, Division 3, clause 180] . These decisions are individually subject to the reconsideration and merits review provisions of Part 24. In other words, the eligibility of, and annual assistance factor calculated in respect of, each individual generation asset, is determined independently of every other generation asset, and are individually subject to the review processes in Part 24.

6.54               However, the number of free Australian emissions units that should be issued in respect of a generation asset is a function of not only the annual assistance factor specified in respect of that generation asset, but also all other annual assistance factors specified in respect of all other generation assets [Part 9, Division 2, clause 176(2)] .

6.55               This is the case because the Authority must take the annual assistance factor in each certificate of eligibility for coal-fired generation assistance and divide it by the sum of all annual assistance factors in all such certificates (the ‘total annual assistance factors for that eligible financial year’). This number, which must be less than 1, is then multiplied by the ‘generation assistance limit for that eligible financial year’ to determine the share of each year’s pool of free Australian emissions units that should be issued in respect of that generation asset for that year (subject to the rounding provisions of [Part 9, Division 2, clause 176(3)] ).

6.56               In this way, the available pool of free Australian emissions units per year is distributed amongst all eligible recipients of these units in each of the first ten years of the Scheme, and the Government’s policy of ‘capping’ the total number of free Australian emissions units to be issued under the Electricity Sector Adjustment Scheme is achieved. Units will be issued on 1 September in each of the first ten eligible financial years of the Scheme [Part 9, Division 2, clause 176(2)] .

Example 6.3 : Calculating the number of free Australian emissions units to issue to particular generation assets

Example 6.1 and Example 6.2 outlined the calculation of annual assistance factors for two hypothetical generation assets. These generation assets, which we shall call ‘Generation asset A’ and ‘Generation asset B’, had annual assistance factors of 9 409.500 and 1 723.968 respectively.

Other generation assets are likely to be found to be eligible for assistance, and to be issued certificates of eligibility for coal-fired generation assistance containing annual assistance factors. For example, these annual assistance factors, including those of Generation asset A and Generation asset B, might add up to 69 100.000.

In this case, Generation asset A and Generation asset B would receive the following number of free Australian emissions units in each of the first, second, fourth and fifth years of assistance (provided they comply with the power system reliability test and that the Minister has not made a declaration in respect of those generation assets):

•        Generation asset A = (9 409.500 ÷ 69 100.000) × 26,140,000

                                   = 3 559 541.679

                                   = 3 599 500 (after rounding)

•        Generation asset B = (1 723.968 ÷ 69 100.000) × 26,140,000

                                   = 652 163.871

                                   = 652 200 (after rounding)

In the third year, the number of free Australian emissions units issued to these generation assets would depend on the number of additional units issued as a result of review events. In the event that no successful reviews of annual assistance factors were concluded prior to 1 September 2013, these generation assets would receive the number of units calculated above in the third year of assistance.

In the sixth, seventh, eighth, ninth and tenth years of the allocations to Generation asset A and Generation asset B would be as follows (provided they comply with the power system reliability test and that the Minister has not made a declaration in respect of those generation assets):

•        Generation asset A = (9 409.500 ÷ 69 100.000) × 19,600,000

                                   = 2 668 975.398

                                   = 2 669 000 (after rounding)

•        Generation asset B = (1 723.968 ÷ 69 100.000) × 19,600,000

                                   = 488 998.159

                                   = 489 000 (after rounding)

6.57               Ordinarily, a review that changes the annual assistance factor determined in respect of a generation asset would change the ‘total annual assistance factors for that eligible financial year’ and so would change the number of free Australian emissions units that should have been issued in respect of all other generation assets with a certificate of eligibility for coal-fired generation assistance. This situation would create significant uncertainty for recipients of assistance as it could, for example, involve the relinquishment of incorrectly issued units to the Authority. To prevent this circumstance from requiring alterations to all previous issuances of assistance, the definition of the ‘total annual assistance factors for that eligible financial year’ includes certificates purportedly issued by the Authority, that is, it includes annual assistance factors in certificates that were found to have been issued incorrectly by the Authority through a review process [Part 9, Division 2, clause 176(2)] . This means that the ‘total annual assistance for that eligible financial year’ cannot change after 1 September of each financial year and that previous issuances of assistance to a given generation asset cannot be altered due to a review of an annual assistance factor determined in respect of a different generation asset.

6.58               However, a review could require the issuance of additional free Australian emissions units in respect of the generation asset that was the subject of the review. In this event, the fact that other allocations are not adjusted could mean that the number of units issued in a given financial year could exceed the Government’s cap for that year. The Government has committed to issue 228,700,000 free Australian emissions units over the first ten years of the Scheme, with a different number of Australian emissions units to be issued in each of the first five years of the Scheme than will be issued in each of the sixth, seventh, eighth, ninth and tenth years of the Scheme. The number of units to be issued (the generation assistance limit for that eligible financial year) for the first, second, fourth and fifth years of the Scheme is set at 26,140,000. Further, the number of units to be issued (the generation assistance limit for that eligible financial year) for the sixth, seventh, eighth, ninth and tenth years of the Scheme is set at 19,600,000 [Part 9, Division 2, clause 176(2)] . However, the generation assistance limit for that eligible financial year is adjusted in the third year of the Scheme to ensure that the number of units issued over the first three years of the Scheme does not exceed 78,420,000 (or three times 26,140,000) when taking into account the 26,140,000 units issued on each of 1 September 2011 and 1 September 2012, and any additional units that may have been issued as a result of a review [Part 9, Division 2, clauses 176(2) and 176(4)] . The adjustment also takes into account units withheld as a result of a generation complex failing the power system reliability test [Part 9, Division 5, clause 188] . This adjustment mechanism ensures that the Government’s overall cap is not breached as a result of any reviews of annual assistance factors that are resolved prior to 1 September 2013. However, the Government’s overall cap could be breached in the unlikely event that a review of a generation asset’s annual assistance factor did not conclude until after 1 September 2013.

6.59               The Authority’s allocation decisions under clause 176 are not subject to the review processes in Part 24 as they simply involve the mechanical application of a formula to determine the correct number of free Australian emissions units to issue in respect of a particular generation asset, and the correct application of the provisions that determine the correct recipient of assistance in respect of that generation asset [Part 9, Division 2, clause 176(6)] . Judicial review is available if, for example, the incorrect number of units is issued in respect of a generation asset or units are issued to the wrong recipient.

6.60               The Authority must publish each certificate of eligibility for coal-fired generation assistance as soon as practicable after it is issued [Part 9, Division 3, clause 180(6)] . This is important because, as outlined above, the number of free Australian emissions units issued in respect of a generation asset, is a function of not only the annual assistance factor specified in the certificate of eligibility for coal-fired generation assistance issued in respect of that asset, but also all other annual assistance factors specified in respect of all other generation assets. Accordingly, the public disclosure of the issue of all certificates of eligibility for coal-fired generation assistance, and the annual assistance factors in those certificates, is important to ensure that all potential recipients of assistance have access to information that impacts on the allocation of units under this Part.

6.61               Free Australian emissions units that are issued in respect of a particular generation asset are issued to the entity that was liable for the emissions created from the operation of that asset as of the end of the previous financial year. To achieve this, it is assumed that the generation asset was a facility, and that this facility created sufficient greenhouse gas emissions to meet the Scheme’s threshold for liability. The provisions of the bill that determine liability for emissions under the Scheme are then applied to identify the person who would be liable for the emissions from the generation asset given those assumptions. This person is the recipient of assistance [Part 9, Division 2, clause 176(6)] . In this way, the recipient of assistance identified under this clause is one of three possible persons:

•        the controlling corporation of a group where one or more members of the group has operational control of the generation asset

•        the non-group entity with operational control of the generation asset

 or

•        the person with a liability transfer certificate in relation to the facility that includes the generation asset (for example, a company with financial control of the facility).

6.62               The issue of units under Part 9 is subject to all of the following:

•        the person in receipt of those units must make a submission to the Authority about whether or not the generation asset in question is likely to receive a ‘windfall gain’ (see below) due to the provision of free Australian emissions units before 30 September 2017

•        the generation asset must not be the subject to a windfall gain declaration and a determination by the Minister following the assessment of whether or not a windfall gain is likely

•        the generation asset must comply with the power system reliability test.

[Part 9, Division 2, clause 176(9)]

Windfall gain review

6.63               The issuance of free Australian emissions units in respect of any given generation asset is subject to the provisions of Part 9, Division 4. This Division implements the Government’s policy that recipients of coal-fired generation assistance must subject themselves to a review to minimise the prospect of them receiving a ‘windfall gain’ in respect of a generation asset. This review applies individually to each generation asset in respect of which free Australian emissions units are issued under this Part.

6.64                The introduction of a scheme to reduce pollution caused by emissions of carbon dioxide and other greenhouse gases would ordinarily be expected to reduce the value of a generation asset that produces a large amount of greenhouse gases. However, the introduction of such a scheme could provide a generation asset with a ‘windfall gain’ where, as part of the introduction of the Scheme, the Government provides assistance in respect of that asset and the value of the assistance exceeds the negative impact of the introduction of the Scheme on the value of the asset.

6.65               However, it is impossible to precisely estimate the impact of the introduction of the Scheme on the value of a generation asset. This is particularly the case for projections of the likely impact of the Scheme on a generation asset into the future, but also applies to estimations of the impact of the Scheme on a generation asset made after the event as it can be difficult to know in retrospect what would have occurred had the Scheme never been introduced. These inherent uncertainties in the windfall gain review are reflected in the design of the review as set out below.

Decision-making process of the review

6.66               The decision-making structure of the windfall gain review reflects the inherent uncertainty of the assessment at hand. The first step of the process requires the Authority to apply the ‘windfall gain test’ to each generation asset in respect of which coal-fired generation assistance is provided [Part 9, Division 4, clause 187] . This test essentially requires the Authority to make an assessment of whether it is likely that the value of assistance provided in respect of a given asset under the Part will exceed the impact of the Scheme on the value of that asset (see 6.94 for more detail). The test requires a judgement of a windfall gain being ‘likely’, because such an assessment will be probabilistic rather than deterministic in nature. If the Authority is satisfied that a windfall gain is likely, that is, the asset in question is assessed to pass the windfall gain test, the Authority must make a ‘windfall gain declaration’ in respect of that asset [Part 9, Division 4, clause 186(2)(a)]. Conversely, if the Authority is not satisfied that the generation asset passes the windfall gain test, the Authority must refuse to make a windfall gain declaration [Part 9, Division 4, clause 186(2)(b)] .

6.67               The Authority must consult on a draft of any windfall gain declaration, and consider any submissions received within the time limit specified for consultation on this draft [Part 9, Division 4, clauses 186(3)(a)-(b)] . The time limit specified cannot be less than 30 days [Part 9, Division 4, clause 186(3A)] . The Authority is also required to consult with the Australian Energy Regulator, Australian Energy Market Commission and appropriate energy market operators, to ensure that it has accessed relevant energy market expertise in making its assessments [Part 9, Division 4, clauses 186(3)(c)-(da)] .

6.68               In deciding whether or not to make a windfall gain declaration, the Authority may make such estimates and consider such matters as it considers reasonable and relevant [Part 9, Division 4, clause 186(4)] . The making of such estimates and consideration of such matters must be relevant to the decision of the Authority under this section, namely the Authority’s consideration of whether or not a particular generation asset passes or does not pass the windfall gain test, as provided for by [Part 9, Division 4, clause 186(2)] . The Authority cannot make estimates and consider matters not relevant to deciding whether or not the windfall gain test is passed or not. For example, the Authority could not consider the effect of the Scheme on the generation asset outside of the 15-year period specified in the windfall gain test in clause 187.

6.69               The Authority must provide a copy of a windfall gain declaration and a report setting out the Authority’s reasons for making the declaration to the person who made a submission to the windfall gain review in respect of that asset at least 14 days before providing the declaration and report to the Minister, or publishing them [Part 9, Division 4, clause 186(9)] . Amongst other things, this will give the affected person an opportunity to request the Authority to remove commercial-in-confidence information from the report, as provided for by [Part 9, Division 4, clause 186(8)] .

6.70               A decision to make a windfall gain declaration, or to refuse to make a windfall gain declaration, in respect of a generation asset, is subject to the review process in Part 24 of the bill. This allows affected persons to fully argue their position in respect of whether a windfall gain is likely to occur. The significance of a windfall gain declaration is also such that clause 35(3)(b) of the Australian Climate Change Regulatory Authority Bill 2010 prohibits such a decision from being delegated.

6.71               The bill clarifies that a windfall gain declaration is not a legislative instrument, and is therefore not subject to Parliamentary disallowance [Part 9, Division 4, clause 186(10)] . This is appropriate as a windfall gain declaration is an administrative decision applicable to one entity, rather than a legislative decision of general application. Further, a windfall gain declaration is subject to both merits review (as noted above) and judicial review (for example, as provided by the Administrative Decisions (Judicial Review) Act 1977 ).

6.72               The second step of the windfall gain review provides the Minister administering the Act with discretion to make, or not make, a determination that halves the number of free Australian emissions units that may be issued to a generation asset that is subject to a windfall gain declaration during the final three years for which coal-fired generation assistance is available [Part 9, Division 4, clause 183(1)] . However, the Minister cannot make such a determination if a windfall gain declaration is not in force in respect of this asset [Part 9, Division 4, clause 183(2)] .

6.73               The broad discretion afforded the Minister reflects the need for judgement as to whether withholding assistance under this clause undermines the policy objective of providing assistance, or whether the provision of only partial assistance for the remaining three years is likely to prove effective in supporting that objective and withholding the remaining portion is a necessary measure to avoid providing the generation asset in question a windfall gain. As the Ministerial decision is in effect another form of review of the Authority's finding, which already has an extensive merits review process, it is inappropriate to subject it to another merits review process. Judicial review is available in respect of the Minister's decision, for example, as provided by the Administrative Decisions (Judicial Review) Act 1977 .

6.74               The bill clarifies that a determination made by the Minister under this clause is not a legislative instrument, and is therefore not subject to Parliamentary disallowance [Part 9, Division 4, clause 183(5)] . This is appropriate as a determination is an administrative decision applicable to one entity, rather than a legislative decision of general application.

6.75               If a windfall gain declaration is over-turned by a court or through a review process under Part 24, the Minister must declare in writing that the Act has effect as if the determination made or purportedly made is revoked [Part 9, Division 4, clauses 184(1)-(2)] .

6.76               Similar to determinations made under clause 183, the Ministerial declaration is not a legislative instrument and is not subject to Parliamentary disallowance [Part 9, Division 4, clause 184(3)] .

6.77               A declaration made under clause 184(2) has the effect of ensuring that the Australian emissions units that were withheld as a result of a determination being made or purportedly made are issued 10 business days after the declaration was made [Part 9, Division 4, clause 184A] . This clause applies separately to each occasion on which a reduced number of Australian emissions units are issued in respect of a generation asset. For example, if a Ministerial determination was revoked on 1 December 2019, it would apply twice: once in respect of the reduced allocation of Australian emissions units issued on 1 September 2018 and a second time in respect of the reduced allocation issued on 1 September 2019.

6.78               The number of Australian emissions units issued under this clause is equal to the reduced number of free Australian emissions units that were issued [Part 9, Division 4, clause 184A(2)] . This ensures that a further 50 per cent of the allocation is issued under clause 184A, returning the allocation to the full number of Australian emissions units that would have been issued had the determination not been made or purportedly made.

6.79               The Australian emissions units issued under this clause will have a vintage year of the year in which they are issued [Part 9, Division 4, clause 184A(3)] . This is necessary because Australian emissions units may be issued under clause 184A after the last auction of Australian emissions units of the vintage year of the eligible financial year in which the reduced number of Australian emissions units were issued.

6.80               For example, if a reduced number of Australian emissions units were issued on 1 September 2018, and a Ministerial determination was revoked on 1 January 2020, it is unlikely that there would be any Australian emissions units of the eligible financial year beginning on 1 July 2018 remaining for issue. Therefore, the Authority would need to issue Australian emissions units with a vintage year of the eligible financial year beginning on 1 July 2019.

6.81               This provision will ensure that the Authority complies with requirements relating to the total number of Australian emissions units of a particular vintage year that are auctioned or issued [Part 4, Division 2, Subdivision A, clause 93] .

6.82               This provision cannot result in a double entitlement to free Australian emissions units [Part 9, Division 4, clause 184A(6)] .

The effect of the review

6.83               The effect of a windfall gain declaration being made in respect of a generation asset is that the number of Australian emissions units available to be issued in respect of that asset is halved for the last three of the ten years for which assistance is provided under this Part [Part 9, Division 4, clause 183(1)] .

6.84               This design of the windfall gain review supports energy security by ensuring that generators will have some incentive to comply with the power system reliability test for the ten year period over which assistance is delivered under this Part, even if the incentive is reduced in the last three years due to a determination having been made in respect of a given generation asset.

6.85               Part 9, Division 4 provides for only two distinct outcomes: if a Ministerial determination is made under clause 183, the number of units must be halved for all of the final three years for which assistance is available; alternatively, if a determination is not made, the full number of units is available for all these years (subject to the power system reliability test). In other words, the windfall gain review does not provide for a spectrum of outcomes, such as allowing the number of units provided to be halved for only one or two years. The windfall gain review is not designed to allow the amount of assistance that is withheld to be calibrated closely to the particular circumstances of a particular generation asset. Designing the review in this way would not reflect the inherent uncertainty in the extent of lost value for a given asset, and therefore the uncertain amount of assistance that would offset this loss whilst avoiding a windfall gain. Further, the intent of providing coal-fired generation assistance was not to fully offset losses in asset value, but to partially offset extreme losses in order to support investor confidence in the sector. Within this context, the Minister will be able to consider, in respect of each individual generation asset, whether withholding the full amount of Australian emissions units that are subject to the review is appropriate where this will mean that the assistance provided falls significantly short of the loss of value in respect of that asset.

Information for the purposes of the review

6.86               The person issued units on 1 September 2017 must make a submission to the Authority about whether or not a windfall gain is likely [Part 9, Division 4, clauses 185(1)-(2)] . This is to be in a form approved by the Authority and containing information and documents specified by the Authority in a legislative instrument [Part 9, Division 4, clause 185(3)] . The Authority is best placed to determine what information is required to apply the windfall gain test and so has been delegated the responsibility for setting these out in a legislative instrument. The Legislative Instruments Act 2003 contains relevant provisions which govern the making of these instruments, including the consultation requirements set out in Part 3 of that Act.

6.87               While it will be important for the Authority to take into account information from recipients of assistance and consider their views on the likelihood of their generation assets receiving a windfall gain, it is unlikely that this legislative instrument will require submissions to include the outcomes of a modelling exercise indicating the likelihood of a windfall gain. Many of the parameters affecting the likelihood of a windfall gain for a given generation asset will be common to many generation assets, such as the level of carbon prices or electricity prices. As outlined below in 6.89, the implementation of the windfall gain test may be best applied through a common modelling exercise undertaken by the Authority in respect of all generation assets, rather than through various separate modelling exercises undertaken by recipients of assistance. The latter approach would involve inconsistent assumptions and methodologies between generation assets, creating issues of fairness in terms of how the windfall gain test was applied between different generation assets.

6.88               The Authority will also be able to draw upon information from other regulatory bodies, such as the Australian Energy Regulator, through its information sharing provisions.

6.89               Failure to make a submission that complies with the necessary requirements will result in all assistance being withheld for the remaining three years of the Electricity Sector Adjustment Scheme [Part 9, Division 4, clause 185(4)] .

The windfall gain test

6.90               As set out above, the windfall gain test essentially requires the Authority to make an assessment of whether it is likely that the value of assistance provided in respect of a given generation asset under the Part will exceed the loss of value experienced by that asset under the Scheme.

6.91               The extent of any loss of asset value experienced under the Scheme must be assessed through a ‘with or without analysis’, that is, an analysis that looks at the value of the asset under the Scheme and its value in the event the Scheme was not implemented. The value of an asset can be determined by looking at the revenue the asset is likely to earn over the period in question from generating electricity, and costs the asset is likely to incur in generating that electricity. The difference between the revenue earned by an asset and the costs it occurs in operating are described as the asset’s ‘net revenue’ throughout Part 9, Division 4.

6.92               The Authority is likely to perform this analysis through detailed modelling of the electricity generation sector. Typically this modelling involves simulating the behaviour of existing and hypothetical new entrant generators in the wholesale electricity market under various conditions. These conditions could include different demand scenarios, different scenarios for the price of various inputs to the generation process (such as the cost of coal or natural gas, or the capital cost of new generating equipment) or scenarios based on different projected carbon prices (including a projection of an absence of any carbon price). Sensitivity testing of different assumptions, or the use of different models employing the same assumptions, can be used to analyse the range of plausible outcomes in the electricity market under different circumstances, and give indications of the likelihood of different scenarios. Necessarily such an analysis requires a simplification of the real technical and commercial constraints on the behaviour of existing and new generators in the electricity market, and so can only give a broad simulation of the impact of different scenarios on a given commercial entity.

6.93               The Authority must perform the analysis over a 15 year period beginning on 1 July 2011 [Part 9, Division 4, clauses 187(4)-(7)] . Accordingly, this analysis will encompass both a historical period (that is, the period from 1 July 2011 until the analysis is performed in 2017 or 2018), and a future period (that is the period from 2017 or 2018 until 30 June 2025). The modelling of future periods necessarily involves simulating possible future outcomes for generators, such as their output, the costs they incur in operating and the general level of electricity prices they can earn in the electricity market. By contrast, modelling equivalent outcomes for a historical period of time could involve simulating hypothetical outcomes using known parameters, or could involve using observed data in place of modelling where possible. However, not all data relevant to the windfall gain test will be available for a given historical period of time. For example, whilst the actual electricity output of a generator might be known for a historical period, the costs incurred by the generator in producing that output may not be. In practice, it is possible that the Authority will use a combination of observed inputs (such as the observed level of electricity and carbon prices) and modelling simulations to apply the windfall gain test to a historical period. Using modelling to simulate outcomes for generators over a historical period also reduces the risk that the windfall gains test will provide incentives for generators to alter their behaviour in that period to alter the outcome of the test. 

6.94               To undertake the windfall gain test, the Authority must firstly determine the value of the projected net revenue from the operation of the generation asset, or the proposed generation complex, during the 15-year period beginning on 1 July 2011 [Part 9, Division 4, clauses 187(4)-(7)] . This analysis requires the Authority to look at the projected net revenue of the generation asset or proposed generation complex under known policy settings, such as the fact that the bill has been enacted to implement the Scheme and that the Renewable Energy (Electricity) Act 2000 was amended on 20 August 2009 to implement the Government’s expanded national Renewable Energy Target. By contrast, the alternative case requires the Authority to assume that the bill was never enacted and that the Renewable Energy (Electricity) Act 2000 as in force at the start of 3 June 2007 was never amended [Part 9, Division 4, clauses 187(4)-(7)]. In this way, the windfall gain test is structured to take into account the effect of both the Scheme and the expanded national Renewable Energy Target on generation assets. The difference between these two scenarios will determine whether a generation asset experiences a projected long-term net revenue loss or a projected long-term net revenue gain. As noted earlier, given the inherent uncertainties involved in such an analysis, the Authority’s assessments of the extent of a projected long-term net revenue loss or a projected long-term net revenue gain should be broad and probabilistic, rather than involving the calculation of a single, precise value.

6.95               It is possible that the cost impact of the Scheme on a relatively less emissions-intensive coal-fired generator could be smaller than the increase in revenue enjoyed by that generator under the Scheme as its competitors face relatively larger increases in costs. This circumstance would result in an increase in the value of the asset under the Scheme. It is also possible that the increase in revenue enjoyed by a generator is approximately the same as the cost impact it faces, and that the asset is essentially indifferent to the introduction of the Scheme. Under these circumstances, a generation asset can be considered to experience a projected long-term net revenue gain as a result of the Scheme, and the provision of any assistance in respect of this asset can be considered to constitute a windfall gain. Accordingly, the Authority must firstly determine whether a generation asset (whether a generation complex or a generation complex project) is likely to experience a projected long-term net revenue gain [Part 9, Division 4, clauses 187(6)-(7)] . Where an asset is likely to enjoy a ‘projected long-term net revenue gain’ under the Scheme, the asset is deemed to pass the windfall gain test [Part 9, Division 4, clause 187(2)(b)].

6.96               Conversely, where the cost impact of the Scheme on a coal-fired generator is greater than the increase in revenue it enjoys under the Scheme, that generator faces a ‘projected long-term net revenue loss’. The Authority must determine both whether a projected long-term net revenue loss is likely to occur for a generation asset (whether a generation complex or a generation complex project), and the extent of that projected long-term net revenue loss [Part 9, Division 4, clauses 187(4)-(5)] .

6.97               Where an asset faces a projected long-term net revenue loss under the Scheme, the outcome of the windfall gain test relies on a comparison of the extent of this loss with the ‘total value of assistance’ provided in respect of that asset. The total value of assistance includes the value of assistance that has not yet been provided but will be provided subject to the windfall gain review [Part 9, Division 4, clause 187(3)]. If it is likely that the total value of assistance will exceed the projected long-term net revenue loss, the generation asset is deemed to pass the windfall gain test and the Authority must make a windfall gain declaration in respect of that asset [Part 9, Division 4, clause 186(2)(a)] . This generation asset is then subject to the Minister’s power to make a determination withholding a portion of the Australian emissions units that could be issued in respect of that asset. As noted earlier, the effect of such a determination is to withhold all units that are subject to the review, which reflects the policy intent that providing coal-fired generation assistance was not to fully offset losses in asset value. The Government considers that partially offsetting extreme losses in asset value is sufficient to support investor confidence in the electricity generation sector.

6.98               The windfall gains test focuses on projected long-term net revenue losses and gains in respect of generation assets. For reasons of fairness, it is important that the Authority will focus on the costs incurred by and revenue available to generation assets, as opposed to the costs incurred by and revenue available to the owners of generation assets. Owners of generation assets (‘equity-holders’) will typically hold loans on these generation assets, and therefore a cost incurred by equity-holders includes interest payments made to creditors. Accordingly, the net revenue earned by generation assets will be apportioned between providing a return to equity-holders (profit) and to make interest payments and repaying the principal of these loans. However, the profit earned by equity-holders will vary according to the level of debt held on an asset and the rate of interest charged on those loans, and may not be able to be fairly compared between assets for the purpose of a transparent and equitable application of the windfall gain test. Further, capital structures change over time for a range of reasons, and it would be problematic to assume either a constant capital structure over the period assessed under the windfall gain test, or to make assumptions about what capital structure may have applied to a generation asset in the absence of the Scheme being implemented. These choices could bias the outcome of the review if it focused only on the impact of the Scheme on returns to equity-holders, rather than on the net revenue available to the generation asset itself (and ignoring the distribution of that net revenue between creditors and equity-holders). Accordingly, the windfall gain test should only be applied to generation assets, and not look at particular impacts on equity-holders or creditors.

6.99               The total value of assistance provided in respect of a generation asset and the extent of a projected long-term net revenue loss or projected long-term net revenue gain must be calculated in ‘net present value’ terms. That is, these losses or gains in value might occur at different points in time, and accordingly have a different impact on a notional investor. For example, a cost borne or a benefit received today has a greater impact on a notional investor than one borne or received in the future, as the money lost or received could be used for or deprived from an alternative purpose that provides a stream of benefits over time. To truly compare the impact of these changes in value on a notional investor, a net present value analysis ‘discounts’ costs and benefits that occur over a period of time to their value at the ‘present’ time. This calculation involves both a ‘discount rate’ and a point in time to use as the present. In this context, a discount rate is the extent to which a notional investor prefers to receive a benefit or avoid a cost today rather than in the future, so it can use the money received or cost avoided to make a new investment earlier rather than later, and earn a return on that investment earlier rather than later. To give greater certainty as to how these different elements of the net present value calculation will be performed, the Authority must publish a legislative instrument setting this out [Part 9, Division 4, clause 187(8)(a)].

6.100           Similarly, the Authority must set out how it will determine the market value and the projected market value of Australian emissions units [Part 9, Division 4, clauses 187(8)(a)-(b)] , to clarify its calculation of the total value of assistance and to estimate the impact of the Scheme on the operating costs of generation assets. For example, the instrument might set out how the Authority will use data relating to the trading of Australian emissions units on a public exchange to determine the market value or projected market value of these units. Finally, the Authority must set out how it will determine net revenue and projected net revenue for the purposes of determining whether there is a projected long-term net revenue loss or projected long-term net revenue gain for an asset. For example, this instrument might set out what costs will be deducted from the revenue of a generation asset to determine its net revenue or projected net revenue.

6.101           The Government has decided that the Authority’s considerations in the windfall gain test should incorporate the effect of contracts entered into prior to 3 June 2007. Such contracts, where they allow a generation asset to pass a greater portion of its costs under the Scheme onto its customers than its economic position in the market might otherwise allow, could increase the likelihood of a generator receiving a windfall gain through the Electricity Sector Adjustment Scheme. Accordingly, the legislative instrument will set out how the Authority must take these contracts into account when setting out how it will calculate the net revenue or projected net revenue of generation assets [Part 9, Division 4, clause 187(9)]. The Government expects that this instrument will set out how the Authority will assess the extent of carbon cost pass through under particular contracts, and adjust the net revenue and projected net revenue calculations for generation assets in light of this and other elements of contracts.

6.102           However, the extent of the matter is limited to the specific consideration of individual contracts entered into before 3 June 2007. The Authority could take into account the general market value of electricity sold by generators in assessing the net revenue and projected net revenue of generators under the windfall gain test. This assessment could be informed by considering prevailing prices for electricity reflected in hedge contracts or direct supply contracts entered into after 3 June 2007. However, such contracts have been, and will be, made with full knowledge of the potential impact of the Scheme on the respective parties to the contract. The intent is that the Authority does not take into account the specific terms of individual contracts entered into after 3 June 2007, but is not prevented from considering the general level of electricity prices as revealed through activity in markets for hedge contracts or direct supply contracts. This approach does not give generators an incentive to enter into disadvantageous or perverse contractual arrangements to distort the effect of the windfall gain review, whilst allowing the Authority to generally consider revealed prices in contract markets as a useful input into its assessments of net revenue and projected net revenue.

6.103           To ensure proper consultation on this legislative instrument, the Authority is required to publish a draft and invite submissions [Part 9, Division 4, clause 187(10)] . The Authority is also required to consider submissions provided within the time limit specified for consultation, which must not be less than 30 days [Part 9, Division 4, clauses 187(10)(b) and 187(11)] . To give sufficient time for applicants to consider these matters before making a submission (which must occur by 30 September 2017), the Authority must take all reasonable steps to ensure that the draft and final instruments are published before 1 January 2017 and 1 July 2017 respectively [Part 9, Division 4, clause 187(12)] .

6.104           The nature of this legislative instrument is that it sets out a manner in which certain values and parameters must be calculated by the Authority. It is not intended that the instrument would set out the value that the Authority will use as the market value or projected market value of Australian emissions units over the period of the test. Instead, the instrument should set out a manner in which this value is to be determined. Similarly, the instrument should set out a manner in which the Authority will calculate the net revenue or projected net revenue for various generation assets, but should not set out a value for the net revenue or projected net revenue of a given generation asset in the instrument. In relation to net present value calculations, it is possible that the instrument might set out not only the mathematical formula the Authority will use to discount a stream of costs and benefits over time to a net present value, but also the discount rate it will apply when doing so. This would be appropriate as, for reasons of fairness, the discount rate applied should be consistent for all generation assets. Given the consultation requirements in place, this legislative instrument would appear to be an appropriate method by which the Authority may determine and set out the discount rate to apply in the windfall gain test in a transparent and up-front manner.

6.105           If, in undertaking a windfall gain test, the Authority took into account the fact that the owner of a generation asset had, for example, modified the asset to improve its efficiency, or planned to do so, its calculation of the projected long-term net revenue loss of the asset would be likely to be lower (reflecting its improved efficiency) and therefore would be more likely to be less than the total value of assistance provided in respect of that asset. Therefore, if actual, planned or possible upgrades to generation assets were taken into account as part of the windfall gain test, the test itself would discourage efficiency improvements or other modifications to generation assets that might reduce emissions of greenhouse gases. This, in turn, would undermine the overall objective of the Scheme. Therefore, the Authority is required to not take these into account in undertaking the windfall gain test [Part 9, Division 4, clauses 187(13)-(14)] .

6.106           In undertaking the windfall gain test, the Authority is required to assume that all Australian emissions units are issued in respect of each generation asset [Part 9, Division 4, clause 187(15)] . This is because the windfall gain test is designed to consider what the impact of the Scheme, and the assistance provided under this Part, would be if the full amount of Australian emissions units available in respect of each generation asset were issued to that asset. The windfall gain test is not designed to consider what would happen in the event that units are withheld under the windfall gain review or the power system reliability test (which is set out in Part 9, Division 5). If this approach were adopted, the windfall gain review would become circular. 

Power system reliability test

6.107           The Government has designed the provision of assistance to coal-fired generators under this Part in a way that minimises the risk of recipients altering their future production decisions in response to the provision of assistance. However, to protect energy security over the first ten years of the operation of the Scheme, the Government has imposed conditions on the provision of assistance. This conditionality is designed to reduce the risk of unexpected behaviour from owners, controllers or operators of generation assets (or their creditors) from affecting the reliability of supply in Australia’s electricity markets. An example of such unexpected behaviour might be where a reduction in asset value of a generator causes its creditors to force it to shut down even though it is still required to operate to maintain sufficient supply in an electricity market.

6.108           Part 9, Division 5 requires generation assets to comply with the ‘power system reliability test’ in order to receive assistance available under this Part. In this way, the power system reliability test uses the value of Australian emissions units available under this Part to influence the decisions of some owners, operators or controllers of generation assets in respect of which assistance is available about when to withdraw generating capacity from Australia’s electricity markets, in order to promote the secure supply of electricity. Depending on circumstances in the electricity market, a decision to withdraw generating capacity from a market could affect energy security by reducing the maximum amount of electricity that can be generated and supplied below the level that is required to reliably meet peak demand. Accordingly, the power system reliability test focuses on changes to a generation complex’s ‘nameplate rating’ because the reliability of a power system depends, in part, on the maximum continuous electrical output of all the generators connected to the system being sufficient to supply the maximum likely demand for electricity within the system, whilst also allowing for contingencies such as malfunctions of generators and technical constraints on the safe operation of the system.

6.109           The power system reliability test is structured around concepts and processes established outside the bill in laws relating to the regulation of energy markets. The primary laws (and instruments made under those laws) that are likely to be applied in the Authority’s assessments of the power system reliability test are:

•        in relation to the National Electricity Market, the National Electricity Rules

•        in relation to the Western Australian Wholesale Electricity Market, the Wholesale Electricity Market Rules.

6.110           These laws require generators to register with the operator of the energy market in which they operate. Rule 2.2 of the National Electricity Rules requires the person who engages in the activity of owning, controlling or operating a generator in the National Electricity Market to register with the Australian Energy Market Operator (AEMO), unless it is the subject of an exemption. Similarly, Regulations 14 and 19 of Western Australia’s Electricity Industry (Wholesale Electricity Market) Regulations 2004 require a person who engages in the activity of owning, controlling or operating a generator in the Western Australian Wholesale Electricity Market to register with the Independent Market Operator of Western Australia, subject to exemptions and a minimum capacity requirement. Registration as a generator under these two laws requires compliance with a range of technical and operational conditions. In turn, compliance with these conditions supports the reliable and safe operation of the National Electricity Market and Western Australian Wholesale Electricity Market, and gives the respective energy market operators powers necessary to manage system security.

6.111           Accordingly, by using the value of assistance available under this Part to create incentives that influence the decision of a recipient of assistance to cease its registration as a generator, or reduce its nameplate rating, the power system reliability test supports the reliable and safe operation of the National Electricity Market and Western Australian Wholesale Electricity Market. A generation complex’s nameplate rating is defined in the bill as its maximum continuous electrical output in megawatts of the generation complex, as registered with the appropriate energy market operator. The National Electricity Rules and the Western Australian Wholesale Electricity Market Rules require registered generators to register various parameters relating to the generating capacity of their various generation units and generation complexes. Of these various parameters, the Authority will need to determine which registered parameter most closely fits the definition of the nameplate rating in the bill, and therefore which parameter must be considered when applying the power system reliability test. Where a particular parameter is provided in relation to individual generation units, the various values might need to be aggregated to the level of the generation complex in respect of which assistance is provided for the purpose of the power system reliability test.

6.112            For example, Schedule 3.1 of the National Electricity Rules requires a person classified as a scheduled generator to register the ‘full load’ in megawatts for each ‘generating unit’, and the ‘total station registered capacity’ in megawatts for a ‘power station’ with AEMO. Either of these parameters could be considered by the Authority to be the nameplate rating of a generation complex (although the full generating load of a generating unit may need to be aggregated to be consistent with the boundaries of the generation complex in question). Whilst the National Electricity Rules separately defines the concept of a ‘nameplate rating’, this parameter is not registered with AEMO under the National Electricity Rules, and so would not fit the definition of a nameplate rating under the bill. Clause (b)(ii) of Appendix 1 of the Western Australian Wholesale Electricity Market Rules requires