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Tuesday, 11 August 2009
Page: 4604

Senator Abetz asked the Minister for Climate Change and Water, upon notice on 8 May 2009:

(1)   With reference to the last dot point on page 14 of the 2009 Exposure draft: Carbon Pollution Reduction Scheme Bill 2009: Commentary: (a) can a list be provided of what are the ‘major economies’ in question; (b) can ‘substantially restrain’ be defined; (c) can a list be provided of what are the ‘advanced economies’ in question; and (d) can ‘comparable’, in this context, be defined (does this mean overall cuts or per capita).

(2)   Is the Carbon Pollution Reduction Scheme (CPRS) a tax or not a tax.

(3)   With reference to the statement on page 12 of the exposure draft that ‘in case the charge for Australian emissions units issued as a result of an auction or for a fixed charge is, at some time in the future, considered to be taxation’, how does the department envisage this potential change in definition taking place.

(4) (a)   Why is it necessary to have exposure drafts of the Carbon Pollution Reduction Scheme (Charges - General) Bill 2009, the Carbon Pollution Reduction Scheme (Charges - Customs) Bill 2009, and the Carbon Pollution Reduction Scheme (Charges - Excise) Bill 2009; and (b) what would be the consequence of not having these three bills passed into law.

(5)   Has the Government sought any legal advice on whether the CPRS is a tax or is not a tax; if so, what was the total cost of that advice; if not, why not.

(6)   How many regulations will be required to fully enact the CPRS.

(7)   On what date will the first, and last, of these regulations be made.

(8) (a)   How many regulations will be created under Chapter 4 of the bill which deals with emissions intensive, trade exposed industries; and (b) on what date will the first, and last, of these regulations be made.

(9)   What is the estimated cost to business: (a) of determining their eligibility; and (b) of complying with the reporting requirements, under the emissions intensive, trade exposed assistance program.

(10)   In regard to example 1.2 on page 40 of the exposure draft commentary where it states that ‘Company A is only liable for the fugitive emissions of 23 000 tonnes of CO2-e’, would company A be exempt from the CPRS because it is below the 25 000 tonne threshold; if not, why not.

(11)   In regard to carbon sequestration rights, who owns the right in the case of a managed investment scheme.

(12)   What is the estimated cost of the computer program/system to work out the unit entitlement to be specified in a certificate of reforestation.

(13)   In regard to example 6.2 on page 186 of the exposure draft commentary, is the Minister stating that eligible reforestation projects will reduce the value of the farm land on which it is planted.

(14)   In regard to section 9.26 in Chapter 9 ‘Compliance and enforcement’ of the exposure draft commentary, does the ‘assistant’ to an inspector require any form of appointment, certification or training.

(15)   In regard to section 312 of the exposure draft, can other examples be provided (e.g. authorities, agencies etc) where inspectors can compel persons to answer questions on threat of imprisonment, with no exemption on the grounds of self-incrimination.

(16)   What is Government’s projected total annual administrative budget for operating the CPRS.

(17)   (a) What is the total number of Government employees that will be required to oversee the operation of the CPRS; and (b) what are the Australian Public Service classifications of these employees.

(18)   (a) What will be the total cost of establishing the Australian Climate Change Regulatory Authority (ACCRA); (b) what will be the total annual cost of running the ACCRA; and (c) how many staff will ACCRA employ.

(19)   Has the department identified the estimated 1 000 emitters who will be covered by the CPRS; if not, when will this be done.

(20)   (a) How many small businesses and sub-contractors will have to report their emissions by virtue of a controlling contract/business being covered by the CPRS; and (b) what will be the annual cost to these small businesses and sub-contractors of having to report their emissions.

(21)   What effect does the Government expect the current world recession will have on the world’s emissions and if emissions growth slow, to what degree and for how long.

(22)   Given that it is accepted that the early 1990s recession had a measurable effect in reducing Australia’s emissions, what is the expected effect that the current economic slowdown in Australia will have on Australia’s emissions.

(23)   Does the department have access to any modelling which explicitly models this legislation, that is, a five per cent emissions cut regardless of any action other countries do or do not take; if so, will the Government release this modelling; if not: (a) why not; and (b) will the Government commit to commissioning such modelling.

(24)   How will free permits be treated for taxation and accounting purposes, i.e. will free permits be taxable.

Senator Wong (Minister for Climate Change and Water) —The answer to the honourable senator’s question is as follows:

(1) (a)   A list of the ‘major economies’ was circulated in the Senate Standing Committee on Economics on 29 May 2009. The ‘major economies’ are the members of the US-led Major Economies Forum on Energy and Climate: Australia Brazil Canada China European Union France Germany India Indonesia Italy Japan Korea Mexico Russia South Africa United Kingdom United States of America

(b)   Committing to ‘substantially restrain’ greenhouse gas emissions is widely understood as meaning that countries should take actions that will result in deviations below their business-as-usual emission trajectories.

(c)   Advanced economies’ refers to Annex I parties to the United Nations Framework Convention on Climate Change (UNFCCC) and at least some other high/middle income economies. Annex I Parties are: Australia Austria Belarus Belgium Bulgaria Canada Croatia Czech Republic Denmark European Economic Community Estonia Finland France Germany Greece Hungary Iceland Ireland Italy Japan Latvia Liechtenstein Lithuania Luxembourg Monaco Netherlands New Zealand Norway Poland Portugal Romania Russian Federation Slovakia Slovenia Spain Sweden Switzerland Turkey Ukraine United Kingdom of Great Britain and Northern Ireland United States of America ‘High or middle-income countries’ are countries that have similar national circumstances based on objective economic and developmental indicators. Indicators that could be used to differentiate countries include gross domestic product per capita, and ranking on the Human Development Index. Australia’s submission to the UNFCCC in November 2008 on ‘Mitigation’ provides an indication of the change in national development circumstances since 1992, when Annex I was established. In our submission we noted that a significant number of ‘advanced economies’ are not members of Annex I, such as Singapore, Malta and Korea. This submission is available at:

(d)   ‘Comparable’ refers to the evaluation of relative effort required by different countries to achieve any given mitigation goal. A number of factors are relevant to assessing comparability and no single indicator can by itself provide a comprehensive picture of the particular national circumstances of each country. Indicators such as capacity to pay, economic costs, emission reduction potential and population trends may be useful in assessing national circumstances and the relative ambition of country’s mitigation commitments. Assessing ‘comparability’ in this context, therefore, requires the use of indicators that assess, amongst other things, ‘overall cuts’ and ‘per capita’ reductions.

(2)   The Commonwealth does not consider that the charges for the auction of Australian emissions units or for the issue of units at a fixed charge (under the ‘price cap’) are taxes for constitutional purposes. However, the Government has taken an approach of abundant caution, with the charges Bills providing safeguards in case a court reaches a different view on this question. Companies should seek advice as to the impact of the Carbon Pollution Reduction Scheme (CPRS) legislation, including the charges Bills, on their particular contractual or other business arrangements.

(3)   Please see answer to part (2) above.

(4) (a)   As these Bills are included as a safeguard, there would be no consequences unless a court found that the imposition of charges for emissions units was a tax for constitutional purposes.

(b)   If the charges Bills were not passed into law and a court found that the imposition of charges for emissions units was a tax for constitutional purposes, the CPRS would be unworkable, as the provisions within the Bill imposing charges for emissions units would be inoperative, and there would be no alternative mechanism to deliver units at cost into the market.

(5)   Yes, legal advice on this matter has been sought. The advice was largely formulated by a lawyer from the Australian Government Solicitor who was out-posted to the Department of Climate Change. In accordance with the written agreement, the Department received invoices for the lawyer’s services at a daily rate and therefore did not receive invoices reflecting the cost of particular advices she worked on during this period.

(6)   The Bill includes approximately 90 clauses that provide for regulations to be made. Some regulations will be essential for the operation of the CPRS, such as those on the emissions-intensive trade-exposed (EITE) assistance program and CPRS caps. Other regulations may be made only if a need arises during the operation of the CPRS. As is common practice in Commonwealth legislation, the regulation-making power has been included to allow flexibility in the administration of the legislation and to avoid future regulatory gaps.

(7)   The first of the essential regulations are likely to be made within three months after the passage of the Bills. The last of the essential regulations are likely to be made by mid-2010. It is expected that regulations will be added and amended over time during the operation of the CPRS, as the need arises.

(8)   The regulations will contain a program for the delivery of Australian emission units to eligible persons who conduct EITE activities. The regulations will consist of procedural requirements for applying for Australian emission units, a list of eligible activities along with their baselines for allocation per unit of product and requirements around the closure of an activity. The volume of the regulations will depend upon how many activities are found eligible under the Government’s threshold for assistance set out in the White Paper.

(9) (a)   The Government has indicated its preference to provide assistance to entities conducting EITE activities on the basis of the historic industry average emissions from entities conducting the activity in Australia. The provision of appropriately audited data will enable determination of the allocative baselines under the program. (The provision of audited data would be required for any allocative methodology which is linked to historic emissions performances of currently operating entities.) The Bill does not, however, require entities to provide information to the Government as a pre-condition for receiving support under the EITE assistance program. For firms that choose to submit data to allow the determination of Australian average emissions per unit of production, we expect that there may be considerable variability in the costs that would be faced. The variability could arise because of differences in a business’s previous participation in emissions reporting or energy efficiency opportunities programs, differences in corporate structure and location, differences in operational systems and record keeping, differences in the complexity and structure of production processes and differences in the costs associated with verifying the information that is being provided to Government to underpin the allocation of free permits.

(b)   Costs for EITE reporting will also vary considerably because of the factors identified in (a) above. The EITE assistance program is designed to minimise the compliance cost to business. The program will use production parameters that are readily accessible to firms in the ordinary course of their business and financial reporting requirement.

(10)   The basic principle is that all emissions count toward the facility threshold, but that a facility would not be liable for emissions for which an upstream fuel supplier has already incurred a liability. The no double counting provisions state that the emissions from fuel for which a person did not quote their obligation transfer number do count for the purposes of determining whether the emissions from a facility meet the threshold (see clauses 17(7)(e), 18(6)(e), 19(6)(e), 20(9)(e), 21(9)(e), 22(8)(e) of the Carbon Pollution Reduction Scheme Bill). The no double counting provisions state that the emissions from fuel for which a person did not quote their obligation transfer number do not count for the purposes of determining their provisional emissions number (see clauses 17(7)(d), 18(6)(d), 19(6)(d), 20(9)(d), 21(9)(d), 22(8)(d) of the Carbon Pollution Reduction Scheme Bill). Therefore Company A’s total emissions of 26,000 tonnes of carbon dioxide equivalent would be counted for the purpose of determining whether it breached the “small facilities” threshold. Company A would not be exempt from the liable entity provisions. However, Company A would not incur a liability for the 3,000 tonnes of carbon dioxide equivalent emissions from the diesel fuel that it was supplied without quoting an obligation transfer number.

(11)   In essence, under the CPRS a carbon sequestration right will be defined as the exclusive legal right to obtain the benefit of sequestration of carbon dioxide by trees to which an eligible reforestation project relates. The CPRS will not create a new set of property rights but will recognise existing rights where they meet certain requirements. The ownership of these rights may differ between forest activities (including in relation to Managed Investment Schemes), for example, the carbon sequestration right may be held by: - the holder of the estate in fee simple unless he or she has granted to another person an interest in the land (such as, for example, a lease) which gives them that right; or - the holder of a lease under which the lessee has exclusive possession of the area; or - the entity granted a carbon sequestration right by the land owner, as provided for under legislation in certain states.

(12)   It is envisaged that the computer program will be an updated version of the National Carbon Accounting Toolbox, developed by the Australian Government. This computer program will be made available to the Australian Climate Change Regulatory Authority (ACCRA). Access to the computer program will be made available, free of charge, to CPRS participants via an on-line interface.

(13)   Example 6.2 has been included in the commentary for illustrative purposes only. The price paid for property that includes an eligible reforestation project will be determined by market forces. For example, prospective buyers may pay less for a property that includes a reforestation project because they intend to clear the forest (in which case they would be required to relinquish units). However, the existing owners would have received a benefit during the period that the forest was earning CPRS credits. In another example, a prospective buyer may pay more for a property that includes a reforestation project because they expect the forest to continue growing and earning CPRS units.

(14)   Clause 310 of the Bill provides for an inspector to be assisted by other persons in entering premises and exercising monitoring powers in relation to premises. A person assisting the inspector may only exercise monitoring powers in accordance with a direction given by the inspector. This arrangement ensures that any inspections will be undertaken by, and under the direction of, an inspector who must have suitable qualifications and experience, under clause 306(2) of the Carbon Pollution Reduction Scheme Bill. Clause 310 will also enable inspectors to draw on a wider range of expertise that may be necessary to conduct inspections effectively. For example, it is envisaged under clause 317 of the Bill that an inspector may need expert assistance to operate electronic equipment on premises being inspected.

(15)   Provisions under which a person may be required to answer questions or to produce information or documents are a common enforcement mechanism in Commonwealth legislation. They are often referred to as ‘notice to produce’ provisions, although in most cases they provide for attendance to answer questions as well. These provisions are appropriate when such powers will assist in the administration of Commonwealth legislation. Clause 312 overrides an individual’s privilege against self-incrimination, but provides an individual with immunity such that self-incriminatory disclosures cannot be used against the person who makes the disclosure, either directly in court (known as ‘use’ immunity) or indirectly to gather other evidence against the person (known as ‘derivative use’ immunity). However, the information could be used against a third party, such as an accomplice. This approach is consistent with the Guide to Framing Commonwealth Offences, Civil Penalties and Enforcement Powers, approved by the Minister for Home Affairs. The Senate Scrutiny of Bills Committee expressed the following views on the privilege against self-incrimination at pages 26-27 of its report on The Work of the Committee during the 41st Parliament November 2004 - October 2007: “2.45 At common law, people can decline to answer a question on the grounds that their reply might tend to incriminate them. Legislation that interferes with this common law entitlement trespasses on personal rights and liberties and causes the Committee considerable concern. 2.46 At the same time, the Committee is conscious of the Government’s need to have sufficient information to enable it to properly carry out its duties to the community. Good administration in some circumstances might necessitate the obtaining of information that can only be obtained, or can best be obtained, by forcing someone to answer questions even though this means that he or she must provide information showing that he or she may be guilty of an offence. Those proposing a Bill that affects or removes a person’s right to silence usually do so on this basis. 2.47 The Committee does not see the privilege against self-incrimination as absolute. Before it accepts legislation that includes a provision affecting this privilege, however, the Committee must be convinced that the public benefit that will follow from its negation will decisively outweigh the resultant harm to the maintenance of civil rights. 2.48 One of the factors the Committee considers is the subsequent use that may be made of any incriminating disclosures. The Committee generally holds to the view that the interest of having Government properly informed can more easily prevail where the loss of a person’s right to silence is balanced by a prohibition against both the direct and indirect use of the forced disclosure. The Committee is concerned to limit exceptions to the prohibition against such use. In principle, a forced disclosure should be available for use in criminal proceedings only when they are proceedings for giving false or misleading information in the statement that the person has been compelled to make.” The effective administration of the CPRS is an issue of major public importance with a significant impact on the Australian community and business. Non-compliance could undermine the capacity of the CPRS to drive cuts in greenhouse gas emissions and meet its international climate change obligations, result in unfair competition between compliant and non-compliant businesses, and reduce auction revenues which are used to assist households and businesses adjust to the CPRS. Clause 312 would enhance the ability of the ACCRA to monitor and ensure compliance with the CPRS in a way that is consistent with the views of the Scrutiny of Bills Committee, as well as Commonwealth legal policy, regarding the privilege against self-incrimination. Precedents for overriding the privilege against self-incrimination as outlined in the Carbon Pollution Reduction Scheme Bill include: - Environment Protection and Biodiversity Conservation Act 1999 (sections 486E, 486F, and 486J); - Telecommunications Act 1997 (section 524); and - Retirement Savings Act 1997 (section 117).

(16)   The annual administrative budget for operating the CPRS will form part of the annual budget for operating the Australian Climate Change Regulatory Authority. A Bill to establish the Authority is currently before the Parliament. The Authority’s annual operating budget will be finalised when the legislation is enacted and is expected to be included in the 2009-10 Additional Estimates.

(17)   The staff numbers required for future operations of ACCRA, and hence the CPRS, are still being assessed against the functions proposed for ACCRA in the White Paper and the draft legislation. At this stage, we anticipate that the final number of employees (including those currently employed in GERO and RER) will involve a significant increase to around 300 at full resourcing. Once settled, these resources will be provided in the Department’s Portfolio Budget Statement.

(18)   (a) The 2009-10 Budget provided $81.9 million to establish ACCRA.

(b)   A Bill to establish the ACCRA is currently before the Parliament. The ACCRAs annual operating budget will be finalised when the legislation is enacted and is expected to be included in the 2009-10 Additional Estimates.

(c)   It is expected that, when fully established, ACCRA will employ around 300 staff, including those currently working in the Department of Climate Change in the Greenhouse and Energy Reporting Office Division.

(19)   This number is an initial upper estimate; more accurate estimates of the number of liable entities will be possible following registrations under the National Greenhouse and Energy Reporting Act 2007, following passage of the Bill. This estimate is informed by analysis undertaken for the Government in development of the National Greenhouse and Energy Reporting System, as well as for the former Task Group on Emissions Trading and Department of Climate Change analysis. The Government proposes to include waste and synthetic greenhouse gases, and all excise and customs remitters through the fuel tax system, which were not included in data considered by the Task Group. This figure counts only those firms with obligations under the CPRS. Forestry entities may choose to opt-in to the CPRS and are not included in this number.

(20)   The CPRS draws on the National Greenhouse and Energy Reporting System for reporting obligations, and does not add to the reporting load for direct emitters, in and of itself. Existing requirements for reporting under the National Greenhouse and Energy Act 2007, which apply to controlling corporations and, in some cases contractors, will continue to apply. The coverage of upstream fuel suppliers and synthetic greenhouse gases will add some smaller businesses, but these generally have reporting obligations under existing legislation, so the additional reporting cost is expected to be minor.

(21)   The global climate change challenge relates to the stock of greenhouse gases in the atmosphere and longer term emissions trends (or flow). Stabilisation of greenhouse gas concentrations at levels between 450 parts per million (ppm) or 550 ppm, or lower, will require substantial reductions in emissions over coming decades. Movements in world emissions are influenced by both structural and cyclical factors. Trend global emissions, in the absence of a global agreement to reduce emissions, are projected to continue to grow strongly reflecting continued trend global economic growth, rising per capita incomes, and the continued reliance on fossil fuels for energy. These trends suggest substantial structural increases in global emissions, even with an expected slowing in world population growth and an overall decline in the emission intensity of the global economy. Some components of global emissions are influenced by cyclical factors, such as emissions arising from industrial production processes. To the extent that the current slow-down in the world economy affects emission-intensive output there will be a slowing in world emissions growth. However, as the world economy recovers from this cyclical slow down, as expected by international organisations such as the International Monetary Fund, world emissions growth would also be expected to go return to its trend growth rate. For example, China’s electricity output has declined by 13 per cent over the twelve months to January 2009. However, in 2007 China’s electricity output had grown by 13 per cent. Global emissions have grown rapidly over the past decade, and at a faster rate than assumed in the highest growth scenarios in the most commonly used global emissions projections. As a result, any slowing in global emissions growth is only likely to fall back towards the highest rates of trend emissions growth in the global projections.

(22)   The link between emissions and GDP growth is not straightforward, and varies significantly from year to year. For example, in 1991, the most recent year in which Australian GDP growth was negative, emissions excluding land use and land-use change rose by 1 million tonnes carbon dioxide equivalent (Mt CO2e). Emissions from stationary energy sources grew by 2.9 per cent in 1991, offsetting slight emission falls in other sectors such as transport, fugitives, industrial processes and agriculture. Excluding land use and land-use change emissions is important for any cyclical analysis as emissions from these two sectors are unlikely to be significantly influenced by short-term economic output. Slower economic growth in Australia in the short-term would be expected to reduce the short-term rate of emissions growth. Reliable estimates of short-term emission forecasts requires reliable sector level estimates of changes in the quantity of output (rather than the value of output), and any changes in sector level emissions intensity. However, given that the Australian economy is likely to return to trend economic growth over time, Australian emissions are expected to continue trending up, not down, in the absence of policies to constrain emissions growth.

(23)   The Garnaut Climate Change Review undertook two economic modelling scenarios, identified as the Copenhagen Compromise and the Waiting Game scenarios in their Supplementary Draft Report released in September 2008. These scenarios explored the implications of Australia reducing emissions regardless of limited or no action by other countries. These scenarios suggested that Australia’s GNP level could be 1.4 and 0.9 per cent below the reference levels in 2020, respectively. The lower economic costs reported in the Waiting Game scenario, relative to those contained in the Governments CPRS scenarios, arise due to the continued strong demand for Australia’s emission intensive exports, such as coal, in the absence of international action to reduce emissions. The comprehensive economic modelling report Australia’s Low Pollution Future: The Economics of Climate Change Mitigation, released by the Government in October 2008, was designed to assist with the development of policy and to facilitate community input into the White Paper decision making process. We note that many of the ‘unilateral action’ scenarios, such as those modelled by Frontier Economics for the NSW Government and the Centre of International Economics (CIE) for the Australian Farm Institute do not include all aspects of the White Paper CPRS design features. In particular, these scenarios do not account for the full range of assistance to shield the EITEs sectors proposed by the Government. The published modelling by the Government and the Garnaut Climate Change Review provide a number of important insights that were taken into account by the Government before policy decisions were taken: - Fair and effective global action that stabilises global greenhouse gas emissions at 450 ppm CO2e, or lower, is in Australia’s long-term economic interest. - Delayed action to achieve the same cumulative emissions reduction is more disruptive and costly than steady early action, at the national and global levels. - Nations that reduce emissions earlier have lower adjustment costs than if they delay action, if emissions restraint and carbon prices spread over time. - At the global level, the economic costs of accelerating emissions reductions are larger than the economic benefits (or avoided costs) of an equivalent deceleration, indicating that it is better to begin by setting more ambitious targets than to ratchet these up over time. - The shielding arrangements outlined in the CPRS White Paper for EITEs eases their transition to a low-emission economy. These insights are consistent with a broad range of national and international economic modelling. The Garnaut Climate Change Review released economic modelling on this issue in their Supplementary Draft Report released in September 2008. The Treasury modelling was released in October 2008.

(24)   Income tax If an entity with an emissions liability (a ‘liable entity’) receives a free Australian emissions unit and surrenders that unit in the same income year, there are no income tax implications. If a liable entity receives a free Australian emissions unit and surrenders that unit in a later income year, the overall income tax position is essentially neutral. An amount may be effectively added to taxable income in the year the unit is received but, if so, this is balanced by the reduction of taxable income by a similar amount in the year of surrender. There is a special ‘no disadvantage’ rule for EITE entities to prevent any timing disadvantage that might otherwise arise in these circumstances (for more detail see the Explanatory Memorandum to the Carbon Pollution Reduction Scheme (Consequential Amendments) Bill 2009, especially at paragraphs 2.88 to 2.92) . If a liable entity sells a free Australian emissions unit, the proceeds are assessable income. However, the entity deducts the amounts it expends in purchasing the necessary units at a later date to meet its emissions liability. If an entity with no emissions liability sells a free Australian emissions unit, the proceeds are assessable income. This will be balanced by the additional amounts that the entity can deduct for increased costs associated with the use of electricity or other fuels for which an upstream CPRS obligation is imposed. Goods and services tax In general, the goods and services tax will not apply to free Australian emissions units because supplies made for no consideration are not taxable supplies. Accounting Accounting systems will need to take into account emissions-related assets, including free Australian emissions units, and liabilities. Subject to priorities associated with their response to the global financial crisis, the International Accounting Standards Board (IASB) is planning to issue an exposure draft of a new standard covering emissions trading schemes in quarter four this year with a final standard expected to be issued in the second half of 2010. The Australian Accounting Standards Board (AASB) is also working with public sector stakeholders in Australia (eg the Department of Finance and Deregulation and the Australian Bureau of Statistics) to determine how emissions units will be valued and accounted for by the Government as the issuer - the AASB is aiming to link the timing of this work with that of the IASB.