Change to carbon price 1

Briefing note July 2013

Change to the Australian carbon price Australian Prime Minister and Treasurer Chris Bowen have announced that the Government will abolish the fixed price on carbon from 1 July 2014.

While a welcome announcement for some sectors, the move will require legislative change and raises a number of significant questions for business.

Implementing the change itself is administered, assuming there are no other major adjustments to the Moving to the floating price phase of mechanism being proposed by the Key issues Australia’s carbon pricing mechanism Labor government. will require an amendment to the  Moving to the floating price Clean Energy Act 2011 (Cth). However, it will increase the pressure phase of Australia’s carbon on the Clean Energy Regulator, the pricing mechanism will The Act is built around the concept of Commonwealth Department of require an amendment to the a “fixed charge year” as being the Industry, Innovation, Climate Change, Clean Energy Act 2011 (Cth) financial year commencing on 1 July Science, Research and Tertiary and related legislation. 2012, 1 July 2013 and 1 July 2014. Education and the Climate Change  We query whether the formal Authority1 to have the carbon unit Thus a change to the definition of a link to the EU’s emissions auctioning rules and other “fixed charge year”, together with a trading scheme will also be infrastructure required for the floating raft of consequential changes to the brought forward. If not, what Act and, potentially, other legislation price phase in place much earlier than will the market look like during in the Clean Energy Package, will be previously anticipated. the transition? needed. One flow on impact for business is  An early move to the floating that there will be much less time Thus, the first challenge for the price will remove a significant available to understand how the finer Government in implementing this amount of Government details of the auctioning process will announcement will be getting the revenue that was earmarked work. amending legislation through for other emissions reduction Parliament – whether it is recalled Other elements of the programmes and so the prior to an election, which seems ongoing viability of these highly unlikely, or in the first sitting floating price phase programs is now in doubt. after a Federal election, which Under the Gillard Labor government, assumes the current Labor  We expect the Australian the Clean Energy Act was amended government is returned. Competition and Consumer to link the Australian carbon pricing Commission (ACCC) will mechanism to the European Union Given the government’s remain active in monitoring Scheme (EU ETS) announcement has been roundly claims about carbon price from 1 July 2015, with a criticised by both the Opposition impacts made by business as parties and the , corresponding removal of the price a result of this announcement. this is a very big challenge. floor for carbon units. As the carbon pricing mechanism was This linked the price of a carbon unit always heading towards the floating in the Australian scheme to the price A significant issue for the Rudd price phase, bringing forward the of a carbon allowance under the EU government to address will be starting date will not have a major ETS, which has remained at the whether this linkage will remain fixed impact on how the pricing mechanism persistently low price of A$6-7. to 1 July 2015 or whether it too will be

2 Change to the Australian carbon price

brought forward by 12 months. Either A$24.15 to around A$7 per tonne, the While the Australian Competition and option will involve a degree of Rudd government announcement Consumer Commission (ACCC) has uncertainty for businesses operating creates a significant revenue hole and no formal role in regulating price within the scheme. has threatened the viability of some of changes due to the operation of the The floating price phase differs from these initiatives. This is particularly carbon pricing mechanism, it has the current fixed price phase in so as the Prime Minister has said that always played a very active role in several other ways. the change to the carbon pricing making sure businesses explained mechanism is to be “revenue neutral”. price increases as a result of the Under floating price phase as it mechanism in a clear and truthful currently exists: Prime Minister Rudd has announced manner and were not making that part of the 'hole' will be filled by 2  there will be a fixed price ceiling cuts to senior public service positions misleading claims to customers . on the carbon price which will be and changes to fringe benefits tax If the floating price phase is brought set at approximately A$20 above calculations. Other announced cuts forward, we would expect that the the anticipated “international include: ACCC will be vigilant in monitoring price” for carbon;  a A$186 million cut to the Jobs the way businesses articulate the  carbon units will be able to be and Competitiveness Program, impact of the floating carbon price on banked for use in future years; which provides compensation to the costs of goods and services and  entities required to surrender industry assist in the transition to ensuring that business does not take carbon units in a year will be able a carbon price unfair advantage from the likely increased uncertainty brought about to borrow up to five per cent of  the return of unallocated funds by the earlier introduction of a floating their liability from the next from the Biodiversity Fund and carbon price. financial year to discharge their the Carbon Farming Futures current year liability; Program (A$356 million) We would recommend in these  certain types of international  changes to the Clean Technology circumstances that businesses carbon units will be able to be Program and Carbon Capture prepare appropriate material to surrendered to meet liabilities and Storage Program, saving support any pricing changes where under the Australian mechanism. A$586 million. that is said to arise from carbon price changes in order to be able to While it is reasonable to assume that The fledgling Carbon Farming Initiative respond to the ACCC using its these elements of the mechanism (CFI) is also likely to be heavily substantiation notices power and remain unchanged by the latest affected by the early shift to the address the risk of the ACCC raising announcement, it remains an open floating carbon price. If the carbon unit questions of misleading conduct. question. price drops to under A$10 per tonne, many biosequestration projects being Potential impacts on the developed under the CFI are likely to Clean Energy Package become uneconomic which will reduce the number of projects in Australia, It is important to remember that the robbing farmers and land owners of a carbon pricing mechanism was potential income stream. merely one element of a broader In short, the Rudd government's package of programs and initiatives announcements appear to have introduced by the shifted government focus to a trading to tackle Australia’s greenhouse gas scheme to manage Australia's emissions and that many of these emissions at the expense of direct initiatives were intended to be funded sequestration measures. by revenue generated during the fixed price phase of the carbon pricing Pricing the impact mechanism. From the outset of the carbon pricing By bringing forward the floating price mechanism, there has been a focus phase, and assuming the price of an on how businesses would pass Australian carbon unit drops from carbon-price impacts on to customers.

Change to the Australian carbon price 3

1. The Climate Change Authority provides independent advice to the Contacts Government on the operation of the carbon pricing mechanism and other Mark Pistilli emissions reduction programs. Partner, M&A and Corporate, Resources Importantly, it is currently conducting T: +61 2 8922 8001 its first “caps and targets review” E: [email protected] which, amongst other things, involves recommending the “cap” on carbon Michael Lishman emissions for the first five years of the Partner, M&A and Corporate, Resources floating price phase of the scheme. T: +61 8 9262 5502 The Authority is not due to present its E: [email protected] final report until 28 February 2014 – a Jon Carson mere four months before the Partner, M&A and Corporate, Resources, Projects proposed start of the floating price T: +61 8 9262 5510 phase. E: [email protected] 2. Information about the ACCC’s role in Dave Poddar carbon pricing claims can be found at Partner, Competition, Regulatory Access www.accc.gov.au/business/pricing/ca T: +61 2 8922 8033 rbon-price-claims. E: [email protected]

Richard Graham Partner, M&A and Corporate, Resources, Infrastructure T: +61 2 8922 8017 E: [email protected] Robyn Glindemann Counsel, Environmental, Projects, Resources T: +618 9262 5558 E: [email protected] Jane Ann Gray Special Counsel, M&A and Corporate, Resources, Infrastructure T: +61 2 8922 8013 E: [email protected]

This publication does not necessarily deal with every important topic or cover Clifford Chance, Level 16, No. 1 O'Connell Street, Sydney, NSW 2000, every aspect of the topics with which it deals. It is not designed to provide Australia legal or other advice. © Clifford Chance 2013 Clifford Chance is a law firm with liability limited by a scheme approved under HKG-1-1000515-v1 Professional Standards legislation We use the word 'partner' to refer to a member of Clifford Chance LLP, or an employee or consultant with equivalent standing and qualifications www.cliffordchance.com

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