Banking on a clean energy future
Tony Hill and Jeff Lynn
Tony Hill (Bio)
Jeff Lynn (Bio)
On July 28 2011, the Australian government released a package of 13 draft Bills to implement its plan to secure a 'clean energy future'. The key elements of the package are:
(i) Clean Energy Bill (to set up a carbon price mechanism);
(ii) Clean Energy Regulator Bill (to establish the regulatory body to administer the carbon price mechanism); and
(iii) Climate Change Authority Bill (to establish a new authority to advise on the future design of the carbon price mechanism).
If passed into law later this year as planned, this package of Bills will have significant impacts on carbon-intensive industries like energy, mining and manufacturing, the banks and financial institutions that work with them, and the broader economy.
The Clean Energy Bill sets up the carbon price mechanism. The price mechanism has an initial fixed price period before a transition into a flexible price period with full trading. Key aspects of the mechanism are set out below.
The carbon price mechanism is intended to commence on July 1 2012.
Liable entities will be required to obtain and surrender carbon permits each year to cover their greenhouse gas emissions. Liable entities will be persons with operational control of facilities with emissions more than 25,000 tonnes of CO2 per annum and also gas retailers. In the case of unincorporated joint ventures, where no one person has operational control of the facility, the participants will have liability in accordance with their percentage interests.
The Clean Energy Bill contemplates the transfer of liabilities in restricted circumstances through the use of "liability transfer certificates" and "obligation transfer numbers".
Fixed and flexible prices
The financial years beginning on July 1 2012, 2013 and 2014 will be known as 'fixed charge years'. In fixed charge years, the mechanism will operate like a tax with units being issued by the Government at a fixed price starting at $23, increasing to $24.15 and then to $25.40 (a rise of 2.5% per annum in real terms). There will be no cap during fixed charge years, meaning that liable entities will be able to access an unlimited number of units at the fixed price. Up to 5% of a liable entity's compliance obligation will be able to be met through Kyoto Protocol compliant credits created under the Carbon Farming Initiative (CFI). It also includes a buy back mechanism for free units issued under the Assistance packages during the fixed charge years.
Following this period, in the 'flexible charge years', the mechanism will move into an emissions trading scheme with units auctioned by the Government (up to the cap established in advance by the regulations taking into account freely issued units) and subsequently traded on the secondary market. In flexible price years, international credits may be used, but at least half of a liable entity's compliance obligation must be met through the use of domestic units. For the first three flexible charge years, there will be a price ceiling set at $20 above the expected international price (rising by 5% in real terms each year) and a price floor starting at $15 (rising annually by 4% in real terms).
The mechanism will have broad coverage from commencement, including stationary energy, industrial processes, non-legacy waste and fugitive emissions. However, the advent of the CFI means different treatment for the agricultural and forestry sectors. These sectors are not covered by the liability components of mechanism but may be able to benefit from carbon sequestration arising from the CFI.
In addition, transport fuels will be excluded from the Clean Energy Bill, but, subject to certain exceptions including for household transport fuels, an equivalent carbon price will be applied through changes in fuel tax credits and excises.
The Clean Energy Bill makes specific provision for natural gas retailers to be liable for the embodied emissions in the natural gas they supply. Similar provisions have not been included in relation to coal.
Free units will be issued under the Jobs and Competitiveness Program (to emissions-intensive trade-exposed industries) and under the Energy Security Fund on a transitional basis to some coal-fired electricity generators.
The detail of the Jobs and Competitiveness Program to the extent it applies to emissions-intensive trade exposed entities is to be set out in regulations.
Certain aspects of the assistance package for coal-fired electricity generators are to be dealt with outside the Clean Energy Bill. The Clean Energy Bill does, however, explain how the number of free units to be issued will be determined for the coal-fired generators, and the conditions attached to the issuing of free units on a transitional basis.
The Clean Energy Regulator Bill establishes the Clean Energy Regulator (CER) as the regulator responsible for administering the mechanism. The CER will also take over responsibility for the greenhouse reporting and renewable energy legislation.
The Climate Change Authority, to be established by the Climate Change Authority Bill, will be responsible for advising on caps and progress towards targets as well as conducting reviews into the carbon price mechanism, greenhouse reporting, renewable energy and CFI legislation. The Land Sector Carbon and Biodiversity Board will be charged with advising the Government about climate change measures that relate to the land sector.
The Productivity Commission, the Australian Competition and Consumer Commission and the Australian Securities and Investments Commission will also have roles to play.
Following a period of stakeholder and public consultation, the Australian government intends to introduce the package of Bills into Parliament later this year (together with the legislation implementing the assistance plan for the steel industry and the household assistance measures).
Further legislation is expected to be introduced in 2012, including legislation to establish the Clean Energy Finance Corporation and the Australian Renewable Energy Agency.