2010-2011

 

The Parliament of the Commonwealth of Australia

 

 

 

House of Representatives

 

 

 

 

 

 

 

Explanatory Memorandum

 

 

 

 

(Circulated by the authority of the Minister for Climate Change
 and Energy Efficiency, the Honourable Greg Combet AM MP)

Glossary.............................................................................................................. 5

Policy context.................................................................................................... 9

Outline of the Clean Energy Bill 2011........................................................ 27

Part 1                        Design of the carbon pricing mechanism................. 43

Chapter 1              Liable entities and covered emissions........................... 45

Chapter 2              Pollution caps................................................................... 105

Chapter 3              Emissions units................................................................ 115

Chapter 4              Assessing and meeting liabilities.................................. 137

Part 2                        Industry assistance...................................................... 157

Chapter 5              Jobs and Competitiveness Program............................. 159

Chapter 6              Energy security................................................................. 181

Part 3                        Administration................................................................ 223

Chapter 7              Compliance and enforcement....................................... 225

Chapter 8              The Regulator’s decisions and review of decisions.. 257

Chapter 9              Public information............................................................ 263

Chapter 10           Independent reviews....................................................... 271

Chapter 11           Administrative and miscellaneous provisions............ 279

Index............................................................................................................... 291

 

 

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

Abbreviation	Definition
ACCC	Australian Competition and Consumer Commission
ACCU	Australian carbon credit unit
ANREU Act	Australian National Registry of Emissions Units Act 2011
ASIC	Australian Securities and Investments Commission
Austrac	Australian Transaction Reports and Analysis Centre
Authority	Climate Change Authority
Authority bill	Climate Change Authority Bill 2011
bill or main bill	Clean Energy Bill 2011
carbon pricing mechanism or mechanism	The carbon pricing mechanism set up by the Clean Energy Bill 2011
CEI plan	Clean Energy Investment Plan
CFI	Carbon Farming Initiative
CFI Act	Carbon Credits (Carbon Farming Initiative) Act 2011
Charges bills	The Clean Energy (Unit Shortfall Charge—General) Bill 2011; Clean Energy (Unit Issue Charges – Fixed Charge) Bill 2011, Clean Energy (Unit Issue Charges – Auctions) Bill 2011, Clean Energy (Charges—Excise) Bill 2011, Clean Energy (Charges—Customs) Bill 2011 Clean Energy (International Unit Surrender Charge) Bill 2011.
Clean Energy Legislative Package	The Clean Energy Bill 2011 and related legislation
CO2 CO2-e	Carbon dioxide Carbon dioxide equivalence
Consequential Amendments bill	The Clean Energy (Consequential Amendments) Bill 2011
CPRS	Carbon Pollution Reduction Scheme
Database	Liable Entities Public Information Database
DCCEE or Department	Department of Climate Change and Energy Efficiency
EN	Emissions number
Eligible emissions unit	A carbon unit, an eligible international emissions unit or an eligible ACCU
Eligible international emissions unit	Defined in section 4 of the ANREU Act as a certified emission reduction (other than a temporary certified emission reduction or a long-term certified emission reduction); or an emission reduction unit; or a removal unit; or a prescribed unit issued in accordance with the Kyoto rules; or a non-Kyoto international emissions unit.  It is immaterial whether a unit covered by paragraph 4(d) was issued in or outside Australia.
Fixed charge period	The financial years 2012-13, 2013-14 and 2014-15, being ‘fixed charge years’
Fund	The Energy Security Fund in Part 8 of the bill
Garnaut Review     Garnaut Review Update 2011	R Garnaut (2008) The Garnaut Climate Change Review: Final Report, Commonwealth of Australia, Cambridge University Press, Melbourne R Garnaut (2011) The Garnaut Review 2011: Australia in the Global Response to Climate Change, Commonwealth of Australia, Cambridge University Press, Melbourne
Green Paper	Carbon Pollution Reduction Scheme Green Paper, July 2008
GW GWh	Gigawatt Gigawatt hour
IPCC	Intergovernmental Panel on Climate Change
JV	Joint venture
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
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
LI Act	Legislative Instruments Act 2003
LETI	Low Emissions Transition Incentive
LTC	Liability transfer certificate
MW MWh	Megawatt Megawatt hour
MPCCC	Multi-Party Climate Change Committee
NGER Act	National Greenhouse and Energy Reporting Act 2007
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
Opt-in Scheme	The Opt-in Scheme set out in Part 3, Division 7 of the bill
OTN	Obligation transfer number
Ozone Act	Ozone Protection and Synthetic Greenhouse Gas Management Act 1989
PC Act	Productivity Commission Act 1998
PEN	Provisional emissions number
Program	The Jobs and Competitiveness Program in Part 7 of the bill
Registry	Australian National Registry of Emissions Units
Regulator	Clean Energy Regulator
Regulator bill	Clean Energy Regulator Bill 2011
White Paper	Carbon Pollution Reduction Scheme: Australia’s Low Pollution Future, White Paper, December 2008

The Government’s Climate Change Plan

On 10 July 2011, the Government released Securing a clean energy future: The Australian Government’s climate change plan^[1], which explains the policy basis for the introduction of the carbon pricing mechanism (the mechanism) and related measures. 

The need for action

The evidence that the world is getting warmer is unequivocal.  In Australia and around the globe, 2001 to 2010 was the warmest decade on record.  In Australia, each decade since the 1940s has been warmer than the last.

If we do not reduce carbon pollution, the world risks serious effects from climate change.  Global average temperatures could increase by up to 6.4 degrees Celsius above 1990 temperatures by 2100.  Sea levels are estimated to rise by between 0.5 and 1 metre by 2100 from 2000 levels and the acidity of the world’s oceans to increase significantly.  Cyclones, storms, floods and other extreme weather events are likely to increase in severity or frequency and rainfall patterns around the world to change, making some places drier and other places wetter.

Australia is a hot and dry continent.  This means that among the world’s developed countries, Australia faces acute risks.  Studies indicate that warming of more than 2 degrees Celsius will overwhelm the capacity of many of our natural ecosystems to adapt.  With that level of warming, for instance, the survival of the Great Barrier Reef will be in jeopardy as higher ocean temperatures and acidity levels cause major changes to coral reefs.

Climate change will not just damage the natural environment.  Left unchecked, it also poses risks to Australia’s economic prosperity.  Climate change will impose economic costs on our society.  These costs can be reduced and managed if the world takes action to reduce carbon pollution.  But the longer action is delayed, the more it will cost and the worse the impacts will be.

How high temperatures might rise in coming decades will depend on how much carbon pollution increases.

Governments around the world have agreed to limit carbon pollution so that average global temperature rise can be held below 2 degrees Celsius above pre‑industrial levels.  If the global 2 degree goal is achieved, Australia will still face some impacts.  However, our communities and environment will be better able to cope.  It is in our national interest to do our fair share.

The task of reducing carbon pollution is achievable.  Economies can be retooled so that growth and rising prosperity are decoupled from growth in carbon pollution.  This will require changes to the way we live and the way we do business, especially to the ways we produce and use energy.

Studies in Australia and around the world have demonstrated that, with known technologies, pollution can be reduced while maintaining economic growth.  Indeed, the retooling of our economy will deliver new technologies, new jobs and new opportunities. 

Australia’s carbon pollution levels are very high given our population size and our economy is heavily dependent on emissions-intensive energy sources.  To maintain our international competitiveness in the future as more countries take action on climate change, we need to reduce our carbon pollution and concentrate on cleaner pathways to economic growth.

Australia’s carbon pollution represents 1.5 per cent of global emissions of greenhouse gases.  That makes us one of the top 20 polluting countries in the world.  Our annual carbon pollution is roughly the same as that of countries like Spain, France, Italy, South Korea and the United Kingdom.  All of those countries have populations two to three times larger than Australia.  In fact, Australia produces more carbon pollution per head of population than any developed country in the world, more even than the world’s biggest economy, the United States.

Reflecting the availability of cheap and abundant coal, electricity generation is Australia’s largest source of carbon pollution.  Electricity generation is responsible for just over a third of Australia’s total carbon pollution.  Direct fuel combustion—reflecting the use of gas and other fuels in industry and homes—accounts for another 15 per cent.  Transport and agriculture each contribute around another 15 per cent. 

The remaining sources are ‘fugitive’ emissions—mainly the methane and carbon dioxide which escapes into the atmosphere when coal is mined and gas is extracted—along with pollution from industrial processes and decomposition of waste in landfills and elsewhere.  Trees absorb carbon dioxide, so when land is cleared there is an increase in carbon pollution and when vegetation grows there is a decrease.  The net impact of these sources—deforestation, reforestation and afforestation—contributes 3 per cent of Australia’s total carbon pollution.

Australia’s emissions are projected to continue to grow by almost 2 per cent a year without action to put a price on carbon.  Even taking into account existing climate change policies such as the Renewable Energy Target and the CFI, our emissions are expected to be around 22 per cent higher than 2000 levels in 2020.

The Government has committed to reduce carbon pollution by 5 per cent from 2000 levels by 2020 irrespective of what other countries do, and by up to 15 or 25 per cent depending on the scale of global action.  These targets will require cutting pollution in 2020 by at least 23 per cent from the level it would otherwise be expected to be.

The Government has also committed to a new 2050 target to reduce emissions by 80 per cent compared with 2000 levels, in line with targets announced by the United Kingdom and Germany.

Australia’s targets represent a fair contribution from Australia, and provide guidance and confidence to investors working to achieve our clean energy future.

The carbon pricing mechanism

A broad-based carbon price is the most environmentally effective and cheapest way to reduce pollution.

A carbon price puts a price tag on carbon pollution.  Under the mechanism, around 500 of the country’s biggest polluters will be required to pay for each tonne of pollution they release into the atmosphere.  This will have two effects. 

It creates a powerful incentive for all businesses to cut their pollution by investing in clean technology or finding more efficient ways of operating.  A price on carbon will also create economic incentives to reduce pollution in the cheapest possible ways, rather than relying on more costly approaches such as government regulation and direct subsidies.

These incentives will flow through the economy.  The carbon price will make lower-polluting technologies, especially clean energy technologies, more competitive and will boost investment in these technologies.  In this way, introducing a price on carbon will trigger the transformation of the economy towards a clean energy future.

Our economy has successfully handled comparable structural changes over its history.  In fact, transformative changes—new products and technologies, and the integration of our economy into the global economy set in train by the reforms of the 1980s and 1990s—have underpinned rising prosperity and sustainable growth in Australia.

Table I: Key elements of the carbon pricing mechanism

Price Fixed price period Emissions trading scheme	A two stage approach: The mechanism will commence on 1 July 2012, with a price that will be fixed for the first three years.  The price will start at $23 per tonne and will rise at 2.5 per cent per annum in real terms. On 1 July 2015, the carbon price will transition to a fully flexible price under an emissions trading scheme, with the price determined by the market.
Coverage	Broad coverage from commencement, encompassing the stationary energy sector, industrial processes, non‑legacy waste, and fugitive emissions (other than from decommissioned coal mines).
Treatment of fuel and transport	Transport fuels comprising liquid petroleum fuels, liquid petroleum gas, liquefied natural gas and compressed natural gas will be excluded from the mechanism.  However, an equivalent carbon price will be applied to some business transport emissions and non-transport uses of these fuels through changes in fuel tax credits or fuel excise. Users of specified fuels can choose to opt into the mechanism instead of paying the equivalent carbon price through the fuel tax system.
International linking	International linking to credible international carbon markets and emissions trading schemes will be allowed from the commencement of the flexible price period.  At least half of a liable entity’s compliance obligation must be met through the use of domestic units or credits.
Price ceiling and floor	A price ceiling and floor will apply for the first three years of the flexible price period.  The price ceiling will be set at $20 above the expected international price and will rise by 5 per cent in real terms each year.  The price floor will be $15, rising annually by 4 per cent in real terms.
Carbon Farming Initiative	Kyoto-compliant credits created under the CFI can be used for compliance under the mechanism subject to a 5 per cent limit in the fixed charge period.
Governance Climate Change Authority Clean Energy Regulator Productivity Commission	Establishment of the Authority to advice on pollution caps, progress towards meeting targets, and undertake reviews of the mechanism. Establishment of the Regulator to administer the mechanism. The Productivity Commission will undertake reviews on industry assistance, fuel tax arrangements and carbon pollution reduction activities internationally.

 

 

 

The carbon pricing mechanism’s governance structure

 

Household assistance

The carbon price will be accompanied by a household assistance package.^[2] Over 50 per cent of carbon price revenue will be spent on households.

A carbon price will add modestly to the cost of living.  The average household will see cost increases of around $9.90 per week, while the average assistance provided will be around $10.10 per week.  The prices of most household purchases will barely be affected by the carbon price—for almost everything other than electricity and gas, the estimated price impact is likely to be less than 0.5 per cent in most cases.  Taking electricity and gas into account, the overall impact on the Consumer Price Index (CPI) is expected to be around 0.7 per cent in 2012–13.  Households will not face a carbon price on transport fuels.

The household assistance package is targeted at those who need help the most, particularly pensioners and low-and middle-income households.  Around two in three households will receive assistance that offsets their expected average price impact.  About nine out of ten households will receive some assistance.

Because the carbon price raises revenue, it provides an opportunity to cut other taxes.  The Government will cut income taxes by raising the tax-free threshold so that, initially, up to 1 million people will no longer need to file a tax return.  From 2015, a second phase of tax reform will mean that up to an additional 100,000 people will not have to file a tax return.  Reducing taxes by increasing the tax-free threshold is an important change in Australia’s tax mix: it involves reducing taxes on desirable things (work and income), boosting incentives to work, and replacing them with a charge on something undesirable (carbon pollution).

The tax‑free threshold will be more than trebled to $18,200 in 2012–13.  From 2015, the tax‑free threshold will be further raised to $19,400.  People with incomes below the new tax‑free thresholds will get to keep all of their wages in their regular pay packets.

In addition to tax cuts, pensions, allowances and benefits will increase.

Other features of the household assistance package include:

•       special payments for people who have high energy use due to medical needs

•       shared assistance between aged care residents and providers

•       the development of an opt‑in program where household assistance payments can be directed towards accredited energy efficiency measures through non‑government organisations.

Household assistance will be permanent and will keep up with increases in the cost of living.

Pensions and other benefits are automatically indexed to keep pace with the cost of living, while the tax changes will be set at a level to cover the expected impact of the expected carbon price to 2019-20.

Jobs and Competitiveness Package

To support Australian businesses to make the transition to a clean energy future, the Government has designed a number of assistance measures for the business community, from large industrial producers to small businesses.  The Government will allocate around 40 per cent of revenue from the mechanism to help businesses and support jobs.

Assistance measures will target emissions‑intensive, trade‑exposed industries, other areas of manufacturing, food processing, foundries and small business.

The Jobs and Competitiveness Program will ensure that businesses that produce a lot of pollution and compete in international markets remain competitive, while still retaining strong incentives to reduce carbon pollution.  Almost all emissions-intensive and trade-exposed activities are in the manufacturing sector.  The Program will provide support to activities that generate over 80 per cent of emissions within the manufacturing sector.

The food processing, metal forging and foundry industries will also be assisted to support jobs in these parts of manufacturing.  More general assistance for small businesses and manufacturing industries will target improvements in energy efficiency.

All of these measures have been carefully designed to avoid interfering with the purpose of the carbon price: creating incentives to reduce carbon pollution.

In addition to these measures, the Government has decided to provide a Coal Sector Jobs Package and a Steel Transformation Plan.

Clean energy

The transformation of Australia’s energy sector towards clean energy sources will unfold over the coming decades.  The carbon price will play a major role, creating powerful commercial incentives to avoid traditional high‑pollution solutions and to adopt low‑pollution alternatives.  However, given the scale of the transformation and the imperative to change, additional measures to support innovation and investment in clean energy are required.

The Government will provide significant levels of financial support for innovation in clean energy technologies.

A new $10 billion commercially oriented Clean Energy Finance Corporation will invest in renewable energy, low pollution and energy efficiency technologies.

A new Australian Renewable Energy Agency (ARENA) will administer $3.2 billion in Government support for research and development, demonstration and commercialisation of renewable energy.

The Renewable Energy Target, combined with other elements of the Government’s plan, including the carbon price, will drive $20 billion of investment in large-scale renewable energy by 2020 in today’s dollars.

Energy markets

The Government will implement measures to underpin a successful energy market transition and maintain secure energy supplies.  These measures will supplement the carbon price and clean energy policies.

An Energy Security Fund will be established to ensure there is a smooth transition which preserves energy security.  The Energy Security Fund comprises two elements. 

The first element is an allocation of free carbon units and cash payments to strongly affected coal-fired electricity generators.  These allocations will be conditional on electricity generators strongly affected by a carbon price publishing Clean Energy Investment Plans, which show how they will reduce their pollution, and by meeting power system reliability standards.

Second, the Government will seek to negotiate the closure of around 2,000 megawatts (MW) of highly polluting generation capacity by 2020.  Closing down some of our highest polluting coal‑fired generation capacity makes room for investment in lower pollution plants—and kickstarts the transformation of our energy industry in a managed way.

In addition to the Energy Security Fund, as a transitional measure the Government will offer loans to coal-fired generators for the purchase of future vintage carbon units at auction for the first three years that auctions are held.  The Government may also offer loans to coal-fired generators for the purpose of refinancing existing debt. 

The Government has also announced the establishment of an Energy Security Council which will provide advice to the Government in the event that systemic risks to energy security emerge from the financial impairment of power stations arising from any source, including form the introduction of carbon pricing.

Energy efficiency

Using energy more efficiently can lower carbon pollution and save money—which is why energy efficiency is the third element in the Government’s clean energy future plan.

The Government is helping households and businesses improve their energy efficiency and will expand these efforts.  The carbon price will create a strong incentive to use energy more efficiently.  A large proportion of industry and household assistance is also directly targeted at facilitating further energy efficiency improvements.

The Low Carbon Communities Program will be significantly expanded to promote energy efficiency at a local level and among low‑income households and to ensure the services of charities who are heavy users of maritime and aviation fuel are not adversely affected by the introduction of a carbon price.

The Government will expedite the development of a national energy savings initiative, as recommended by the Prime Minister’s Task Group on Energy Efficiency.  The energy savings initiative will be a ‘white certificate’ scheme, creating and trading credits that reward energy efficiency activities.

Land sector initiatives

The farming, forestry and land sectors have just as important a role to play in reducing carbon pollution as governments, households and the wider business community.

A carbon price will not apply to agricultural emissions.  This means there will be no requirement for farmers to pay for emissions from livestock or fertiliser use.

Australia faces significant opportunities to reduce carbon pollution and increase the amount of carbon stored on the land.  Those who pursue these opportunities will be rewarded through the CFI, which allows farmers and land managers to receive credits for carbon storage and pollution reduction activities.  Kyoto-compliant credits can be sold to liable entities under the mechanism, and all credits can be sold in the domestic voluntary market or exported to foreign purchasers.

The Government will also provide substantial funding for a range of new land-based measures, including an ongoing fund for landholders to undertake projects that establish, restore, protect and manage biodiverse carbon stores.  The Biodiversity Fund will improve the resilience of Australia’s unique species to the impacts of climate change, enhance the environmental outcomes of carbon farming projects, and help landholders protect biodiversity and carbon values on their land.

An ongoing Carbon Farming Futures program will help farmers and landholders benefit from carbon farming by supporting research and development, measurement approaches and action on the ground to reduce emissions or store carbon.

The Government is also providing ongoing support for Indigenous communities to participate in carbon farming, and support for natural resource management bodies to plan for climate change.

Major steps to date

International commitments

United Nations Framework Convention on Climate Change

On 30 December 1992 Australia ratified the United Nations Framework Convention on Climate Change.^[3] 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

On 3 December 2007 Australia formally ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change^[4] and 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).

Cancun Agreements

The 2010 Cancun Agreements^[5] anchor under the Climate Change Convention the mitigation pledges made by developed and developing countries in the Copenhagen Accord.  The agreements recognise the need to hold any increase in global temperature to below 2 degrees Celsius.  Over 85 countries, including both developed and developing economies, have already made pledges to limit their emissions.  Together, these countries represent more than 90 per cent of the global economy and are responsible for more than 80 per cent of global emissions.

The Garnaut Review and Update

On 30 September 2008, the Government published The Garnaut Climate Change Review: Final Report.^[6]  This was an independent study conducted by Professor Ross Garnaut AO commissioned by the Australian, state and territory governments.  In November 2010, the Australian Government commissioned Professor Garnaut to provide an update to the 2008 Review. 

Professor Garnaut released a series of papers in early 2011 addressing developments across a range of subjects including climate change science and impacts, emissions trends, carbon pricing, technology, land and the electricity sector. 

Professor Garnaut presented his final report, called The Garnaut Review 2011: Australia in the Global Response to Climate Change^[7], to the Government on 31 May 2011.  The Report concluded that a broad-based market approach will best preserve Australian prosperity as we make the transition to a low carbon future. 

Previous policy development and legislative processes

In the late 1990s the Australian Greenhouse Office released a series of discussion papers on the design of an Australian emissions trading scheme.

In 2006, a task force set up by the States and Territories released a paper on setting out a proposed design of an Australian emissions trading scheme.

In 2007, the Howard Government's Prime Ministerial Task Group on Emissions Trading^[8] — a group of leading business representatives and senior officials — recommended that the Government adopt an emissions trading scheme.  Later that year, the States and Territories released their final report on emissions trading scheme design. 

On 16 July 2008 the Government released its Carbon Pollution Reduction Scheme Green Paper.^[9] This Paper reflected the Government’s preferred positions on issues concerning the CPRS.

On 15 December 2008, the Government released a White Paper called Carbon Pollution Reduction Scheme: Australia’s Low Pollution Future.^[10] The decisions in the White Paper formed the basis the CPRS legislative packages.

In 2009 and 2010, the Government introduced three packages of legislation to implement the CPRS.  These were not passed by the Parliament. 

Treasury modelling

On 10 July 2011, the Government released Strong growth, low pollution: Modelling a carbon price^[11], which models various scenarios concerning the proposals set out in Securing a clean energy future: The Australian Government’s climate change plan.  This built on Australia’s Low Pollution Future: The Economics of Climate Change Mitigation^[12], which was released on 30 October 2008.

The reports present the results of the Treasury’s economic modelling of the potential economic impacts of reducing emissions over the medium-and long-term.  They span global, national and sectoral scales, and look at distributional impacts, such as the implications of carbon 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.

Architecture for a carbon pricing mechanism

In September 2010 the Government announced the establishment of the Multi-Party Climate Change Committee (MPCCC) to consult, negotiate, and report to the Cabinet, through the Minister for Climate Change and Energy Efficiency, on agreed options for the implementation of a carbon price in Australia; and to provide advice on, and participate in, building community consensus for action on climate change.^[13] 

On 24 February 2011, the Prime Minister announced the climate change framework outlining the broad architecture for a mechanism, which had been considered by the MPCCC.  The proposed mechanism focused on the high level architecture, start date, potential mechanisms to allow flexibility to move to emissions trading, sectoral coverage and international linking arrangements.

DCCEE conducted a public consultation process on the proposed mechanism in April and May 2011.

Securing a clean energy future

On 10 July 2011, the Government published Securing a clean energy future: The Australian Government’s climate change plan.  This set out the details of the mechanism and related proposals for fostering renewable energy generation, energy efficiency and action on the land.  It also set out measures to assist Australian households and businesses to adapt to the mechanism and to support energy markets. 

Exposure draft legislation

On 28 July 2011, the Government released the following draft bills to implement the mechanism and related initiatives for public comment:

•       Clean Energy Bill 2011;

•       Clean Energy (Consequential Amendments) Bill 2011;

•       Clean Energy Regulator Bill 2011;

•       Climate Change Authority Bill 2011;

•       Clean Energy (Unit Shortfall Charge—General) Bill 2011;

•       Clean Energy (Unit Issue Charge—General) Bill 2011;

•       Clean Energy (Charges—Excise) Bill 2011;

•       Clean Energy (International Unit Surrender Charge) Bill 2011;

•       Ozone Protection and Synthetic Greenhouse Gas (Manufacture Levy) Amendment Bill 2011;

•       Ozone Protection and Synthetic Greenhouse Gas (Import Levy) Amendment Bill 2011;

•       Fuel Tax Legislation Amendment (Clean Energy) Bill 2011;

•       Excise Tariff Legislation Amendment (Clean Energy) Bill 2011; and

•       Customs Tariff Amendment (Clean Energy) Bill 2011.

The exposure process

During the period from 28 July 2011 to 22 August 2011, DCCEE:

•       met with government representatives from the States and Territories;

•       convened a forum for peak industry, environmental, community and other non-government organisations;

•       convened three legal experts workshops (in Sydney, Melbourne and Brisbane);

•       convened four technical working group meetings on the treatment of natural gas, the point of liability and landfill (in Canberra and Perth);

•       conducted meetings and teleconferences with business representative groups, businesses and other stakeholders; and

•       received over 300 submissions on the draft legislation. 

The 2011 Clean Energy Legislative Package

A description of the bills introducing the mechanism is set out below.

Table II: The Clean Energy Bill 2011 and related bills

Main bill	The Clean Energy Bill 2011 creates the mechanism.  It sets out the structure of the mechanism and process for its introduction.  These include: •       entities and emissions that are covered by the mechanism; •       entities’ obligations to surrender eligible emissions units; •       limits on the number of eligible emissions units that will be issued; •       the nature of carbon units; •       the allocation of carbon units, including by auction and the issue of free units; •       mechanisms to contain costs, including the fixed charge period and price floors and ceilings; •       linking to other emissions trading schemes; •       assistance for emissions-intensive, trade-exposed activities and coal-fired electricity generators; •       monitoring, investigation, enforcement and penalties; •       administrative review of decisions; and •       reviews of aspects of the mechanism over time.
Statutory bodies	The Clean Energy Regulator Bill 2011 sets up the Regulator, which is a statutory authority that will administer the mechanism and enforce the law.  The responsibilities of the Regulator include: •       providing education on the mechanism, particularly about the administrative arrangements of the mechanism; •       assessing emissions data to determine each entity’s liability; •       operating the Australian National Registry of Emissions Units (the Registry); •       monitoring, facilitating and enforcing compliance with the mechanism; •       allocating units including freely allocated units, fixed charge units and auctioned units; •       applying legislative rules to determine if a particular entity is eligible for assistance in the form of units to be allocated administratively, and the number of other units to be allocated; •       administering the National Greenhouse and Energy Reporting System (NGERS), the Renewable Energy Target (RET) and the Carbon Farming Initiative (CFI); and •       accrediting auditors for the CFI and NGERS.
	The Climate Change Authority Bill 2011 sets up the Authority, which will be an independent body that provides the Government with expert advice on key aspects of the mechanism and the Government’s climate change mitigation initiatives. The Government will remain responsible for carbon pricing policy decisions. This Bill also sets up the Land Sector Carbon and Biodiversity Board which will advise on key initiatives in the land sector.
Consequential amendments	The Clean Energy (Consequential Amendments) Bill 2011 makes consequential amendments to ensure: •       NGERS supports the mechanism; •       the Registry covers the mechanism and the CFI; •       the Regulator covers the mechanism, CFI, the Renewable Energy Target and NGERS; •       the Regulator and Authority are set up as statutory agencies and regulated by public accountability and financial management rules; •       that emissions units and their trading are covered by laws on financial services; •       that activities related to emissions trading are covered by laws on money laundering and fraud; •       synthetic greenhouse gases are subject to an equivalent carbon price applied through existing regulation of those substances; •       the Regulator can work with other regulatory bodies, including the Australian Securities and Investments Commission (ASIC), the Australian Competition and Consumer Commission (ACCC) and the Australian Transaction Reporting and Analysis Centre (Austrac); •       the taxation treatment of emissions units for the purposes of GST and income tax is clear; and •       the Conservation Tillage Refundable Tax Offset is established.
Procedural bills	Those elements of the mechanism which oblige a person to pay money are implemented through separate bills that comply with the requirements of section 55 of the Constitution.  These bills are the Clean Energy (Unit Shortfall Charge—General) Bill 2011, Clean Energy (Unit Issue Charge – Fixed Charge) Bill 2011, Clean Energy (Unit Issue Charge – Auctions) Bill 2011, Clean Energy (Charges—Excise) Bill 2011, Clean Energy (Charges—Customs) Bill 2011, Clean Energy (International Unit Surrender Charge) Bill 2011, Ozone Protection and Synthetic Greenhouse Gas (Manufacture Levy) Amendment Bill 2011 and Ozone Protection and Synthetic Greenhouse Gas (Import Levy) Amendment Bill 2011.
Related bills	Other elements of the Government’s Climate Change Plan are being implemented through other legislation.  These are: •       the Clean Energy (Excise Tariff Legislation Amendment)  Bill 2011 and the Clean Energy (Customs Tariff Amendment) Bill 2011, which imposes an effective carbon price on aviation and non-transport gaseous fuels through excise and customs tariffs; •       the Clean Energy (Fuel Tax Legislation Amendment) Bill 2011, which reduces the business fuel tax credit entitlement of non-exempted industries for their use of liquid and gaseous transport fuels, in order to provide an effective carbon price on business through the fuel tax system; and •       the Clean Energy (Household Assistance Amendments) Bill 2011, Clean Energy (Tax Laws Amendments) Bill 2011 and the Clean Energy (Income Tax Rates Amendments) Bill 2011, which will implement the household assistance measures announced by the Government on 10 July 2011.  These bills amend relevant legislation to provide payment increases for pensioners, allowees and family payment recipients and provide income tax cuts and establish new supplements for low- and middle-income households.

Structure of the Clean Energy Bill 2011

The bill creates the mechanism.  The mechanism is also implemented through other bills, and reference should also be made to those bills where appropriate.  This Explanatory Memorandum indicates where those other bills are relevant. 

Table III: Structure of the Clean Energy Bill 2011

Part	Title	Description
Part 1	Preliminary	Part 1 sets out the objects of the bill, arrangements for commencement, definitions and explains specific concepts of relevance to the mechanism.
Part 2	Carbon pollution cap	Part 2 provides that a carbon pollution cap can be set by the Government through regulations.
Part 3	Liable entities	Part 3 sets out the circumstances in which a person is liable under the mechanism, deals with mechanisms for transferring liability and establishes the Opt-in Scheme for specified fuels.
Part 4	Carbon Units	Part 4 provides for carbon units and the way in which these are issued by the Regulator and dealt with under the Registry.
Part 5	Emissions Number	Part 5 sets out how a person’s emissions number is determined.
Part 6	Surrender of eligible emissions units	Part 6 sets out the way in which a person may make a payment or surrender units to meet their obligations under the mechanism.
Part 7	Jobs and Competitiveness Program	Part 7 provides for assistance to emissions-intensive trade-exposed industries to adjust to the mechanism.
Part 8	Coal-fired electricity generation	Part 8 provides for assistance to coal-fired electricity generators to support energy markets.
Part 9	Publication of information	Part 9 sets out the Regulator’s obligations to publish specific information about the mechanism.
Part 10	Fraudulent conduct	Part 10 sets out the circumstances in which a person may be ordered to relinquish units if they are convicted of a criminal offence involving fraudulent conduct.
Part 11	Relinquishment of carbon units	Part 11 sets out the way in which a person relinquishes units where he or she must do so.
Part 12	Notification of significant holdings of carbon units	Part 12 sets out the obligations of corporate groups and others to notify the Regulator of a significant holding of units.
Part 13	Information gathering powers	Part 13 sets out the Regulator’s information gathering powers when investigating possible contraventions.
Part 14	Record-keeping requirements	Part 14 sets out liable entities’ reporting requirements under the mechanism and the consequences of not complying with them.
Part 15	Monitoring powers	Part 15 sets out the Regulator’s powers to engage in monitoring activities, including entering premises under warrant, when investigating possible contraventions
Part 16	Liability of executive officers of bodies corporate	Part 16 provides that executive officers of bodies corporate may be liable for contraventions in certain circumstances.
Part 17	Civil penalty orders	Part 17 sets out the way in which civil penalties, including pecuniary penalties, are imposed for contraventions.
Part 18	Infringement notices	Part 18 sets out the way in which infringement notices may be issued.
Part 19	Offences relating to unit shortfall charge and administrative penalties	Part 19 sets out the way in which sanctions for contraventions of criminal offences are imposed.
Part 20	Enforceable undertakings	Part 20 provides that the Regulator may accept enforceable undertakings from persons who may have engaged in a contravention, and the way in which these undertakings may be enforced.
Part 21	Review of decisions	Part 21 provides for reviews of administrative decisions made by the Regulator and the Government.
Part 22	Reviews by Climate Change Authority	Part 22 sets out the obligations of the Authority to undertake periodic reviews about the mechanism and aspects of it and also specific reviews requested by the Minister or both Houses of Parliament.
Part 23	Miscellaneous	Part 23 provides for a range of matters which facilitate the operation of the mechanism.

The objects of the carbon pricing mechanism

The objects of the mechanism are:

•       to give effect to Australia’s international obligations on addressing climate change under the Climate Change Convention and the Kyoto Protocol;

•       to support the development of an effective global response to climate change, consistent with Australia’s national interest in ensuring that average global temperatures increase by not more than 2 degrees Celsius above pre-industrial levels;

•       to take action directed towards meeting Australia’s long-term target of reducing net greenhouse gas emissions to 80 per cent below 2000 levels by 2050 and take that action in a flexible and cost-effective way; and

•       to put a price on greenhouse gas emissions in a way that encourages investment in clean energy, supports jobs and competitiveness in the economy and supports Australia’s economic growth while reducing pollution.

The objects of the bill are set out in Part 1.  The constitutional basis of the mechanism is addressed in Chapter 11. 

The mechanism

The mechanism starts on 1 July 2012.  From that date, businesses covered by it will pay for each tonne of carbon pollution they put into the atmosphere each year.

The commencement arrangements of the bill are set out in Part 1 (see Chapter 11).

There will be two stages.  For the first three years, the carbon price for each tonne of pollution will be fixed, and will operate like a carbon tax.  Then, from 1 July 2015, the mechanism will shift to a ‘cap and trade’ emissions trading scheme.  In this second ‘flexible charge’ stage, the carbon price will be set by the market.

The fixed charge period

An initial stage with fixed carbon charges will provide stability and predictability.  This will give businesses time to get used to the new system, to understand their obligations and to start planning ways to reduce their pollution.  Businesses will reduce their pollution when it is cheaper to do so than to pay the fixed charge.  Thus the market will create incentives to cut carbon pollution.

The fixed charge will start at $23 per tonne on 1 July 2012.  In each of the next two years, it will rise by around 2.5 per cent in real terms, assuming inflation of 2.5 per cent a year, which is the mid-point of the Reserve Bank of Australia’s target range for inflation.  The carbon charge will be $24.15 per tonne in 2013-14 and $25.40 per tonne in 2014-15.

This issue is discussed in Chapters 1, 2, 3 and 4 of this Explanatory Memorandum.  The operation of the fixed charge period is covered in Parts 3, 4, 5 and 6. 

Moving to a flexible price

The mechanism will move automatically to a flexible, market-driven approach on 1 July 2015.  From this date, the carbon charge will no longer be fixed, but will be set by the market.

During the flexible price period, an overall limit (or cap) will be placed on Australia’s annual greenhouse gas emissions from all sources of pollution covered by the carbon price.  There will be no limits on individual sectors, firms or facilities.

The Government will set the cap by issuing a fixed number of carbon units each year.  Each unit will represent one tonne of pollution.  This will be one of the main ways Australia meets its pollution targets.  Some of the carbon units issued each year will be sold by the Government at auction.  Others will be allocated to businesses without charge to support jobs and competitiveness, and help strongly affected industries make the transition to a clean energy future. 

Businesses will be free to buy and sell the carbon units they have acquired from the Government.  This will create a market for carbon units that is designed to ensure the reductions in pollution under the carbon price are achieved at the lowest cost to the economy: firms will buy units if they cannot reduce their pollution for less than the cost of the units.

This issue is discussed in Chapters 1, 2, 3 and 4 of this Explanatory Memorandum.  The operation of the flexible price period is covered in Parts 2, 3, 4, 5 and 6. 

Pollution caps

In the flexible price period, the Government will set annual caps on pollution.  Before the start of this flexible price period, the Government will be required to set out the caps for the first five years from 1 July 2015.  Once the flexible price system is under way, the caps will be extended each year.  This is designed to ensure that businesses always have five years of certainty about the pollution caps they face.

Table IV: Timeline for setting pollution caps

Deadline	Pollution cap announced for financial year(s) beginning:
31 May 2014	2015, 2016, 2017, 2018 and 2019
30 June 2016	2020
30 June 2017	2021
	Pollution caps will continue to be set annually

Pollution cap timelines are discussed in Chapter 2 of this Explanatory Memorandum.  Pollution caps are covered in Part 2. 

Climate Change Authority

The bill provides for reviews by an independent statutory body, the Authority, which will provide independent advice to the Government on the performance of the carbon price and other initiatives.  It is set up by the Authority bill. 

One of the Authority’s roles will be to make recommendations to the Government on pollution caps and on any national emissions trajectory or carbon budget.  The Government will make the final decisions.  The Authority will report regularly on progress.  The Authority will conduct regular, public reviews and its reports will be made public.  The Government will respond to its recommendations within a limited timeframe.

The Authority will complete its first review – which will provide recommendations on the mechanism’s first five years of pollution caps –  February 2014.

This issue is discussed in Chapter 10 of this Explanatory Memorandum.  The Authority’s responsibilities are set out in Part 22 and the Authority bill. 

Price ceilings and floors

For the first three years of the flexible price period, safety valves will be built into the system, in form of price ceilings and floors, to avoid price spikes or plunges.  This will reduce the risk for businesses as they gain experience in having a market set the carbon price.

A price ceiling will be set $20 higher than the expected international carbon price at the start of the flexible price period (1 July 2015).  A price floor will mean that the carbon price cannot fall any lower than $15 a tonne in 2015-16.  The floor is designed to reduce the risk of sharp downward movements in the price, which could undermine long-term investment in clean technologies.  Both the price ceiling and the price floor will increase gradually each year.

The price ceilings and floors will apply for the first three years of the flexible price period.  A review by the Authority of the role of the price ceiling and price floor will occur in 2017.

This issue is discussed in Chapter 2 of this Explanatory Memorandum.  Price ceilings and floors are addressed in Part 4, Division 2 and in Part 23.

Coverage of the carbon price

Carbon pollution from the following sources will be covered by the mechanism: stationary energy, non-legacy waste, industrial processes and fugitive emissions (other than from decommissioned coal mines). 

Some business transport emissions will face an equivalent carbon price through changes to fuel tax credits or fuel excise.  Emissions from non-transport uses of liquid petroleum transport fuels (for example, diesel and petrol) and gaseous transport fuels (LPG, LNG and CNG) will also be subject to an equivalent carbon price in this way.  This issue is discussed in greater detail in the section below on transport. 

The bill also allows for the establishment of an Opt-in Scheme to enable large users of specified fuels to voluntarily opt into the mechanism instead of paying the equivalent carbon price under the fuel tax or excise systems.

Treasury modelling shows that a broad-based carbon price will encourage pollution reductions across all sectors of the economy.  If sectors are excluded, it means that Australia misses out on their full contribution to the pollution reduction task. 

Around 60 per cent of Australia’s emissions will be directly covered by the mechanism and around two-thirds will be covered by a carbon price applied through various means.

This issue is discussed in Chapter 3 of this Explanatory Memorandum.  Coverage is addressed in Part 3.

Carbon Farming Initiative

Farming and other land-based activities will not be covered by the mechanism.  However, the CFI will give farmers and other land managers an opportunity to generate income from taking action to reduce their pollution.

The CFI is covered by the CFI Act and the Carbon Credits (Consequential Amendments) Act 2011. 

Gases

The mechanism will cover four of the six greenhouse gases counted under the Kyoto Protocol – carbon dioxide, methane, nitrous oxide and perfluorocarbon emissions from the aluminium sector.  The remaining greenhouse gases counted under the Kyoto Protocol (hydrofluorocarbons and sulphur hexafluoride) as well as other perfluorocarbon emissions will face an equivalent carbon price through existing synthetic greenhouse gas legislation.

Amendments to apply an equivalent carbon price to synthetic greenhouse gases are set out in the Consequential Amendments bill. 

Large polluters

It is important to ensure that the mechanism is practical and minimises costs to business.  For this reason, only facilities that release over a certain amount of carbon pollution a year, or are users or natural gas suppliers, will pay the carbon price under the mechanism.  Facilities that have direct greenhouse gas emissions of 25,000 tonnes of CO₂-e a year or more (excluding emissions from transport fuels and some synthetic greenhouse gases) will be covered.  There will be a lower threshold for certain landfill facilities.  Facilities that consume large volumes of natural gas will also be covered.  Natural gas suppliers will be liable for carbon pollution from the use of natural gas they supply to small-to medium-sized customers.

Liable entities will be required to either make a payment for emissions or surrender an equivalent number of units.  If a liable entity does not surrender any units or an insufficient number to meet their liability, then it will become liable for a shortfall charge.  Those who choose to pay, or who are liable for, a shortfall charge will pay a premium above the value of the unit. 

This issue is discussed in Chapters 3 and 4 of this Explanatory Memorandum.  The operation of the fixed charge period is covered in Parts 3 and 6. 

Transport

Households and light commercial vehicles will not face a carbon price on the fuel they use for transport.  In addition, the agriculture, forestry and fishing industries will not face a carbon price on their off-road fuel use.

An effective carbon price will apply to fuels used in domestic aviation, marine and rail transport.  Similarly, a carbon price will apply when liquid petroleum and gaseous transport fuels are used for non-transport purposes, such as running diesel generators on a mine site. 

In general, where an effective carbon price applies to transport fuels, it will be applied through changes in fuel tax credits or changes in excise.  The changes will be calculated to have the same price effect as coverage by the mechanism and will be adjusted periodically to ensure the effective carbon price on transport fuels is in step with the carbon price applying to the rest of the economy.

The Government intends to apply an effective carbon price to heavy on-road transport from 1 July 2014. 

While no transport fuels will be covered directly under the mechanism on a mandatory basis, large users of specified transport fuels may, in certain circumstances, choose to opt into coverage by the mechanism via the Opt-in Scheme.  These opt-in arrangements will be available from 1 July 2013.  By opting-in, fuel users will have their fuel emissions directly covered by the mechanism and will not face the equivalent carbon price through the fuel tax system.

 

Table V: Treatment of transport fuels

A carbon price will be applied to:	A carbon price will not apply to:
Domestic aviation	Fuel used by households for transport
Domestic shipping	Light on-road commercial vehicles
Rail transport	Ethanol, biodiesel and renewable diesel
Off-road transport use of liquid and gaseous fuels (except in agriculture, forestry, fisheries)	Gaseous fuels used for on-road transport
	Off-road fuel use by the agriculture, forestry and fishing industries
Non-transport use of liquid and gaseous fuels	Transport fuels when used as lubricants and solvents or in other ways that do not result in emissions

The treatment of transport fuels is addressed through the:

•       Clean Energy (Fuel Tax Legislation Amendment) Bill 2011;

•       Clean Energy (Excise Tariff Legislation Amendment) Bill 2011; and

•       Clean Energy (Customs Tariff Amendment) Bill 2011.

Jobs and Competitiveness Program

The Government recognises the importance of manufacturing and heavy industries that compete on international markets and use large amounts of energy or generate significant levels of carbon pollution.  The goods these industries produce will remain important in a clean energy economy. 

In most industries, a carbon price will represent a very small proportion of total revenue.  However, some industries, particularly heavy manufacturing industries, are pollution intensive. 

Without appropriate assistance arrangements, applying constraints on carbon pollution in Australia before other countries could risk ‘carbon leakage’ — activities could be relocated from Australia to countries where those activities may not be subject to comparable carbon constraints.  Carbon leakage is not in Australia’s interests — either from an environmental or an economic point of view.  The Jobs and Competitiveness Program (the Program) is designed to reduce this risk.

The Government has designed the Program to provide assistance to our emissions-intensive, trade-exposed industry while still maintaining a strong price signal for industries to reduce the pollution intensity of their products.  Making products like steel, aluminium, glass, clinker and chemicals in cleaner and more efficient ways is good for the environment, supports Australian jobs and will ensure our industry remains competitive.

This issue is discussed in Chapter 5 of this Explanatory Memorandum.  The Program is set out in Part 7.

Energy Security Fund and coal-fired electricity generation

An Energy Security Fund will be established to smooth the transition and maintain energy security.  This Fund will incorporate two main initiatives.  First, there will be transitional assistance to highly emissions-intensive coal-fired power stations in Australia.  This assistance will come with conditions to ensure security of supply and transparent information on the action taken by these generators to move to a cleaner energy future.  Second, there will be scope for payments for the closure of around 2,000 megawatts (MW) of very highly emissions-intensive coal fired generation capacity by 2020.  This will start the process of replacing existing, highly polluting electricity assets with cleaner generation. 

This issue is discussed in Chapter 6 of this Explanatory Memorandum.  The Fund and assistance for coal-fired electricity generation is covered in Part 8.

International linking

Australia’s carbon price will be linked to carbon markets around the world from the start of the flexible price period.  This will allow reductions in carbon pollution to be pursued globally at the lowest cost.  Carbon pollution is not confined to national borders.  It affects the whole planet.  International linking of carbon markets will allow businesses that release carbon in one country to be matched up with businesses in other countries that are able to reduce their carbon pollution at lower costs.  International linking encourages action to reduce carbon pollution around the world, and plays an important role in helping developing countries adopt clean technologies.

International linking will start when the carbon price moves to its flexible price period from 1 July 2015.  Australian businesses will be able to buy international units from credible international carbon markets or emissions trading schemes in other countries.  They will be allowed to use these units to meet some of their local obligations.  When an Australian business buys an international unit, it means that a tonne of pollution cannot be released overseas.  In addition, farmers will be able to sell credits generated from the CFI to international markets.

Safeguards will be in place to ensure international units are credible and do not undermine the environmental integrity of Australia’s pollution reduction efforts.  Until 2020, businesses will have to meet at least half of their annual obligations each year by buying carbon units or Australian Carbon Credit Units (ACCUs).  It will be more efficient and less costly to reduce Australia’s carbon pollution by a mixture of domestic reductions and international unit purchases compared with relying on domestic action alone.  International linking allows Australian businesses to pursue credible, cheaper carbon pollution reduction opportunities wherever they are available.

If reducing carbon pollution in Australia is more expensive than reducing carbon pollution in another country, Australian firms will be able to purchase an international unit.  With international linking, the carbon price in Australia will be set by international supply and demand for units.

This issue is discussed in Chapter 3 of this Explanatory Memorandum.  International linking issues will be addressed in Part 4 of the bill and in the Consequential Amendments bill. 

Governance

Sound governance will ensure that the mechanism is efficient and effective.  The roles of making, administering and reviewing the rules have been carefully allocated to ensure that appropriate accountabilities are in place.

The Government and the Parliament will be responsible for major policy decisions that require the balancing of environmental, economic and social factors.

Clean Energy Regulator

The Regulator will administer key elements of the mechanism, as well as the CFI and the Registry.  It will have robust powers to ensure the integrity of the mechanism and the Registry. 

The Regulator is set up through the Regulator bill.  This issue is discussed in Chapter 7 of this Explanatory Memorandum and the Explanatory Memorandum for the Regulator bill.  The Regulator’s responsibilities and powers to administer and enforce the mechanism are set out throughout the bill, and general powers set out in Part 23. 

Climate Change Authority

The Authority will review pollution caps, the future trajectory of Australia’s pollution levels and the performance of the carbon price and will track Australia’s progress towards meeting its targets for reducing carbon pollution.

The Authority is set up through the Authority bill.  Its role is discussed in Chapters 2 and 10 of this Explanatory Memorandum and the Explanatory Memorandum for the Authority bill.  The Authority’s responsibilities and powers to conduct reviews are set out in Part 22. 

Productivity Commission

The Productivity Commission will review industry assistance under Parts 7 and 8.  It will also review the impact of the carbon price on industry and continue reporting on actions by other countries to reduce carbon pollution.

This issue is discussed in Chapters 5 and 6 of this Explanatory Memorandum.  The Commission’s responsibilities and powers to conduct reviews are set out in Parts 7 and 8.

Links to other Regulators

The mechanism will be administered by the Regulator; however other national economic Regulators and law enforcement agencies will also have a role.  Under the Package, the Regulator will be given powers to share information and cooperate with these agencies. 

The Australian Competition and Consumer Commission (ACCC) administers and enforces economy-wide competition, fair trading and consumer protection laws, which will apply to business activity under the mechanism.  The ACCC has received additional funding of $12.8 million over four years for additional resources to deal with false and misleading claims about the carbon price.

The Australian Securities and Investments Commission (ASIC) administers and enforces Australia’s financial services laws, which will cover emissions units, as these will be defined as financial products.  It will also have responsibility for the regulation of related trading markets. 

The Regulator will also have powers to work with the Australian Transaction Reports and Analysis Centre (Austrac), the Australian Federal Police and the Commonwealth Director of Public Prosecutions concerning activities that may contravene the requirements of the mechanism and be linked with fraud and criminal activity, such as money laundering. 

The bill’s operation and background

Simplified outlines

The bill includes a simplified outline of the mechanism and each Part of the bill includes a simplified outline of that Part’s contents. 

Date of effect and application

Once passed:

•       clauses 1 and 2 will commence on the date the bill receives the Royal Assent;

•       the substantive provisions of the bill (clauses 3 to 303 and 304 to 311) will commence on a date to be proclaimed; and

•       clauses 303A, 303B and 312 will commence on the day after the bill receives the Royal Assent. 

The first year for which entities will be liable under the mechanism will commence on 1 July 2012.  This is achieved by use of the phrase ‘eligible financial year’ which is defined to mean the financial year beginning on 1 July 2012 or a later financial year. 

Prompt commencement will allow liable entities and the Regulator to prepare for the mechanism and for the Regulator to prepare for its functions as the responsible agency for the CFI and the Registry.  The timeframe will also provide time for:

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

•       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 for reforestation.

Proposal announced

The measures are based on the announcement on 10 July 2011 and the publication of Securing a clean energy future: The Australian Government’s climate change plan. 

Transitional provisions and consequential amendments

The transitional provisions and consequential amendments are included in the Consequential Amendments bill.  There is a separate Explanatory Memorandum for that bill.

Financial impact

The financial impact associated with the legislative proposals in the Clean Energy Legislative Package, is reflected in Fiscal Tables 1 to 4 below.^[14] 

Further detail on the financial implications of these measures is provided in Securing a clean energy future: The Australian Government’s climate change plan and related documents.

The Government will use all of the revenue 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.

 

Fiscal Table 1: Plan for a clean energy future

	Fiscal Impact ($m)				Fwd Est’s.
	2011-12	2012-13	2013-14	2014-15
Revenue from the sale of units	0	7,740	8,690	9,190	25,620
Revenue from the application of carbon price via other measures[15]	0	290	320	320	930
Fuel tax credit reductions[16]	0	570	70	70	710
Household assistance measures	-1,534	-4,230	-4,809	-4,830	-15,403
Assistance for low- to middle-income households	-1,470	-4,125	-4,672	-4,700	-14,967
Increases in transfer payments[17]	-1,470	-775	-2,302	-2,380	-6,927
Tax reform	0	-3,350	-2,370	-2,320	-8,040
Low Carbon Communities - redesign and extension	-5	-39	-83	-90	-217
Other household energy efficiency measures[18]	-7	-13	-15	-13	-48
Household assistance implementation	-51	-54	-39	-28	-172
Support for jobs	-26	-3,017	-3,475	-3,773	-10,291
Jobs and Competitiveness Program	0	-2,851	-3,059	-3,312	-9,222
Clean Technology Program[19]	-19	-142	-245	-312	-717
Increased small business instant asset write-off	0	0	-100	-100	-200
Regional structural adjustment	0	-10	-50	-30	-90
Other business energy efficiency measures[20]	-7	-15	-21	-19	-62
Clean Energy Finance Corporation[21]	-2	-21	-467	-455	-944
Energy security and transformation[22]	-1,009	-1	-1,003	-1,042	-3,054
Land and biodiversity measures	-69	-131	-506	-489	-1,194
Carbon Farming Initiative	0	-47	-65	-81	-193
Biodiversity Fund	-37	-35	-250	-251	-572
Carbon Farming Futures Program	-31	-30	-113	-102	-276
Carbon Farming Initiative Non-Kyoto Carbon Fund	0	-1	-50	-47	-97
Regional Natural Resource Management Planning	0	-13	-23	-4	-40
Other land and biodiversity measures[23]	-1	-5	-5	-4	-16
Governance	-78	-90	-106	-107	-382
Clean Energy Regulator	-68	-68	-61	-59	-256
Coverage of synthetic greenhouse gases	-1	-2	-26	-31	-60
Climate Change Authority	0	-6	-9	-9	-25
Productivity Commission Reviews	-4	-4	-5	-5	-18
Other governance	-5	-9	-5	-4	-23
Total impact	-2,717	1,110	-1,285	-1,116	-4,008

Fiscal Table 2: Plan for a clean energy future

	Underlying Cash Balance Impact ($m)				Fwd Est’s.
	2011-12	2012-13	2013-14	2014-15
Total receipts (net of free units)	0	4,270	6,680	7,211	18,161
Total payments	-2,683	-4,779	-7,078	-7,303	-21,843
Total impact	-2,683	-509	-398	-92	-3,682

 

Fiscal Table 3: Plan for a clean energy future including Government measures

	Fiscal Impact ($m)				Fwd Est’s.
	2011-12	2012-13	2013-14	2014-15
MPCCC agreed measures	-2,717	1,110	-1,285	-1,116	-4,008
Additional Government measures	-223	-48	-322	178	-416
Coal Sector Jobs Package	-222	0	-231	-243	-696
Coal Mining Abatement Technology Support Package	0	-11	-16	-15	-41
Steel Transformation Plan	-1	-38	-75	-75	-189
Additional fuel tax credit reductions for heavy on-road transport from 2014-2015	0	0	0	510	510
Total impact	-2,940	1,061	-1,607	-938	-4,424

 

Fiscal Table 4: Plan for a clean energy future including Government measures

	Underlying Cash Balance Impact ($m)				Fwd Est’s.
	2011-12	2012-13	2013-14	2014-15
MPCCC agreed measures	-2,683	-509	-398	-92	-3,682
Additional Government measures	-223	-48	-304	124	-452
Total impact	-2,907	-558	-701	32	-4,134

 

Regulation impact statement

The Regulation Impact Statement, entitled Australia’s plan for a clean energy future, is available at http://ris.finance.gov.au.  The RIS was prepared by the Department and has been assessed as adequate by the Office of Best Practice Regulation.

Outline of chapter

1.1                  Chapter 1 explains:

•       which greenhouse gas emissions give rise to liability;

•       which entities are responsible for those emissions;

•       how obligations may be transferred voluntarily from one entity to another, to allow liability to be met more efficiently; and

•       the arrangements allowing entities using specified fuels to choose to opt into coverage by the mechanism.

This chapter covers Part 3.

Context

1.2                  The mechanism covers emissions from stationary energy, industrial processes, fugitive emissions (except from decommissioned coal mines) and non-legacy waste.  Amendments to other legislation covering fuel tax and synthetic greenhouse gases apply an equivalent carbon price to some business transport emissions, non-transport use of transport fuels, and synthetic greenhouse gases. 

1.3                  Around 60 per cent of Australia’s emissions will be directly covered by the mechanism, and around two-thirds are covered by a combination of the mechanism and equivalent carbon pricing arrangements.  Together, these approaches cover all six greenhouse gases counted under the Kyoto Protocol.

1.4                  This broad coverage will ensure that the economy as a whole starts moving towards a clean energy future and that the cheapest ways of reducing pollution will be implemented, thereby lowering the overall cost to the Australian economy. 

1.5                  Treasury modelling shows that a broad-based carbon price will encourage pollution reductions across all sectors of the economy.  If sectors are excluded, Australia misses out on their full contribution to the pollution reduction task. 

1.6                  Agricultural emissions are not covered by the mechanism.  However, the CFI will give farmers and other land managers an opportunity to generate income from taking action to store carbon in the landscape and to reduce their pollution.

1.7                  To minimise costs to business and reduce administrative complexity, only firms that directly release large amounts of greenhouse gas emissions or are natural gas suppliers (and are responsible for potential greenhouse gas emissions embodied in the natural gas) will pay the carbon price.  It is expected that around 500 large polluters will be liable entities under the mechanism.

Summary of new law

Liability of direct emitters

1.8                  Part 3, Division 2 deals with the liability of direct emitters under the mechanism.  Liable entities include those who operate a facility which emits more than a specified amount of greenhouse gases, and those who are liable for emissions from a facility because they are members of a JV or hold an LTC.  It also deals with the way in which landfill operators are covered by the mechanism. 

Liability for emissions embodied in natural gas

1.9                  Part 3, Division 3 deals with the liability under the mechanism for emissions embodied in natural gas. 

1.10              Part 3, Division 4 deals with the way in which an OTN is issued and used.  An OTN is used to transfer liability for emissions arising from the use of natural gas from the supplier to the user of that gas.  An OTN is used to keep track of liability so that it is not imposed twice on the same emissions.  For example, it ensures that emissions from the use of natural gas that count towards a facility’s emissions do not count towards a gas supplier’s liability.  OTNs also ensure that liability is not imposed on natural gas that is used in a way that does not result in emissions.

Direct emitters - Liability for participants in unincorporated joint ventures

1.11              Part 3, Division 5 deals with unincorporated JVs which operate facilities covered by the direct emitters provisions.  These may be ‘mandatory designated JVs’ and ‘declared designated JVs’: 

•       A ‘mandatory designated JV’ is designated when a facility is operated by a JV, but no one party has operational control of that facility.  The liability for emissions from the facility is shared between participants in proportion to their interest in the JV.  Applying liability directly to JV participants will facilitate the pass-through of the carbon price under contracts for sale of the output of the facility held by the JV participants.

•       A ‘declared designated JV’ is declared when a facility is operated exclusively for a JV by an operator and the JV participants voluntarily assume the liability for emissions, with the current operator’s consent.  This will provide JV participants more flexibility to manage emissions obligations from a facility by allowing them to directly assume those obligations if they wish to do so.

Direct emitters - Transfers of liability by liability transfer certificates

1.12              Part 3, Division 6 covers LTCs.  LTCs are used to transfer liability for a facility from the facility operator to another member of the corporate group or to a person who has financial control of a facility. 

Opt in arrangements for entities covered by the fuel tax system

1.13              Part 3, Division 7 allows the Minister to make regulations establishing the Opt-in Scheme.  This will allow entities who use significant quantities of liquid petroleum fuels to opt into the mechanism to manage their carbon emissions liability for specified fuels instead of paying the equivalent carbon price through the fuel tax system.  The Opt-in Scheme will start from 1 July 2013.

Detailed explanation of new law

Liability for emissions under the mechanism

1.14              Under the mechanism a person may be liable as:

•       a ‘direct emitter’ for greenhouse gas emissions directly emitted by a facility; or

•       a ‘natural gas supplier’ for greenhouse gas emissions embodied in natural gas supplied to another person; or

•       a person that opts-in under the Opt-in Scheme  for greenhouse gas emissions embodied in specified fuels.  [Part 3, clause 19], [Part 1, clause 5, definition of ‘covered emission’], [Part 1, clause 5, definition of ‘facility’], [Part 1, clause 5, definition of ‘greenhouse gas’], [Part 1, clause 5, definition of ‘natural gas’]

Such a person is a ‘liable entity’.  [Part 1, clause 5, definition of ‘liable entity’]

Direct emitters

1.15              A person is liable for greenhouse gases emitted from the operation of a facility if:

•       the person has operational control of that facility (with specific arrangements for JVs or LTC holders (see below)); and

•       the facility produced covered emissions (see below); and

•        the amount of those covered emissions exceeds a threshold or the facility is a ‘large gas consuming facility’ (see below).  [Part 3, clause 20(1)-(3)], [Part 3, clause 21(1)-(3)], [Part 3, clause 22(1)-(3)], [Part 3, clause 23(1)-(3)], [Part 3, clause 24(1)-(3)], [Part 3, clause 25(1)-(3)], [Part 3, clause 55A]

The types of liability for direct emitters are set out in Diagram 1.1. 

Diagram 1.1 Liability of direct emitters under the carbon pricing mechanism

Operational control

1.16              Generally, a person with liability for emissions from a facility is the person with ‘operational control’ of that facility.  Operational control has the same meaning as in section 11 of the NGER Act.  [Part 1, clause 5, definition of ‘operational control’] Operational control is generally held by the person that:

•       has the greatest ability to introduce and implement operational, environmental and health and safety policies for a facility; and

•       is declared to have operational control by the Regulator.

1.17              The Consequential Amendments bill broadens the range of entities that can have operational control for the purposes of the NGER Act from ‘a controlling corporation or another member of the corporation’s group’ to ‘a person’ (see Schedule 1, Part 2, items 340-348 of the Consequential Amendments bill).^[24]  [Part 1, clause 5, definition of ‘group’]

1.18              The person with operational control will generally have the greatest ability to bring about emissions reductions.  This person will also generally hold the contracts for sale of the output of the facility, and will be in the best position to pass through the carbon price to customers of the facility.  If liability was placed on another party then carbon price clauses in existing contracts may not be triggered.

1.19              Exceptions to this approach are provided through LTCs and designated JVs (see below).  These exceptions aim to address situations where a person other than the operator can more efficiently manage carbon liabilities.

Direct (facility) emissions covered by the mechanism

Covered emissions

1.20              ‘Covered emissions’ are those greenhouse gas emissions that count towards facility thresholds and give rise to liability under the mechanism.  Broadly, these are ‘scope 1 emissions’, where:

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

•       the greenhouse gas is released in Australia; and

•       a method or criteria for measurement has been provided to measure those emissions under the NGER Act (currently the National Greenhouse and Energy Reporting (Measurement) Determination 2008);

•       the greenhouse gas is not one of the excluded types of emissions (see below).  [Part 3, clause 30(1) and (2)], [Part 1, clause 5, definition of ‘covered emissions’], [Part 1, clause 5, definition of ‘scope 1 emission’]

Scope 1 emissions

1.21              ‘Scope 1 emissions’ are defined by reference to section 10 of the NGER Act and regulation 2.23 of the NGER Regulations, and for which methods or criteria for measurement are provided under the NGER (Measurement) Determination 2008.  Scope 1 emissions are those that are the direct result of an activity or series of activities (including ancillary activities) that constitute the facility (for example the emissions produced when coal is burned at a power station). 

Greenhouse gases

1.22              ‘Greenhouse gas’ has the same meaning as in section 7 of the NGER Act.  [Part 1, clause 5, definition of ‘greenhouse gas’] Greenhouse gases include:

•       carbon dioxide;

•       methane;

•       nitrous oxide;

•       sulphur hexafluoride;

•       hydrofluorocarbons specified in the regulations; or

•       perfluorocarbons specified in the regulations.

1.23              However, as explained below, most synthetic greenhouse gas emissions are excluded from the meaning of ‘covered emissions’ and are covered by alternative arrangements under the Ozone Protection and Synthetic Greenhouse Gas Management Act 1989. 

1.24              The Consequential Amendments bill amends the NGER Act to provide for additional gases to be included through regulations (see Schedule 1, Part 2, item 323 of the Consequential Amendments Bill).  This allows additional greenhouse gases which are internationally recognised to be brought into the mechanism in the future.

Direct (facility) emissions not covered by the mechanism

1.25              Some scope 1 emissions from facilities are not covered emissions for the purposes of the mechanism and give rise to no liability under it.  [Part 3, clause 30(2)-(12)] 

Fuels subject to excise or customs

1.26              Where liquid petroleum fuel, LPG, LNG or CNG are combusted and are subject to excise or customs duty, the resulting emissions will not count as covered emissions.  [Part 3, clause 30(2)], [Part 1, clause 5, definition of ‘compressed natural gas’], [Part 1, clause 5, definition of ‘liquified petroleum gas’], [Part 1, clause 5, definition of ‘liquified natural gas’] 

1.27              This ensures that emissions from transport fuels that are excluded from a carbon price, for example, emissions from private passenger vehicles, are not subject to a carbon price.  It also ensures that fuels subject to an equivalent carbon price under fuel tax legislation are not also subject to a carbon price under the mechanism. 

1.28              An equivalent carbon price will be applied to some uses of excisable liquid petroleum fuels, LPG, LNG and CNG under the Clean Energy (Excise Tariff Legislation Amendment) Bill 2011, Clean Energy (Customs Tariff Amendment) Bill 2011 and Clean Energy (Fuel Tax Legislation Amendment) Bill 2011.  [Part 1, clause 5, definition of ‘liquid petroleum fuel’]

1.29              Where liquid petroleum fuel, LPG, LNG or CNG are combusted and are not subject to excise or customs duty, the resulting emissions will count as covered emissions.  [Part 3, clause 30(2)], [Part 1, clause 5, definition of ‘compressed natural gas’], [Part 1, clause 5, definition of ‘liquified petroleum gas’], [Part 1, clause 5, definition of ‘liquified natural gas’]  For example, certain fuels are combusted at petroleum refineries and are exempt from excise – the emissions from the combustion of these fuels are covered emissions.

Combustion of biomass, biofuels and biogas

1.30              Emissions from the combustion of biomass, biofuels and biogas are not covered emissions.  Carbon dioxide produced from these sources is part of the natural carbon cycle and does not count towards Australia’s emissions obligations.  Other greenhouse gases from the combustion of these sources are a minor source of emissions and are excluded for administrative simplicity.  [Part 3, clause 30(3)]

Agriculture

1.31              Emissions from agricultural sources are excluded from the mechanism.  [Part 3, clause 30(4)] Agricultural emissions correspond to many of the emissions sources covered by the CFI Act, which broadly correspond to the agricultural emissions that countries are required to report under international accounting rules.

1.32              The exclusion of soil-related emissions is limited to emissions that arise from, or that are produced in, soil.  Emissions that result from carbon capture and storage, or emissions attributable to the operation of a landfill facility are not exempted.  [Part 3, clause 30(5)]

Other emissions from land

1.33              Emissions, other than emissions attributable to the operation of a landfill facility, from changes in the levels of carbon sequestered in living biomass, dead organic matter or soil and that are attributable to land use, changes in land use (including land clearing) or forestry activities, are not covered emissions.  [Part 3, clause 30(6) and (7)]

Fugitive emissions from decommissioned underground mines

1.34              Fugitive emissions from decommissioned underground mines are not covered emissions.  A ‘decommissioned underground mine’ will be defined in the NGER Regulations, and this definition will be used to determine whether an underground coal mine has been decommissioned or not.  [Part 1, clause 5, definition of ‘decommissioned underground mine’], [Part 1, clause 5, definition of ‘fugitive emissions’], [Part 3, clause 30(8)]

Legacy emissions from landfill facilities

1.35              Emissions attributable to waste deposited in a landfill facility prior to 1 July 2012 are not included in a landfill facility’s liability.  [Part 3, clause 30(9)], [Part 1, clause 5, definition of ‘landfill facility’], [Part 1, clause 5, definition of ‘legacy emissions’]

1.36              These legacy emissions are excluded from liability because, in many cases, there is little or no opportunity for landfill operators to recover the cost of meeting a liability for waste that was deposited in the past.  However, as discussed below legacy emissions do count for the purpose of determining whether a landfill facility exceeds emission thresholds.

1.37              Details on developing a legacy emissions profile to allow liable landfill facilities to determine the ongoing annual emissions from legacy waste will be set out in regulations.  [Part 3, clause 32]

Closed landfill facilities

1.38              Landfill facilities which no longer accept waste and closed prior to 1 July 2012 are excluded from the mechanism.  [Part 3, clause 30(10)]

1.39              The operator of a landfill facility that closed after 30 June 2011 will be a liable entity if the facility meets one of the thresholds outlined below.  If there is a change in operational control 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.

Synthetic greenhouse gases

1.40              Emissions of synthetic greenhouse gases (hydrofluorocarbons, perfluorocarbons and sulphur hexafluouride) are excluded from the mechanism, except for emissions of perfluorocarbons emitted as a result of aluminium production.  [Part 3, clause 30(11) and (9)] Synthetic greenhouse gases emissions that are excluded from the mechanism will face an equivalent carbon price using existing import and manufacture controls under the Ozone Act (which is covered by the Consequential Amendments bill).

Scope 2 and 3 emissions

1.41              Indirect scope 2 emissions, such as those concerning electricity use, and scope 3 emissions are not included in the definition of a facility’s emissions.  This ensures that there is no double counting of emissions.  .  Scope 2 emissions are defined in section 10 of the NGER Act and regulation 2.23 of the NGER Regulations.  Scope 3 emissions are not defined in the NGER legislation; they are greenhouse gas emissions that are generated in the wider economy as a consequence of a facility’s activities but that are physically produced by another facility and that are not scope 2 emissions (for example, a gas-fired electricity generator will not be liable for fugitive emissions associated with the production and transport of the natural gas that it uses).  [Part 1, clause 5, definition of ‘covered emissions’], [Part 1, clause 5, definition of ‘scope 1 emission’]

Facilities covered by the mechanism

1.42              The mechanism covers three types of facilities:

•       landfill facilities;

•       large gas consuming facilities; and

•       facilities that are neither landfill or large gas consuming facilities.

Different rules apply to liability for emissions from each of these types of facilities. 

Facilities that emit greenhouse gases with a CO₂-e of 25,000 tonnes or more

1.43              A person is a liable entity if a facility it operates emitted covered greenhouse gases with a CO₂-e of 25,000 tonnes or more during an eligible financial year.  [Part 3, clause 20(4)], [Part 3, clause 21(4)], [Part 3, clause 22(4)] This threshold broadly aligns with the facility threshold in section 13 of the NGER Act. 

Example 1.1 Application of 25,000 tonnes of CO₂-e threshold

During a financial year HosCo Ltd operates a facility that emits 20,000 tonnes of CO₂-e from the combustion of coal, and 15,000 tonnes of CO₂-e from cement clinker production (an industrial process). 

The total covered emissions from the facility total 35,000 tonnes of CO₂-e.  HosCo Ltd is a liable entity.

Large gas consuming facilities

1.44              A person is a liable entity if it operates a facility that is a ‘large gas consuming facility’, which is a facility that has, in a financial year after 1 July 2010, combusted natural gas with a CO₂-e of 25,000 tonnes or more.  A facility ceasesto be a large gas consuming facility when it satisfies the conditions specified in the regulations.  [Part 3, clause 20(1)], [Part 3, clause 21(1)], [Part 3, clause 22(1)], [Part 3, clause 55A], [Part 1, clause 5, definition of ‘large gas consuming facility’]

1.45              The arrangements for large gas consuming facilities are designed to ensure that facilities do not move in and out of coverage from year to year.  They provide certainty as to when an OTN quotation should be used and will ensure that gas suppliers will know that they are not liable for emissions from particular facilities in advance of a financial year. 

1.46              The threshold for large gas consuming facilities is based on emissions in an earlier financial year.  Once a facility reached this threshold it is considered to be a large gas consuming facility for all future years until such time that it satisfies the conditions specified in the regulations.  The regulations will provide that facilities that have consistently reduced their natural gas combustion emissions to below 25,000 tonnes CO₂ equivalence will cease to be a large gas consuming facility. 

Example 1.2 Liability for facility with natural gas emissions

Brick Factory is operated by NG Limited, which receives supplies of natural gas for use at the facility from GasCo.  In 2012-13, covered emissions from the operation of the facility comprise:

•    10,000 tonnes of CO₂-e from use of natural gas; and

•    20,000 tonnes of CO₂-e from other sources.

Natural gas emissions from Brick Factory have never been over 25,000 tonnes of CO₂-e in previous financial years.  Therefore Brick Factory is not a large gas consuming facility and NG does not have to quote an OTN. 

Brick Factory has total covered emissions of 30,000 tonnes of CO₂-e.  Because the facility is over the direct emitters threshold, NG is liable for emissions from the operation of the facility in 2012-13.

Since NG did not quote an OTN for natural gas used at Brick Factory, it has a total liability of 20,000 tonnes of CO₂-e for Brick Factory.

Landfill facilities that exceed an emissions threshold

1.47              A landfill facility may be a liable entity if it meets one of two thresholds:

•       the landfill facility emits covered plus legacy waste emissions with a CO₂-e of 25,000 tonnes or more; or

•       the landfill facility emits covered plus legacy waste emissions with a CO₂-e of 10,000 tonnes or more in an eligible financial year, and is located within a prescribed distance of another landfill facility which:

–      is a ‘designated large landfill facility’; and

–      accepts a similar classification of waste.  [Part 3, clause 23(4) and (10)], [Part 3, clause 24(4) and (10)], [Part 3, clause 25(4) and (8)]

1.48              A ‘designated large landfill facility’ is a landfill facility that triggered the 25,000 tonnes of CO₂-e threshold in the previous eligible financial year’.  The Regulator may publish a list of designated large landfill facilities and their locations to assist landfill operators to determine whether the 10,000 tonnes of CO₂-e threshold applies to them for an eligible financial year.  [Part 1, clause 5, definition of ‘designated large landfill facility’], [Part 9, clause 206]

1.49              The additional, lower threshold is intended to prevent diversion of waste from designated large landfill facilities to smaller facilities nearby. 

Example 1.3 Application of 10,000 tonnes of CO₂-e threshold for landfill facilities

LandfillCo, a landfill facility, emits 14,000 tonnes of CO₂-e in an eligible financial year. 

LandfillCo is within the prescribed distance of another open landfill facility, operated by TipCorp, which accepts the same classification of waste and in the previous eligible financial year emitted 25,000 tonnes or more of CO₂-e. 

LandfillCo is covered by the mechanism and is a liable entity. 

Emissions that count towards determining whether thresholds are met

1.50              All covered emissions count when determining whether a facility meets the relevant threshold.  To avoid doubt, for those facilities that are not landfill facilities, their emissions from solid waste disposal count for the purposes of determining whether that facility meets the threshold. 

1.51              For landfill facilities, all covered emissions plus legacy waste emissions from the facility count for the purposes of determining whether that facility meets the threshold for inclusion in the mechanism.  This includes covered emissions from combustion of energy sources at the facility.

Facilities that exceed a pro-rata emissions threshold

1.52              A pro-rata threshold is applied where the liable entity for a facility changes during an eligible financial year.  If a facility’s emissions reach or exceed the relevant pro-rata threshold, then the operator of that facility will be a liable entity.  This also applies when an entity holds an LTC for a facility for only part of the year, or when there is a designated JV concerning the facility for only part of a year.  [Part 3, clause 20(1)], [Part 3, clause 21(1)], [Part 3, clause 22(1)], [Part 3, clause 23(1)], [Part 3, clause 24(1)], [Part 3, clause 25(1)]

1.53              The pro-rata threshold ensures that facilities that would reach a threshold during an entire financial year continue to be covered under the mechanism for the full compliance year even when the operator changes.  This maintains consistent coverage under the mechanism and prevents entities from avoiding thresholds, deliberately or otherwise, by changes in operational control or the issue of an LTC.

1.54              Pro-rata thresholds are calculated using a specified formula.  [Part 3, clause 20(5)], [Part 3, clause 21(5)], [Part 3, clause 22(5)], [Part 3, clause 23(5)], [Part 3, clause 24(5)], [Part 3, clause 25(5)] The calculation is:

25,000 × number of control days or certificate days (whichever is relevant)	=	pro-rata threshold
365

1.55               ‘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, clause 20(1)], [Part 3, clause 21(1)], [Part 3, clause 23(1)], [Part 3, clause 24(1)], [Part 1, clause 5, definition of ‘group’]

1.56              ‘Certificate days’ are the days in the financial year, where this is less than the full year, that a person was the holder of an LTC for a facility.  [Part 3, clause 22(1)], [Part 3, clause 25(1)]

Example 1.4 Pro rata threshold

A.M.Y Limited had operational control of a facility for 100 days of the year.  A.M.Y’s pro-rata threshold for that facility is worked out as follows:

25,000 × 100 control days ÷ 365

=

6,849 tonnes of CO2-e

If the emissions from that facility are 6,849 tonnes of CO₂-e or more during the 100 control days then those emissions will count towards A.M.Y’s liability.

Provisional emissions numbers

1.57              If an entity is liable for a facility, then the number of tonnes of covered emissions in CO₂-e emitted from the facility will be a PEN for that facility.  PENs are used to work out an entity’s total liability under the mechanism, and therefore the number of eligible emissions units the entity must surrender (see Chapter 4).  [Part 3, clause 20(1)], [Part 3, clause 21(1)], [Part 3, clause 22(1)], [Part 3, clause 23(1)], [Part 3, clause 24(1)], [Part 3, clause 25(1)], [Part 1, clause 5, definition of ‘provisional emissions number’]

1.58              However, to ensure that emissions from natural gas combustion are not counted twice - once by the liable entity for the facility and once by the natural gas supplier to the facility - covered emissions that are from the combustion of natural gas will not count towards the facility PEN when a natural gas supplier is responsible for emissions embodied in the natural gas.  A liable entity for a facility will know whether they are responsible for the natural gas combustion emissions from the facility as follows:

•       the liable entity for the facility will be responsible for the emissions if an OTN has been quoted  for the gas supplied to the facilty;

•       the supplier of gas to the facility will be responsible for the embodied emissions if an OTN has not been quoted  for the gas supplied to the facilty.

In the case of a large gas consuming facility OTN quotation is mandatory and therefore liability will always rest with the liable entity for the facility.

Further information about OTNs is provided below.

Re-allocation of liability for direct emitters under the mechanism

1.59              In certain circumstances liability for a covered facility will be shared between two or more entities.  In other circumstances a liable entity may transfer its liability to one or more other persons.  The situations covered by the bill are:

•       where the JV participants in a JV collectively operate a facility, liability will be allocated amongst those participants.

•       a direct emitter may share or transfer liability to the participants in a JV. 

•       a direct emitter may transfer liability to another member of its corporate group or the financial controller of the facility outside of the corporate group by means of a LTC. 

These arrangements are shown in Diagram 1.2. 

Diagram 1.2 Re-allocation of liability by direct emitters

Designated joint ventures

1.60              Where a JV has a covered facility, specific rules apply to the way in which liability for that facility’s emissions will be treated under the mechanism.  These rules ensure that liability for a facility is allocated where the JV participants collectively operate a facility and assist with the efficient management of liability under the mechanism.  Where there is a distinct operator the treatment of JVs differs, depending on whether the JV is a:

•       mandatory designated JV; or

•       declared designated JV.  [Part 1, clause 5, definition of ‘designated joint venture’], [Part 1, clause 5, definition of ‘joint venture’]

Mandatory designated joint ventures

1.61              A mandatory JV exists where:

•       a JV has a facility; and

•       the JV participants have an agreement concerning the facility; and

•       two or more persons have the ability to introduce the operational, health and safety and environmental policies at the facility (that is, satisfy the requirements of section 11(1)(a) of the NGER Act); and

•       no one person has greater authority to introduce the operational, health and safety and environmental policies (and no declaration has been made by the Regulator under sections 55 or 55A the NGER Act that a person has operational control of the facility),

(see Example 1.5).  [Part 3, clause 65], [Part 1, clause 5, definition of ‘mandatory designated joint venture’]

1.62              Where there is no one party with operational control of a facility operated by a JV, JV participants are likely to hold separate contracts for the sale of outputs of the facility and may not have arrangements in place that allow for the pass-through of the carbon price in those contracts. 

1.63              Imposing mandatory liability on each of the JV participants will maximise the chance that change of law or price pass-through clauses in contracts will be triggered, so as to allow for pass-through of the price to customers. 

Example 1.5 Mandatory designated joint venture

Companies A, B and C are members of an unincorporated JV that operates an emitting facility.  They receive shares in the output of the facility of 20 per cent, 50 per cent and 30 per cent respectively.  They collectively operate the facility, and no one party has the most authority to implement operational, health and safety and environmental policies.

Accordingly, liability for the emissions from the facility will be allocated to cach company in proportion to its interest.

1.64              The requirements that:

•       a JV has a facility; and

•       that JV participants have an agreement in place for the facility,

are intended to ensure that the JV is sufficiently related to the facility, and that the JV participants should have liability for the facility, even if the JV participants do not formally own the facility.  [Part 3, clause 65(1)(a)]

1.65              The JV participants must notify the Regulator that they are participants in a JV, and of the facility to which the JV relates, by 31 July 2012 (where a facility already exists on 1 July 2012), or within 30 days of the JV coming into existence (for a JV that comes into existence after 1 July 2012).  [Part 3, clause 66(1), (2) and (3)]

1.66              Where a JV ceases after 1 July 2012to be a mandatory designated JV and it would be reasonable to expect that, were the JV a company (rather than a JV), the company would be a liable entity, then  the JV participants must jointly notify the Regulator within 30 days if a JV ceases to fulfil the requirements for a mandatory designated JV.  A JV will cease to be a mandatory designated JV is any of the requirements of clause 65 are no longer satisfied.  [Part 3, clause 66(4)]

1.67              The participants must also apply for a ‘participating percentage determination’, which is used to allocate liability for the emissions from the facility between the JV participants.  [Part 3, clause 66(5)]

1.68              If a person fails to notify the Regulator of the JV, or of the cessation of a JV that has previously been declared a mandatory designated JV, then they are liable to pay a civil penalty.  [Part 3, clause 66(6)]

Declared designated joint ventures

1.69              A declared designated JV is where:

•       the JV has a facility; and

•       the JV participants are parties to an agreement concerning the facility; and

•       a facility is operated exclusively for the JV by a person who may be a JV participant; and

•       none of the participants is an individual; and

•       the JV is not a mandatory designated JV.

 (see Example 1.6).  For the purposes of the mechanism, this is the ‘joint venture declaration test’.  [Part 3, clause 67], [Part 1, clause 5, definition of ‘declared designated joint venture’]

1.70              This transfer of liability recognises the potential complexity of JV arrangements and facilitates efficient management of emissions liabilities by the participants. 

1.71              As the operator of the facility may change over time, and that accordingly provisions that refer to the operator should refer it is the current operator (the ‘relevant operator’) that is involved in processes such as consenting to the start date of a JV declaration.  [Part 3, clause 67A]

1.72              The JV participants can apply to the Regulator for a declaration that the JV is a declared designated JV if they have the written consent of the relevant operator and have provided any other documents required by the regulations or information requested by the Regulator.  [Part 3, clause 68], [Part 3, clause 69]

1.73              Before making a declaration, the Regulator can require the participants to provide more information about the application, and must not make a declaration unless satisfied that the JV meets the required criteria, namely:

•       the JV passes the JV declaration test;

•       the applicants have, and are likely to continue to have, the capacity, the access to information and the financial resources necessary for them to comply with the mechanism; and

•       such other requirements as are specified in regulations.  [Part 3, clause 70]

1.74              If a JV participant has previously been subject to obligations under the Clean Energy Act (once enacted) or associated legislation, the Regulator must also be satisfied that the participant has a satisfactory record of complying with those obligations.  This provision is intended to provide additional assurance that the participants in the JV will meet their obligations under the mechanism by excluding participants that, irrespective of their capacity to meet obligations, might have a history of not meeting those obligations.

1.75              The declaration of the designated JV may come into effect from an earlier date than the declaration is made, as long as that date is within the same financial year.  The declaration may also come into effect in the future, at a date up to the end of the following financial year.  In each case the applicants and the relevant operator must consent to the start date.  This provides additional flexibility around the application to facilitate forward planning and certainty for participants, and to reduce time pressure on processing applications.  [Part 3, clause 71]

1.76              The declaration continues indefinitely, although the Regulator must revoke the declaration if:

•       requested by the JV participants, with the consent of the current operator of the facility;

•       the Regulator is satisfied that the JV no longer meets the JV declaration test for that facility; or

•       there is a continuing failure by one of the JV participants to pay a unit shortfall.  If a JV participant has an outstanding shortfall charge for more than 3 months the Regulator must notify all of the JV participants that their declaration will be revoked by the next 1 July unless the shortfall charge is paid, If the payment is not made by 1 July the Regulator must revoke the declaration by written notice to the JV participants.  [Part 3, clause 72]

1.77              In the last case, The liability for the emissions from the facility from 1 July will return to the operator of the facility, but the liabilities for emissions up to that time will remain separately with the JV participants (that is, the operator and the other JV participants will not have liability for the default on emissions, which will remain with the defaulting participant). 

1.78              This provision is intended to ensure that a JV participant cannot fail to meet its obligations indefinitely.  The declared designated JV is allowed to continue until 1 July to allow an opportunity for the JV participants to seek to bring the defaulter back into compliance, and to provide certainty for the operator and JV participants about emissions liabilities for the remainder of the financial year.  [Part 3, clause 67], [Part 3, clause 71], [Part 3, clause 72]

1.79              The participants in a declared designated JV will also be required to jointly notify the Regulator within 30 days if the JV ceases to pass the designated JV declaration test in relation the facility.  A JV will cease to pass the test if any of the requirements in clause 67 are no longer satisfied.  [Part 3, clause 71A]

Example 1.6 Designated declared JV arrangements

 

 

Companies A, B and C are JV participants. 

A facility is operated for the JV, but the party with operational control (and therefore liability) is an independent contractor that operates the facility (this transfer would also apply if the operator was owned by the JV participants or if one of the JV participants was the operator). 

The JV members apply to the Regulator for a declaration and, if granted, each is liable for the facility’s emissions in proportion to its interest in the facility.

Participating percentage declaration

1.80              Designated JV participants must make an application to the Regulator for a participating percentage declaration.  This sets out the shares of liability for emissions from the facility for each JV participant.  The application must be made in an approved form and the Regulator may request further information concerning the application.  [Part 3, clause 73], [Part 3, clause 74], [Part 3, clause 75]

1.81              The Regulator must make a determination of the ‘participating percentage’ of emissions for each participant in the JV, with the percentages adding up to 100 per cent of the facility’s emissions.  [Part 3, clause 76]

1.82              The participating percentage determination must be made according to a hierarchy of criteria, namely:

•       the share of goods each participant receives from the facility; then

•       if the first criterion does not apply, the share of access to services that each participant has; then

•       if the second criterion does not apply, any criteria set out in regulations.  [Part 3, clause 78]

1.83              The participants in a designated JV may also apply for a replacement participating percentage determination to replace an existing one.  This is intended to allow for changes in the interests of the participants over time, for instance if it is known that the amount of the output of the facility taken by each participant will change as the JV progresses.  The percentages must always add up to 100 per cent so that all covered emissions from a facility are accounted for.  [Part 3, clause 79]

1.84              The determination can also be specified as a formula, for instance based on participant shares of a variable product mix from the facility.  This flexibility recognises that JVs may be complex and evolve over time.  A static allocation of percentages might not reflect changing interests, and require frequent changes to the determination.  [Part 3, clause 76]

1.85              The Regulator may also make a determination on its own initiative, but before making any such determination must provide a copy to the JV participants and have regard to submissions made within a specified period, which is not to be less than 28 days.  [Part 3, clause 77]

1.86              At each step the Regulator can accept an alternative percentage if it is satisfied that this reflects equally well or better the economic benefits received by JV participants.  The determination may also be varied by the Regulator issuing a replacement determination.  [Part 3, clause 78], [Part 3, clause 79]

1.87              This approach is intended to provide flexibility to recognise the wide range of JV arrangements, while ensuring that the sharing of emissions liability between JV participants accurately reflects the economic benefits participants receive from the facility and minimising risks of avoidance activities concerning the distribution of liability for emissions from the facility.

1.88              The participating percentage determination will come into force on a date specified in the determination.  For a new designated JV this date must be the same as the date of the declaration of the JV (that is, the participating percentage must apply from the start date of the designated JV). 

1.89              For a designated JV which is already in existence but is receiving a replacement participating percentage determination, the determination may come into force at an earlier date than the determination, as long as it is in the same financial year, or a later date as long as it is before the end of the next financial year.  In either case the JV participants and the operator of the facility must consent to the date.  This is intended to allow flexibility for JV participants to apply for a determination in advance, or to backdate the determination to reflect the timing of a change in circumstances of the designated JV.  [Part 3, clause 78A]

Liability transfer certificates

1.90              The operator of a facility that is a direct emitter may transfer its liability to a range of other specified entities by means of an LTC.  LTCs take two forms: corporate group transfers and financial control transfers.  [Part 1, clause 5, definition of ‘liability transfer certificate’]

Corporate group transfer test

1.91              A registered company can apply to the Regulator for an LTC to transfer to itself liability for a facility, where the facility is under the operational control of another company within the same corporate group.  [Part 3, clause 80], [Part 3, clause 81], [Part 1, clause 5, definition of ‘corporate group transfer test’]

1.92              Where an LTC is issued, the operator is taken to have guaranteed the payment of any unit shortfall charge or associated late payment penalty which is payable by the holder of the LTC for the relevant financial year.  [Part 6, clause 138] This ensures that there is always a liable entity for a covered facility and prevents the transfer being used to avoid emission liabilities.

Example 1.7 Corporate group liability transfer

A corporate group LTC is issued for Subsidiary Y concerning Facility 2. 

Subsidiary Y takes on the emissions liability for Facility 2 under the mechanism.  As a liable entity subsidiary Y also has requirements to provide reports, under the NGER Act, to the Regulator for the purposes of determining emissions obligations (see Schedule 1, Part 2, Item 367 of the Consequential Amendments bill). 

Corporation A will not have emissions obligations or liability for Facility 2 but, as the controlling corporation of the corporate group, will continue to have reporting obligations under the NGER Act. 

Subsidiary X will, however, have consented to the application for the transfer and in doing so will have guaranteed the payment of shortfall charges incurred by Subsidiary Y.

Facility 2 will continue to form part of Corporation A’s group for the purposes of meeting the NGER Act group thresholds, and Corporation A will retain general reporting obligations under the NGER Act.

Financial control transfer test

1.93              Liability may be transferred from the operator of a facility to another person who has ‘financial control’ (see below) over the facility.  [Part 3, clause 84], [Part 1, clause 5, definition of ‘financial control’], [Part 1, clause 5, definition of ‘financial control transfer test’] As the person with financial control of a facility may also have an influence over its emissions, it is appropriate to let that person accept liability with the agreement of the operator. 

1.94              Transfers are not allowed to certain persons:

•       the person cannot be an individual person; this avoids complications that may arise when an individual person is liable, such as the person’s death or incapacity. 

•       the person cannot be a foreign person; this prevents liability from being transferred to a person overseas to avoid compliance under the mechanism, recognising that it would be more difficult enforce obligations against a foreign person.  [Part 1, clause 5, definition of ‘foreign person’]

•       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 corporate group transfer test,

(see Example 1.8).  [Part 3, clause 84]

1.95              In many circumstances the operator of a facility has 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. 

1.96               ‘Financial control’ covers a person that has a significant ability to control a facility through financial means only and, therefore, can give effect to decisions concerning 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 that does not have any direct influence on emissions reductions.  [Part 3, clause 92]

1.97              ‘Financial control’ recognises that more than one person may have financial control over a facility.  For example, several persons may be participants in a JV 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 mechanism.  [Part 3, clause 92]

Criteria for the issue of a liability transfer certificate

1.98              An entity must meet the same criteria for the issue of an LTC by the Regulator for a corporate group transfer (see above).  [Part 3, clause 87] These criteria are included to ensure that an entity has the capacity, access to financial resources and information to comply with its obligations under the mechanism, as well as the NGER Act.

1.99              The financial criterion ensures that a person does not transfer liability to a person that cannot meet mechanism obligations in order to avoid or delay compliance.  This test is not, however, intended to involve an exhaustive explanation by the applicant of its financial situation.  [Part 3, clause 87]

Reporting obligations and liability transfer certificates

1.100          The LTC holder will take on any obligation to report under the NGER Act for a facility under a financial control LTC.  This includes reporting obligations concerning not only greenhouse gas emissions, but also energy production and energy consumption where currently required under the NGER Act.  This is given effect by the Consequential Amendments bill (see Schedule 1, Part 2, items 175-181 of the Consequential Amendments bill). 

1.101          The LTC holder will not take on any obligation to report under the NGER Act for a facility which is the subject of a corporate group LTC because general reporting obligations under the NGER Act do not follow the transfer, but remain with the controlling corporation of the corporate group.

Example 1.8 Transfer of liabilities from the operator to the financial controller of a facility

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 an LTC. 

An LTC is issued and Subsidiary F takes on all obligations and liability for Facility 1 under the mechanism and under the NGER Act — this includes reporting concerning emissions, energy production and energy consumption.

Corporation A will not have obligations or liability for Facility 1 under the mechanism or under the NGER Act. 

Application process for a liability transfer certificate

1.102          An application for an LTC must be made in writing in a form approved by the Regulator and include specific information:

•       An application for a corporate group LTC must be accompanied by a written statement from the operator of the facility that it has operational control of the facility, is a member of the same corporate group as the transferee and consents to the transfer.  [Part 3, clause 81(c)], [Part 1, clause 5, definition of ‘member’]

•       An application for a financial control LTC must include the written consent of the controlling corporation of the corporate group (if the operator is a member of a corporate group), or the facility operator.  In either case, the application must include any information and documents specified in the 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 an LTC.  [Part 3, clause 85(3)]

1.103          To assist the Regulator’s decision making, the Regulator may request further information about an application within a period specified in a notice given by the Regulator.  The Regulator must ensure that the information requested is relevant to its consideration of the application and must exercise this power reasonably.  [Part 23, clause 297] If the applicant does not provide the information in the time required, then the Regulator may refuse to consider the application or refuse to take any action, or any further action, concerning the application.  [Part 3, clause 82], [Part 3, clause 86]

1.104          The Regulator must take all reasonable steps to ensure that a decision is made on an application for an LTC within 90 days of receiving an application or within 90 days of being given further information.  The Regulator must inform an applicant in writing if it decides to refuse to issue an LTC.  [Part 3, clause 83], [Part 3, clause 87]

Duration of a liability transfer certificate

1.105          The start date may be at an earlier date within the same financial year as the day on which the LTC is issued, or a later date up to the end of the next financial year if the applicant and the relevant parties consent to that start day.  This ensures that all persons that may be liable under the mechanism know who is liable for a given period.  It also provides flexibility for advance applications to increase certainty for applicants and assist with forward planning to meet obligations under the mechanism.  This flexibility may also even out the spread of applications over the year and consequently spread the workload for the Regulator in assessing applications [Part 3, clause 88]

1.106          Once made, an LTC remains in force indefinitely unless it is surrendered or cancelled.  [Part 3, clause 88(4)]

Voluntary surrender of liability transfer certificate

1.107          If an entity wants to surrender an LTC it must obtain written consent from the Regulator.  The Regulator must not consent to the surrender unless:

•       where applicable, the controlling corporation(s) or facility operator that agreed to the making of the application for the LTC agrees to the surrender; and

•       the LTC has been in force for at least four years; or

•        the LTC has been in force for less than four years, but the Regulator is satisfied that there are special circumstances that warrant the giving of its consent to the surrender.  [Part 3, clause 89]

1.108          If the Regulator refuses its consent, then it must give written notice to the person.  [Part 3, clause 89(5)]

1.109          Special circumstances are unlikely to include a change of operator or contract, as these changes are normal business practice and are foreseeable by a person at the time of their application for an LTC.  The four year requirement ensures that the liable entity remains consistent and prevents multiple transfers of liability aimed at avoiding liability.  [Part 3, clause 89]

Cancellation of liability transfer certificate

1.110          The Regulator must, by written notice, cancel an LTC in the following circumstances:

•       if a company ceases to pass a corporate group or financial control liability transfer tests;

•       in the case of corporate group LTC, the company is no longer a member of the controlling corporation’s group;

•       in the case of a financial control LTC, the holder of the LTC ceases to be a member of the corporate group of the controlling corporation that consented to the application;

•       if a company has not paid a unit shortfall charge more than 30 days after it became due for payment;

•       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 entity.  [Part 3, clause 90]

1.111          The cancellation or surrender of an LTC will result in future obligations and liability returning to the person that would have had obligations and liability in the absence of the LTC.  The Regulator will be required to provide written notice of the cancellation to the person with operational control of the facility of the cancellation of an LTC to ensure that the operator is aware that it has reassumed liability for the emissions from the facility.  [Part 3, clause 89], [Part 3, clause 90]

1.112          Each LTC relates to a single facility.  This allows a person to apply for the transfer of liability for particular facilities at different times, as the person’s circumstances change.  [Part 3, clause 80], [Part 3, clause 81]

1.113          An LTC transfers significant obligations concerning a facility.  For this reason an LTC can only be issued by the Regulator and is not transferable.  [Part 3, clause 91]

Definitions relevant to direct emitters

‘Persons’ that may be liable entities

1.114          The mechanism applies to liable entities, which are responsible for their emissions of greenhouse gases.  The way in which these entities are liable is set out in Part 3.  [Part 3, clause 19]

1.115          A liable entity may be any type of legal person, including an individual, a trust (a trustee or trust estate), a body corporate, corporation sole, a body politic (that is, the Australian, state and territory governments) and a local governing body.  [Part 1, clause 5, definition of ‘person’], [Part 1, clause 5, definition of ‘local governing body’], [Part 1, clause 5, definition of ‘trust’], [Part 1, clause 5, definition of ‘trustee’], [Part 1, clause 5, definition of ‘trust estate’]

1.116          The Australian Government and the state, territory and local governments are bound by the bill.  In line with normal practice, the Crown is not subject to prosecution for a criminal offence or a pecuniary penalty, with the exception of penalties for late payment of shortfall charge and for failure to meet relinquishment requirements.  This protection does not apply to an authority of the Crown, such as a body conducting a business activity.  [Part 1, clause 8]

1.117          Government bodies may be liable under the mechanism if they fall within the criteria set out in Part 3.

Meaning of ‘facility’

1.118          ‘Facility’ is defined in section 9 of the NGER Act.  Broadly, a facility is an activity, or a series of activities, where:

•       greenhouse gas emissions are produced; or

•       energy is produced; or

•       energy is consumed. 

1.119          The activity or activities must form a single undertaking or enterprise and meet requirements in the regulations, or they must be declared to be a facility by the Regulator.^[25]

1.120          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’]

1.121          The landfill provisions are not intended to cover facilities for which disposal of solid waste is a secondary purpose, for example a mine that disposes of mine-generated waste on‑site.  It should be noted that direct emissions from waste still count towards emissions thresholds and emissions liabilities for facilities that are not landfills.

Measurement of covered emissions

1.122          Under the mechanism, greenhouse gases emitted from the operation of a facility will be measured using methods to be determined under subsection 10(3) of the NGER Act, or methods which meet criteria under that subsection, where the use of those methods satisfies any conditions specified under that subsection.  [Part 3, clause 31]

1.123          The Consequential Amendments bill provides for subsection 10(3) of the NGER Act 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 for the mechanism and the NGER Act (see Schedule 1, Part 2, items 337-339 of the Consequential Amendments bill).  These methods are currently published in the National Greenhouse and Energy Reporting (Measurement) Determination 2008.

Liability for emissions from natural gas

Overview

1.124          Natural gas is used by large facilities, small and medium-sized businesses, and households.  Given the significant amount of natural gas used beyond large facilities, a two-tiered approach applies to provide efficient and complete coverage of greenhouse gas emissions embodied in natural gas:

•       large users of natural gas are responsible for their own emissions; and

•       natural gas suppliers are responsible for the remaining emissions from natural gas used by other end-use customers. 

Applying liability to a relatively small number of suppliers is an effective way of applying a carbon price to the natural gas emissions of many small to medium end-users. 

1.125          To ensure that there is no double counting of emissions OTNs are used to let suppliers and end-users know who is responsible for the emissions that will result from a particular supply of gas.  In some circumstances, there is also flexibility for medium sized gas users to quote an OTN and assume liability for their natural gas emissions, instead of their supplier.

Responsibility for emissions from natural gas combustion

1.126          Under the mechanism liability for natural gas applies to the following entities:

•       to a natural gas supplier when it supplies gas to another person who does not quote an OTN and when it may reasonably be expected that the gas is wholly or partly for use by that other person [Part 1, clause 5, definition of ‘distribution pipeline’]

•       to a person who is a liable entity for a large gas consuming facility (see above); in this case a natural gas supplier is not liable for the emissions when that person quotes an OTN to the supplier;

•       other OTN holders who are permitted to quote an OTN for natural gas supplied to them.  Typically the OTN holder will purchase gas for a facility under its operational control (which is  not a large gas consuming facility) and will want to assume liability from the supplier.

These types of liable entities are set out in Diagrams 1.4 and 1.5.

1.127          For natural gas suppliers gas liability applies to potential emissions embodied in natural gas and not actual emissions.  This is because liability generally arises before the gas is combusted and emissions are released.  In practice, there is little difference between the actual emissions arising from the combustion of natural gas among different customers: the use of potential emissions does not lead to material inaccuracies compared with actual emissions.

 

 

Diagram 1.3 Liability for gas supplied

Diagram 1.4 Liability for natural gas

Liability for natural gas suppliers

1.128          Natural gas suppliers are liable where:

•       the natural gas has been withdrawn from a natural gas supply pipeline to supply to a customer; and

•       it may reasonably be expected that the customer will consume all or part of the gas; and

•       the customer does not quote an OTN to the supplier for that natural gas^[26];[Part 3, clause 33], [Part 1, clause 5, definition of ‘supply’], [Part 1, clause 6], [Part 1, clause 5, definition of ‘natural gas supplier’]

1.129          Any supplies that occur within the natural gas supply pipeline system (which would include both transmission and distribution pipelines), such as wholesale gas supplies between gas producers and gas retailers, do not involve consumption of the gas and, therefore, do not create a liability for the natural gas supplier (in this case, the producer). 

1.130          Gas supplies that may result in liability for the gas supplier (assuming no OTN is quoted) include, but are not limited to, supplies to:

•       a residential customer;

•       a business customer, such as an office building or a small to medium business that uses gas for heating;

•       the operator of a gas pipeline, where gas is supplied to the pipeline operator for use in compressors that are attached to the pipeline. 

1.131          A supply occurs when the natural gas passes a point ascertained in accordance with the regulations.  If the regulations do not specify such a point, a supply occurs at the point when the gas is delivered to the customer.  [Part 1, clause 6]

Preliminary and provisional emissions numbers

1.132          Each supply of natural gas for which a natural gas supplier is liable gives rise to a preliminary EN.  A preliminary EN is equal to the amount of greenhouse gas emissions in tonnes of CO₂-e embodied in the amount of natural gas supplied, and which is withdrawn from a gas supply pipeline for the purpose of the supply to the customer. 

1.133          The PEN of the natural gas supplier is the sum of the supplier’s preliminary ENs for the financial year.  [Part 3, clause 33]

1.134          The regulations may specify that the natural gas supplier can ‘net out’ certain amounts of natural gas from their PEN.  [Part 3, clause 33(3)]  This allows for ‘fine tuning’ of a supplier’s liability, which addresses specific circumstances where the general rules result in liability being applied in situations when it should not. 

Example 1.9 Natural gas supplier

In a financial year, a GasCorp supplies a total amount of natural gas to its customers with potential emissions embodied in the natural gas of 150,000 tonnes of CO₂-e.  Of this amount of natural gas:

•       natural gas with embodied emissions of 70,000 tonnes of CO2-e is withdrawn by customers who quote an OTN to the supplier.  The supplier is not liable for this amount of emissions – liability rests with the OTN holders.

•       natural gas with embodied emissions of 80,000 tonnes of CO2-e is withdrawn by small residential customers who are not required or permitted to quote an OTN.  GasCorp is liable for this amount of emissions.

Liability for large gas consuming facilities

1.135          Large gas consuming facilities are responsible for their own emissions (see above).  A large gas consuming facility is a facility that, in any previous financial year starting from 2010-11, had emissions from natural gas of at least 25,000 tonnes of CO2-e, or the amount specified in the regulations.  This regulation making power allows for the definition of a large gas consuming facility to change to reflect, among other things, future industry arrangements. 

1.136          To ensure natural gas suppliers have no liability for these emissions the recipient of natural gas that is for use in the operation of a large gas consuming facility must quote an OTN for the supply of natural gas for use at that facility.  [Part 3, clause 55A], [Part 3, clause 55B] The recipient of the natural gas does not need to be the operator of the large gas consuming facility to be subject to this requirement.  Failure to quote an OTN will result in a civil penalty.  [Part 3, clause 55B(3)]  

1.137          To give a natural gas supplier time to make any necessary supply arrangements, a customer must notify the supplier of its intention to quote an OTN.  The notice must be in writing and given to the supplier at least 28 days before the first OTN quotation, or within a shorter time agreed by the supplier and the customer.  [Part 3, clause 55B(2)]  A natural gas supplier must accept an OTN quotation made in this way.  [Part 3, clause 59(4)], [Part 3, clause 60(4)]

Example 1.10 Large gas consuming facilities

Maximus Gas operates the Maximus Facility, a large facility.  Another company, AntheCo, is the recipient of supplies of natural gas from GasCorp for combustion at the Maximus Facility.

In the 2010-2011 financial year, the Maximus Facility had emissions from natural gas combustion of 70,000 tonnes of CO₂-e. 

From the 2011-12 financial year onwards (that is, from 1 July 2011), the Maximus Facility is a large gas consuming facility, because its emissions from natural gas combustion in the previous financial year  were greater than 25,000 tonnes of CO₂-e.

As the recipient of natural gas for use at a large gas consuming facility, AntheCo is required to quote its OTN to GasCorp.  28 days before the start of the mechanism, AntheCo notifies GasCorp in writing of its intention to quote its OTN.  AntheCo quotes its OTN to GasCorp on 1 July 2012 to take on liability for the natural gas supplied.

For a few months during the 2014-2015 financial year, the Maximus Facility temporarily closes, and the natural gas emissions from its operation are only 20,000 tonnes of CO₂-e during that financial year.  In 2015-16, the Maximus Facility’s natural gas emissions  return to 70,000 tonnes of CO₂-e.  The Maximus Facility remains a large gas consuming facility, despite dropping below the threshold in 2014-15, because it passed the threshold test in a previous financial year.  The OTN quotation by AntheCo remains in place in 2014-15 and future financial years.

 

 

 

Preliminary and provisional emissions numbers

1.138          In some situations natural gas consumed at a facility is purchased by an entity other than the facility operator. In such cases, double counting of liability is avoided by ensuring that where an OTN is quoted for the gas, whether by the facility operator or another person, liability always rests with the liable entity for the facility. [Part 3, clause 35(2)], [Part 3, clause 20(1)], [Part 3, clause 21(1)], [Part 3, clause 22(1)], [Part 3, clause 23(1)], [Part 3, clause 24(1)], [Part 3, clause 25(1)], [Part 3, clause 20(8)-(9)], [Part 3, clause 21(7)-(8)], [Part 3, clause 22(6)-(7)], [Part 3, clause 23(8)-(9)], [Part 3, clause 24(7)-(8)], [Part 3, clause 25(6)-(7)]

1.139          In the above circumstances, if some of the natural gas is not ultimately combusted at the facility, the OTN holder will be liable for that portion of natural gas not combusted at the facility. For example, this would apply where a facility owner purchases gas for use at a facility that is operated by another person, but also uses some of the gas at its own smaller facility nearby.

Example 1.11 Large gas consuming facility, where all natural gas received is combusted at the facility

Steel Mill is a large gas consuming facility operated by JCL Limited. Another company, Danmetals Limited, receives supplies of natural gas from a natural gas supplier for combustion at Steel Mill.

In 2012-13, covered emissions from Steel Mill comprise 90,000 tonnes of CO₂-e from use of natural gas.

In a given financial year, Danmetals receives three supplies of natural gas. The amount of natural gas in each supply has embodied emissions of 30,000 tonnes of CO₂-e. All of these amounts of natural gas are combusted at Steel Mill.

Danmetals must quote its OTN to its natural gas supplier, and the supplier must accept the quotation. Usually, under clause 35(1), a preliminary EN arises for OTN holders who quote their OTNs. However, since Danmetals is not the operator of the facility it is not a liable entity.

JCL Limited is liable for Steel Mill’s emissions, because the facility has total covered emissions of 90,000 tonnes of CO₂-e.

Example 1.12 Liability where some of the gas is not used at the facility

In 2013-14, ElsieRylee Inc. operates Steel Mill and AmYear Ltd receives supplies of natural gas from a natural gas supplier for combustion at Steel Mill.

In 2013-14, AmYear receives supplies of natural gas with total embodied emissions of 90,000 tonnes of CO2-e. Most of this gas is combusted at Steel Mill, resulting in emissions of 80,000 tonnes of CO2-e. The rest of the gas, embodying emissions of 10,000 tonnes of CO2-e, is used by AmYear at Ferro Forge which is under its operational control. AmYear combusts half of this gas at Ferro Forge, resulting in emissions of 5,000 tonnes of CO₂-e. The other half of the gas, embodying emissions of 5,000 tonnes of CO₂-e, is used at Ferro Forge as a feedstock. There are no other emissions from the facility. See diagram below which represents these arrangements.

AmYear must quote its OTN to its natural gas supplier, as the recipient of natural gas to be used at a large gas consuming facility. It is liable for emissions of 5,000 tonnes of CO₂-e from Ferro Forge. No liability arises for natural gas used as a feedstock.

ElisieRylee is liable for emissions of 80,000 tonnes of CO₂-e at Steel Mill.

 

 

 

 

 

 

 

 

Liability for OTN holders who voluntarily take on liability

1.140          In certain situations, entities can quote an OTN and take on liability for natural gas emissions where the natural gas is not for use in a large gas consuming facility.  In these circumstances OTN quotation is voluntary.  [Part 3, clause 56], [Part 3, clause 57], [Part 3, clause 58], [Part 3, clause 59], [Part 3, clause 60]

1.141          There are two types of voluntary OTN quotation:

•       the first is where a supplier must accept the OTN quotation.  This is the case where natural gas will be used in a way that does not result in emissions (including as a feedstock) or where the gas is converted into LPG, LNG or CNG that will subsequently fall within the fuel tax system.   

•       the second is where a supplier may accept an OTN quotation but they are not required to do so.  This applies where a person is permitted to quote an OTN for a large gas consuming facility and has other facilities under their operational control that are not large gas consuming facilities.  This also applies where a person expects that a facility under their operational control will become a large gas consuming facility in the future. 

Voluntary OTN quotations

Eligibility to quote an OTN where quotation is voluntary

1.142          Entities eligible to voluntarily quote an OTN to a natural gas supplier and assume liability for embodied emissions from natural gas are:

•       large users of natural gas; [Part 3, clause 56(1)(e)(ii)]

•       persons approved by the Regulator; [Part 3, clause 56(1)(e)(i)]

•       users of natural gas as a feedstock; [Part 1, clause 5, definition of ‘feedstock’]

•       users of natural gas in manufacturing CNG, LNG or LPG.  [Part 3, clause 56(1)], [Part 3, clause 57], [Part 3, clause 58]

Large user of natural gas

1.143          A person is a large user of natural gas if they are required to quote their OTN because they are the recipient of natural gas for use at a large gas consuming facility.  [Part 3, clause 55B]

1.144          If a person is a large user of natural gas, they may quote an OTN to their natural gas supplier to assume liability for natural gas supplied for use at other facilities which are under their operational control which do not meet the ‘large gas consuming facility’ threshold.  [Part 3, clause 56]

1.145          This approach allows large users of natural gas to manage all their liability for natural gas, as long as one facility for which they receive natural gas was a large gas consuming facility.  This will simplify billing arrangements where a large fuel user purchases natural gas from one supplier for use at more than one facility.

Example 1.13 Large user of natural gas

SDK has operational control over a large manufacturing plant and is supplied natural gas for use at the plant which it withdraws from a natural gas supply pipeline.  In 2010-11 emissions from the plant comprise 40,000 tonnes of CO₂-e from use of natural gas.

In 2012-13, SDK is required to quote an OTN to take on liability for emissions from this supply of natural gas because the plant is a large gas consuming facility. 

SDK also has operational control over another smaller plant which is a facility in its own right.  In 2011 emissions from this second plant comprise 15,000 tonnes of CO₂-e from use of natural gas.

In 2012-13, SDK is permitted to quote an OTN to its natural gas supplier for the natural gas supplied to it at the smaller plant. It is permitted to do this because it is required to quote its OTN as the recipient of natural gas for use at a large gas consuming facility. 

The company makes an OTN quotation in its natural gas supply contract, and the OTN quotation is accepted by the natural gas supplier.  SDK must manage mechanism obligations for all natural gas supplied under this contract.

Approved person

1.146          An ‘approved person’ can also quote an OTN for natural gas supplied to them by a natural gas supplier.  [Part 3, clause 56(3)] Entities can apply to the Regulator to become an approved person in accordance with the specified procedures and requirements.  [Part 3, clause 56(4), (5) and (6)] The Regulator will only approve an application if satisfied that the person operates a facility and it is likely that this facility will have emissions from natural gas of at least 25,000 tonnes of CO₂-e, or an amount specified in the regulations.  [Part 3, clause 56(8)]

1.147          This allows entities that do not yet qualify as a ‘large user’ to quote an OTN if a facility that they operate is likely to exceed the large gas consuming facility threshold.  This might occur, for example, where an entity expects to permanently increase production at an existing facility or where they are setting up a new facility.

Example 1.14 Start-up company that expects to be a large user of natural gas

NatGas is in the process of commissioning a manufacturing plant.  It expects to emit 50,000 tonnes of CO₂-e of greenhouse gases from the combustion of natural gas withdrawn from a distribution pipeline in its first year of operation.  NatGas applies to the Regulator for an OTN and submits all information and documents specified in the regulations. 

The Regulator assesses the application and decides that it is likely that NatGas’s emissions from natural gas combustion will exceed the threshold value specified in the regulations.  The Regulator, by written notice, declares that the company is an approved person.  NatGas is permitted to quote an OTN for the natural gas it purchases for its new electricity plant. 

User of natural gas as a feedstock

1.148          If a person uses natural gas as a feedstock, they may quote an OTN to their natural gas supplier to assume liability for embodied emissions in natural gas supplied to them.  [Part 3, clause 57] ‘Feedstock’ is defined as ‘a substance that is converted by a chemical process into another substance that is not a greenhouse gas’.  [Part 1, clause 5, definition of ‘feedstock’]

1.149          The person may ‘net out’ from their gross liability any amounts of natural gas which are used as a feedstock and which therefore do not result in greenhouse gas emissions.  No liability arises for uses of natural gas which ultimately do not result in the release of greenhouse gas into the atmosphere.

User of natural gas in manufacturing CNG, LNG or LPG

1.150          An equivalent carbon price applies to CNG, LNG and LPG at the point that these fuels attract excise and customs duty through fuel taxation legislation.

1.151          Some entities manufacture these fuels from natural gas supplied by a natural gas supplier.  Without special provision, liability under the mechanism might arise for these fuels twice: once through the mechanism when the fuel is supplied by a natural gas supplier, and again when an ‘equivalent carbon price’ is applied at the time that excise or customs duty is paid on the CNG, LNG or LPG.

1.152          Therefore, if a person receives natural gas from a supplier, and carries on a business manufacturing CNG, LNG or LPG, the person may quote an OTN to the natural gas supplier for the natural gas supplied.  [Part 3, clause 58]

1.153          As with users of natural gas as a feedstock, the person can ‘net out’ from their gross liability for the emissions embodied in any amounts of natural gas which are used to manufacture these fuels.  This will avoid applying a carbon price twice to these fuels.

Mandatory acceptance of OTN quotation for natural gas used as a feedstock or in manufacturing CNG, LNG or LPG

1.154          To ensure that a carbon price is not applied to non-emissive uses of natural gas, and that a carbon price is not applied twice to fuels which enter the excise system, natural gas suppliers are required to accept an OTN quotation for a supply of natural gas which is used as a feedstock or in manufacturing CNG, LNG or LPG.  [Part 3, clause 59(4)], [Part 3, clause 60(4)]

1.155          Where a person makes an OTN quotation that a supplier must accept the OTN holder must provide the supplier with a written declaration that sets out that quotation is being made under a relevant section of the Bill.  [Part 3, clause 59(3)], [Part 3, clause 60(3)]  It is an offence to make a false or misleading declaration.  The maximum penalty is a period of imprisonment for up to 12 months.  [Part 3, clause 62]

Preliminary and provisional emissions numbers

1.156          Each supply of natural gas for which an OTN is quoted gives rise to a preliminary EN for the OTN holder.  The exception to this rule is where natural gas is supplied for use in a large gas consuming facility (see above).  A preliminary EN is equal to the number of tonnes of potential greenhouse gas emissions embodied in the amount of natural gas supplied, in CO₂-e. 

1.157          The PEN of the OTN holder is the sum of the OTN holder’s preliminary ENs for the financial year.  [Part 3, clause 35(3)] If an OTN holder has a PEN, they are a liable entity under the mechanism. 

Netted-out numbers

1.158          Particular amounts of natural gas can be ‘netted out’ from an OTN holder’s PEN.  The OTN holder’s PEN is reduced by the netted-out numbers (but not below zero).  [Part 3, clause 35(4)-(9)]  The purpose of netted out numbers is to reduce the PEN (but not below zero) to take account of:

•       the need to avoid double counting, that is to account for where a PEN has arisen for that gas under another provision of the Bill; and

•       uses of natural gas which do not result in greenhouse gas emissions; and

•       amounts of natural gas that will be manufactured into a substance which will have a carbon price applied through alternative arrangements (i.e CNG, LNG or LPG).  [Part 3, clause 35(4)-(8)]

1.159          In particular, if an OTN holder quotes an OTN for an amount of natural gas, a netted-out number arises for the OTN holder where:

•       the OTN holder used an amount of that natural gas as a feedstock or in a way that did not result in greenhouse gas emissions; [Part 3, clause 35(5)]

•       an amount of that natural gas counts towards the OTN holder’s ‘direct emitter’ liability under Division 1 of Part 3; [Part 3, clause 35(6)]  Note that this netted out number does not apply to amounts of natural gas combusted at a large gas consuming facility as these amounts do not give rise to a PEN under clause 35(3) in the first place. 

•       the OTN holder manufactures CNG, LNG or LPG from an amount of that natural gas, and the OTN holder holds a licence under the Excise Act 1901 to manufacture that fuel, and that fuel is entered for home consumption and attracts excise duty; and [Part 3, clause 35(7)]

•       the OTN holder supplies an amount of that natural gas to another person who quotes their OTN concerning the supply.  [Part 3, clause 35(8)]

•       the regulations provide for additional netted out numbers.  These will be included where necessary provided they are consistent with the purposes of clause 35.  [Part 3, clause 35(9)]

1.160          Once netted-out numbers are taken into account, a person may have a PEN that is greater than zero.  This will represent the potential greenhouse gas emission embodied in amounts of natural gas that are combusted at facilities that are not covered facilities. 

Example 1.15 Feedstock user of natural gas

JBurn Limited (JBurn) receives an amount of natural gas from AK Gas.  JBurn uses a portion of the natural gas as a feedstock in a fertiliser manufacturing process that completely sequesters the natural gas into the fertiliser.  JBurn also uses a portion of the natural gas for heating purposes. 

JBurn quotes its OTN to AK Gas concerning the supply.  AK Gas is required to accept this OTN quotation, as it is made by a feedstock user of natural gas.

The emissions embodied in the portion of gas which is used as a feedstock is a netted-out number.  JBurn will not be liable for these potential emissions.  However, JBurn will be liable for greenhouse gas emissions released from the portion of fuel combusted for heating purposes.  It will have a PEN which is equal to the potential emissions embodied in the natural gas supplied by AK Gas minus the netted-out number representing the use of gas as a feedstock.

Example 1.16 OTN quotation for natural gas used to produce CNG

The WA Facility is operated by JW Pty Limited (JW).  In 2012-13, JW receives a number of supplies of natural gas from its supplier with total embodied emissions of 30,000 tonnes of CO₂-e. 

In 2012-13, covered emissions from the operation of the WA Facility comprise:

•    15,000 tonnes of CO₂-e from use of natural gas; and

•    5,000 tonnes of CO₂-e from other sources.

In 2012-13, natural gas with embodied emissions of 15,000 tonnes of CO₂‑e is converted into CNG at the WA Facility and on-sold to another company.

JW quotes its OTN to its natural gas supplier because it creates CNG from natural gas.  The supplier is required to accept the OTN quotation.

JW (as the OTN holder) receives a preliminary EN under clause 35(1) for each supply of natural gas in 2012-13.  JW is a liable entity under clause 35(3). 

JW adds the preliminary ENs to give a PEN of 30,000 tonnes of CO₂-e, however it nets-out from this amount 15,000 tonnes of CO₂-e for natural gas converted to CNG under clause 35(7).  Therefore under clause 35, JW is a liable entity but has a PEN of 15,000.  This amount represents the gas which is combusted at the facility. 

JW is not liable for the other emissions of 5,000 tonnes of of CO₂-e from the facility as the WA Facility does not exceed the 25,000 tonne threshold. 

Using OTNs

Issuing an OTN

1.161          An OTN may be issued in one of two ways; as a result of an application, or on the Regulator’s own initiative.  [Part 3, clause 37]

1.162          The Regulator may issue an OTN to a person if satisfied that the person is likely to be permitted or required to quote an OTN and the Regulator has carried out an identification procedure that enables the Regulator to verify the identity of the person.  [Part 3, clause 40], [Part 3, clause 41] Once issued, an OTN is not transferable.  [Part 3, clause 44]

1.163          The power for the Regulator to issue OTNs without an application will simplify the process for entities that the Regulator can readily identify as needing an OTN.  For example, the Regulator can identify many entities that are large users of natural gas from emissions data reported under the NGER Act. 

1.164          Where the Regulator is not able to readily identify a person that needs an OTN, the person can apply for an OTN.  [Part 3, clause 39]

1.165          If the Regulator refuses to issue an OTN, it must give written notice of the refusal to the person.  [Part 3, clause 42(4)]

Cancelling or surrendering an OTN

1.166          OTN holders no longer permitted or required to quote an OTN may continue to hold their OTNs except where the Regulator decides to cancel an OTN.  [Part 3, clause 43]

1.167          The Regulator may, by written notice, cancel an OTN:

•       that is held by a person not permitted or required to quote it and who is unlikely to be permitted or required to quote it in the future; and [Part 3, clause 43(2)(a)]

•       if a person has contravened a provision of the bill or an associated provision.  It is anticipated that the Regulator may take this step where there is an unacceptably high risk of further breaches of the bill or associated provisions concerning the use of that OTN.  [Part 3, clause 43(2)(b)], [Part 1, clause 5, definition of ‘associated provisions’]

1.168          The Regulator must cancel an OTN if the person to whom it was issued has ceased to exist.  [Part 3, clause 43(3)]

1.169          Where a person is no longer required or permitted to quote an OTN and is not likely to be required or permitted to quote an OTN in the future they may surrender their OTN with the written consent of the Regulator.  [Part 3, clause 42] 

Example 1.17 Cancellation of an OTN and grace period for OTN quotation

From 1 July 2012, NatGas makes weekly supplies of natural gas under an OTN quotation to Davidson Ltd.  Davidson Ltd has previously quoted its OTN and advised NatGas in writing that it intends to use the natural gas as a feedstock.  Davidson Ltd is liable for emissions from its use of the gas.

The Regulator discovers that Davidson Ltd is not permitted to quote an OTN, as the company is combusting all of the natural gas rather than using it as a feedstock. 

The Regulator cancels Davidson Ltd’s OTN on 1 August 2012.  The Regulator removes Davidson Ltd’s entry on the OTN Register and lists the OTN and the time of cancellation on its website.  The Regulator sends an email to all natural gas suppliers that are listed on the OTN Register, notifying the suppliers of the cancellation and the time of its effect. 

Davidson Ltd and NatGas agree that the grace period before liability reverts to NatGas will be 21 days, rather than the default period of 28 days. 

During these 21 days, NatGas supplies gas to Davidson Ltd with embodied emissions of 1000 tonnes of CO2-e.  Davidson Ltd remains liable for emissions resulting from its use of this gas.  After this time, NatGas is liable for emissions embodied in the natural gas it supplies to Davidson Ltd.

1.170          If an OTN quotation is in effect, and the OTN is cancelled or surrendered, a 28-day grace period applies, during which further supplies of gas made to the OTN holder will be treated as if the OTN were still in effect.  As such, during the grace period, liability for emissions embodied in the gas will accrue to the OTN holder, not the supplier.  The grace period may be reduced by agreement of the supplier and the OTN holder.

The OTN Register

1.171          The Regulator must keep an electronic register called 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 Regulator’s website.  It will contain an entry for every current OTN.  When an OTN is cancelled or surrendered the Regulator must remove the entry from the register.  [Part 3, clause 45]

1.172          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.  [Part 1, clause 5, definition of ‘ABN’], [Part 3, clause 45]

1.173          The OTN Register will also include a list of natural gas suppliers. 

1.174          The listing of natural gas suppliers on the OTN Register will serve two main purposes.  It will assist users of natural gas to find a supplier who may be willing to accept their OTN quotation.  It will also provide the Regulator with list of supplier who wish to be notified of any changes to the OTN Register, such as when an OTN is cancelled, surrendered, when the name of an OTN holder changes, or when a new entry is made in the register.  This will lower compliance costs for suppliers as they will be sent up-to-date information on changes to the OTN Register.

1.175          The Regulator must, if requested by a natural gas supplier, include an entry for that supplier in the register.  An entry for a natural gas supplier will include the name of the supplier, their last known address, their telephone number, their website address, their ABN and any conditions the supplier places on the acceptance of OTN quotations which the supplier is not required to accept.  [Part 3, clause 45]

1.176          An OTN holder (or a natural gas supplier with an entry in the Register) who changes their name or address as set out in the register must within 28 days notify the Regulator of the change.  A person who fails to meet this requirement may incur a civil penalty.  [Part 3, clause 47]The regulator may make an alteration to the OTN Register when an OTN holder changes their name [Part 3, clause 47]

Quotation of an OTN by a natural gas customer

1.177          A person quotes an OTN concerning a supply or a class of supplies of natural gas by making a statement in writing concerning the supply or class of supplies.  The statement may be included in a contract, order or similar document and may be in electronic form.  [Part 3, clause 48]

1.178          A quotation must 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; and

•       any other information that is specified in the regulations.  [Part 3, clause 48(1)]

1.179          Where the acceptance of an OTN is mandatory, it is mandatory for a supplier to accept an OTN for natural gas that is for use:

•       in the operation of a large gas consuming facility; or

•       as a feedstock or in other ways that do not result in emissions; or

•       to manufacture CNG, LNG or LPG.

In this situation, the OTN holder must provide notice on the first occasion on which they quote their OTN.

1.180          This is intended to allow natural gas suppliers time to make any necessary supply arrangements, including reading the customers meter.  This notice must be in writing and must be given to the supplier at least 28 days before the first OTN quotation, or a shorter time if agreed by the supplier and the recipient.  [Part 3, clause 55B(2)], [Part 3, clause 57(2)], [Part 3, clause 58(2)]

1.181          In other circumstances OTN acceptance is voluntary and there is no requirement for the OTN holder to give written notice.

1.182          A person must not purport to quote a number as if it was that person’s OTN if it is not that person’s OTN.  This is a ‘bogus OTN’.  [Part 3, clause 64(1)]

1.183          If a person purports to quote a bogus OTN, and that number is not shown in the OTN Register as the person’s OTN, the natural gas supplier must not supply natural gas to that person.  [Part 3, clause 64(3)]

1.184          Natural gas suppliers will therefore need to check the OTN register at the time an OTN quotation is made and ensure that the person quoting the OTN is the person listed on the OTN register against that OTN.

1.185          A person is liable to pay a civil penalty if a court finds that the person has quoted a bogus OTN or aided a person who quotes a bogus OTN.  [Part 3, clause 64], [Part 21, clause 252]

1.186          If an OTN holder purports to quote a number as an OTN (that is, quotes an incorrect OTN) and the purported quotation is due to an honest mistake, then the Regulator may determine that the Act has, and is taken to have had, effect as if the OTN holder had quoted the correct OTN concerning the supply.  A determination by the Regulator must be in writing and must be given to the OTN holder and the natural gas supplier.  [Part 3, clause 53]

Process of acceptance

1.187          For an OTN quotation to take effect it must be accepted.  Acceptance of an OTN quotation involves the supplier giving a written notice to the OTN holder that the OTN quotation is accepted. 

1.188          This may be included in a contract, order or similar document and may be in electronic form.  This formal process of acceptance ensures that both the OTN holder and supplier understand when an OTN quotation comes into effect.  [Part 3, clause 59], [Part 3, clause 60]

1.189          The notice of acceptance must set out:

•       the words ‘acceptance of quotation of OTN’ followed by the OTN;

•       the OTN holder’s name;

•       if the OTN holder has an ABN, that ABN;

•       a description of the supply or class of supplies;

•       the name of the natural gas supplier;

•       if the natural gas supplier has an ABN, that ABN; and

•       any other information that is specified in the regulations.  [Part 3, clause 59(5)], [Part 3, clause 60(5)]

1.190          If the acceptance is voluntary and the supplier chooses not to  accept 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, clause 59], [Part 3, clause 60] That is, the supplier would be liable for the potential greenhouse gas emissions embodied in the gas supplied to that customer.

Example 1.18 Notice period for OTN quotation where acceptance of quotation is mandatory

Anastasios Enterprises Limited (AEL) operates the TS Factory, a medium-sized facility.  In the 2012-13 financial year, PY Gas will supply natural gas with embodied emissions of 15,000 tonnes of
CO2-e to AEL for use at the TS Factory. 

During this financial year, AEL intends to use some of this natural gas as a feedstock at the TS Factory, which will result in no emissions.

Upon application by AEL, the Regulator issues the company an OTN because AEL intends to use natural gas as a feedstock. 

AEL intends to quote its OTN to PY Gas on 1 July 2012 to take on liability for the supply of natural gas.  In this case, acceptance of an OTN quotation by PY Gas is mandatory, and AEL must notify PY Gas of its intention to quote its OTN.  AEL and PY Gas agree on a notice period of 14 days rather than the default 28 days.  AEL notifies PY Gas in writing of its intention to quote its OTN on 17 June 2012.  AEL then quotes its OTN to PY Gas on 1 July 2012 to take on liability for emissions from natural gas from this date.

Withdrawal of OTN quotation

1.191          An OTN quotation can be withdrawn and, when withdrawn, an OTN quotation ceases to be in place.  An OTN holder may withdraw an OTN quotation by notifying the supplier in writing when either:

•       an OTN holder ceases to be permitted to quote their OTN concerning a supply or class of supplied to which the quotation relates[Part 3, clause 51]; or

•       an OTN holder has a voluntary OTN quotation in effect and the natural gas supplier agrees to the withdrawal of a quotation concerning a supply or class of supplies.  [Part 3, clause 52]

1.192          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, clause 49], [Part 3, clause 50]

1.193          In these circumstances, the natural gas supplier would have little notice of the withdrawal.  Therefore, to enable the supplier time to read the customers meter and begin a new billing period (in the case that the supplier continues to supply the customer), the OTN holder will be liable for the potential greenhouse gas emissions in any supply  that occurs in the 28 days from when the surrender or cancellation takes effect.  However if the supplier and OTN holder agree to an earlier date, the OTN holder will only be liable for supplies that occur up to that date.  [Part 3, clause 54], [Part 3, clause 55] 

1.194          To provide suppliers with early notice of the cancellation or surrender of OTNs, suppliers may apply to the Regulator to be in the OTN Register.  Suppliers who register in this way will receive an email from the Regulator informing them of any cancellations and surrenders.   

Misuse of OTN

1.195          The fact that the Regulator issues 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, clause 63]  For the avoidance of doubt, a person does not misuse their OTN if they are no longer permitted or required to to quote an OTN concerning a supply but an OTN quotation is in effect concerning that supply because the person was permitted or required to quote an OTN at the time that the quotation was made. 

1.196          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.  This ensures that a supplier accepting the quotation of a valid OTN is not penalised by having a liability for emissions embodied in natural gas supplied under an OTN quotation that the supplier believed was permitted or required under the Bill.  That is, the quotation will relieve the supplier of liability concerning that supply.  However, unlike a quotation which is required or permitted, a person who misuses an OTN is liable for the potential greenhouse gas emissions embodied in the fuel supplied and does not have the benefits of any netted out numbers.  [Part 3, clause 36], [Part 3, clause 63(4)]

1.197          A person is liable to pay a civil penalty, if a court finds that the person has contravened the requirement not to quote an OTN in circumstances where it is not required or permitted or has, for example, aided such a contravention.^[27] [Part 3, clause 63(1)], [Part 21, clause 252]

Definitions relevant to liability for emissions from natural gas

1.198          Liability for fugitive emissions from pipelines will apply through the general facility rules.  [Part 3, clause 20], [Part 3, clause 21], [Part 3, clause 22]

1.199          ‘Natural gas’ will be defined in amended regulations to the NGER Act.  [Part 1, clause 5, definition of ‘natural gas’] This definition will exclude substances which are not intended to be captured by the upstream liability arrangements but which can be conveyed in a pipeline, for example, pure ethane. 

1.200          ‘Supply’ is defined as supply (including re-supply) by way of sale, exchange or gift.  [Part 1, clause 5, definition of ‘supply’] A supply of natural gas will be taken to occur when the natural gas passes a point specified in the regulations or, if this does not apply, when the gas is physically delivered.  [Part 1, clause 6]

1.201          It is intended, where possible, to align a gas supplier’s emissions liability with metering arrangements for end-use customers, so that the measurement occurs when the gas supplied passes through a meter used to measure the volume of gas supplied for billing purposes.  However, in the absence of a meter, liability for emissions should reflect the amount of gas delivered to the customer under the contract, noting that the gas must also be withdrawn from a gas supply pipeline. 

1.202          These arrangements are not intended to apply outside the natural gas supply pipeline system (including both transmission system and distribution networks).  For this reason, gas must be withdrawn from a ‘gas supply pipeline’.  A ‘gas supply pipeline’ will be defined, for these purposes, in the regulations and will exclude specified types of pipelines to which these arrangements will not apply, including pipelines that convey natural gas between a gas well and a gas processing plant, or a gas well and an LNG export plant.  [Part 1, clause 5 definition of gas supply pipeline’]  For the avoidance of doubt, any emissions from the combustion of natural gas at facilities that are supplied by way of such excluded pipelines will count towards the covered emissions of those facilities. 

1.203          Certain types of ‘natural gas supply pipeline’ can be excluded in the regulations.  This allows for the exclusion of gas supplies in pipelines which do not form part of the wider system that conveys gas to end-use customers, for example, gas that is transferred along a pipeline from a gas well to a gas production facility and sold to the production facility. 

1.204           ‘Withdrawal’ will be defined in the regulations.  This definition will encompass situations where:

•       natural gas is taken out of a natural gas supply pipeline for combustion at residential and commercial properties and upstream facilities; and

•       amounts of gas are combusted by pipeline operators in pipeline compressors in the process of operating the pipeline.  Including this situation in the definition of ‘withdrawal’ will ensure comprehensive mechanism coverage of natural gas.

Potential greenhouse gas emissions

1.205          Liability for natural gas is based on potential greenhouse gas emissions, rather than actual emissions, except where direct emitters are liable for emissions from natural gas.  This is because the liability generally arises before the fuel is combusted and emissions are released [Part 3, clause 33(1)(e)], [Part 3, clause 35(1)(d)], [Part 3, clause 36(1)(e)]

1.206          The potential greenhouse gas emissions embodied in an amount of natural gas 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 NGER Act, which will be amended to define this concept [Part 1, clause 5, definition of ‘potential greenhouse gas emissions’] (see Schedule 1, Part 2, items 309, 323 of the Consequential Amendments bill).

1.207          It is intended that the potential greenhouse gas emissions embodied in an amount of natural gas will be calculated in two ways (see Schedule 1, Part 2, item 323 of the Consequential Amendments bill).

•       Under the first method, known as the default method, the calculation will involve multiplying the amount of natural gas by a value specified in the regulations.

•       Alternatively, a person may elect to use a prescribed alternative method which involves, among other things, testing one or more samples of the natural gas. 

Opt-in arrangements for entities otherwise covered by the fuel tax system

1.208          During the public exposure period for the Package industry stakeholders expressed a desire to manage their carbon liability for fuels under the carbon pricing mechanism instead of paying the equivalent carbon price through the fuel excise and fuel tax credit systems.  This arrangement is given effect through the Opt-in Scheme. 

1.209          The Regulator will be responsible for administering the Opt-in Scheme.  It will work with the Australian Taxation Office and Australian Customs Service to ensure entities comply with their obligations under the mechanism and the fuel tax system.

Establishment of the Opt-in Scheme

1.210          Regulations may establish an Opt-in Scheme that allows a person who meets the criteria under the Scheme to choose to have emissions from fuels covered directly under the mechanism instead of paying an equivalent carbon price through the fuel tax system.  The regulations will specify the types of fuels that are eligible for the Opt-in Scheme.  [Part 3, clause 92A]

1.211          The bill sets out the parameters of the Opt-in Scheme and its main design features.  The regulations would prescribe matters such as the eligibility criteria for opting-in (including which other persons would need to consent to the opt-in), the timeframes for opting-in and opting-out, and how the arrangement will take into account the pollution cap setting process.

1.212          The use of regulations will allow the Government to consult with stakeholders on the detailed design of the technical requirements for the Opt-in Scheme, and to allow for their adaptation over time to respond to changing regulatory and business circumstances.  This is particularly important given the need to maintain a degree of flexibility in the arrangements to ensure the ongoing effectiveness of the interaction between the mechanism and the fuel tax system. 

1.213          The Minister must take all reasonable steps to ensure that the regulations establishing the Opt-in Scheme are made before 15 December 2012.  The phrase ‘take all reasonable steps’ is used because, despite his or her best endeavours, a Minister cannot guarantee that the Governor-General will make regulations.  [Part 3, clause 92A(5)]

Main design features of the Opt-in Scheme

1.214          The regulations establishing the Opt-in Scheme will provide:

•        that the Regulator may declare a person a designated opt-in person for an amount of fuel of a specified kind; [Part 3, clause 92A(1)(a)(i),(ii), (iii) and (5)]

•       the requirements that must be met before the Regulator may declare a person a designated opt-in person; [Part 3, clause 92A(1)(a)(v)]

•        that a designated opt-in person will be liable for the potential greenhouse gas emissions in the fuel (of a kind specified in the regulations) for which they are opting-in.  [Part 3, clause 92A(1)(a) and (b)]

1.215          As well as meeting criteria specified in regulations, the designated opt-in person must, for the fuel for which they are opting in:

•        be a member of a GST group where that GST group  is entitled to the fuel tax credits for that fuel; or [Part 3, clause 92A(4)(a)]

•       be a member of a GST joint venture where that GST joint venture is entitled to the fuel tax credits for that fuel; or [Part 3, clause 92A(4)(b)]

•       if neither of these criteria apply, then be the entity entitled to the fuel tax credits for that fuel.  [Part 3, clause 92A(4)(c)]

1.216          The Clean Energy (Fuel Tax Legislation Amendment) Bill 2011 provides that a designated opt-in person will no longer pay an equivalent carbon price through the fuel excise and fuel tax credit systems for the amount of fuel for which they have opted-in. 

1.217          To ensure that a person liable under the Opt-In Scheme is not liable for emissions that are not included in the carbon price, the regulations will also allow for liability to be reduced if certain conditions are met.  [Part 3, clause 92B]

1.218          The regulations will also be able to provide for opting-out of the Opt-in Scheme.  The regulations will set out the process for doing so and the obligations on the Regulator.  [Part 3, clause 92A(1)(a)(v)]

1.219          To ensure consistency between the mechanism and the taxation, excise and tariff systems, the Regulator will be required to notify the Commissioner of Taxation and the Chief Executive Officer of Customs when the Regulator makes a declaration under the Opt-in Scheme.  [Part 3, clause 92G]

1.220          Application procedures, times and fees will be set out in regulations.  [Part 3, clause 92E]

1.221          To the extent that it is necessary t supplement the reporting and record-keeping requirements for liable entities under the NGER Act, further requirements will be set out in regulations.  [Part 3, clause 92C and 92D]

Commencement of the Opt-in Scheme

1.222          The Opt-in Scheme will take effect from 1 July 2013, so that the 2013-14 financial year is the first year in which designated persons can manage the liability for their fuel emissions under the carbon pricing mechanism.  [Part 3, clause 92A(2)]

1.223          The commencement of the Opt-in Scheme on 1 July 2013 will facilitate its implementation, enabling detailed consultation on its practical requirements and implementation.  For the 2012-13 financial year, entities that would opt-in if the Opt-in Scheme was in operation are liable for emissions under the fuel tax system.

Anti-avoidance

1.224          Chapter 7 outlines the provisions addressing schemes entered into with the substantial purpose of obtaining the advantage of a threshold.  Put briefly, attempts to avoid the mechanism’s operation may result in any benefit of the threshold provision being lost.^[28] [Part 3, clause 29]