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Client Update: Carbon Pollution Reduction Scheme exposure draft legislation

11 March 2009

In brief: Yesterday afternoon the Federal Government released exposure draft legislation for its proposed Carbon Pollution Reduction Scheme (CPRS). While the draft legislation is extensive and submissions on it are due by 14 April, it closely mirrors the proposals put forward by the Government in its White Paper, Australia's Low Pollution Future, released on 15 December last year. These proposals are summarised in the nine-article series on the White Paper that is available in the Climate Change publications area of our website. Partner Grant Anderson (view CV) reports.

CPRS legislation package

The draft legislation comprises six Bills:

  • the Carbon Pollution Reduction Scheme Bill (CPRS Bill), which implements the proposals set out in the White Paper;
  • the Australian Climate Change Regulatory Authority Bill, which establishes the Australian Climate Change Regulatory Authority – this body is to administer the CPRS and to assume the functions of both the Greenhouse Energy and Data Officer under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGERA) and the Office of the Renewable Energy Regulator under the Renewable Energy (Electricity) Act 2000 (Cth);
  • the Carbon Pollution Reduction Scheme (Consequential Amendments) Bill, which makes a number of amendments to associated legislation, including the NGERA, corporations legislation and tax legislation; and
  • the Carbon Pollution Reduction Scheme (Charges – General) Bill, the Carbon Pollution Reduction Scheme (Charges – Excise) Bill and the Carbon Pollution Reduction Scheme (Charges – Customs) Bill which, for constitutional reasons, are structured as separate Bills to cater for the possibility that the amounts payable for Australian Emissions Units (AEUs) at auction or under the five-year transitional price cap constitute a tax, customs duty or excise duty. We have previously expressed the view that the CPRS does not impose a tax and we see these Bills as being proposed due to an abundance of caution rather than suggesting that the CPRS does in fact impose a tax.

The Government plans to introduce these Bills into Parliament in May 2009, with their passage being achieved in June 2009 and the CPRS commencing in 2010.

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Points of interest

As stated above, the principal components of the CPRS are contained in the CPRS Bill, and these closely mirror the White Paper proposals. However, the following aspects of this package of Bills are particularly worth noting:

  • Under the NGERA and the CPRS, liability to report greenhouse gas emissions (as well as energy production and consumption), and to surrender AEUs, is generally imposed on the ultimate Australian holding company (or 'controlling corporation') of a group that has 'operational control' over the relevant facility. Where an unincorporated joint venture (as opposed to an operator of that joint venture) has operational control over such a facility, the joint venturers will be obliged to jointly nominate one of their number to be the responsible entity under the NGERA and the CPRS.1 The effect of such a nomination is that the nominated joint venturer (or its controlling corporation, if there is one) will be liable to report the joint venture's greenhouse gas emissions (and energy production and consumption) under the NGERA and to surrender the AEUs required to cover the joint venture's greenhouse gas emissions under the CPRS. If no nomination is made, then not only will all the joint venturers be subject to a pecuniary penalty, but they will also each be liable to fulfil the reporting and AEU surrender obligations attaching to the joint venture's activities. While the commentary accompanying the draft legislation suggests that liability under the CPRS would be apportioned among the joint venturers, this does not seem to be reflected in the draft legislation. This is a substantial change from the existing NGERA provisions, which are designed to encourage, but not compel, joint venturers to nominate a responsible entity as the reporting entity.
  • The CPRS Bill contemplates that the provisions regarding assistance to emissions-intensive trade-exposed activities will largely be included in regulations. However, the commentary that accompanies the CPRS Bill reiterates the White Paper proposals regarding this assistance scheme, and these are expected to be incorporated in the regulations. On 18 February 2009, the Government released a guidance paper that requested industry participants to provide it with information required for the Government to determine the eligibility of activities for assistance on the basis that they are emissions-intensive and trade-exposed. The information given in response to this guidance paper will also be taken into account in the regulations.
  • The CPRS Bill does not provide for the pass through of carbon costs, but does provide for limited statutory mechanisms under which CPRS liabilities (and therefore costs) can be transferred by a liable entity. These mechanisms take the form of a liability transfer certificate, under which a liable entity can transfer its CPRS liability either to a subsidiary or to an unrelated entity that has financial control over the emitting facility, and an Obligation Transfer Number scheme, under which a supplier of fossil fuels can transfer its CPRS liability to a purchaser of those fuels.
  • The CPRS Bill contains broad anti-avoidance provisions, which apply with effect from 15 December 2008 and are directed at entities that structure their activities in such a way as to fall below the applicable liability thresholds for the purpose of avoiding liability under the CPRS (see the CPRS Bill, clauses 23 and 30).
  • 'Executive officers' of a company that fails to comply with certain requirements under the CPRS may incur personal liability where they knew that (or were reckless or negligent as to whether) the contravention would occur, were in a position to influence the company's conduct and failed to take reasonable steps to prevent the contravention (CPRS Bill, clause 324). For these purposes an 'executive officer' is defined to mean a director, chief executive officer, chief financial officer or secretary of the company. A compliance program will be an important part of establishing an executive officer's defence against such liability (see CPRS Bill, clause 325).
  • The NGERA will be amended in a number of respects so as to complement and support the CPRS; for example, by accommodating both on-shore and off-shore carbon capture and storage activities. There will also need to be extensive amendments to the regulations and measurement determination that have already been made under the NGERA. In addition, the Government has yet to draft amendments to the NGERA to accommodate matters such as the reporting obligations and thresholds for facilities to which a liability transfer certificate applies.
  • Both the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) will be amended to recognise AEUs and eligible international emissions units as 'financial products' and therefore subject to financial services regulation under those Acts. However, the Government acknowledges that the application of the financial services regime to these units will need to be amended to accommodate both their peculiar characteristics and associated compliance issues. The Government will develop these amendments in consultation with stakeholders.

If you would like further information in relation to the draft CPRS legislation, or assistance with drafting submissions on it, please contact any of the people below.

Footnotes
  1. Partnerships are treated in the same way as unincorporated joint ventures.

Published 11 March 2009

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