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Focus: Regulations released on emissions-intensive trade-exposed industry assistance program

3 July 2009

In brief: The Department of Climate Change has released draft regulations for public comment that set out the details of the emissions-intensive trade-exposed assistance program that is to form part of the Federal Government's proposed Carbon Pollution Reduction Scheme. Partner Grant Anderson (view CV) and Lawyer John Henderson report.

How does it affect you?

  • Applications for free Australian emissions units under the emissions-intensive trade-exposed assistance program must be submitted by 31 October of the financial year for which the assistance is being sought.
  • Broadly speaking, the applicant must be the person who would be liable for any direct emissions from the emissions-intensive trade-exposed activity under the Carbon Pollution Reduction Scheme. If there is more than one such person, the application must be a joint application which includes an agreed apportionment of the units between those persons.
  • Applicants must have their applications independently audited.
  • Where the activity is recently commenced or substantially expanded, the output by reference to which the assistance is to be calculated may be estimated. However, applicants using estimated output amounts must provide a considerable amount of substantiating information.
  • Large electricity users are required to apply for the determination of a facility-specific electricity allocation factor by 1 January 2011, failing which they will receive no assistance for increased electricity costs for the period 2011-12 to 2015-16. Such an application must be made by all large users irrespective of when they entered into their electricity supply arrangements (although entirely new electricity supply arrangements entered into after 3 June 2007 seem to be entitled to the default national electricity allocation factor). Where the electricity supply arrangements were entered into before 3 June 2007 (apparently including where those arrangements have been subsequently amended, as opposed to replaced), the applicant must comply with quite onerous information provision requirements.

Background

To help ameliorate the risk that the Carbon Pollution Reduction Scheme (CPRS) will adversely affect Australia's international competitiveness, the Federal Government has committed to providing an annual allocation of free Australian emissions units (AEUs) to emissions-intensive trade-exposed (EITE) activities until Australia's major trading competitors adopt comparable carbon constraints. The details of the EITE assistance program are set out in the White Paper and the commentary that accompanied the exposure draft CPRS bills that were released on 10 March 2009. On 4 May 2009, the Government announced that the levels of assistance for EITE activities would be increased for the first five years of the CPRS (2011-12 to 2015-16) through the incorporation of a 'global recession buffer'. The Government has now released for public comment draft regulations which detail the operation of the EITE assistance program.

The EITE assistance program is intended to provide assistance to EITE activities in relation to their direct (scope 1) emissions, which attract liability under the CPRS, and the increase in electricity and natural gas feedstock costs that those activities face as a result of the CPRS increasing the price of electricity and natural gas. This assistance is to be provided in the form of free AEUs, which will generally have a vintage of the year to which the assistance relates,1 and which are allocated by the Australian Climate Change Regulatory Authority (ACCRA).

An activity will only qualify for EITE assistance where it is prescribed by regulation as an emissions-intensive activity, in which case the regulations will also set out the principal parameters for the calculation of the assistance to which that activity is entitled – namely:

  • the applicable rate of assistance, which will depend on whether the activity is classified as 'highly emissions-intensive' or 'moderately emissions-intensive';
  • the output by reference to which the assistance is to be calculated NC the number of free AEUs that are to be allocated to an activity is based on the level of output produced by that activity; and
  • the direct emissions intensity2, electricity use and natural gas feedstock use baselines for the activity.

In addition, the draft regulations prescribe the following parameters:

  • the electricity allocation factor, which is 1tCO2-e/MWh for all activities unless the large electricity user provisions (see below) apply; and
  • the natural gas feedstock allocation factor, which differs depending on the state (or other jurisdiction) in which the activity is conducted.

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Emissions-intensive trade-exposed activities

The draft regulations currently identify eight activities, which are listed in Table 1, as emissions-intensive activities.

Table 1: Emissions-intensive activities

Highly emissions-intensive activities
Activity Description Output
Production of bulk flat glass The physical and chemical transformation of silica and other raw and recycled materials to produce bulk flat glass products, including wired glass and patterned glass, by controlled melting and forming in a contiguous process. Tonnes of bulk flat glass of saleable quality.
Production of methanol The chemical transformation of one or more of the following to produce liquid methanol in which the concentration of methanol is equal to or greater than 98 per cent with respect to mass:
  • hydrocarbons;
  • hydrogen feedstocks;
  • carbon feedstocks; or
  • oxygen feedstocks.
 Tonnes of 100 per cent equivalent methanol.
Production of carbon black The chemical transformation of gaseous or liquid hydrocarbons to produce a colloidal carbon material (known as 'carbon black'), in the form of spheres or of fused aggregates of the spheres, with a particle size of below 1,000nm in at least one dimension. Tonnes of pelletised carbon black (on a dry weight basis) of saleable quality.
Production of silicon The chemical transformation of silica to produce silicon with a concentration of silicon equal to or greater than 98 per cent, conducted in accordance with the overall chemical equation:
SiO2(s) + 2C(s) ¨Si(s) + 2CO(g). 		Tonnes of silicon of saleable quality.
Smelting zinc The chemical transformation of either or both of the following to produce zinc metal with a concentration of zinc equal to or greater than 99.95 per cent:
  • concentrated mineralised zinc compounds; and
  • zinc-bearing secondary materials.
Tonnes of zinc of saleable quality.
Manufacture of newsprint The physical transformation through an integrated process of any or all of woodchips, sawdust, wood pulp and recovered paper, through an integrated process, into rolls of uncoated newsprint that:
  • has a grammage range of 30 to 80 g/m2;
  • has a moisture content in the range of 6 per cent to 11 per cent by weight; and
  • is generally usable for newspaper products.
Air dried tonnes of rolls of uncoated newsprint of saleable quality.

Tonnes of bone dried equivalent pulp used in the integrated process.
Moderately emissions-intensive activities
Activity Description Output
Production of glass containers The physical and chemical transformation of silica and other raw and recycled materials to produce blown or pressed glass containers, by controlled melting and forming in a contiguous process. Tonnes of blown and pressed glass containers of saleable quality.
Production of white titanium dioxide pigment The chemical transformation of one or more of the following to produce white titanium dioxide pigment which conforms with American Society of Testing and Materials classification D476-00 and has an iron concentration of not more than 0.5 per cent:
  • rutile;
  • synthetic rutile;
  • ilmenite;
  • leucoxene; or
  • titanium slag that has an iron concentration of greater than or equal to 7 per cent.
Tonnes of white titanium oxide pigment of saleable quality.

Ten other activities have also been approved and definitions of them are expected to be included in a subsequent version of the regulations. These ten activities are aluminium smelting, alumina refining, and the production of carbamide, chlorine gas and sodium hydroxide solution, high purity ethanol, fused alumina, fused zirconia, magnesia, pig iron and synthetic rutile.

Further activities will be added as they are evaluated in accordance with the Department of Climate Change's 2009 Guidance Paper. In this regard, the first criterion that an activity must satisfy to qualify for EITE assistance is that it is 'trade-exposed', which generally means that the annual trade share of the activity (calculated as the value of imports and exports expressed as a proportion of domestic production) must be more than 10 per cent in any of the years 2004-05, 2005-06, 2006-07 or 2007-08. The second criterion is that the activity must be 'emissions-intensive'. As stated above, the draft regulations differentiate between 'highly emissions-intensive' and 'moderately emissions-intensive' activities. The basis of this distinction is that:

  • highly emissions-intensive activities have an emissions intensity above 2,000tCO2-e/$million revenue or 6,000tCO2-e/$million value-added; and
  • moderately emissions-intensive activities have an emissions intensity of between 1,000 to 2,000tCO2-e/$million revenue or between 3,000 to 6,000tCO2-e/$million value-added,

with emissions per unit of output being derived from 2006-07 and 2007-08 data and revenue or value-added being derived from data referable to the period from 1 July 2004 to 31 December 2008.3

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Assistance rates

Highly emissions-intensive activities receive a higher rate of assistance than moderately emissions-intensive activities. In addition, the assistance rates for the first five years of the CPRS incorporate a 'global recession buffer' (an additional 5 per cent for highly emissions-intensive activities and an additional 10 per cent for moderately emissions-intensive activities), and the assistance rates for each year are reduced by a 'carbon productivity contribution' of 1.3 per cent per annum. The resultant rates for each year are as set out in Table 2.

Table 2: Assistance rate

Financial year Assistance rate
Moderately emissions-intensive Highly emissions-intensive
2011-12 66.0% 94.5%
2012-13 65.1% 93.2%
2013-14 64.4% 92.1%
2014-15 63.5% 90.8%
2015-16 62.6% 89.7%
2016-17 (global recession buffer ceases to apply) 56.2% 84.3%
2017-18 55.5% 83.2%
2018-19 54.8% 82.1%
2019-20 54.0% 81.1%
2020-21 53.3% 80.0%

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Output

As stated above, EITE assistance is allocated on the basis of output, and the type of output of an activity by reference to which the assistance is calculated will be prescribed by regulation (Table 1 sets out this output for those activities which are included in the draft regulations). As a general rule, the quantity of output that will be used to determine the EITE assistance for an activity for a particular financial year will be the quantity of output produced by the EITE activity in the immediately preceding financial year.4 However, this general rule is subject to the following qualifications:

  • for the first year of the CPRS (2011-12) an applicant for EITE assistance may elect to use the output of the activity in any of the 2008-09, 2009-10 and 2010-11 financial years5 – this is intended to enable the choice of an output quantity that is not distorted by the global financial crisis;6
  • where the EITE activity does not have two financial years' worth of historical output, the EITE assistance must be based on estimated output for the relevant financial year, in which case provision is made for a subsequent true-up of the estimated and actual output;7 and
  • where the facility at which the EITE activity is conducted has undergone a 'significant expansion' (eg as where capacity to produce the output of the EITE activity has been increased by more than 20 per cent)8, the EITE assistance may also be based on an estimate of the increased output for the relevant financial year, in which case provision is also made for a subsequent true-up of the estimated and actual output.9

Where an estimated output is to be used, the EITE assistance application must include detailed information to substantiate the reasonableness of that estimate,10 together with an auditor's certification that the assumptions on which the estimate is based are reasonable, that the estimate is properly made on the basis of those assumptions, and that the estimate has been made in accordance with appropriate measurement policies.11 If ACCRA is not satisfied that the estimate is the best estimate possible in the circumstances (or that the estimate complies with other applicable requirements) it may substitute its own estimate of that output after considering submissions from the applicant12 (failing which it must refuse the application).13

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Application for EITE assistance

As a general rule, an entity will only be eligible to apply for EITE assistance in respect of an EITE activity for a financial year where, as at the end of the immediately preceding financial year, that entity:

  • is the 'controlling corporation' of a group, a member of which has 'operational control' over the facility at which the EITE activity is undertaken;
  • has 'operational control' over the facility at which the EITE activity is undertaken, and is not a member of a (corporate) group; or
  • holds a liability transfer certificate in relation to the facility at which the EITE activity is undertaken.14

The concepts of 'operational control', 'controlling corporation' and '(corporate) group' are as defined under the National Greenhouse and Energy Reporting Act 2007 (Cth), and the liability transfer certificate mechanism is a feature of the CPRS. Where the EITE activity was not undertaken at the facility in the preceding financial year (ie it is a 'new' activity), then the entity that will satisfy the above criteria when that activity is first undertaken in the relevant financial year will be eligible to apply for EITE assistance (for this purpose pre-commissioning testing is to be disregarded).15

Currently, the draft regulations suggest that the facility to which the EITE activity relates is a physical plant rather than an activity or series of activities, which is the sense in which the National Greenhouse and Energy Reporting Act and the CPRS use the concept of 'facility'. This mismatch is of some concern as it may result in ambiguity in interpreting and applying the EITE assistance program provisions.

An application for EITE assistance for a financial year must be made to ACCRA by 31 October of that financial year, failing which the applicant will not be entitled to EITE assistance for that year.16 Moreover, it is necessary for all entities that are eligible to apply for EITE assistance in relation to an EITE activity that is carried on at one or more facilities to jointly apply for that EITE assistance, failing which ACCRA must refuse the application.17 This means that all eligible applicants will need to cooperate in submitting such a joint application, including by agreeing the manner in which the free AEUs that are referable to the EITE activity are to be apportioned between them.18 However, this situation will generally only arise where an EITE activity comprises activities that are under the operational control of different corporate groups19, which is likely to be rare at least if the relevant facility is an activity rather than a plant (see above).

An application for EITE assistance must be independently audited, with the auditor certifying both that the activity is an EITE activity and that the output by reference to which the annual EITE assistance is to be calculated has been measured using a method recommended by ACCRA or that complies with an accepted industry standard.20

The draft regulations are reasonably prescriptive as to process and methodology so as to facilitate ACCRA making its determinations in a timely manner and to minimise the prospect of appeals. Nonetheless, decisions by ACCRA to substitute a quantity of output and to refuse an application for EITE assistance are subject to review by the Administrative Appeals Tribunal.

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Large electricity user provisions

Where more than 2,000GWh of electricity is consumed at a single facility in 2008-09, the applicant for EITE assistance must apply to ACCRA for a 'large user electricity certificate' before 1 January 2011, failing which the electricity allocation factor for any EITE activity conducted at that facility will be zero for the first five years of the CPRS (2011-12 to 2015-16).21 Such a certificate is intended to set out an electricity allocation factor that is specific to that facility, which is to apply instead of the 'default' national electricity allocation factor of 1tCO2-e/MWh. The purpose of these provisions is to avoid the applicant being:

  • under-compensated for its electricity cost increases, eg as where the electricity is supplied by a coal-fired electricity generator with an emissions intensity of greater than 1tCO2 e//MWh and, under its existing electricity supply arrangements, that generator is able to pass through to the applicant the entire cost of acquiring AEUs to cover its emissions; or
  • over-compensated for its electricity cost increases, eg as where its existing electricity supply arrangements do not permit any pass through to the applicant of the carbon cost associated with that electricity.

The requirement to apply for a large user electricity certificate applies to all such large users, even where their electricity supply arrangements have been replaced after 3 June 2007, although in such a case it appears that the electricity allocation factor will be required to be 1tCO2 e//MWh. However, where the relevant electricity supply arrangements were entered into before 3 June 2007 (including, it appears, even if they have since been amended but not replaced), ACCRA is required to determine a facility-specific electricity allocation factor. In these circumstances, the electricity allocation factor must be calculated having regard to the proportion of electricity supplied under these pre-3 June 2007 arrangements and the proportion of electricity supplied under any post-3 June 2007 arrangements, as well as the likely electricity price increase under the pre-3 June 2007 electricity supply arrangements.22 The information that must be provided to ACCRA for this purpose is quite extensive and includes an opinion by senior counsel as to the potential pass through of carbon costs under any pre-3 June 2007 electricity supply arrangements and the view of the electricity supplier as to the likely price impact of the CPRS under these arrangements.23

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Cessation of EITE activity

Broadly speaking, an EITE activity will be considered to have ceased being undertaken at a facility if production of the output of the EITE activity at the facility has ceased and is unlikely to be resumed within six months.24 In such a case, the recipient of EITE assistance for the financial year in which the EITE activity ceases to be undertaken will be required by ACCRA to relinquish the number of free AEUs allocated to it that are deemed to be attributable to the foregone output.25

Moreover, a recipient of EITE assistance must advise ACCRA of any proposed or likely cessation of the relevant EITE activity in the next two years, and ACCRA must reduce an allocation of AEUs for a financial year where it considers that the EITE activity is likely to cease during that financial year.26

These decisions by ACCRA are subject to review by the Administrative Appeals Tribunal.

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Records and reporting

Recipients of free AEUs are required to keep the related records for five years, and must report to ACCRA on matters such as changes to the entity that is eligible to receive the EITE assistance (eg as where the relevant production facility is sold).27

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The next step

Submissions on the draft regulations are due by 14 August 2009, with the final regulations to be made by 1 July 2010. If you would like further information about the draft regulations and their implications for you, please contact any of the people below.

Footnotes
  1. regs 1001-1002.
  2. This baseline may be reduced for facilities the direct emissions of which are likely to be below 25ktCO2-epa (the general threshold for CPRS liability): see reg 905.
  3. See the paper entitled Establishing the eligibility of activities under the emissions-intensive trade-exposed assistance program (June 2009) which was released with the draft regulations.
  4. reg 907(8) (definition of Pia t-1).
  5. reg 704.
  6. Commentary accompanying draft regulations, par.81.
  7. reg 907(8), (9).
  8. See reg 203(2); see also reg 203(3) (return from mothballing: 20 per cent production increase), reg 203(4) (recommissioning: 50 per cent production increase) and reg 203(5) (second year production ramp-up: 20 per cent production increase).
  9. reg 907(8), (9).
  10. regs 705(4), 706(2).
  11. reg 604(6)(c).
  12. regs 803, 903, 904.
  13. reg 804(2)(e)(ii), (3).
  14. regs 503-506.
  15. regs 507-511.
  16. reg 1003.
  17. reg 804(2)(a), (3).
  18. reg 602(a).
  19. See reg 703.
  20. reg 604. Note also the audit certifications required in relation to estimated output and referred to above.
  21. regs 908, 909(1), (8).
  22. reg 909(6), (7).
  23. reg 909(2)(d), (f)-(h).
  24. reg 204.
  25. regs 1301-1304.
  26. regs 906(3)(a), 1203-1206.
  27. regs 1101, 1202.

Published 3 July 2009

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