briefing Carbon Pollution Reduction

Transcription

1 Scheme (CPRS): The White Paper The Minister for Climate Change and Water, Penny Wong has released a White Paper, which sets out elements of the Carbon Pollution Reduction Scheme (CPRS), a medium-term target range for the reduction of carbon pollution in Australia and an indicative emissions trajectory for In this briefing, Maddocks identifies the main features of the scheme, notes aspects of the scheme that have been clarified in the White Paper and examines some issues arising under the scheme that are likely to be of particular interest and significance across all sectors of the economy. Key Elements of the CPRS Covered sectors Thresholds for direct emissions Targets and trajectory Liable entity Monitoring and reporting obligations Stationary energy Transport Fugitive emissions Industrial processes Synthetic greenhouse gases Waste Forestry New in White Paper A decision on the coverage of agriculture will be taken in 2013 In general, a threshold of 25,000 tonnes C0 2 -e applies A threshold of 10,000 tonnes CO 2 -e applies to some landfill facilities Targets The medium-term target will be between 5 and 15 % below 2000 levels 5% reduction by 2020 is a minimum, unconditional commitment 15% reduction by 2020 is conditional upon a global agreement under which all major economies commit to substantially restraining emissions and all advanced economies take on reductions comparable to Australia Long-term target of 60% reduction below 2000 levels by 2050 has been confirmed Trajectory The indicative national emissions trajectory will be: in , 109% of 2000 levels in , 108% of 2000 levels in , 107% of 2000 levels Obliged to acquire and surrender permits according to emissions level Incorporated and unincorporated bodies, including Commonwealth, state, territory and local governments Entities that have operational control over facilities producing emissions, although entities with financial control may be able to assume liability in some cases Obligation to monitor emissions and annually report Consequences for non-compliance include payment of administrative penalty for failing to surrender sufficient permits Continued on the following page

2 Key Elements of the CPRS (Cont) Adjustment assistance Tax implications EITEs Emissions-intensive trade-exposed industries will be allocated around 25% of total permits at scheme commencement, increasing to around 45% by 2020 Strongly affected industries Under the Electricity Sector Adjustment Scheme, the most emissions-intensive electricity generators will receive a fixed, one-off allocation of free permits Climate Change Action Fund Fuel A Climate Change Action Fund, to which $2.15 billion will be allocated over five years, will be established to provide transitional assistance to businesses, community sector organisations, workers, regions and communities Fuel taxes will be reduced Agricultural and fishing businesses and heavy vehicle road users, which do not pay fuel tax, will be eligible for CPRS fuel credits Households Main features of CPRS $6.0 billion will be allocated in towards a household assistance package, including assistance for pensioners, seniors, carers and people with a disability; self-funded retirees; recipients of allowance benefits; and low and middle income families Permits brought to account for income tax under rolling balance method conceptually similar to trading stock Normal GST rules apply to scheme transactions The CPRS establishes a cap and trade scheme, which is expected to commence on 1 July A cap on the total amount of greenhouse gas emissions will be established for each year through the issuance of a set number of permits. New in White Paper Under the scheme, significant emitters of greenhouse gases must acquire a permit for every tonne of gas emitted in a particular year. Entities that are obliged to acquire permits will be able to trade them, which will thereby place a price on emissions. Each year, the liable entity is required to surrender a permit for every tonne of emissions produced in that year. Scope and coverage Gases The CPRS covers all six Kyoto Protocol gases namely, carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, hydrofluorocarbons and perfluorocarbons. Sectors The following sectors are covered under the CPRS: Stationary energy: Emissions from this sector are produced predominantly from electricity generation, which contributes around 50% of Australia s total emissions. The CPRS will apply to direct emissions and to suppliers of fuel (for example, natural gas) to small energy users Transport: Emissions are primarily from combustion of fuels for road and rail transport and account for around 14% of total emissions. The CPRS will apply to upstream fuel suppliers. Fuel that is exported and used for international transport will be exempt from the scheme Fugitive emissions: These are emissions that are released during the production, processing, transport, storage and distribution of coal, oil and gas and contribute around 6% of total emissions Industrial processes: Industrial processes produce emissions from chemical reactions associated with manufacturing processes, mineral processing and chemicals and metal production and account for around 5% of Australia s emissions Synthetic greenhouse gas emissions: These are emissions from the use of commercial and household equipment such as refrigeration, air-conditioning and highvoltage electrical equipment and contribute around 1% of total emissions. Scheme obligations will apply to bulk importers of synthetic greenhouse gases, large importers of equipment containing synthetic greenhouse gases and domestic synthetic greenhouse gas manufacturers Waste: Emissions from this sector are predominantly from solid waste sent to landfill and from the treatment of domestic,

3 commercial and industrial wastewater and solvent and clinical waste incineration and contribute just over 3% of Australia s emissions Forestry: Reforestation will be covered on a voluntary basis, but deforestation will not be covered. Forests established after 1 January 1990 will be eligible to create tradeable emissions permits where they increase the net amount of CO 2 stored in the forest. The White Paper indicates that the government is disposed towards covering agriculture under the CPRS by However, a final decision will be taken on this issue in Thresholds In general, the scheme will apply when direct emissions exceed 25,000 tonnes of carbon dioxide equivalent or more (CO 2 -e). In the case of the waste sector, to avoid waste displacement from covered to uncovered sites, a threshold of 10,000 CO 2 -e will apply to landfill facilities operating within a distance to be determined of another operating facility. The threshold will return to 25,000 CO 2 -e for these facilities 10 years after closure. Liable entities (a) Definition Both incorporated and unincorporated entities (including Commonwealth, state and territory governments and local councils) may be liable under the CPRS if emissions in a covered sector exceed the relevant threshold. The entity that has operational control of the relevant facility will generally be held responsible for obligations under the CPRS that is, the body that has the authority to introduce and implement operating, health and safety and environmental initiatives. Entities with financial control may be able to assume liability where certain criteria have been met and the scheme regulator has approved transfer of liability. Where multiple entities exercise a degree of operational control over a covered facility, a single responsible entity must be nominated or the scheme regulator will make this determination. In the case of controlling corporations of a corporate group, CPRS obligations will generally fall on that corporation where either the controlling corporation or a member of the group has control over a covered facility. (b) Main obligations Entities are free to emit at whatever level they choose the CPRS does not impose limits on emissions from individual sectors, firms or facilities. However, if entities do decide to emit, they are obliged to acquire and surrender a permit for every tonne of greenhouse gases emitted in a particular year. In addition, liable entities have monitoring and reporting obligations under the CPRS. Liable entities will bear the costs involved with participation in the scheme, including costs associated with establishing emissions estimation systems, annual reporting and managing permits. Monitoring and estimating emissions Liable entities are required to monitor their emissions according to defined methodologies to determine the extent of their CPRS obligations each year. They are also required to keep appropriate documentation and records to enable reported emissions to be assured. Emissions estimation methodologies for the purposes of the CPRS are those available under the National Greenhouse and Energy Reporting System (NGERS), which is established under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGERA). These methodologies include observable activity data (such as volumes of fuel combusted or site production data) and site sampling (such as sampling the carbon content of fuel before combustion). Reporting under the NGERA Once liable entities have monitored and estimated their emissions, they are obliged to report them pursuant to the NGERA by 31 October each year. Under the CPRS, emitters producing 125,000 tonnes of CO 2 -e or more are required to have their annual emissions reports assured by an independent, accredited third party prior to their submission. The CPRS regulator also has the power to undertake audits of emissions reports. Consequences of non-compliance The White Paper states that the CPRS regulator will have a range of investigative and enforcement powers to respond to non-compliance, including civil and criminal penalties. An administrative penalty, to be prescribed in the regulations for the relevant compliance year, will be imposed on liable entities if they fail to surrender sufficient permits.

4 Caps and targets The Government has re-affirmed its commitment to a long-term national emissions reduction target of 60% below 2000 levels by The White Paper also indicates that the target range for 2020 will be between 5 and 15 per cent below 2000 levels. Five per cent reduction by 2020 is a minimum, unconditional commitment whereas adoption of a 15 per cent target by 2020 is conditional upon a global agreement under which all major economies commit to substantially restraining emissions and all advanced economies take on reductions comparable to Australia. The government has announced that the indicative national emissions trajectory will be: in , 109% of 2000 levels in , 108% of 2000 levels in , 107% of 200 levels These figures are summarised in Figure 1 below: Under the scheme, annual emissions caps will be set on a rolling five-year basis. The caps for the first 5 years of the scheme s operation (that is, from ) will be announced in early Gateways will be set every five years for the 10- year period beyond the scheme caps. Up to 10 years of scheme gateways will be announced in early Scheme caps will be set equal to the indicative emissions trajectory in the relevant year, less the projected emissions from sources not covered under the CPRS. Allocation of permits Free allocation As part of its assistance packages to aid with adjustment to the CPRS: Around 25% of total permits will be issued free to emissions-intensive tradeexposed industries (EITEs) at scheme commencement, increasing to around 45% by The government has extended the assistance to EITEs compared with the position stated in the Green Paper. It will now apply to activities at a lower level of emissions intensity (>1000 tonnes CO 2 - e/$million revenue). There will also be an additional option for determining eligibility (CO 2 -e/$million value-added) Under the Electricity Sector Adjustment Scheme, the most emissions-intensive electricity generators will receive a fixed, one-off allocation of free permits worth $3.9 billion. Auctions Allocations of permits will eventually move towards 100% auctioning. Twelve auctions will be held throughout each financial year and will be double-sided, meaning that auction participants can both buy and sell permits at auction. The first auction will take place in 2010, prior to commencement of the scheme. Permits will be differentiated by annual vintages that is, the financial year cap to which a permit pertains. Four years of vintages will be auctioned at a time the current vintage and advance auction of the three succeeding vintages. Entities receiving free permits will be able to sell them at auctions in calendar years 2010 and Price cap A cap on the price of permits of $40 has been imposed for , and will rise in real terms by 5% each year. If it is reached, the price becomes fixed at the price cap and the emissions limits will need to be increased. Figure 1. Indicative trajectory and 2020 target range

5 In practical terms, the price cap is a mechanism for setting the maximum cost of compliance under the CPRS. More specifically, if a liable entity fails to meet its obligation to acquire and surrender sufficient emissions permits, it must pay the penalty that is, the price cap rather than pay for permits. Banking and borrowing of permits Permits may be saved indefinitely and used in future years, without limitation (banking). In other words, permits will have no expiry date. Liable entities may discharge up to 5% of their current obligations by surrendering permits dated from subsequent years (borrowing). Recognition of Kyoto units and international offsets The White Paper states that liable entities are entitled to use eligible Kyoto units for compliance with obligations under the CPRS, without limitation. This contrasts with the Green Paper, which indicated that limitations would be imposed. Kyoto units are units related to the reduction of emissions that are recognised and tradeable under the Kyoto Protocol, including under the Clean Development Mechanism for offset projects in developing countries and Joint Implementation for offset projects in developed countries. International non-kyoto units will not be accepted for compliance during the CPRS from This position will be reviewed after that period in light of developments in international negotiations. Export of permits will not be allowed under the scheme. If this position is to be changed, five years notice will be provided. Adjustment assistance Auction revenue will be used to assist households and businesses to adjust to the economic impact of the CPRS. The following forms of assistance will be available under the CPRS: E m i s s i o n s - i n t e n s i v e t r a d e - e x p o s e d industries Free permits will be available for entities who are defined as EITEs that is: having a trade share (that is, the ratio of the value of the entity s imports and exports to the value of domestic production) of greater than 10% in any year between and ; or a demonstrated lack of capacity to pass through costs of compliance with the CPRS due to the potential for international competition. Existing and new EITEs will be entitled to: 90% free permits for those entities that had at least 2000 tonnes CO 2 -e/ $million revenue 60% free permits for those entities that had between 1000 and 1999 tonnes CO 2 -e/$million revenue or 3000 and 5999 tonnes CO 2 -e/$million value added. Assistance for EITEs relates to direct emissions and emissions from the use of steam and associated with extraction and production of natural gas and its derivatives, such as methane and ethane, when used as feedstock. Assistance will decline at a rate of 1.3% per annum. Strongly affected industries The White Paper states that coal-fired electricity generation is the only sector that has the characteristics of a strongly affected industry that is, non-trade-exposed; emissionsintensive; unable to pass on costs of scheme compliance; significant sunk capital costs; and no significant economically viable abatement opportunities. Under the Electricity Sector Adjustment Scheme, the most emissions-intensive coalfired generators will be provided a once-andfor-all fixed allocation of free permits, amounting to $3.9 billion. The amount of assistance for each eligible generator will be determined assuming an initial carbon price of $25 per tonne. Assistance will be determined on the basis of: the historic energy output of the power station between 1 July 2004 and 30 June 2007 the extent to which a generator s emissions intensity exceeds the threshold level of 0.86 tonnes CO 2 -e/mwh generated, which is the average emissions intensity of all fossil-fuel based generation. Climate Change Action Fund The Government will allocate $2.15 billion to the Climate Change Action Fund over five years, which aims to provide transitional assistance to businesses, community sector organisations, workers, regions and communities. The fund will be used for four main streams of activity: to provide information for business and community service organisations about the operation of the CPRS and how to manage expected financial impacts

6 to encourage investment in energy efficiency and low emissions technologies undertaken by small businesses, small community organisations and other entities that are not eligible for other forms of assistance structural adjustment in cases where workers and communities are disproportionately affected by the CPRS coal mine operations with high fugitive emissions up to a maximum of $250 million over 5 years. Fuel taxes Fuel taxes will be reduced. Agricultural and fishing businesses and heavy vehicle road users, who do not pay fuel tax, will be eligible for a CPRS fuel credit to offset the initial price impact on fuel from introducing the scheme. Households A permit price of $25 is considered to be broadly consistent with an emissions target of 5% below 2000 levels by At this price, electricity prices are estimated to increase by around 18% and gas prices by 12%, corresponding to an increase in average household spending of $4 per week on electricity and $2 per week on gas and other household fuels. To assist households adjust to these increased costs, the White Paper states that the government has allocated $6.0 billion in towards a household assistance package. The household assistance package includes specific commitments to assist: pensioners, seniors, carers and people with a disability self-funded retirees recipients of allowance benefits low and middle income families. Trading of emissions permits There are no limits on who can hold and trade emissions permits. The price of permits is not set by government, but by the market in which the permits are traded (that is, the carbon market). A permit will be a financial product for the purposes of the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth). One consequence of this categorisation is that those who trade emissions permits will need to obtain a financial services licence to do so. In addition, the Australian Securities and Investment Commission will be given power to investigate and prosecute market manipulation in the carbon market. Tax implications Income tax Permits will be brought to account for income tax under a rolling balance method conceptually similar to the treatment of trading stock. A permit s cost is deductible. Proceeds of a permit s sale are assessable as income. With respect to any difference in the permit s value from the start to the end of an income year: an increase in value is included in assessable income; a decrease in value is allowed as a deduction. The value (at the taxpayer s election) is either the permit s historical cost (the rolling balance increases in line with the original cost of a permit purchased and banked and decreases by that amount when the permit is surrendered or sold) or market value (the closing value of a permit is equal to its market value at year end and the rolling balance is adjusted each year to take account of changing market values). The effect of the rolling balance method will generally be that any expenditure on permits will only affect taxable income in the year in which the permit is surrendered or sold. Taxpayers may change valuation methods once in the first 5 years of the scheme after which no change is allowed. The value of administratively allocated permits is included in the taxpayer s assessable income in the year the permits are received. Penalties imposed under the scheme will not be deductible. GST The Government does not support establishing a discrete set of GST rules for scheme transactions. The normal GST rules will apply to scheme transactions, including the input taxed treatment of financial supplies of financial derivatives of permits. GST will not apply to administratively allocated permits and government assistance, unless they are supplied for consideration. Areas for ATO risk review and audit action In assessing compliance with the tax implications of the CPRS, the ATO is likely to consider: The extent to which a taxpayer has records of the cost of each permit surrendered or sold The value of permits for a taxpayer who opts to use the market value method for the purposes of the rolling balance How permits are accounted for on an entity joining or leaving a consolidated group How a taxpayer has accounted for GST on the taxable supplies of permits it sells and input tax credits in respect of permits it acquires. Stamp duty In due course, taxpayers will need to consider the stamp duty implications of the scheme which may arise at the State level. Draft legislation for the CPRS, including key scheme features, scheme caps and targets, coverage, rules for permit allocation and penalties for non-compliance, will be released in late February Introduction of relevant Bills into Parliament is expected to commence in the winter session of 2009.

7 maddocks Sustainability & Climate Change Team For further information and advice on the CPRS and related issues, please contact the Maddocks Sustainability & Climate Change Team. This team draws together a broad range of commercial and planning & environment expertise to focus on sustainability, emissions trading, water, energy and climate change. John Thwaites Consultant john.thwaites@maddocks.com.au Maria Marshall maria.marshall@maddocks.com.au Robert Gregory robert.gregory@maddocks.com.au Stan Kondilios stan.kondilios@maddocks.com.au Prue Burns prue.burns@maddocks.com.au David Baird david.baird@maddocks.com.au Christopher Conolly christopher.conolly@maddocks.com.au Andrew Chapman andrew.chapman@maddocks.com.au Geoff Charnock geoff.charnock@maddocks.com.au Dariel De Sousa Consultant dariel.desousa@maddocks.com.au The material contained in this Paper is of the nature of general comment only. No reader should rely on it without seeking legal advice. If you do not wish to receive further Papers or Updates from us, please marketing@maddocks.com.au. Maddocks Lawyers Angel Place 140 William Street 123 Pitt Street Melbourne Victoria 3000 Sydney New South Wales 2000 Australia Australia Telephone Telephone Facsimile Facsimile info@maddocks.com.au Affiliated offices Adelaide, Auckland, Beijing, Brisbane, Colombo, Dubai, Hong Kong, Jakarta, Kuala Lumpur, Manila, Mumbai, New Delhi, Perth, Singapore, Tianjin