24/07/2014

On 17 July 2014 the Australian Government repealed the legislation which created Australia’s ‘carbon pricing mechanism’ (commonly referred to as the ‘carbon tax’).

The ‘carbon tax’ took about 5 years to implement - and lasted only 2. While the Australian Government intended for there to be a direct transition from the ‘carbon tax’ to its ‘Direct Action Plan’ for carbon regulation - the timing, design and prospects of any ‘Direct Action Plan’ being implemented in Australia is uncertain.

In this article we set out the key actions for businesses to address the implications arising from the ‘carbon tax’ repeal, and consider the regime that may lie ahead for carbon regulation in Australia.

Liable entities must comply with ‘carbon tax’ liability for FY 2013-14

The ‘carbon tax’ repeal is effective from 1 July 2014, and no ‘carbon tax’ liabilities will be incurred from this date.

Liable businesses and other entities must, however, satisfy all ‘carbon tax’ liabilities incurred up to 30 June 2014. The final payment for FY 2013-14 ‘carbon tax’ compliance obligations is due in February 2015.

Industry assistance provided under the Jobs & Competitiveness Program and the Energy Security Fund continued in FY 2013-14 for the purpose of liable entities meeting their ‘carbon tax’ liabilities for this period. This assistance has now ceased.

The Clean Energy Regulator (and other government agencies) will retain powers to enforce the payment by liable entities of any outstanding ‘carbon tax’ liabilities.

Key Actions

  • Liable entities should ensure that final payment of any ‘carbon tax’ liabilities for FY 2013-14 is made by February 2015. 

Prohibition on 'price exploitation'

The Government has not introduced any transitional provisions to deal with specific commercial arrangements (including contracts) for the pass-through of savings arising from the ‘carbon tax’ repeal.

The Government has, however, introduced mechanisms to ensure that savings relating to the repeal of the ‘carbon tax’ are passed down the supply chain.

In this regard, a new prohibition on ‘carbon tax’ related price exploitation has been inserted into the Competition and Consumer Act 2010 (CC Act). Price exploitation will occur if:

  • an entity makes a ‘regulated supply’ of ‘regulated goods’ during the ‘carbon tax’ repeal transition period (FY 2014-15); and
  • the entity fails to pass through ‘all of the entity’s cost savings related to the supply that are directly or indirectly attributable to the carbon tax repeal’.

At this stage, the price exploitation prohibition targets wholesale and retail suppliers of natural gas and electricity, as well as the suppliers of synthetic greenhouse gases and equipment (SGGs). This is because the only goods that expressly come within the definition of a ‘regulated good’ are electricity, natural gas and SGGs.

The Minister does have the power, however, to prescribe other goods as ‘regulated goods’. This will allow the Minister, in the event that there are significant concerns about pricing behaviour in other markets or sectors, to extend the operation of the price exploitation powers to these additional markets or sectors.

In determining whether an entity has breached the price exploitation prohibition, consideration will be given to the following matters:

  • the entity’s cost savings that are directly or indirectly attributable to the ‘carbon tax’ repeal;
  • how the cost savings can reasonably be attributed to the different supplies that the entity makes;
  • the entity’s costs; and
  • any other relevant matter that may reasonably influence the price.

The penalties for breaching the price exploitation prohibition are material, with a maximum penalty of $1.1 million for a corporation. In addition, the entity must pay a penalty of an amount equal to 250% of the cost savings that were not passed through (plus interest).

The Australian Competition & Consumer Commission (ACCC) will have broad and strengthened powers to monitor prices of certain goods to assess the general effect of the ‘carbon tax’ scheme.

Key Actions

  • Suppliers of electricity, natural gas and SGGs should determine the amount of cost savings that will arise from the repeal of the ‘carbon tax’ in order to comply with obligations;
  • while other industry sectors (that were liable entities under the ‘carbon tax’) are not currently subject to the price exploitation prohibition, it would be prudent for these businesses to determine the cost savings that will arise and to consider whether to adjust prices, particularly if they increased prices on the basis of the ‘carbon tax’; and
  • review contracts to determine how cost savings can be passed through, and ensure that the prohibition on price exploitation is complied with.

Prohibition on ‘false or misleading’ representations

The CC Act has also been amended to prohibit a corporation from making false or misleading representations about the effect of the ‘carbon tax’, and its repeal, on prices for the supply of goods or services during the ‘carbon tax’ repeal transition period (FY 2014-15).

This prohibition will apply across all industry sectors and, unlike the price exploitation prohibition, is not limited to the electricity and gas sector.

While there is already a provision in the CC Act which prohibits false and misleading misrepresentations, the new carbon-specific prohibition is intended to make it very clear that misrepresentations with respect to ‘carbon tax’ are prohibited.

The ACCC was very active in investigating statements made at the commencement of the ‘carbon tax’ about the quantum of price rises attributable to the scheme, and can be expected to take a similar approach in relation to the repeal. We anticipate that companies that came to the ACCC’s attention at the commencement of the ‘carbon tax’ can expect particular scrutiny.

The penalties for breaching this prohibition are material, with a maximum penalty of $1.1 million for a corporation.

Key Actions

  • Businesses should ensure that any statements they make, including in public comments and in communications with customers, are accurate; and
  • in particular, businesses should ensure that in communicating their decisions as to whether to reduce prices and, if so, by how much, any reasons they give are not misleading or deceptive.

Substantiating the impact of the ‘carbon tax’ repeal on price

A suite of mechanisms have been introduced which places the onus on retailers of electricity, natural gas and SGGs to substantiate the impact of the ‘carbon tax’ repeal on price. We have set out below the key mechanisms and timeframes for compliance.

Carbon Tax Removal Substantiation Notice

The ACCC must issue a ‘carbon tax removal substantiation notice’ to retailers of electricity, natural gas and SGGs by 18 August 2014. The entity must comply with the notice within 21 days (or the within an extended period of not more than 28 days), by providing the ACCC with a statement (and sufficient supporting information to substantiate the statement) that explains:

  • how the ‘carbon tax’ repeal has affected, or is affecting, the entity’s regulated supply input costs; and
  • how reductions in the entity’s regulated supply input costs that are directly or indirectly attributable to the ‘carbon tax’ repeal are reflected in the prices charged by the entity for regulated supplies of electricity, natural gas or SGGs.

Carbon Tax Removal Substantiation Statement 

Retailers of electricity, natural gas and SGGs must provide the ACCC with a ‘carbon tax removal substantiation statement’ by 18 August 2014 that estimates (on an average annual percentage price basis or an average annual dollar price basis) the entity’s cost savings that are attributable to the ‘carbon tax’ repeal and that will be passed on to customers during FY 2014-15. The entity must provide sufficient supporting information to substantiate the statement.

Customer Statement

Retailers of electricity or natural gas must communicate to customers a statement that identifies (on an average annual percentage price basis or an average annual dollar price basis) the estimated cost savings to each class of customers that are attributable to the ‘carbon tax’ repeal for FY 2014-15. The entity must communicate the contents of the statement to customers during the period between 18 August 2014 and 16 September 2014.

Key Actions

  • Retailers of electricity, natural gas and SGGs should expect to receive a ‘carbon tax removal substantiation notice’ from the ACCC by 18 August 2014. Accordingly, it would be prudent for retailers to commence preparing a written response, which must be lodged with the ACCC within 21 days of receiving the notice; and
  • retailers of electricity, natural gas and SGGs should commence preparing a ‘carbon tax removal substantiation statement’, which must be lodged with the ACCC on or before by 18 August 2014 and be made publicly available on the entity’s website until 30 June 2015; and
  • retailers of electricity and natural gas should commence preparation of a statement to customers, which must be distributed between 18 August 2014 and 16 September 2014.

What is next for carbon regulation in Australia?

The Commonwealth Government has maintained its commitment to implementing its 'Direct Action Plan' to reduce Australia’s emissions by 5% below 2000 levels by 2020.

The central component of the 'Direct Action Plan' is an Emissions Reduction Fund (ERF). The ERF will be a fund of $2.55 billion from which the Government intends to purchase carbon credits generated by certified emission reduction projects. 

On 18 June 2014 the Government introduced the Carbon Farming Initiative Amendment Bill 2014 (CFI Amendment Bill) to implement the ERF. The CFI Amendment Bill was referred to the Senate Legislation Committee for inquiry and report by 7 July 2014. While the Committee supported the CFI Amendment Bill as a key component of the Government’s response to climate change, there was and remains no bipartisan support for this approach to carbon regulation in Australia. Parliament is not expected to consider the CFI Amendment Bill until late August 2014. The Government will not be able to pass the legislation through the Senate to create the ERF without the support of Palmer United Party Senators. At this stage the Palmer United Party has indicated that any support for the ERF is conditional on the Coalition Government’s support for a form of emissions trading scheme proposal, which to date appears unlikely to be given by the Government. 

A ‘safeguard mechanism’ is proposed to be implemented by 1 July 2015 to set absolute emissions baselines for large scale facilities that emit direct emissions of at least 100,000 tonnes of CO2-e a year (estimated to be around 130 companies). While the Government intends to implement a flexible framework to enforce compliance with the emissions baseline, there is scope for deal-making arising from  the implementation of the ERF could result in the ‘safeguard mechanism’ adopting some emissions trading scheme mechanisms (such as a baseline and credit trading scheme). 

The effect of the above is that greenhouse gas emitting sectors will enter a ‘carbon void’ for an unspecified period of time in which there is no national regulatory scheme in place.

Businesses should consider how best to use funds freed up by the ‘carbon tax’ repeal, to position themselves to compete in a ‘carbon constrained’ Australian environment in the long term. In our view, a commitment to best practice sustainability will remain integral to streamline approval pathways for greenhouse gas emitting projects – regardless of the current political landscape surrounding carbon regulation in Australia.

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