• Australia’s carbon price - Opportunities for Europe
  • August 23, 2011
  • Law Firm: Norton Rose Canada LLP - Montreal Office
  • Introduction

    On Sunday 10 July 2011 the Australian government announced that a carbon pricing mechanism will be introduced in Australia from 1 July 2012 and that this will transition to an emissions trading scheme from 1 July 2015. Australia’s introduction of a carbon pricing mechanism provides many opportunities for European businesses, but also some challenges.

    The article covers:

    • the challenges for European businesses involved in Australia, including:
      • the need to address the liability for increased costs resulting from the carbon pricing mechanism in contract and business negotiations; and
      • the need to review existing contracts that will extend past 1 July 2012; and
    • the opportunities for European businesses in the renewable energy sector, including:
      • exporting energy efficient technology, products and know-how to Australia;
      • obtaining funding for renewable energy projects in Australia; an
      • selling European carbon permits to Australian businesses.

    Overview of Australian scheme

    The Australian government estimates that only the biggest 500 “polluters” in Australia will be required to purchase carbon permits. However, businesses that are not required to purchase carbon permits will be indirectly affected, particularly because energy costs will rise.

    The price per tonne of carbon pollution (or CO² equivalent) will commence at a fixed price of $23 on 1 July 2012, and will rise to $24.15 on 1 July 2013 and $25.40 on 1 July 2014 before becoming market driven on 1 July 2015, although subject to a floor and ceiling for the first 3 years. Initially, businesses will be able to acquire as many carbon permits as required. But from 1 July 2015, the number of permits available will be capped and the permits will be auctioned.

    This naturally provides opportunities in the renewable energy sector.  Firstly, because renewable energy will become more competitive with Australia’s predominantly coal-fired power stations, and secondly because the Australian government is committing significant funds to drive investment into the renewable energy sector.

    Under the mechanism, the liable entity for direct emissions is generally the person exercising control over operations of the emitting facility. Where the facility is operated by an unincorporated joint venture, then all of the venture parties will be liable entities in proportion to their respective interests in the facility (provided no one entity has “operational control”).

    Currently, the mechanism allows for the operator to apply for a liability transfer certificate to transfer liability to another member of its corporate group, a person outside of its corporate group that has financial control over the facility or in respect of an operator of an unincorporated joint venture, to the joint venture participants in proportion to their interest in the facility.

    The challenges

    Provided businesses do not attempt to exploit the introduction of the carbon pricing mechanism as a means to increase prices, there is no prohibition on businesses passing on the costs of the carbon pricing mechanism to consumers or business partners. However, on the other hand, businesses will also have no statutory right to do so. Accordingly, the wording of contracts will be very important.

    For European businesses dealing with Australia, the following actions should be taken:

    • before entering a contract with an Australian supplier, the question of who bears the liability for increased costs resulting from the carbon pricing mechanism should be raised, and directly addressed in the contract;
    • existing contracts with Australian suppliers that will extend beyond 1 July 2012 should be reviewed to determine: 
      • who will be liable for the increased costs resulting from the carbon pricing mechanism; and
      • whether it is possible to adjust the prices under the contract due to the introduction of the carbon pricing mechanism;
    • for European businesses involved in unincorporated joint ventures in Australia, it should be determined who will bear liability for increased costs resulting from the carbon pricing mechanism and whether there is a need and ability to allocate that liability differently among the joint venture partners.

    The opportunities

    Clean Energy Finance Corporation

    A new “Clean Energy Finance Corporation” (CEFC) will be established and provided with AUD$10 billion to invest in renewable energy, low-pollution and energy efficiency technologies. The CEFC is intended to operate similarly to the UK’s Green Investment Bank or the USA’s Department of Energy. It will not provide grants as such, but will be able to offer loans, loan guarantees, and equity investments in suitable projects. 

    Half of the CEFC’s allocated funding will be directed towards renewable technologies, such as geothermal and wave energy and large scale solar power generation, with the other half directed more broadly for example, to low-emissions cogeneration technology. 

    The CEFC will not invest in carbon capture and storage as this is supported by other programs. 

    The Chair of the CEFC will be required to report to the prime minister in early 2012 on its policy on investments in foreign listed companies.  Otherwise, there is currently no prohibition on CEFC supporting foreign owned companies, where projects are carried out in Australia.  Draft legislation is expected within the next month and will need to be reviewed to determine whether any “Australian-owned” pre-requisites will be placed on projects in which CEFC invests.

    The CEFC will offer European businesses with interest in Australian renewable energy projects a potential source of funding.

    Australian Renewable Energy Agency

    The current Australian Centre for Renewable Energy and the Australian Solar Institute will be incorporated into a new statutory authority, the Australian Renewable Energy Agency (ARENA). 

    ARENA will provide early-stage grants and financing assistance for projects that strengthen renewable energy and energy efficiency technologies and make them more cost competitive.

    Existing government investment in renewable energy ($3.2 billion) will be administered by ARENA, including the Solar Flagships Program, and Renewable Energy Venture Capital Fund. 

    This provides a further source of potential funding for eligible projects in Australia.

    Clean Technology Program

    While European businesses may not be directly eligible for grants or assistance under the Clean Technology Program, the program should increase the demand from Australian manufacturing businesses for energy efficient capital equipment and low-pollution equipment.  Europe is generally several years ahead of Australia in the development of such equipment, and therefore European businesses are well placed to capitalise on this increased demand.

    The Clean Technology Program is aimed at supporting investments in energy efficient capital equipment and low-pollution technologies, processes and products.  It incorporates the following programs:

    Clean Technology Investment Program

    AUD$800 million in grants will be available over 7 years from 1 July 2011 under this program to manufacturing businesses to invest in energy efficient capital equipment and low-emissions technologies, processes and products. This program is targeted at business with an annual electricity consumption of at least 300 megawatt hours or 5 terajoules of natural gas, or businesses that are directly liable under the carbon pricing mechanism in the year prior to application. Grants will be available for programs such as:

    • Adoption and deployment of technologies to reduce energy use and/or carbon emissions at manufacturing facilities;
    • Process re-engineering involving the adoption of energy or carbon efficient manufacturing tools;
    • Support the conversion of facilities from coal to natural gas;
    • Investing in co-generation plants; and
    • Assistance with the implementation of energy efficiency opportunities.

    Manufacturing businesses must themselves invest $3 for every $1 of grant money.

    Clean Technology Food and Foundries Program

    This is very similar to the Clean Technology Investment Program, but is specifically directed at manufacturers in the metal forging and foundry and the food processing sectors. It is considered that these industries require special assistance because they are trade-exposed and have somewhat higher exposure to energy costs than general manufacturing businesses.

    $200 million will be available under this program over six years from 1 July 2011. This program directs $50 million specifically at manufacturers in the metal forging and foundry sector and $150 million at manufacturers in the food processing sector to invest in energy efficient capital equipment and low-emissions technologies, processes and products. 

    Again, while European businesses may not be able to apply for grant money themselves, there is a huge opportunity to market energy saving technology to Australian manufacturing businesses, as the program should result in an increased demand for these products within the Australian manufacturing sector.

    Clean Technology Innovation Program

    AUD$200 million over five years from 1 July 2012 will be available to provide grants for research and development, proof-of-concept and early-stage commercialisation of clean technology for development in renewable energy, low-emissions technologies and energy efficiency. Grants will be provided from $50,000 up to $5 million.  However, each business receiving a grant will be required to match the grant with its own investment.

    Sale of European carbon permits to Australian businesses

    From 1 July 2015 Australian corporations will be able to purchase international carbon permits instead of Australian carbon permits to satisfy their obligations under the emissions trading scheme in Australia. Until 2020, 50 percent of liabilities must be met with Australian carbon permits. The following international units will be accepted in Australia:

    • Certified emission reductions (CERs) from Clean Development Mechanism projects under the Kyoto Protocol (excluding certain CERs, eg those from nuclear projects);
    • Emission reduction units (ERUs) from Joint Implementation projects under the Kyoto Protocol (excluding certain ERUs, e.g. those from nuclear projects);
    • Removal units (RMUs) issued by a Kyoto Protocol country on the basis of land use, land-use change and forestry activities under Article 3.3 or 3.4 of the Kyoto Protocol; and
    • Any other international units that the Government may allow by regulation.

    The use of a given type of international unit may be disallowed at any time to ensure the system works as intended.  However, disallowed units may still be surrendered to the Government to comply with obligations in the year of disallowance. In any event, the European Union emissions trading scheme is generally referred to as a model and we would not expect EU carbon permits to be disallowed.  In particular, the government has stated that it wishes to preserve links to the EU Emissions Trading Scheme and the New Zealand Emissions Trading Scheme.

    This has the potential to provide European businesses with another market where carbon units under the EU emissions trading scheme can be sold.

    Draft legislation to implement the announced carbon pricing mechanism was released on 28 July 2011 and submissions regarding the draft legislation are due by August 22. Norton Rose can provide further information and advice on any aspect of the carbon pricing mechanism in Australia.