As part of its commitment to implement its Carbon Pollution Reduction Scheme (CPRS) by next July, the Australian Government yesterday released its eagerly awaited draft emissions trading legislation in a package of six bills.  The exposure draft remains largely unchanged from the details provided in the Government’s controversial White Paper released last December.  Importantly, much of the detail is yet to be covered in regulations. 

At the heart of the scheme is the Government’s commitment to reduce greenhouse gas emissions by at least 5% from 2000 levels by 2020, with the potential for a 15% cut if a global agreement is reached.  Problematically, however, the center-left Labor Government does not have a majority in the Senate and faces increasing resistance to the scheme from both the Greens and the conservative opposition, the Liberal Party.  The Opposition wants delays and more compensation for big business given the current economic environment; while the Greens want deeper cuts of around 25% by 2020.  The Opposition and the Greens have collaborated to establish a two-month Senate inquiry, saying they will not support the scheme without significant changes.  The position advanced by the Opposition is seemingly supported by Lawrence Summers, head of President Obama’s National Economic Council, who has been reported as suggesting that a recession is no time to introduce emissions trading by arguing that “expenditures for climate change will be far easier to make in economies where per-capita income is growing.”

Key Features of the Scheme

• The Carbon Pollution Reduction Scheme Bill 2008 (the Bill) will establish a national cap and trade scheme under which the quantity of GHG’s for which liable entities are responsible will be monitored, reported and audited and at the end of each year, each liable entity must surrender an Australian Emissions Unit (AEU) for every ton of GHG’s that they are responsible for in that year.
• The penalty for failure to surrender sufficient AEU’s will be specified in regulations, but may not exceed 110% of the benchmark average auction price, with penalties for late payment and a make good provision.
• The scheme cap will be set by regulation and thus may be adjusted by the government.
• Entities subject to the cap include operators of facilities with annual direct GHG emissions greater than 25Kt of CO2-e.
• AEU’s may be issued: at auction; by free allocation to eligible emissions intensive, trade-exposed entities and coal-fired electricity generators; for a fixed charge of $40 for the first five years, which will rise in real terms by 5% a year (the so called “safety valve”); or for abatement in non-covered sectors such as reforestation or destruction of synthetic GHG’s.
• The Bill allows for the import of an unlimited number of CER’s (but not other types of Kyoto units) and provides for the possibility of linkages with other systems or countries.
• Importantly, the Bill classifies AEUs as personal property that are fully transferable and does not prevent the creation of equitable interests or taking of security over AEUs. Understanding and classifying the specific rights attaching to emissions allowances is becoming of increasing significance as the world grapples to streamline the interlocking and expanding web of global carbon schemes.
• A National Registry of Emissions Units will be established to record and track the creation, transfer and surrender or cancellation of AEU’s and Kyoto units.
• Executive officers of corporations will be subject to civil penalties if they are aware that the corporation will contravene the law, are in a position to influence the corporation’s conduct, and fail to take reasonable steps to prevent it.
• Of particular importance to the energy, resources and infrastructure sectors is the absence of any discussion on contractual cost pass through. The Government has left this issue to determination by the private sector in respect of existing contracts or contracts straddling the commencement of the scheme which is a major legal and commercial issue for companies where the price review or change-in-law clauses are not explicit.

The Government plans to enact the legislation by June this year, to allow one year for implementation, and is seeking written submissions to the Bill, due April 14, 2009.  The CPRS promises to be the most broad ranging scheme worldwide to date, covering approximately 75% of total national GHG’s and involving 1,000 firms and auctioning the bulk of its permits.  In contrast, the EU ETS covers 40% of industrial emissions and has, at least in the past, given out most of its allowances for free.  Whether the Government is able to stick to its original timetable and implement the scheme will depend largely on the cooperation of the Opposition and the Greens which to date has not been forthcoming.

For further information about this topic, please contact Akin Gump.