'Axing the tax' - the end of the Australian carbon pricing scheme

In brief

Federal Parliament has passed legislation to repeal the carbon pricing scheme, removing the nationwide impost on greenhouse gas emissions. Partner Grant Anderson and Associate Albert Yu report. 

Background

The Federal Government first introduced into Parliament legislation to repeal the carbon pricing scheme on 13 November 2013. However, the Senate, which was then controlled by the Labor and Greens parties, rejected the repealing legislation. On 23 June 2014, the Government reintroduced the same legislation into Parliament where, after much political turmoil, it was again voted down – this time by the new Senate in which the Government relies on the support of six of the eight micro party Senators to pass legislation that is opposed by the Labor or Greens parties. Following rather chaotic negotiations with the Palmer United Party (which, with the allied Australian Motoring Enthusiasts Party, controls a critical four Senate votes), the Government agreed to amendments to the legislation that were primarily designed to ensure that electricity and gas retailers pass through to households their savings arising from the repeal of the carbon pricing scheme. The amended legislation passed the House of Representatives on 14 July 2014 and the Senate on 17 July 2014, receiving Royal Assent on the same day.

Repeal of the carbon pricing scheme

Overview of the carbon pricing scheme

In 2011, the Federal Parliament passed legislation that established a carbon pricing scheme covering four of the six Kyoto Protocol greenhouse gases (carbon dioxide, methane, nitrous oxide and perfluorocarbon) emitted from the stationary energy (eg electricity generation), industrial processing, mining and waste disposal sectors.

Broadly speaking, this scheme imposed liability on entities that operated facilities that emitted 25ktCO₂-epa or more of greenhouse gases. The scheme comprised two phases: a fixed price phase that commenced on 1 July 2012 (during which the prices for carbon units were fixed by legislation), followed by a floating price phase that was to commence on 1 July 2015 (during which the prices for carbon units would largely have been determined by market forces). Entities liable under the scheme were required to purchase and surrender sufficient carbon units to cover their liable emissions.

Provision was also made for assistance, in the form of free carbon units, to be given to emissions-intensive trade-exposed industries; the initial (2012/13) assistance rates equated to 94.5 per cent of industry-average direct and indirect (primarily electricity consumption-related) emissions for highly emissions-intensive activities and 66 per cent of direct and indirect emissions for moderately emissions-intensive activities, with the rate declining at 1.3 per cent per annum.

Effect of repeal

The repealing legislation repeals the Clean Energy Act 2011 (Cth) (the CEA), which established the carbon pricing scheme; it also repeals or amends associated legislation, such as the charging Acts, which provided for the imposition of a unit shortfall charge where liable entities failed to surrender sufficient carbon units to cover their emissions, and the National Greenhouse and Energy Reporting Act 2007 (Cth), which mandated the submission of carbon liability reports.

While the CEA is repealed with effect from 1 July 2014, liable entities are still required to acquit their 2013/14 scheme liabilities in full and in the ordinary course. As a result, liable entities will need to acquire and surrender fixed price carbon units (at a price of $24.15 per unit) for the purpose of meeting their 2013/14 final scheme liability, which equates to around 25 per cent of their 2013/14 liable emissions and must be satisfied by 1 February 2015. A failure to satisfy this liability will incur a unit shortfall charge that is calculated at 130 per cent of the fixed carbon unit price.

Jobs and Competitiveness Program

The Jobs and Competitiveness Program (JCP) was established to provide for the allocation of free carbon units to entities in emissions-intensive trade-exposed (EITE) industries that were liable for direct emissions from their EITE activities and/or that needed to sell such units to fund the higher electricity prices that they faced as a result of the carbon pricing scheme. Because JCP carbon unit allocations for a year are based on estimated production of the EITE activity for that year (the estimate typically being the previous year's production), the repeal legislation contains a true-up mechanism for the 2013/14 JCP carbon unit allocation. Under this mechanism, if there has been an under-allocation of 2013/14 JCP carbon units (because 2012/13 production is less than 2013/14 production), then the Clean Energy Regulator is required to issue to the JCP recipient such number of additional free 2013/14 JCP carbon units as corresponds to the under-allocation. Conversely, if there has been an over-allocation of 2013/14 JCP carbon units (because 2012/13 production is greater than 2013/14 production), then the JCP recipient must relinquish to the Clean Energy Regulator such number of carbon units as is equal to that over-allocation, failing which a levy of $24.15 per over-allocated unit will be payable.

An exposure draft of the rules that are required to support this true-up mechanism was released in June 2014. These draft rules require JCP recipients to provide an audited true-up report to the Clean Energy Regulator by 31 October 2014 that sets out (among other things) actual 2013/14 production from the relevant EITE activity. The Clean Energy Regulator will use this report as the basis for calculating the JCP recipient's true-up adjustment, which it must notify to the JCP recipient by no later than 16 January 2015. The draft rules provide that, where there has been an under-allocation of JCP carbon units, the Clean Energy Regulator must issue the make-up units by no later than 23 January 2015 (these units can then be sold back to the Regulator under the buy-back mechanism by 1 February 2015). However, if there has been an over-allocation of JCP carbon units, then the draft rules provide that the excess units must be relinquished by 2 February 2015, with any true-up shortfall levy being payable by 16 February 2015.

Tax-related amendments

Effective from 1 July 2014, the repealing legislation also removes:

• the reduction in fuel tax credits attributable to the carbon impost that would otherwise apply in respect of taxable fuels acquired, manufactured or imported on or after 1 July 2014;
• the carbon impost that is included in the customs and excise duties payable on gasoline and kerosene that is used as aircraft fuel; and
• the carbon impost that is included in the manufacture and import levies payable in respect of synthetic greenhouse gases.

Carbon component of prices of goods and services

Prohibitions

The repeal legislation amends the Competition and Consumer Act 2010 (Cth) (the CCA) to impose two new prohibitions, and confer extensive enforcement and price monitoring powers on the ACCC, in connection with the repeal of the carbon pricing scheme.

The first new prohibition is on an entity making false or misleading representations during 2014/15 concerning the effect of the repeal of the scheme on the price for the supply of goods or services.¹ This supplements the existing prohibition on a corporation making false or misleading representations in connection with the supply of goods or services.² 

The second new prohibition, which is referred to as the prohibition on 'price exploitation in relation to the carbon tax repeal', is a strengthened version of the prohibition that was previously included in the repeal legislation that failed to pass the Senate. It applies to an entity that supplies 'regulated goods' – that is, electricity, natural gas, synthetic greenhouse gases or equipment that contains synthetic greenhouse gases (eg refrigeration units).³ Under this prohibition, such entities must not charge a price for the supply of those goods which 'does not pass through all of the entity's cost savings relating to the supply that are directly or indirectly attributable to the carbon tax repeal', taking into account the entity's costs and other relevant matters that may reasonably influence the price.⁴ This is broader than the previously proposed prohibition, which only applied to charging a price that was:

• unreasonably high having regard alone to the repeal of the carbon pricing scheme; and
• unreasonably high even if the supplier's costs, supply and demand conditions and other relevant matters are taken into account.

The explicitly stated aim of this new prohibition is to ensure that all cost savings attributable to the repeal of the carbon pricing scheme are passed through the supply chain for the regulated goods, and on to the consumers of those goods through lower prices.⁵ As such, the prohibition applies not just to those entities that supply electricity, natural gas, synthetic greenhouse gases and equipment that contains synthetic greenhouse gases to end-users, but also to entities further up in the supply chain, such as wholesalers and producers (eg electricity generators and natural gas producers) who supply those regulated goods to retailers.

This does not, however, mean that prices will fall to their pre-carbon tax levels because, in the interim, there may well have been other non-carbon tax related price increases (eg increasing network charges have driven up electricity prices since 1 July 2012). Moreover, there is likely to be a degree of lagged cost recovery that is attributable to suppliers continuing to recoup carbon costs associated with their 2013/14 carbon liability in 2014/15.

Importantly, a retailer is only required to pass on carbon tax-related cost savings that it actually realises. This means that if a supplier higher up in the supply chain (such as an electricity generator or natural gas producer) does not pass on cost savings that it realises due to the repeal of the carbon pricing scheme, then the retailer is not required to pass those savings on to consumers – that is, there is still the potential for cost savings to be trapped higher up in the supply chain. In this regard while, for example, some electricity hedge contracts provide for a zero carbon charge in 2014/15, other hedge contracts do not. Notwithstanding these constraints, the cost savings that a retailer is required to pass on are quite broadly defined, extending beyond direct carbon cost savings to indirect cost savings that potentially arise in administrative and compliance costs.⁶

Significant penalties apply for a contravention of these prohibitions. The maximum pecuniary penalty is $1.1 million for corporations and $220,150 for individuals.⁷ Alternatively, the ACCC may issue an infringement notice under which the alleged contravener may, without admission of liability, pay a smaller pecuniary penalty ($102,000 for a listed corporation, $10,200 for any other body corporate, and $2,040 for a non-body corporate) and obtain immunity from proceedings by the Commonwealth and the ACCC (but not third parties) in respect of the alleged contravention.⁸ Such a notice will typically only be issued for minor contraventions.⁹ 

Other enforcement tools of the ACCC include injunctive relief, a corrective advertising order and (in the case of the prohibition on price exploitation in relation to the carbon tax repeal) a court order that the entity must not supply the regulated goods at above a specified price and/or that the entity must refund money to purchasers of the regulated goods.¹⁰

Any person who suffers loss or damage as a result of a breach of either prohibition may also recover the amount of the loss or damage, or have the benefit of a court compensation order.¹¹

Finally, an entity that contravenes the prohibition on price exploitation in relation to the carbon tax repeal¹² may additionally be required to pay the Commonwealth, by way of a penalty, an amount equal to 250 per cent of the cost savings that are not passed through in its prices (this amount is payable on 1 July 2015).¹³ 

Reporting obligations

A subset of the suppliers of regulated goods is also subject to new reporting obligations. These suppliers are electricity retailers, natural gas retailers and bulk importers of synthetic greenhouse gases. Significantly, while natural gas retailers are not defined for this purpose to include gas producers, electricity retailers are defined to include entities that produce electricity in Australia. This would encompass electricity generators of all sizes, whether or not they are connected to the grid and whether or not they sell electricity directly to end-users. It is the case that the explanatory memorandum states that this definition of 'electricity retailers' is only intended to extend to electricity producers that sell electricity into a wholesale electricity market to a retailer.¹⁴ However, this is a rather unsatisfactory way of attempting to limit the scope of this concept.

Under the new reporting obligations:

• The ACCC must, by 16 August 2014, give a 'carbon tax removal substantiation notice' to each relevant supplier that requires the supplier, within 21 days, to explain how the carbon tax repeal has affected (or is affecting) the supplier's input costs and how reductions in those costs that are attributable to the carbon tax repeal are reflected in the supplier's prices.¹⁵ The supplier must also provide the ACCC with information or documents that substantiate this explanation.
• A relevant supplier must, by 16 August 2014, give to the ACCC a 'carbon tax removal substantiation statement' which sets out the supplier's estimate of its average annual cost savings that have been, are, or will be, directly or indirectly attributable to the carbon tax repeal and that have been, are being, or will be, passed on to each class of its customers during 2014/15.¹⁶ The supplier must also provide the ACCC with information that substantiates these estimates and must publish this statement on its website until 30 June 2015.
• An electricity or natural gas retailer must, by 16 August 2014, prepare a statement that identifies the average annual estimated cost savings to each class of its customers during 2014/15 that have been, are, or will be, attributable to the carbon tax repeal, and the retailer must ensure that the contents of this statement are communicated to each customer of the relevant class by 15 September 2014.¹⁷ Such a communication could conceivably be by way of the inclusion of the relevant information in an invoice, a bill insert or a separate letter. While the explanatory memorandum also suggests that the communication could be on a website,¹⁸ it is not clear how this could constitute a communication to a specific customer.

Failure by a supplier to comply with these obligations is a strict liability offence for which monetary penalties of up to $85,000 may be payable.¹⁹ 

ACCC's new enforcement and price monitoring powers

The legislation gives the ACCC a number of new powers including the following:

• The ACCC may issue a notice to an entity if it considers that the entity has breached the prohibition on price exploitation in relation to the carbon tax repeal, in which case the notice is prima facie evidence of that breach,²⁰ ie the entity has the onus in any court proceedings of proving that the price of the regulated goods it supplies passes through all of its cost savings attributable to the carbon tax repeal. The ACCC can also issue a 'warning' notice to an entity if it believes that doing so would aid in preventing the entity breaching this prohibition, in which case the notice must specify the maximum price that (in the ACCC's opinion) may be charged for the supply of the relevant goods without contravening the prohibition.²¹
• The ACCC has the power to monitor prices to assess the general effect of the repeal of the carbon pricing scheme on prices charged, offered or advertised by entities for the supply of regulated goods in the period from 1 July 2014 to 30 June 2015, and may use this power to assist it in considering whether an entity has breached, is breaching, or may in the future breach, the prohibition on price exploitation in relation to the carbon tax repeal. This power also extends to enabling the ACCC to monitor the prices charged, offered or advertised for goods, in the period from 1 July 2014 to 30 June 2015, by entities that are liable entities under the carbon pricing scheme.²² 
• The ACCC has coercive information-gathering powers under which it can require the provision of information and documents that it reasonably believes may be useful to it in monitoring prices as described above.²³

The ACCC is required to report quarterly to the Treasurer about the exercise of these powers and these reports will be made publicly available.²⁴

Next steps

Entities that are subject to the new prohibitions added into the CCA by the repeal legislation would benefit from carefully reviewing their advertising material and pricing structures in light of those prohibitions so as to ensure that:

• their advertising material does not misrepresent the effect of the repeal of the carbon pricing scheme on their prices for 2014/15; and
• to the extent appropriate, their cost savings from the repeal of the carbon pricing scheme are passed through to their customers and that this is well-documented.

In place of the carbon pricing scheme, the Government proposes to establish an Emissions Reduction Fund as part of its Direct Action Plan. The legislation to establish the Fund has passed the House of Representatives, but it is not certain that it will pass the Senate. In this regard, the current position of the Palmer United Party is that its support for the Fund is conditional on there being legislation for a 'dormant' emissions trading scheme under which the price for carbon units would be fixed at $0 until the United States, China, India, Japan, South Korea and the European Union adopt equivalent emissions trading schemes. The Government's agreement to this position would seem highly unlikely given its 'in principle' opposition to an emissions trading scheme.

However, it appears that other climate change-related initiatives may be retained despite the Government's desire to change or abolish them. In this regard, the current position of the Palmer United Party seems to be to support the retention of the Renewable Energy Target scheme in its existing form (irrespective of the recommendations of the Warburton review) and to keep the Climate Change Authority, the Clean Energy Finance Corporation and the Australian Renewable Energy Agency.