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The legal implications of changing the carbon pricing mechanism

The legal implications of changes to the carbon price mechanism are subtle, but important. Pawel Loj

The legal implications of changing the carbon pricing mechanism

Earlier this week the federal Government announced important changes to the carbon pricing mechanism (CPM). The political and economic consequences have been much discussed, but the less-talked-of legal issues could have a greater impact.

Three changes were made to the CPM:

  • The $15 floor price will not take effect from 2015.

  • From 1 July 2015, there will be a 12.5% cap (reduced from 50%) on the amount of eligible units created under the Kyoto Protocol (CERs) that can be surrendered to meet an entity’s annual liability (that is, the number of units that an entity must surrender as a result of its emissions). CERs are tradeable permits created by the Clean Development Mechanism (CDM). The CDM is a project-based offset mechanism established under the Kyoto Protocol.

  • From July 1 2015, Australia will start one-way linking with the EU Emissions Trading Scheme (ETS). In 2018, this will become two-way. This will enable Australian liable entities to use European units to meet up to 50% of their annual liability (minus any CERs that an entity surrenders). From 2018, this change will also broaden the market in which Australian carbon units can be traded.

These changes will have many implications for liable entities. The majority of these will be economic or commercial.

There are also political and environmental implications. Leading commentators have already canvassed the most important of these.

But what are the legal implications? Are there any?

The answer is, of course. However, these will be more subtle – though no less important – than the other implications.

Broadly speaking, the legal implications of the revised carbon price design fall into two categories. The first is the legislative amendments required to give effect to the new policy direction. The second concerns the ability for any future government to revoke the CPM.

Legislative amendments will be required to give effect to the revised design of the CPM; they are likely to go ahead. The most prominent of these include:

  • The Clean Energy Act 2011 (the Act) will need to be amended to impose a new limit on the ability for liable entities to surrender CERs from 2015.

  • The Act will need to ensure that a European unit can be surrendered under the CPM from 2015. To achieve this, the Australian National Registry of Emissions Units Act 2011 and its accompanying regulation will need to be amended. These documents regulate the eligibility of international units under the CPM. Changes in the operation of the registry for carbon units will also be necessary to enable European units to be registered.

  • The Act should be amended to remove all references to the existence of a floor price. Currently, the Act is drafted to impose the floor price on any Australian carbon unit sold at auction between 1 July 2015 and 30 June 2018. The floor price also applies to any international units.

Practically it may be possible for the regulator not to impose the floor price in these circumstances. However, these amendments would provide certainty to liable entities that the floor price would not be reinstated at a later date (at least not without further legislative amendment).

Removing the floor price and providing eligibility for European units under the CPM means that liable entities with existing accounts in the EU ETS can now purchase European units. This can be done in preparation for their surrender in 2015 when these units become eligible in Australia. It has been suggested that this operates to embed the CPM further, as companies will not readily give up their positions in European units.

From a legal perspective this may be true if the European units held on an Australian registry are deemed to be personal property. I expect this will be the case: this is the approach that applies to all other eligible units. In this instance, any attempts to terminate the CPM could lead to a potential claim for compensation by the holders of these units. This is not to mention the potential political backlash.

In the end, companies, liable entities and politicians will be most concerned with the political, economic and environmental implications of the changes to the CPM that were announced by the Government earlier this week. However, it is important to remember that these changes need to be underpinned by the law, which itself can have profound implications for the long-term operation of the scheme.