January 2014
The business of
climate change
Navigating the new carbon policy landscape
The change in Federal Government has ushered
in a new period of potential complexity in
Australian climate policy. It also elevates
the need for industry to understand the
Government’s two main policy objectives: repeal
of the Carbon Pricing Mechanism (CPM) and
implementation of the Direct Action Plan (DAP).
Contents
Comparison with the CPM
2
What are the opportunities?
3
What are the critical design features
of the ERF?
6
What are the critical design features
of the Safeguarding mechanism?
15
How do I prepare for the CPM repeal?
19
What next?
23
The Green Paper for the Emissions Reduction Fund (ERF),
introduces the concept of the “Safeguarding” mechanism, which
is to be treated separately to that of the ERF process. Given
this approach and the associated timelines, businesses need
to work quickly to understand the implications of the proposed
policy both with respect to the opportunities to receive funding
under the ERF and the potential penalties imposed by the
Safeguarding mechanism. While the Green Paper sets out more
detail than the Terms of Reference, there remains considerable
scope for policy development ahead of its implementation.
As always, the devil will be in the detail of the policy and
legislation. It is clear, however, that the DAP will provide real
opportunities for emissions abatement and businesses should
be doing what they can to make sure they are prepared to
realise these opportunities. Responding immediately will allow
your business sufficient time to gather the information needed
to assess the scale and nature of the opportunities and what
elements of the policy are crucial to success. At the same time,
you will need to plan for the implications of the proposed repeal
of the CPM. Failing to take advantage of the opportunities
may result in greater costs in the future.
To help you navigate your way through the changing
policy landscape, this paper provides an overview of
the key implications of the Government’s climate change
policy objectives for businesses. It starts with a comparison
of the CPM and ERF. It then follows with details of the
opportunities and implications associated with the ERF and
the Safeguarding mechanism, and the key design elements
that are critical to your business. Also included is a discussion
on what you need to do to prepare for the repeal of the CPM.
Lastly, you will also find a Roadmap for Action, appropriate for
any impacted business, which outlines key next steps to guide
your journey.
Comparison with the CPM
Design element
Clean Energy Future and the Carbon Pricing Mechanism (existing policy)
Emission Reduction Fund and Safeguarding Mechanism (new policy)
Emissions targets
5% emissions reduction by 2020 based on 2000 levels.
5% emissions reduction by 2020 based on 2000 levels.
80% emissions reduction by 2050 based on 2000 levels.
Review of DAP proposed in late 2015 to decide on post 2020 architecture and targets.
Fixed carbon price for three years, transitioning to an emissions trading scheme in
July 2015.
An emissions offset scheme — termed the Emissions Reduction Fund and a separate
penalty regime — termed the “Safeguarding” mechanism.
Liable entities are required to surrender carbon units (that are purchased or are allocated
freely) for every tonne of carbon dioxide equivalent (CO2-e) that they emit.
The ERF to utilise Australian Carbon Credit Units (ACCUs), issued by the Clean Energy
Regulator for reductions in emissions from the baseline level. ACCUs can then be offered
for sale to the ERF through a reverse auction process, subject to an annual capped dollar
value or a maximum price.
Scheme design
Designed to enable liable entities to choose the most cost-effective compliance
method (i.e. emission reduction, permit surrender or international permits during
the flexible period).
Coverage
Entities with operational control over facilities whose emissions exceed 25,000 tonnes
of CO2-e, as calculated in accordance with the National Greenhouse and Energy Reporting
Scheme (NGERS) framework.
Entities covered by the Safeguarding mechanism will be encouraged to decrease emissions
below a historically calculated baseline through an unspecified penalty, the design of which
is proposed to be developed over a longer consultation period for commencement in 2015.
Access to funding through the ERF is open to a wide range of participants (potentially
subject to a minimum project size), with aggregation of projects into large scale abatement
options likely to be favoured.
Coverage of the “Safeguarding” mechanism is yet to be decided. However, thresholds
could potentially include both scope 1 and scope 2 emissions, which may expand liable
entities beyond those covered under the CPM.
Penalty regime
Liable entities who fail to surrender sufficient permits are subject to a penalty.
As per above liable entities who exceed their prescribed emissions baseline will be
subject to a penalty — administered via the Safeguarding mechanism.
Government
revenue
Revenue derived by the Government from the sale of carbon units redistributed
to other parts of the economy. Also used to support the following programs:
Current expectation is that the Government will not receive any revenue.
• Clean Energy Finance Corporation: investing in renewable energy, low pollution
and energy efficiency technologies ($10 billion)
• Australian Renewable Energy Agency: streamlined governance of government
support for renewable energy innovation ($3.2 billion)
• Clean Technology Innovation Program: grants for research and development proof
of concept and early stage commercialisation of clean technology ($800 million)
Link to a
secondary
market
Once the CPM entered its flexible price phase (July 2015) it was anticipated that
there would be a strong secondary market associated with the scheme (both in
Australia and overseas).
The final design of the ERF could allow for a secondary market, facilitating trading
between entities participating in the ERF through “make good clauses”, or as part of a
voluntary market. This is particularly important for projects generating non-Kyoto ACCUs.
The continuation of the Carbon Farming Initiative (CFI) provides an opportunity for
Kyoto-compliant credits to be generated, which could be sold overseas.
International
linkages
Once the CPM entered its flexible price phase (July 2015), the CPM was designed
to enable bilateral trading with the European Union Emissions Trading Scheme.
The draft legislation for repeal of the CPM includes removal of linkages to the European
Union Emissions Trading System.
However the Government is seeking feedback on using international permits as a
make good option if companies exceed their historical baselines as set under the
Safeguarding mechanism.
The business of climate change Navigating the new carbon policy landscape
2
What are the opportunities?
Diagram 1: Different emissions trajectories
700
Emissions per year (MtCO2-e)
BAU forecast
Kyoto rollover
650
DAP/ERF
Abatement
Challenge
600
550
500
450
400
2000
2005
2010
2015
2020
Year
2013 Projected BAU
Kyoto Rollover
Abatement Pathway
Notes to Diagram 1:
Kyoto rollover of 121MtCO2-e, allocated equally to each year.
Source: Australian Government 2013; EY analysis
The Government has indicated that to achieve
the 5% reduction in emissions by 2020
compared to 2000 levels, a reduction of
431MtCO2-e will need to be delivered from
2014 to 20201.
design of the scheme, the average funding level available to
participants for the announced three year funding period is
$3.60 per tCO2-e abatement: this does not include potential
funding post 2017, for which the Government has indicated
funds could be made available.
Diagram 2: Estimated ‘Per-tonne’ funding rate under various
design scenarios
As shown in Diagram 1, the DAP/ERF will be the core
policy vehicle through which this emissions abatement is
to be achieved.
As an election commitment the Government announced
that the ERF will allocate $1.55 billion over the three years
from 1 July 2014 to support emissions abatement projects.
This funding will create opportunities for businesses to fund
abatement initiatives that may not have otherwise been
financially viable. Of course, the final design of the ERF will
affect the degree to which specific opportunities become
economically feasible and the range of opportunities that are
available in different sectors and industries.
Funding rates likely to influence the business
case for your projects
ERF funding to 2020 under abatement target*
Estimated ‘Pertonne funding rate*
$1.55b
$5.15b
$3.60
$11.95
Notes to Diagram 2:
Assumes the ERF only funds abatement to 2020. All estimates assume
that international certificates are not used to meet abatement targets.
The Government’s revised cumulative abatement target is 431MtCO2-e
including the impact of forecast economic conditions, treatment of land use
emissions, and allowance roll-over from the first Kyoto compliance period.
* Committed funding over the first three years of the ERF is $1.55b. Additional funding of $1.2b per year for three years would bring the
total funding under the ERF to $5.15b.
The financial viability of business cases for abatement projects
will be strongly influenced by the average ‘per-tonne’ funding
rate under the ERF, which in turn will be influenced by a range
of policy design considerations. Diagram 2 shows the average
potential funding ($/tCO2- e abated) available from the ERF. This
varies depending on the amount of abatement purchased and
the total amount of funding available to purchase abatement
following the forward estimate period. Depending on the
1. Australian Government: Department of Environment, Emissions Reduction Fund Green Paper (20/12/2013)
The business of climate change Navigating the new carbon policy landscape
3
“Funding opportunities will
be influenced by available
‘per tonne’ funding under
the ERF.”
Understanding your internal cost of abatement
is also important
Determining whether or not the ERF will assist in getting your
project up requires not only an expectation of abatement
funding available, but also knowledge of the internal cost of
abatement and the ability to align specific low-carbon projects
against expected funding streams. Where a company’s internal
cost of abatement is below the funding available through the
ERF, there may be an opportunity for the company to costeffectively reduce emissions.
One effective way of understanding the cost-effective potential
for abatement within your business is to use a Marginal
Abatement Cost Curve (MACC). A MACC reveals the abatement
opportunities that have the highest net present value to a
business and allows the most cost-effective opportunities to
be identified. For businesses, the cost of abatement would
typically be calculated over the full lifetime of the project:
with the announced funding under the ERF currently limited to
three years. Business will need to consider both the different
levels of average funding available and the impact of a limited
funding window on the financial viability of abatement projects.
As shown in Diagram 3, the MACC considers both:
• Cost: how do the abatement costs for opportunities within
your business compare to the average funding rate expected
under the ERF?
In the development of the MACC, it is important to remember
that the ranking of opportunities for the business will be
influenced by the design of the ERF. For example, the decision
over whether the ERF pays for abatement through to 2020, or
for the lifetime of the project, will affect the financial viability
of long-term or capital-intensive abatement opportunities and
hence affect the priority of projects identified by a MACC.
A funding window that is shorter than the full life of the project
will mean businesses require a funding level that is greater
than the marginal cost of abatement to compensate for the
period of the project’s life where no ERF funding is available.
While the impact of funding duration will only be clear once the
ERF rules are determined, companies can prepare for this by:
• Making it clear in Government submissions the impact of
decisions around funding duration on the availability of
projects to come forward under the ERF
• Understanding their own MACC and its sensitivity to funding
duration (amongst other factors)
• Considering the facility versus activity options for ERF
projects and determining if either of these or a third
approach is most beneficial for the emissions abatement
projects identified.
• V
► olume: if your business contracts to sell abatement
to the Government under the ERF, what amount of
abatement would be available from different activities
within your business?
The business of climate change Navigating the new carbon policy landscape
4
Diagram 3: Example Marginal Abatement Cost Curve
30.00
As part of their preparation for the
introduction of the DAP and participation in
the ERF, businesses should be revisiting their
MACC and internal abatement assessment
to assist in identifying and prioritising
opportunities within their business. This
would typically include detailed financial
analysis of the available options, incorporating
information gained through experience and
reporting requirements such as NGERS,
together with updated assumptions over
future prices for abatement. In the context
of the ERF, this information could be useful
in supporting decisions over the abatement
price businesses are willing to bid at as part
of the ERF reverse-auction process.
Abatement Cost (A$/tCO2-e)
20.00
10.00
0.00
-10.00
Carbon reduction and energy
efficiency options that provide
the best commercial outcomes
i.e. that deliver a positive NPV
-20.00
-30.00
-40.00
-50.00
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
Cumulative Abatement (tCO2- e)
Project A
Project F
Abatement required to meet cap (tCO2- e)
Project B
Project G
Marginal cost curve
Project C
Project I
Market price of carbon credits (A$/tCO2-e)
11000
12000
Companies should further consider all
opportunities available for a facility and
determine total potential abatement for each
facility under their operational control with the
required abatement cost on a facility basis.
Project D
The business of climate change Navigating the new carbon policy landscape
5
What are the critical design features of the ERF?
As a priority, businesses should seek to
understand the implications of the critical
design elements for the ERF under various
scenarios to identify the impact on business
operations, this can then form a basis for
any submissions made to the Government.
The Green Paper states that “Three principles will guide
decisions on the design of the Emission Reduction Fund”.
These are:
• Lowest-cost emissions reductions
• Genuine emissions reductions
Critical design considerations of the ERF
Facility and
• What are the likely sources of low-cost,
activity methods
large scale abatement under the ERF?
• Consider abatement opportunities: would
either a facility or activity boundary be
more beneficial?
• Could the facility option be available to
companies who aren’t currently covered by
NGERS (E.g. a large agricultural property
conducting multiple activities)?
• Are there international methodologies
already available for the types of
abatement activities I am considering?
Project baseline
setting
• How will baselines be set if I want to
establish a project under the activity
method approach?
• Will the baselines for participation in facility
method ERF projects be consistent with
that set for Safeguarding mechanism?
Auction process
• Is there the potential to aggregate
an opportunity open to my company
with others to create a large scale
abatement opportunity?
• What are the abatement projects that
will facilitate early participation to the
auction process?
• Streamlined administration
Contractual
arrangements
• What make good provisions would I be
willing to consider?
• Will credits have any banking restrictions?
Eligibility of methodologies will influence uptake
of abatement projects
The Green Paper outlines two different types of ERF project
methodologies to be considered
• Method 1 activity methods
• Method 2 facility methods
Method 1. activity methods would include an expansion of
CFI methodologies to incorporate specific activities in other
emission abatement areas such as energy efficiency and
fuel switching. The Government’s preference for streamlined,
low cost projects indicates that aggregated activity method
projects based on developed technologies could be favoured.
A banding or sectoral approach to splitting the available funds
that would facilitate a broad range of technologies accessing
the funds is not favoured in the Green Paper as “the overriding
objective of the Emissions Reduction Fund should be to
purchase emissions reductions at the lowest available cost.”2
In order for an activity driven emissions abatement program
such as the ERF to encourage organisations to develop
projects, it is important to have project methods that enable
broad participation while ensuring that the environmental
integrity of the regime is maintained. At present it is unclear
which methods may be eligible under the ERF in addition to
the current CFI methodologies. However, the Government has
indicated that methods will need to be approved, including
protocols for measuring the abatement.
2. Australian Government: Department of Environment, Emissions Reduction Fund Green Paper (20/12/2013)
The business of climate change Navigating the new carbon policy landscape
6
Currently only certain sectors are covered under NGERS
while others are omitted, for example the agriculture
sector. To create consistency and an even playing field
across ERF project methods, the inclusion of all activities
within the NGERS (Measurement) Determination 2008
might be considered.
Under the proposed ERF design, agriculture-based ERF
activity projects could sell abatement calculated from
project specific emissions factors, while other ERF
activity-based projects would sell abatement calculated
from prescribed emission factors and methodologies set
out in the NGERS Determination.
By including all activities with ERF activity methodologies
within the NGERS framework a consistent measurement
approach to abatement would be created. This may also
allow all project proponents the opportunity to choose
between the activity and facility methods.
A clear opportunity exists for organisations to shape
the type of methods that should be eligible under the
ERF by considering:
6
• T
► he key principles against which methods could be
designed (i.e. proven methodologies under similar schemes,
transparency, additionality, environmental outcomes, etc.)
5
• The type of activities that could be included in the ERF
• The process that could apply to assess and approve
methodologies to ensure cost efficient outcomes
Note that if activity methods do not currently exist for your
industry, it may take some time to develop them.
Method 2. facility methods would allow large facilities
that report under NGERS to ‘bundle’ emissions reductions
from several abatement activities into a single project. The
calculation of the abatement size of these projects would be
relatively streamlined where the operational boundary of the
facility has not changed between the current and historical
periods, allowing the comparison of the facility’s current
emissions levels to historical NGERS reports. The Green Paper
suggests a four or five year mean or median historical baseline
calculation that is periodically reset to allow for business-asusual improvements over time.
An alternate approach could be to base the future business as
usual (BAU) forecast for a facility on its historic emissions, but
with an annual energy efficiency improvement applied (based
on an industrial average) as shown in Diagram 4. This would
eliminate the issue of periodic resets, and provide long-term
certainty over the future BAU pathway for the facility.
The business of climate change Navigating the new carbon policy landscape
Diagram 4: Operating under a prescribed baseline
4
BAU level
Could activities with ERF methodologies be
incorporated under NGERS?
3
2
1
0
2015 2017 2019 2021 2023 2025 2027 2029
Example 1: Five year periodic resets
Example 2: Integrated efficiency factor
It is not further discussed in the Green Paper as to whether
the historic baseline and coverage of companies allowed to
use the facility method would match the baseline set in the
design of the Safeguarding mechanism. Using a common
baseline approach would reduce the compliance burden for
these companies and increase the participation levels of those
companies covered by the historical baseline.
7
Abatement will need to meet
additionality requirements
The Green Paper rules out any “double dipping” of
abatement crediting by excluding offset projects from the
ERF that have received or will receive funding under any
other federal or state-based emission reduction programs
(unless emissions reduction is incidental to the funded
project). It also excludes emission reductions from a
decrease in production under normal market conditions
or from previously installed plant and equipment upgrades.
Beyond these exclusions, the Green Paper seeks further
feedback on how to increase the certainty that purchased
abatement is ‘genuine’ and ‘additional’ without increasing
compliance costs beyond reasonable levels. Specifically,
the Green Paper outlines two additionality concepts:
Regulatory additionality: Abatement is deemed additional
where it is proved that the abatement measures are beyond
regulated measures. This concept of additionality is currently
used under the CFI.
Financial additionality: Abatement is deemed additional where
it is proved that the abatement project would not be financially
viable without funding. It is noted that the Government
considers this concept to be financially and administratively
burdensome, however it is not ruled out.
The facility method will add an additional layer of complication
for proving additionality, as a direct comparison of actual
emissions to historically reported emissions does not mean
all abatement has come from post 2014 additional sources.
The business of climate change Navigating the new carbon policy landscape
This may be addressed to a degree through the setting of a
baseline that adjusts for a level of expected BAU energy and
emissions efficiency.
Another option discussed is the inclusion of a pre-selection
process for project proponents before being allowed to bid into
the ERF. This process could include for example, checks that
project proponents meet the definition of a “fit and proper
person”, projects are technically viable under the relevant
method, and project budgets/plans are sound. This could,
however, act as a disincentive to participate if it was seen by
potential participants as a significant barrier or risk.
Reverse auction process to reward least
cost abatement projects
The proposed reverse auction process under the ERF
is designed to reward the projects that deliver least
cost abatement.
The aim of the auction is to increase the chance of successful
abatement projects while decreasing the possibility that
project proponents can “game” the market. The auction design
should also aim to lower the financing costs faced by project
proponents and improve the likelihood of reaching the 5%
reduction by 2020 target.
Is the holding of a “Partial Exemption
Certificate” additional?
The Green Paper seeks feedback on several proposed auction
design mechanisms including:
Defined Emissions-Intensive, Trade-Exposed (EITE)
industries receive assistance in the form of a Partial
Exemption Certificate (PEC) under the Renewable Energy
Act 2007. If additionality is prescribed as is currently
suggested in the Green Paper, entities receiving a PEC
could be classified as receiving regulatory assistance
and thus impact the ability to claim electricity reduction
activities under either a facility or activity method.
• Benchmark price
The Government has announced a review of the
Renewable Energy Target (RET) in 2014. Design of the
additionality conditions for the ERF could reflect the
current operation of the RET specifically in relation to
PEC, with the review of the RET incorporating these
considerations.
• Under delivery
• Minimum bid size
• Maximum bid size
• Auction schedule
• Off-take contract
• Crediting period
We have performed a high analysis of the benefits and
challenges of the proposed auction design mechanisms as
well as other considerations not discussed in the Green Paper
as outlined in the table below.
8
Proposed auction design mechanism: benefits and challenges
Design mechanism
Description
Benefits
Challenges
Benchmark price
This is proposed to be a confidential maximum price for
abatement that is set prior to each auction, which is
intended to operate as a price ceiling on bids during
that auction. Any bid over the benchmark price would
not be considered even if the Government’s budgeted
funds for that auction were not met.
This mechanism is intended to assist the Government
to purchase abatement when prices are at a reasonable
level. This mechanism is also intended to reduce the
opportunities of large bidders forcing auction prices
higher.
The main drawback of the mechanism is it caps the
potential earnings of an ERF project.
A minimum bid size sets a floor on the volume of
abatement for a project to be eligible to participate in
the auction process.
Minimum bidding sizes encourages aggregation of
small projects to reduce transaction, compliance and
administration costs. Therefore, such a mechanism will
be beneficial to aggregators and large-scale projects
proponents.
Minimum bid size
The minimum size could be set on an annual basis, over
the life of an ERF contract or over the life of a
prospective project.
The flexibility to alter the benchmark price between
auctions should benefit project proponents, as it should
allow the benchmark to be raised if feedback from early
auctions shows it is initially set too low.
Allowing the minimum size to apply to abatement over
the life of the contract or project — rather than an
annual floor — will improve the likelihood of success for
new projects, as such projects generally encounter a
ramp up phase during early years.
A benchmark price also adds an extra complexity for
project proponents and financiers to consider. For
example, if the benchmark price is confidential yet
subject to change prior to each auction, this will
increase the uncertainty associated with the achievable
abatement price, which could, in turn, increase
financing costs.
A minimum bidding size may exclude or delay some
small-scale projects that cannot easily be aggregated.
Clear rules for the operation of the minimum bid size
may need to be considered for the mechanism to
operate effectively. For example, potentially significant
penalties would be needed to prevent a participant
successfully bidding into the ERF just above the
minimum bid size, but subsequently delivering below
the minimum bid size.
An annual floor also improves the market conditions for
projects already up and running that can shift into the
ERF e.g. current landfill and agriculture CFI projects.
Maximum bid size
A maximum bid size sets a ceiling on the
volume of project abatement that is eligible to
participate in the auction process. The purpose
of this mechanism is to prevent monopolies
from forming.
Discussed alternatives are:
• A separate process outside the ERF auction
for large projects
• A minimum number of bidders required to register
before an auction can take place
Auction schedule
The auction schedule relates to the number of auctions
held each year. This could be set on a periodic basis or
change depending on market conditions e.g. many
auctions early in anticipation of increasing project
start-ups.
The business of climate change Navigating the new carbon policy landscape
A maximum bid size will favour smaller project
proponents as it will help prevent a few large projects
from dominating the auction outcomes.
A separate process outside the ERF for large projects
may streamline the administrative processes and
reduce the uncertainty of success for proponents able
to access this process. This may assist these project
proponents in reducing private financing costs.
A minimum number of bidders guarantees competition
and does not disadvantage smaller projects compared
to larger projects as a separate process might do.
A flexible auction schedule could match the supply
curve better and be favourable for proponents who will
be ready to bid into the ERF close to the start date.
A maximum bid size may exclude larger projects from
selling all abatement units and therefore not receiving
the maximum return from the ERF, even if the project is
the lowest cost abatement option.
A separate process outside the ERF for large projects
may reduce the transparency of the ERF while also
creating the possibility of cherry-picking projects. This
may disadvantage smaller projects that are not able to
access this alternative process.
A minimum number of bidders may mean auctions are
deferred causing a delay in the financial returns an ERF
project proponent can receive. This may cause
financing issues if cash flows are not as expected.
A flexible auction schedule increases uncertainty levels
around cash flow timings faced by project proponents.
9
Design mechanism
Description
Benefits
Challenges
Off-take contract
An off-take contract is the contract between a project
proponent and the Government that legally commits
the Government to buy abatement credits at the
auction price. The Green Paper specifies these will be
standard forward contracts with a maximum duration
of five years.
A standard contract increases the tradability of
emission reductions, as it increases the like-for-like
qualities of abatement units. This will simplify any
replacement or make-good transactions.
A standard contract should also reduce the
administration burden for proponents, as terms and
conditions are the same in all contracts.
Standard contracts may require some flexibility across
sectors due to differences in the activity and facility
methodologies. Businesses with highly specialised ERF
projects may not favour the use of standard contracts
as such contracts will not consider the special nature of
the project.
A five year forward off-take contract gives projects
certainty over short term cash flows which should be
bankable.
Crediting period
A crediting period relates to the period over which the
CER will issue abatement credits to a project. This
period may extend beyond the five year off-take
contract period.
If a secondary market for the CFI credits is created
beyond 2020, an extended crediting period may
improve longer term cash flow prospects — voluntary
markets already exist but currently operate at
low volumes.
A five year forward period is likely to be shorter than
the life of many projects. Given the limited information
relating to the ERF architecture beyond 2020 (which
will not be clarified until 2015), the use of standard
contracts could prove difficult for projects to attract
private funding.
If there is no secondary market beyond 2020, the
extended crediting period will have limited or no value
until the ERF architecture beyond 2020 is clarified.
Long crediting periods should be favoured by those
wanting the ability to trade abatement units outside
the ERF.
Under-delivery provisions
The Green Paper discusses “make-good” options where
a proponent could purchase domestic or international
offsets to make up contracted volumes or a financial
cost borne by the proponent that allows the CER to
purchase replacement domestic units.
International units are liquid and will be readily
available compared to domestic units. These units have
historically been significantly cheaper than domestic
units and therefore may be a favoured alternative to
keep the financial burden of under delivery low.
Domestic replacement units will guarantee abatement
is achieved within Australia and should come at a
similar or slightly higher cost than the units they are
replacing.
As international units are likely to be cheaper than
domestic units, allowing their use as a replacement
may encourage over-bidding or under-delivery in the
auction process. As mentioned, this may mean projects
that should have been successful in the auction miss
out to projects that purposely over-bid.
Domestic units may not be liquid and hard to replace at
short notice if no secondary market beyond a small
voluntary market exists outside the ERF.
This option may also deter over-bidding at auctions and
therefore may be favoured by proponents with
legitimate low-cost abatement options.
The business of climate change Navigating the new carbon policy landscape
10
Design mechanism
Description
Benefits
Challenges
Depending on the auction schedule and the
implementation of a benchmark price, the funding
available at each auction could be split across planned
auctions during the year or available up to the total
annual amount from the first auction and roll over the
balance if not all allocated as each auction occurs.
Fixed funding levels will improve transparency and
provide certainty around the level of funds available to
proponents. This option may allow higher auction
prices to be obtained if only a few projects are bidding
in some auctions.
Fixing funding allocations may be irrelevant if a
benchmark price concludes the Government’s
purchases before the fixed funding level
is reached.
Upfront funding model — Annual committed funding
could purchase abatement for the whole contracted
period for each successful project.
An upfront funding model will guarantee funding for
future contract years is available, and therefore may
decrease financing costs. It also means most
abatement projects will come on line in later years
which may increase the obtainable ERF price for
those projects.
An upfront funding model will mean most of the
abatement purchased by the ERF will occur in later
years. This means fewer projects will be successful at
auctions in the earlier years.
A model that funds projects for contracted periods
beyond 2020 could allow for an overall higher volume
of abatement to be purchased and allow for projects to
start up in staggered manner.
A model that funds projects for contracted periods
beyond 2020 will require a lower average ERF price
to meet the 2020 reduction target, as a large chunk
of purchased abatement may occur outside the
2020 window.
Other considerations not discussed in the Green Paper:
Funding levels available
Funding model – upfront,
year-on-year or funding
committed outside the 2020
target window
Rolling funding levels allows for early participation if
viable, low-cost projects are available.
Year-on-year funding model — Annual committed
funding could be used to purchase abatement
scheduled in that compliance year with later year’s
funding used to purchase contracted abatement in each A year-on-year funding model would encourage more
abatement sooner and will allow more projects to start
subsequent contracted year.
up in earlier years.
Funding committed outside the 2020 target window
— Annual funding could purchase abatement for the
whole contracted period (similar to the Upfront funding
model) but the five year contracted periods can extend
beyond the 2020 target window.
See Diagram 5 for graphical representations of each
funding model.
The business of climate change Navigating the new carbon policy landscape
Rolling funding levels increases the uncertainty around
cash flow timings which may cause financing issues and
delay the start of viable abatement projects.
A year-on-year funding model may increase the
financing costs, as funding availability for future
contracted years may be seen as at risk, especially
given only three years of committed funding has
currently been disclosed.
11
500
500
120
350
150
300
250
100
200
150
100
50
50
0
0
2015
2016
2017
2018
2019
2020
Year ending 30 June
100
400
80
350
300
60
250
200
40
150
100
20
0
50
0
2015
2016
2017
2018
2019
2020
Year ending 30 June
Upfront funding model:
Year-on-year funding model:
• Funding allocated in each year is to purchase
abatement from projects commencing in that year
out to 2020.
• Funding allocated in each year is fully allocated to
abatement in that year: subsequent year abatement
for contracted projects is purchased out of
subsequent year funding.
• E.g. $300m allocated in 2015 purchases $50m of
abatement in each year 2015-2020
• E.g. $1.2b allocated in 2019 purchases $0.6b of
abatement in 2019 and 2020
• Average funding available: $11.70/tCO2-e
• Total abatement purchased: 431Mt CO2-e, all by 2020
• E.g. $300m allocated in 2015 purchases $300m
of abatement in 2015; $500m allocated in 2016
purchases $300m of abatement from 2015
projects, plus an additional $200m of abatement
from new projects
• Average funding available: $11.70/tCO2-e
• Total abatement purchased: 431Mt CO2-e, all by 2020
Annual abatement (MtC02-e)
200
450
Annual abatement (MtC02-e)
400
Cumulative abatement (MtC02-e)
Annual abatement (MtC02-e)
450
Cumulative abatement (MtC02-e)
250
160
800
140
700
120
600
100
500
80
400
60
300
40
200
20
100
Cumulative abatement (MtC02-e)
Diagram 5: Analysis of different funding models
0
0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Year ending 30 June
Funding committed outside the 2020 target window
funding model:
• Funding allocated in each year to purchase
abatement from projects commencing in that year,
for a fixed period of five years.
• E.g. $300m allocated in 2015 purchases $60m of
abatement in each year 2015-2019
• E.g. $1.2b allocated in 2019 purchases $240m of
abatement from 2019-2023
• Average funding available: $6.60/tCO2-e
• Total abatement purchased: 781Mt CO2-e, out to
2024, with 431Mt CO2-e of that coming by 2020
For all scenarios the total funding is $5.15b, split by year $0.3b in 2015, $0.5b in 2016, $0.75b in 2017, then $1.2b out to 2020
The business of climate change Navigating the new carbon policy landscape
12
The role of existing CFI methodologies within
the ERF
The Green Paper indicates there will be an increased role for
the CFI in operationalising the ERF3, with the suggestion that
the CFI will continue to be operated by the CER, but extended
to be the basis of measurement under the ERF. In order to
facilitate this outcome, the Government has noted that it
intends to retain all of the project types and methodology
determinations that have been approved to date under the CFI.
Businesses should consider whether particular low cost
abatement opportunities exist in their sector for which
a CFI methodology could be developed to allow funding
through the ERF. Should significant activities exist, it may
be appropriate for business to engage with Government
during the consultation phase over the approval process
for new CFI methodologies.
It has been suggested that the methodology development
framework and reporting and verification processes currently
used by the CFI be retained with some changes to improve
efficiencies and that these be used to manage the ERF.
By expanding the CFI to other methodologies that become
eligible the Government can ensure that the focus of the ERF
is sufficiently broad, incorporating methodologies that are
not solely focussed on land-based abatement (i.e. energy
efficiency and low emissions technologies). In addition, the ERF
could have accelerated access to a wider range of approved
CFI methodologies by supporting a process to streamline the
application and approval of new methodologies.
The proposed changes to the current CFI processes
includes:
• Creating a priority list of activities that may provide
additional and genuine abatement at low cost for
methodology development
• Simplify methodologies and incorporate information
from the national inventory
• Release final form of draft methodologies for public
consultation and reduce consultation period from
40 to 28 days
• Reduce permanence criteria for carbon sequestration
projects (e.g. forestry, revegetation and soil carbon)
from 100 to 25 years
• Changing the requirement for abatement verification
for all projects to a risk-based approach to reduce the
administration burden of smaller projects
3. The CFI currently operates in conjunction with the CPM, providing a mechanism by which emissions abatement credits can be generated; these credits can then be sold for voluntary and
compliance use, generating revenue for the person or organisation that generated the credit. To generate credits under the CFI, participants need to conform to specific methodologies which
have been authorised by the Domestic Offsets Integrity Committee.
The business of climate change Navigating the new carbon policy landscape
13
Potential to leverage existing methodologies
from other schemes
The Green Paper set outs the option of importing
methodologies from other international offset crediting
schemes, and where possible adapting these methodologies
to be consistent with NGERS.
While the ERF would initially rely on existing methodologies
developed under the CFI, there are existing domestic and
overseas initiatives whose project-specific methodologies may
be able to be adopted for use. Domestically, there are protocols
such as the National Australian Built Environment Rating
System (NABERS), together with state-based energy efficiency
schemes with pre-existing and standardised methodologies.
Internationally, there may also be an opportunity to
‘import’ existing methodologies: the United Nations’ Clean
Development Mechanism (CDM) has developed a number of
methodologies that are designed to support the development
of energy efficiency projects in order to achieve emissions
abatement.
In addition to the formalised structure of the CDM, there are
further voluntary mechanisms under which project-based
emissions abatement methodologies have already been
designed that may be able to be readily adopted under the
DAP. For example, California’s Climate Action Reserve and the
international Verified Carbon Standard (VCS) have developed a
range of voluntary methodologies that quantify the emissions
abatement benefits of a project and provide guidance to
help proponents determine project boundaries, set baselines
and assess additionality. These methodologies have been
designed for a range of sectors from manufacturing, transport,
construction and electricity generation.
Some of the methodologies under the CDM that may be
able to be transitioned into the ERF include:
• E
► nergy distribution and energy efficiency
Appendix B in the Green Paper provides detail regarding some
sectors where possible areas of low-cost emissions abatement
have been investigated.
Also the Green Paper identifies the following areas in the
agriculture sector as priority areas for method development:
• soil carbon
• livestock emissions
• environmental plantings
• reforestation
If the Government chooses to fast-track the approval of priority
areas these may be the activities they include in this process.
If you were considering a project not in a listed area, you
should consider consulting with the Government as early as
possible to avoid delays in approval processes.
• Fuel switching
• Methane avoidance and methane recovery
• Waste gas and heat recovery
The business of climate change Navigating the new carbon policy landscape
14
What are the critical design features of the
Safeguarding mechanism?
To achieve emissions reductions, the
Government has included a penalty regime
known as the Safeguarding mechanism that
will create incentives for existing facilities to
remain below historical emissions baselines.
The Government is proposing the Safeguarding
mechanism commence on 1 July 2015, one
year later than the commencement of the
ERF. All aspects of this policy, including the
coverage, applicability and setting of baselines
are being considered separately to the ERF.
There are a number of design elements relevant to the
Safeguarding mechanism that need to be considered, as
outlined in the table and further discussed below. Central
to this is the baseline that will be used to measure
abatement against.
"Safeguarding mechanism
increases the incentives to
bid into the ERF early"
The business of climate change Navigating the new carbon policy landscape
Critical design considerations
Coverage
Baseline
setting
Compliance
• D
► oes the inclusion of Scope 2 emissions
introduce a risk to my business given these
are determined by a third party or the
Government each year?
• Could the threshold be set at a higher level
than the CPM ensuring a minimum number
of companies are affected?
• I► s the absolute highest emissions baseline
suitable to my operations or am I forecasting
expansion in my operations?
• W
► ould an emissions-intensity target suit my
operations?
• W
► ill the baseline for a facility participating in
ERF projects be consistent with that set for
Safeguarding mechanism?
• I► n looking at your operations historically are
there consistent trends in emissions over
certain time periods?
• I► s the average of emissions over a time
period beneficial or could this lead to a
larger deferred penalty and thus impairment
considerations?
• W
► ill businesses be allowed access to low-cost
international certificates to bring their net
emissions back within their baseline?
• W
► hat other alternatives to revenue could be
considered? Contribution to the 20 million
trees or one million solar roofs activities?
Baseline will directly influence the impact of
the penalty
The level at which the baseline is set will influence the
applicability to each entity covered by the Safeguarding
mechanism. The less allowance for normal fluctuation in
business practice, the more likely the Safeguarding mechanism
will apply to a larger number of entities. These considerations
need to be balanced with the overall objective of achieving an
economy wide emissions reduction.
For existing facilities, baseline setting will require a clear
understanding of the scope of emissions and facilities covered.
The Government has indicated that it intends to retain the
NGERS framework covering the six Kyoto gases.
A separate policy is proposed for the treatment of “new
entrants” i.e. greenfield sites to encourage the adoption
of best practice.
Coverage
An option outlined in the Green Paper is to include both
Scope 1 (direct emissions) and Scope 2 (indirect emissions)
in the calculation of the total facility emissions.
Scope 2 emissions are defined in the NGERS (Measurement)
Determination as “resulting from activities that generate
electricity, heating, cooling or steam that is consumed by
a facility but that do not form part of the facility”. With the
exception of the state based electricity Scope 2 factors, all
other Scope 2 emissions are calculated by the third party
supplying the energy product to the end user.
15
As an indirect emission, companies are inherently limited in
their ability to influence the emissions-intensity associated
with the product supplied. Companies should carefully consider
their Scope 2 emissions exposure and the potential risks
of including Scope 2 emissions in providing feedback to
the Government. In the Green Paper the Government
has proposed to conduct consultation with the electricity
generation industry separately. For those industries purchasing
steam, heating or cooling with associated Scope 2 emissions,
the options for the inclusion of these in the total reportable
emissions for a facility should also be discussed with the
Government to ensure no unintended consequences evolve
from the treatment of all Scope 2 emissions in the manner
agreed with the electricity generation industry.
The Transport Sector
Under the Clean Energy Act 2011, the current coverage
of transport fuels (legislated to change coverage from
1 July 2014) excluded the emissions associated with these
from the requirement to purchase carbon units and instead
were captured through an equivalent reduction in the fuel
tax excise rebate received for certain fuels. The proposed
design of the ERF and the Safeguarding mechanism do not
make any special considerations for transport fuel which
will result in transport companies, or companies using
significant quantities of these fuels, being covered by the
baseline scheme.
As a complementary measure, vehicle emissions fuel
standards have been suggested. It is important to consider
the impact of both the proposed baseline scheme coverage
in the context of regulatory measures.
The business of climate change Navigating the new carbon policy landscape
Absolute versus intensity baselines
Assessing emissions performance on an absolute basis
offers a relatively straight forward approach to determining
performance against baseline. For entities that are downsizing
(e.g. through a downturn or de-merger), absolute baselines
would be easily met.
The complexity in absolute baselines is centred on the
treatment of changes to the scope of operations of an entity.
For businesses that grow (either through organic expansion
or through acquisition), there is a significant risk that future
emissions will exceed a baseline established solely on historic
performance. Companies should consider any specific
factors in their operations from FY09 to FY13 which may
have contributed to the highest absolute reported emissions
baseline and assess the likelihood of these occurring again in
the period out to 2020.
The Green Paper suggests that absolute baselines could be
“normalised” or that significant expansion rules similar to those
established under the Jobs and Competitiveness Program (JCP)
could be applied. In these circumstances, the administration
required for each option increases significantly for the
companies involved. Those companies with forecast growth
should consider this in their response to the Government.
Intensity baselines offer a method for addressing the
limitations of absolute baselines, as emissions performance
would be benchmarked against the emissions intensity of
operations (e.g. emissions per tonne of steel produced,
emissions per unit revenue, emissions per unit of value added)
rather than the scale of operations. Under this approach,
growth industries would not be penalised, and the impact of
mergers and de-mergers could be treated equitably.
Establishing intensity baselines would, however, require
additional data (e.g. production data) from entities
participating in the ERF. While this would be straight forward
for emissions intensive trade exposed activities (who have
previously reported this information), for other entities that
may participate in the ERF (e.g. local council authorities) it is
less clear what production unit would form the basis of the
intensity metric. For entities not currently reporting production
data, there would be a need to establish the rules around
production assessment, together with potential issues over
historic production levels. Also, if only intensity baselines
are applied, companies that scale back production can be
negatively impacted as, although absolute emissions may fall,
intensity may actually increase.
It is unlikely that a ‘one size fits’ all approach can be found
in regard to baseline setting where the ultimate aim is
administrative simplicity regardless of the final coverage of the
Safeguarding mechanism. It may be more appropriate to allow
companies to choose the best metric for their forecast business
operations upon the commencement of the scheme on a facility
(or even entity) basis. In the event that a company wishes to
change the selected approach, the administrative burden could
rest with the company to establish the historical revision of
reported data to the Government and make up and penalties
incurred due to the changed approach across the time period.
Facility and/or entity level assessment
The Green Paper proposes a facility level assessment for
the establishment of baselines that reflect the performance
of different production units within an organisation. This
would be of value where an entity operates facilities with a
16
The business of climate change Navigating the new carbon policy landscape
2022
2021
2020
2019
2018
2017
2016
2015
2014
Early implementation of ERF projects may also save
businesses from future penalties in the situation where
a future regulatory review imposes a more stringent
emissions baseline (as shown in the Diagram 6).
New baseline calculation
2013
The Government has raised the option of a transitional period
in relation to compliance. With the implementation of the
carbon price requiring significant new IT infrastructure, it is
likely that the transitional arrangements under a compliance
regime relying on NGERS reported data should be relatively
streamlined. However, transitional periods are necessary
with the introduction of new policies to allow flexibility in
compliance as businesses are required to adapt the current
processes and operations to reflect the new policy setting.
Noting that the Green Paper is suggesting targeting the largest
emitting facilities in the economy that have previously been
covered by a carbon price, the baseline setting will be crucial
to ensure undue compliance costs are not incurred by this
process, furthermore flexibility in the setting of the baseline
in the early years could be desirable.
Businesses operating under a BAU baseline should
consider the financial benefits that may be derived
from implementing ERF projects, particularly if these
projects can assist businesses to avoid a penalty under
the Safeguarding mechanism. The earlier businesses
successfully implement ERF projects, the earlier the
resulting emissions reductions can be deducted from
the BAU baseline. This will maximise any extra financial
benefits that may be derived from the ERF and minimise
the likelihood of the imposition of penalties.
Diagram 6: Performance against an emissions
intensity baseline
Emissions intensity
However, establishing facility level compliance obligations
could add to the burdens facing entities participating in the
ERF. Further, in the absence of the ability to trade abatement
certificates it would limit the ability of entities to demonstrate
overall emissions abatement (including both above and below
baseline performance from different facilities). An entity level
compliance assessment would address these issues. However,
as noted above, such an approach may create difficulties
where there are substantial changes to the ownership of
facilities between different entities.
A Safeguarding mechanism increases
the incentives to bid into the ERF early
2012
wide range of emissions intensities, and the utilisation of the
different facilities varies significantly over a reporting period.
Facility level assessment would also simplify the transfer of
emissions performance data between entities in the case of
a mergers or de-merger.
Initial baseline — 3% efficiency
Predicted intensity — no projects
Reset baseline — 2% efficiency
Predicted intensity — with ERF projects
17
New entrants
For new entrants (or developments), the setting of a baseline
is a specific challenge given both the lack of historical
performance data and the known challenges in “ramping up”
operations that produce emissions intensities which are not
reflective of the expected on-going emissions profile.
While the Green Paper sets out options for the consideration
of best practice, the Government has a stated intention of
defining best practice “to establish an objective, repeatable
test to apply fairly across industries”. For greenfield sites
there are a number of factors for each industry which restrict
the ability of a facility to achieve “best practice” however it is
ultimately defined.
In considering best practice for new activities under the
JCP program, the current legislation allows discretion from
the Minister in determining both if the activity is emissions
intensive trade exposed and also in setting the baseline for
assistance for that industry. The ‘Production of Helium’ is
one such activity approved under this set of regulations and
sets an example of policy that is adaptive to the particular
circumstances of each industry. Potentially, the establishment
of greenfield site baselines could also be subject to the same
process as for new activities under the JCP program, with
decisions taken by the Minister on the emissions baseline
following consideration of all of the potential definitions of best
practice inclusive of:
• L
► east emissions and energy intensive operation in Australia
per tonne of product
• L
► east emissions and energy intensive operation
internationally per tonne of product
• A
► verage performance of the top 10% of installations
(domestic or internationally)
• T
► echnology dependent consideration of the least emissions
and energy intensive operations (i.e. per production method/
type of equipment)
• C
► onditional baselines set on the expected performance of
key emissions mitigation measures identified for the facility
(with potential for revision where the proposed technology
is experimental)
Type of penalty regime will correlate to the cost
of compliance
As discussed previously, businesses that reduce their emissions
below their individual baseline may be able to offer this
abatement for sale to the government through the facility
method. However businesses that exceed their BAU emissions
levels may incur a financial penalty. The value of penalties
could be on a sliding scale at levels commensurate with the size
of the business and the extent to which they exceed their BAU
levels which may assist businesses in managing the scale of
their compliance costs.
The establishment of a penalty regime based on facility/entity
baselines needs to consider factors affecting the baselines
and provide options to businesses to optimise the cost of
compliance. Key considerations include:
• P
► oint of compliance for the penalty regime
• S
► etting the level of the penalty and the link with
the auction price
• A
► bility to pass on penalty costs to third parties
(e.g. customers, joint venture partners)
• Ability to use local or international credits to reduce
compliance costs
• Ability to contribute to complementary measures
(e.g. 20 million trees or one million solar roofs) to
reduce compliance costs
• Treatment of unexpected activities that impact on a
business’ ability to achieve abatement (e.g. plant shutdown,
new projects, significant expansion)
The business of climate change Navigating the new carbon policy landscape
18
How do I prepare for the CPM repeal?
The Government has indicated its intention to
repeal the Clean Energy Act (and its associated
regulatory framework) by 1 July 2014, or to
have the repeal take effect by 1 July 2014
retrospectively. However, with the Opposition
indicating that it will not support repeal of the
CPM, it is unlikely that the Government will
obtain Senate approval for the repeal until
after 1 July 2014 (when new senators take up
their position in the Senate).
Under this scenario, the Government would either need to
seek a double dissolution ahead of 1 July 2014, or introduce
legislation for a retrospective repeal of the CPM during the
latter parts of 2014 (assuming this approach is supported by
the new Senate).
For many businesses, this provides an incentive to move
forward and plan for the removal of the carbon price.
However, it is not as simple as ignoring the existing regulatory
framework, as the proposed repeal of the CPM brings with
it a range of implications that will need to be considered in
advance. Specifically, this includes in the areas of:
National Greenhouse and Energy Reporting Scheme
NGERS will be unaffected by the repeal — businesses
will be required to submit annual NGERS reports by the
31 October each year as per the existing requirements
of the NGERS Act 2007.
Compliance will need to be maintained
The scenario that the repeal legislation is ‘not passed’
by 1 July 2014 should not be dismissed. In this scenario,
the Clean Energy Regulator will continue to administer the
scheme and enforce any outstanding carbon tax liabilities
until it is repealed. Businesses therefore need to ensure
they are positioned to continue to comply with the
requirements of the Clean Energy Act. This includes (as
shown in Diagram 7 below):
• Submitting reports
The Government has suggested that under the DAP,
‘business as usual’ emissions baselines will be calculated
using data reported under NGERS. It is therefore
important to continue to collect NGERS data and submit
your report by 31 October each year.
Jobs and Competitiveness Program
Businesses that are eligible for assistance under the JCP
may continue to seek assistance for the FY14 compliance
year and until the repeal bills are passed. A true up of JCP
permits for the FY14 financial year will still be required
and the 2013-14 final production report will be due in late
2014 with a final adjustment on 2 February 2015.
The assistance will not continue under the DAP. As a
consequence, businesses partaking in EITE activities as
part of the RET may have to re-separate PEC and JCP
assurance requirements for FY14.
• Obtaining assurance of reports
• Surrendering of liability
• Applying for assistance
Diagram 7: CPM compliance timeline
• Compliance
Submit FY14
• Contractual arrangements
• Budgeting
• Accounting
2013
The business of climate change Navigating the new carbon policy landscape
2014
19
Contractual arrangements will need to be
reviewed and updated
Just as with the introduction of the CPM, businesses will
need to consider their ability to adjust prices as a result of the
repeal. And as evidenced from the introduction of a carbon
price, this can take some time. Contracts should be reviewed to
identify any relevancy of carbon cost clauses and subsequently
re-drafted to reflect the removal of the carbon price.
Businesses should consider notifying customers of contractual
changes in advance as a matter of good commercial practice.
The Australian Competition and Consumer Commission (ACCC)
will continue to have a role in monitoring prices and impose
penalties for false or misleading behaviour. Included in the
repeal exposure draft are amendments to the Competition and
Consumer Act 2010. The purpose of these amendments is to
ensure tough scrutiny over carbon cost past-through once the
CPM has been repealed. These amendments include providing
the ACCC with new powers to penalise corporations engaging
in price exploitation of “regulated goods” (being natural gas,
electricity, synthetic greenhouse gas, synthetic greenhouse
gas equipment or other goods that are prescribed by
The business of climate change Navigating the new carbon policy landscape
regulation) and for making false or misleading representations
about goods and services regarding the carbon price for one
year following the repeal. Therefore, businesses looking to
adjust prices or, alternatively, leave prices static due to the
carbon price repeal during the prescribed period will need to
understand if they supply regulated goods and the implications
of the extra powers the ACCC has regarding these goods.
All businesses will also need to consider preparing economic
analysis and justification for their strategies.
Further complexities will arise when the timing of repeal does
not match the contractual start/end dates (e.g. in the case of a
repeal part-way through the financial year but where a contract
has terms that match the financial year). Specific detail will
be required to analyse contracts involving goods that received
fuel tax credits or carbon price levies. Similarly, any element
of retrospectivity would involve added complexity, especially
if refunding carbon price components of invoices or works in
progress was anticipated.
Regardless of the complexity of the contractual arrangements,
businesses should start to prepare now and allow time for
renegotiations.
Additional contractual issues for large users
of electricity
Energy retailers and power generators will have entered
into forward contracts to hedge some of their exposure
to electricity price volatility. These forward contracts
normally mature 3-5 years in the future and have a ‘fixed’
carbon price associated with them. This means suppliers of
electricity will not necessarily be able to reflect and pass on
the full price change expected until the forward contracts
expire.
Large users of electricity should:
• Review electricity contracts in detail to assess if
adjustments due to carbon price repeal match with the
real cost of supply
• Consider informing ACCC of the inability to pass on cost
reductions from the carbon price repeal due to electricity
arrangements
• Benchmark ability to pass through electricity cost
reductions from a repeal against competitors to assess
any change to competitiveness
20
Budgeting and cash flow will need to be reviewed
and updated
Accounting implications will require
careful consideration
In the case where a business has a long term contract that
can't be amended, the business will need to continue to include
the fixed carbon cost in their budgets. Conversely, where
carbon costs can be removed, budgets will need to be updated
to reflect this change in costing.
There are numerous accounting implications that need to
be considered and these will differ depending on how an
entity is impacted by the CPM and the types of contractual
arrangements that they have in place. The timing of the repeal
could make these considerations more complex.
There may be asymmetric cost impacts, e.g. businesses still
paying for carbon pricing through their supply chain in terms
of inputs due to the nature of purchase contracts but cannot
pass these on due to the nature of their business/sales
contracts. These cash impacts will need to be considered in
the budgeting process.
Once the CPM has been repealed, businesses with assets liable
under the CPM, or that use electricity or gas as an input fuel
or feedstock, will need to reassess carbon cost assumptions
used in impairment calculations. The inclusion of future cash
inflows from free carbon units (CUs) (for example, from the
Government’s buy-back facility) or other expected assistance
under the CPM will also need to be considered. Any adjustment
made to discount rates in impairment calculations that have
been included due to the impact of the CPM will need to also
be taken into account. Any changes may significantly alter
impairment model outputs.
A retrospective repeal will involve additional considerations
for budgeting. Specifically, invoiced amounts issued for work
completed after 1 July 2014, or the price of work in progress,
may change retrospectively and would result in cash flow
changes that need to be budgeted for. The impacts of such
changes are likely to depend on the types of contractual
arrangements in place.
In addition, waste management facilities will need to consider
the implications of the cash flow mismatches given ‘future’
liabilities would be cancelled.
The business of climate change Navigating the new carbon policy landscape
Entities should consider whether there is cause to make any
changes to impairment models until a retrospective appeal
passes through both houses of Parliament. Until such time, it
is unlikely that alterations to cash flows would be appropriate.
However, uncertainties will need to be considered. In particular,
significantly impacted entities could consider providing
additional disclosure in their financial statements to explain the
potential impact of the withdrawal of the CPM.
21
Examples of additional potential implications that liable entities and those businesses currently receiving assistance under the CPM should consider include:
Repeal by 1 July 2014
Retrospective repeal
Liable entities
All liable entities will still be required to recognise a carbon liability for the FY14
compliance period including the final true up for the FY14 carbon liability that would
not occur until 2 February 2015.
It is likely that entities will need to consider the appropriateness of their provisions.
And at the point that the CPM is repealed, liable entities are likely to determine
that it is appropriate to reverse any carbon liability recognised to date for the FY15
compliance period.
Entities receiving
assistance under
the CPM
Any entities receiving assistance under the JCP, the Energy Security Fund or the Steel Recognition of freely allocated carbon units:
Transformation Fund would still be entitled to all of their assistance relating to the
Many entities account for free carbon units as government grants under grants
FY14 period, even if this assistance is allocated post repeal date.
under AASB 120 Accounting for Government grants and Disclosure of Government
Therefore, it is likely those entities will not change their accounting treatment of free Assistance. Under this standard, a government grant is not recognised until there is
reasonable assurance that the entity will comply with any conditions attaching to the
carbon units (CUs) received for the FY14 compliance period.
grant and that the grants will be received.
However businesses receiving free CUs that have entered into contracts to
Businesses will need to carefully consider whether there is reasonable assurance that
sell forward any freely allocated CUs to third parties (other than through the
they will receive and be entitled to keep freely CUs for the FY15 compliance period
Government’s buy back mechanism) should review the terms of these contracts to
accounted for under AASB 120. This assessment will likely require professional
determine whether any CUs should also be evaluated.
judgment and consideration of ‘all facts known at the time’. This analysis may involve
splitting freely allocated CUs into those received for direct emissions and those
received for electricity and natural gas cost pass through as it will be extremely
difficult to retrospectively refund businesses for electricity and natural gas costs
passed on from 1 July 2014. Therefore, this could lead to a scenario whereby
businesses are allowed to keep this portion of free permits allocated in FY15.
However, an entity accounting for freely allocated CUs under AASB 120 would still
need to apply the recognition criteria when determining the appropriate accounting.
Freely allocated carbon units that have already been sold back to the Government:
Depending on the timing of the repeal, some businesses may have already sold freely
allocated CUs back to the Government. In this case, the business will need to assess
whether it may have an obligation to repay this money to the Government and,
therefore, consider whether it needs to recognise this as a liability. Alternatively, if
an entity has sold CUs to another business, they should carefully assess the terms of
these arrangements to determine whether they need to account for any claw back
mechanism under such contracts. Any CUs should also be evaluated.
The business of climate change Navigating the new carbon policy landscape
22
What next?
Timing is critical. With the potential for a quick
turnaround in the consultation period of the
ERF, and CPM repeal before the proposed
implementation data, holding off is not an
option. So what now?
The "Roadmap for Action" checklist provides
you with some immediate steps to consider in
moving forward.
Quick ’10 step’ Roadmap for Action checklist for impacted businesses:
Engaging with the policy process
Understanding your opportunities
Aligning with the CPM Repeal
1. Mobilise the most appropriate
Subject Matter Experts required
to respond: this could include
personnel from the functions of
Finance, Marketing, Procurement
and Legal
5. Analyse marginal abatement cost
8. A
ssess potential cash flow and
2. Assess the impact of policy design
elements, including eligibility of
ERF methodologies, ERF auction
design mechanisms, contract
arrangements with Government
to purchase abatement and
safeguard mechanism design and
baseline setting and ensure you
understand the implications for
your organisation and industry
3. Perform benchmarking analysis
over safeguard baseline options,
and identify specific circumstances
which have triggered higher than
business as usual emissions. Has
your operational boundary for
each facility changed over the
five year period or do you have
expectations that this may be the
case?
curves to assist in identifying and
prioritising emissions reduction
opportunities within the business
and where you could potentially
“package” opportunities into one
facility-based or activity-project.
Identify within prioritised list,
the activity methods requiring
approval and the requirements of
additionality (e.g. activities not
funded under existing state-based
energy savings schemes)
6. A
nalyse cash flow impact
scenarios (including “business as
usual” levels, CAPEX for carbon
abatement options, revenue from
various abatement units)
accounting impacts associated
with treatment of permits and
re-assess asset impairment models
9. Review and revise contracts to
identify relevancy of carbon cost
clauses and subsequently re-draft
to reflect the removal of the
carbon price
10. Ensure ongoing compliance is
maintained under NGERS and
CPM, including submission of
required reports under the
Clean Energy Act 2011 and
NGERS Act 2007
7. A
ssess existing governance
frameworks to incorporate ERF
risks – understand the implications
of changes to governance
frameworks once the design
elements are released
4. Prepare your submission to the
ERF Green Paper response and
prepare for the White Paper
The business of climate change Navigating the new carbon policy landscape
23
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About EY’s Climate Change and Sustainability Services
Governments and organizations around the world are increasingly focusing on the
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Your business may face new regulatory requirements and rising stakeholder concerns. There
may be opportunities for cost reduction and revenue generation. Embedding a sustainable
approach into core business activities could be a complex transformation to create long-term
shareholder value.
The industry and countries in which you operate as well as your extended business
relationships introduce specific challenges, responsibilities and opportunities.
Our global, multidisciplinary team combines our experience in assurance, tax, transactions
and advisory with climate change and sustainability skills and experience in your industry.
You'll receive a tailored service supported by global methodologies to address issues relating
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to support you in reaching your sustainability goals.
© 2014 Ernst & Young, Australia.
All Rights Reserved.
SCORE No. AU00001826
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Climate Change and Sustainability Services
Tel: +61 3 9288 8121
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