FAQ:  The Clean Energy Legislation

What is the Carbon Pricing Mechanism?

The Carbon Pricing Mechanism (CPM) is a mechanism by which businesses pay a charge for each tonne of carbon pollution they emit each year.  The following industries will be covered by the CPM:

• Stationary energy
• Industrial processes
• Fugitive emissions (but excluding those from decommissioned coal mines); and
• Emissions from non-legacy waste (waste deposited after the scheme starts)

Affected businesses will pay the charge by purchasing a carbon unit (permit) for each tonne of carbon pollution emitted and surrender these to the government either yearly, or half-yearly if they emit greater than 35,000 tonnes.

The CPM will be divided into two stages.  From 1 July 2012, there will be a fixed price stage, whereby businesses will pay a fixed charge per tonne of carbon emissions. 

From 1 July 2015, the mechanism will shift to effectively change to a market based system, whereby carbon units are tradable on an emissions market and the price of a carbon unit is “floating”. The floating system is called a ‘cap and trade’ emissions trading scheme, and a minimum floor and maximum ceiling will be set for the price of a carbon unit.

How does the first (fixed) stage of the CPM work?

The first stage starts on 1 July 2012 and ends on 30 June 2015.  During the first stage of the CPM, affected businesses will be charged a fixed price per tonne of carbon emissions.  The initial price will be $23 per tonne of carbon, increasing by 2.5% in real terms per year, over the next two years. As such, the fixed price for a carbon unit has been set at:

The fixed carbon price will be imposed by the Clean Energy Regulator issuing carbon units (ie permits to emit a tonne of carbon pollution) for a fixed charge to affected businesses. These carbon units issued during the fixed stage will have a “vintage” year allocated to each unit, which prevents the banking of carbon units to later periods.

As referred to further below, both business and individuals who will be strongly impacted by the introduction of a CPM will be compensated by the government as part of the proposed Clean Energy package. Energy Intensive Trade Exposed industries will be allocated some carbon units free of charge to facilitate their transition into the CPM.  Emissions intensive electricity generators may also receive free carbon units to aid their transition into the CPM.

The Regulator may acquire back from businesses any unused allocation of carbon units during the fixed stage.

How does the second (flexible) stage of the CPM work?

The second stage of the CPM is applicable from 1 July 2015.

In the second stage of the CPM, the Government will place an overall limit on Australia’s emissions from polluters subject to the CPM.  Based on this limit, the Clean Energy Regulator will issue a fixed number of carbon units each year, with each unit representing one tonne of carbon pollution.  In this way, Australia will limit its overall level of carbon pollution and meet its set pollution targets.

Carbon units issued by the Regulator during the flexible stage of the CPM will also have a “vintage” year. However where the vintage year is after the commencement of the flexible stage, these carbon units can be surrendered any time after that vintage year and can be banked for later use.

Some of the carbon units will be auctioned to businesses by the Clean Energy Regulator, while others will be allocated free of charge to certain strongly impacted businesses to aid in their transition to the CPM.

Businesses will then be free to buy and sell their carbon units to other businesses, thus creating a market for the carbon units.  As the units are freely traded on the market between businesses, the price of the units will be determined by the market, subject to floor and ceiling prices set by the Government. 

Once the second, flexible stage of the CPM commences, certain international equivalent carbon units may be brought into a business’s carbon unit registry account to offset their Australian emissions.

What emissions are caught by the CPM?

The CPM will cover 4 of the 6 Kyoto greenhouse gases. These have been identified as:

1. carbon dioxide
2. methane
3. nitrous oxide
4. perfluorocarbon

These are also covered by the introduction of the National Green Energy Reporting Act 2007, which was effective from 1 July 2008.

Will I be subject to the Carbon Price Mechanism?

The government has continually announced that only the “top 500 Australian polluters” will be liable for a price on carbon under the CPM.  If you are not one of these, then you will not need to pay a charge for carbon under the CPM.

If you fall within the CPM, you will be required to have a carbon unit registry account and surrender an amount of carbon units from that registry account equivalent to the number of tonnes of carbon pollution emitted during a year. 

If you do not have sufficient carbon units or surrender insufficient  carbon units, you will be subject to a unit shortfall charge.

If you are not one of the “top 500 Australian polluters”, your business will be directly impacted by a potential increase in costs as a result of the “top 500 Australian polluters” passing on the effect of the CPM. If this applies to you, please read on.

Who are the “top 500 polluters”?

The businesses subject to the CPM (the “top 500 polluters”) are those which emit carbon pollution above a certain threshold level each year.  This threshold is 25,000 tonnes of carbon dioxide equivalent or more each year, but excludes emissions from transport fuels and some synthetic greenhouse gases. 

The 25,000 tonne threshold is on a per facility basis, which was one of the reporting requirements under the National Greenhouse Energy Reporting legislation. A facility is defined as an activity, or a series of activities, that involve the production of greenhouse gas emissions. It is important to understand that a series of activities that are related to an output can be combined to constitute a single activity for the purpose of the 25,000 tonne threshold.

There is a lower threshold for some landfill facilities that may be grandfathered under the proposed provisions.

I am not one of the top 500 polluters.  How will my business be impacted?

Although the scheme will only require approximately 500 of the country’s biggest emitters to purchase and surrender carbon units for their greenhouse gas emissions, many other businesses are likely to be impacted in several ways.

Most businesses are likely to experience the indirect effects of increased prices on many production inputs and general business expenses, as suppliers subject to the CPM are likely to pass on their carbon price burden to their customers, in the form of increased prices.

In conjunction with the scheme, there will also be changes to the Fuel Tax Credit system. The effect of these changes is to reduce the Fuel Tax Credit available and apply an “effective carbon price” on the use of certain fuels.  As these changes are not confined to the same top 500 polluters, they will directly impact many more Australian businesses from various industries that are currently eligible for fuel tax credits. This is explained further below.

The degree to which any particular business experiences increases in its cost structure will depend on a number of factors, in particular, the amount of energy it expends in its operations, its exposure to transportation costs and the proportion of its domestic inputs and production compared to its imports.

How will I know if my suppliers will directly pay under the CPM?

Under the proposed Clean Energy legislation, the Regulator will be required to publish a list of liable entities every year on a publicly available information database. The database will also be required to disclose the level of emissions for each entity which is liable to pay for a carbon unit under the CPM.

Is it a tax?

Although the CPM has a similar effect to levying a tax on carbon emissions during its initial fixed stage, it is not technically a tax. 

Each carbon unit is a separate asset issued by the Clean Energy Regulator and paid for by emitters.  A carbon unit is considered to be an item of personal property and as such it is not a tax.

During the second stage of the CPM, these units are able to be traded on the market with other businesses.

The cost of acquiring the carbon units will be deductible to business; however the timing of the deduction will be similar to trading stock in that the amount of the deduction will be limited to the proportion of the carbon units surrendered/traded.

Taxpayers will be assessable on revenue account on amounts they are entitled to receive on ceasing to hold a unit.  Free carbon units granted to certain emissions intensive industries which are not required to be surrendered can be sold back to the Regulator or traded, at which time that income will be assessable.

Please feel free to contact Grant Thornton’s climate change team or your usual Grant Thornton advisor if you require further details or have any questions.

Mark Azzopardi (Tax enquiries)
National Head of Tax
T  +61 3 8663 6200
E  mark.azzopardi@au.gt.com

Tony Markwell (Business advisory enquiries)
National Head of Privately Held Business
T  +61 7 3222 0291
E  tony.markwell@au.gt.com

Andrew Archer (Audit and financial reporting enquiries)
National Head of Audit & Assurance
T  +61 2 8297 2528
E  andrew.archer@au.gt.com

Brian O'Meara (Enviornment and industry assistance enquiries)
Associate Director - Privately Held Business
T  +61 3 8663 6257
E  brian.omeara@au.gt.com