LAST week the Government and Greens announced an agreed proposal for a carbon price to start as early as 1 July 2012.

The proposal presents ‘framework elements’ only, including:

• An initial carbon tax (fixed price on emissions) as early as 1 July 2012. International credits not allowed during this phase, but domestic offsets probably will be allowed. 
  
• Then a transition to an emissions trading scheme (ETS) within three to five years. Criteria for moving to the 'ETS phase' have not been announced. The transition date will be determined before the legislation is introduced and be subject to review a year before scheduled ETS commencement. The ETS could be further deferred. In this phase the price would be unrestricted, set by the market. Accepted international and domestic credits could be used. 
  
• Coverage of stationary energy, transport, industrial processes, fugitive emissions (other than from decomissioned coal mines) and non-legacy waste. Coverage could be staged, with sectors phased in. Emissions covered by the Government’s proposed Carbon Farming Initiative voluntary carbon scheme (CFI), including agriculture, would be excluded. 
• The 2020 emissions reduction target would be set prior to ETS commencement. 

Key details yet to be determined include industry, community and household assistance, support for low emissions technology and innovation and treatment of petrol use. These are likely to be hotly contested. It is expected that industry assistance will be no more than under the Government’s previously proposed Carbon Pollution Reduction Scheme.

Implementation of these plans will require further negotiation. The Greens are expected to require strong emissions reductions and less compensation. Industry is concerned to ensure its interests are protected, especially for existing power generation and international trade exposed industries. The Tony Abbott led Coalition is strongly fighting the proposal and has pledged to repeal it if the Coalition wins the next election.

So significant politicking remains, but the indications are that with the Greens and key independents’ support the Government will pass the necessary legislation.

Likely business and consumer impacts 

A carbon price (regardless of being a ‘carbon tax’ or ETS) will impose a cost on carbon emissions. Direct costs (eg liability to acquire and surrender permits under an ETS or pay a carbon tax) will likely be imposed on the ‘head company’ of a corporate group operating facilities with carbon emissions. Businesses will look to ‘pass-through’ these costs wherever they can, indirectly spreading the costs through the economy. The main point of pricing carbon is to drive technological and behavioural change to drive emissions reductions. 

The controversial issue of electricity prices presents a useful example. The head company of a corporate group operating a coal power station will incur costs. They will look to pass them through to end consumers, increasing power bills. However, that price rise impact will be influenced by the compensation available for both the power company group (most likely free permit allocations) and consumer (most likely tax breaks for low income earners and possibly SMEs). As the carbon price rises over time the cost of conventional emitting power will rise, making renewable power more price competitive, thus leading to emissions reductions. 

Notably, electricity prices have been and will continue to rise significantly (outstripping carbon price rises) due to necessary network investment and to address historic State government price subsidisation. The investment uncertainty caused by carbon price approach uncertainty has also delayed necessary generation investment decisions, potentially also increasing electricity prices (which a final carbon price would help ease). 

Carbon offsets may be one key way to manage carbon costs. They can present a ‘lower cost of abatement’, where it is preferable to pay for carbon sequestration or emissions reduction, than to pay for a carbon tax or ETS permit. They can also have other associated benefits, such as biodiverse and salinity reducing tree plantings and increased regional employment and income. However, their use (especially cheaper international permits) is to be finalised. The Government’s proposed CFI will likely lay the framework and, with its planned 1 July 2011 start date, will allow trial preparation for the mandatory carbon price. 

Legal implications

Businesses, and their lawyers, should always consider where emissions (and therefore costs and risks) are likely to arise and how they can be best managed. Issues can arise at all points in the economy and project life cycle, for example financing, equity investment, construction, operation, supply, delivery to customers and buying/selling businesses. It is fundamentally important that carbon price consequences are addressed in commercial agreements. 

Ideally carbon costs are effectively passed through (and not bottlenecked). At the same time there should be appropriate cost management requirements (with consideration of which party is best placed to manage costs). End users and intermediates should be careful to not unduly compromise their supply chain by refusing appropriate cost pass through.

Law firm approach

This is a new and evolving area, needing innovation, flexibility and commercial focus, based on a sound understanding of the proposed regime and client impacts. While there are risks, there are also great opportunities, including for developing lawyers looking to work in this exciting space.

The area has had a ‘stop, start’ life, growing to the end of 2009, stalling in 2010 and now back on the agenda. This has made businesses ‘once bitten, twice shy’ and thus a difficult area for law firms. But it certainly now has momentum again, meaning both businesses and law firms need to rapidly gear up. With the proposed 1 July 2012 start date there is little time to fully engage with and prepare for the impending carbon price.

Freehills has looked to innovatively communicate with clients, industry, the media and broader community on this high profile and rapidly developing issue. We have used Twitter (@freehills_CC) to both follow developments and respond in a timely and commercially focused way. 

Written by John Taberner, consultant, Sydney (0416 225 427, This email address is being protected from spambots. You need JavaScript enabled to view it.) and Michael Voros, senior associate, Perth (0439 864 208, This email address is being protected from spambots. You need JavaScript enabled to view it.). They are the key members of Freehills’ climate change team.