The Government has released its carbon price mechanism (CPM) details, planned to commence on 1 July 2012. The CPM would be the most significant economic and industry reform since the GST and it will have far reaching implications for the Australian economy, especially in carbon intensive sectors including electricity, oil and gas, major refining and manufacturing, and mining.

A primary issue for business is: will it happen this time? This is the latest chapter in a long and twisting story. While the CPM still poses a political minefield for a Government facing all time low poll results, the Government does have the numbers to pass the necessary legislation through Parliament. Any future rollback appears highly unlikely, and if it did happen would be after the CPM commenced.

The key for commercially advising clients is to understand the likely impacts for their businesses and therefore the risks and opportunities. This is not something easily gained, but only comes from an appreciation of the clients’ business and the CPM’s development. 

Lawyers need to understand where covered emissions will arise, who will bear the liability to directly pay the costs (by acquiring and surrendering permits), what indirect costs may arise (from an earlier point in the supply chain that have been passed through) and whether it is commercially appropriate for these direct and/or indirect costs to be passed through to customers (and if so the appropriate restrictions). 

The issues are greatest for the carbon intensive sectors, primarily the generation and supply of electricity and its carbon intensive fuels coal and gas. 

In our experience, specific carbon cost pass-through clauses are not common in other types of agreements. For example, for construction contracts the CPM impacts will generally be low and the principal will prefer contractors to factor in the estimated carbon price (like any business input) and bid on that basis, with fluctuations to be covered by the CPI mechanisms. 

CPM matters can be adequately addressed in new agreements prepared in light of the announced details. However, issues may arise under historic arrangements. The most at risk are the long term agreements prepared some time ago without any contemplation of an Australian carbon price. The CPM may come within any change of law or tax/impost clauses. Though notably the CPM proposal, despite regularly being called a ‘carbon tax’ in the media, is a not a true tax (as a government levy) but is an obligation to surrender permits.

More recent agreements (from at least 2006/2007 onwards) should have considered carbon issues. However, because of the chops and changes in the proposals, the drafting in these agreements may still be deficient for the final CPM (for example by being CPRS specific). Some agreements may also have simply been poorly drafted.

Where existing agreements address carbon issues in a suboptimal way it is in the parties’ best interests to commercially consider any acceptable amendments.

If that is not possible and greyness remains then litigation may inevitably occur.