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Like the planet, debate on a carbon tax is warming up. Environment lawyer Fergus Green explains why views that the scheme will either save the planet or destroy business is only adding to the…

Like the planet, debate on a carbon tax is warming up. Environment lawyer Fergus Green explains why views that the scheme will either save the planet or destroy business is only adding to the hot air.

After outlining the plethora of reports and inquiries her newly-elected Government had commissioned on carbon pricing, Prime Minister Julia Gillard warned in a speech late last year that "no responsible decision maker will be able to say next year that they need more time or more information on climate change". "In 2011", she warned, "there will be nowhere to hide".

It's now mid-way through 2011 and the reports are coming in thick and fast, informing the negotiations within Parliament's Multi-Party Climate Change Committee (MPCCC) on the details of a new carbon pricing scheme that would require all major greenhouse gas-emitting sectors of the economy (except agriculture) to acquire and surrender carbon permits - and therefore pay a carbon price - for their emissions.

The Government's key climate adviser, Professor Ross Garnaut, released a suite of papers containing recommendations on the design of the new scheme, including that the scheme operate in two phases. During the first phase, the price of permits should be fixed by the Government at an initial rate of between $20 to $30 per tonne of carbon dioxide equivalent and indexed annually at a real rate of 4 per cent. After three years, the scheme should "switch" to a full "cap-and-trade" scheme in which the Government would set declining annual caps on the number of available permits, in line with an overall emissions reduction target, leaving the market to set the price of permits. These recommendations generally mirror the few basic details of the new scheme that have so far been agreed by the MPCCC.

As Garnaut was releasing his review, the Productivity Commission handed the Government the results of its inquiry into the costs of carbon reduction policies in a number of major economies. The Inquiry found that Australia ranks in the middle of the eight countries studied in respect of total resources committed to emissions abatement, total abatement achieved and unit cost of abatement.

While the Commission's analysis supports the Government's argument that carbon pricing is a relatively cost-effective means of reducing emissions compared with more direct forms of regulation, the report itself notes that it provides "little guidance ... as to what the appropriate starting price of an ETS should be".

Treasury modelling will further inform the MPCCC on this matter. Under a $20 per tonne carbon price, revealed the Treasurer in a recent speech, Australia's economy will continue to grow strongly, as will gross national income per person. Moreover, aggregate jobs and jobs growth in the economy will not be affected (there will be some shift from higher to lower emissions-intensive jobs).

Aside from the obvious observations that a higher carbon price will result in more emissions abatement, higher compliance costs for liable entities and greater scheme revenue for the Government, the difference between a $20/tonne and a $30/tonne starting carbon price is likely to be marginal. Any starting price within this range will not be high enough to cause fuel-switching from coal to gas in the National Electricity Market, let alone to usher in the "clean energy revolution" frequently referred to by senior members of the Gillard Government.

Investments in new electricity generation infrastructure, especially in renewable energy, will be more affected by projections of the medium-long term price of carbon than by the starting price. Four unresolved policy parameters of the scheme will most strongly influence this longer term outlook: the duration of the fixed price phase of the scheme; the indexation rate during the fixed-price phase; the mechanism by which the scheme "switches" to the floating-price phase; and the medium and long-term targets for Australia's emissions (and the associated annual scheme caps).

"The likely reality is that this particular carbon pricing scheme will produce relatively low levels of abatement and high levels of uncertainty"

Fergus Green, lawyer, Allens Arthur Robinson

A lengthy fixed price period accompanied by a high indexation rate would result in high carbon prices in the medium-to-long-term and would imbue the scheme with a high degree of stability. Accordingly, it would create a favourable climate for long-term private and public investments in clean technology and infrastructure.

However, based on Professor Garnaut's recommendations and some initial indications from the MPCCC, the scheme is likely to move from a fixed price phase with a low level of indexation to a floating price with weak targets and scheme caps in a relatively short period of time (perhaps 3-5 years). Furthermore, the mechanisms for triggering the "switch" between scheme phases and for setting the targets and caps are likely to be heavily influenced by international and domestic political factors.

These likely features of the new scheme imply a fairly soft long-term carbon price characterised by a significant degree of uncertainty that will unnecessarily inflate the policy risk associated with long-lived, low-carbon investments.

Corporate lawyers will be busy throughout the next financial year helping clients navigate these and other complex issues associated with the new carbon scheme. Climate change law specialists are increasing their efforts to educate clients and other lawyers on policy and legal developments as more details of the scheme become known.

When the scheme legislation is released, lawyers will be busy advising on its legal and commercial implications. As was the case when the Rudd Government introduced the ill-fated Carbon Pollution Reduction Scheme Bill (CPRS) in 2009, lawyers are likely to be called upon to advise companies on such matters as: whether they would be liable under the scheme (particular complications tend to arise where two or more companies have shared responsibility for an emissions-intensive facility, such as is common in unincorporated mining joint ventures); whether they are eligible for compensation under the Emissions-Intensive Trade-Exposed Industry assistance scheme or other industry compensation mechanisms; and the application of statutory mechanisms for transferring scheme liability within a corporate group or to a downstream customer. Lawyers will also continue to play a critical role in drafting contractual clauses to allocate and pass-on carbon costs incurred by upstream liable entities and in advising on whether existing change in law, change in tax or carbon pass-through clauses in contracts will be triggered by the new scheme.

Finally, climate savvy legal specialists in areas ranging from fi nancial services to planning and environment law will be helping clients to navigate the complex interactions between the federal carbon pricing scheme and other areas of federal, state and local law.

Lawyers and clients alike would be wrong, however, to think that the new carbon price scheme will become the definitive instrument of carbon regulation. The likely reality is that this particular carbon pricing scheme will produce relatively low levels of abatement and high levels of uncertainty, as soft carbon prices mean that many additional laws and policies will be needed to usher in a true structural shift to a low emissions economy.

Fergus Green is a climate change lawyer in the Energy & Resources Group at Allens Arthur Robinson in Melbourne.

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