Australia: Carbon price stays (for now)

Introduction

In an extraordinary day in Federal Parliament yesterday, the Government failed in its third¹ attempt to have the Senate pass the carbon price repeal legislation.

The unexpected outcome arose when the Palmer United Party (PUP) senators and Motoring Enthusiast Party senator Ricky Muir voted in support of Labor and the Greens to defeat the legislation. The PUP had been poised to move amendments to the Clean Energy Legislation (Carbon Tax Repeal) Bill 2013 [No. 2] (Main Repeal Bill), but the motion to move these amendments was withdrawn at the last moment and instead a vote took place on the Main Repeal Bill in its original form, with the result that the Main Repeal Bill was voted down by 37 to 35.

Implications of yesterday's vote

The result in the Senate means that the Clean Energy Act 2011 (CE Act) and associated legislation currently remains in place. This has significant implications for liable entities under the Carbon Pricing Mechanism (CPM), as they continue to have legal obligations under the legislation. Until legislation is actually repealed, our primary position is that companies must comply with the law as it is. Therefore, liable entities and others impacted by the CPM will need to carefully monitor developments in Parliament next week and to potentially reassess their strategies with respect to CPM compliance, carbon pricing and any contractual obligations (particularly if the repeal does not get through next week).

A key factor in working out an appropriate strategy will be the new timeframes within which the carbon price repeal legislation can be re-introduced to Parliament and voted on by the House of Representatives and the Senate. The Government has stated that it intends to reintroduce the legislation into the House of Representative on Monday, with a view to securing passage through both Houses before the end of the current sitting period on Thursday 17 July.

Timeframe for passage of legislation

On our analysis, the application of the Parliamentary procedural rules that apply to the passage of legislation will be critical to the possible timeframes that the Government is able to achieve.

Of particular relevance is Senate Standing Order 111, which deals with the processes governing the initiation and consideration of Bills by the Senate. It provides (at paragraph (5)) that:

"Where a bill:

1. is first introduced in the Senate by a minister in a period of sittings; or
2. is received from the House of Representatives and was introduced in that House in the same period of sittings; or
3. is received from the House of Representatives after the expiration of two-thirds of the total number of days of sitting of the Senate scheduled for that period of sittings,

and a motion is moved for the second reading of the bill, debate on that motion shall be adjourned at the conclusion of the speech of the senator moving the motion and resumption of the debate shall be made an order of the day for the first day of sitting in the next period of sittings without any question being put.

If the Main Repeal Bill (and associated bills) are tabled again in the House of Representatives on Monday, and then subsequently tabled in the Senate later in the week, paragraph (b) will apply. Paragraph (c) will also apply given that the Senate two thirds cut-off date for the current sitting period was Wednesday 9 July.

Accordingly, to comply with Standing Order 111 it would appear that debate in the Senate would need to be adjourned until the first day in the next sitting period, namely 26 August.

However, there is also provision in the Senate Standing Orders for a particular standing order to be overridden. This can be done if either leave is granted or a motion is passed to suspend the standing order (Standing Order 209). Leave requires the unanimous consent of all senators present in the chamber, whereas a motion to suspend a standing order only requires the agreement of a majority of the Senate (an absolute majority of all senators is required for a motion without notice; a majority of senators actually voting is required where notice has been given of the motion).

This option is summarised in the Legislation Handbook (developed by Department of the Prime Minister and Cabinet in 2000) as follows: "[t]he Senate may exempt a bill from the order [i.e. Order 111] provided that the government gives reasons for such exemption. The statement of reasons assists in the process of seeking exemption by providing an explanation to the Senate of the urgency of a bill. A statement of reasons is formally presented to the Senate when exemption from the cut-off order is sought, i.e. when the Senate's agreement is sought to introduce and debate a bill in the one sitting period."

Assuming that a majority in the Senate agree to exempt the repeal bills from Standing Order 111, this would mean that they could still be debated and passed by the Senate next week. However, if a successful Senate vote is not forthcoming or the vote does not get made prior to the end of Thursday, the next opportunity for the Senate to consider the bills will be when Parliament resumes in August.

1 September is a critical date

If the legislation is not passed next week, then the Government will no doubt seek to ensure the repeal takes place before 1 September. There are only three sitting days, commencing on 26 August for this to occur. The significance of the 1 September date is that, from then, liable entities under the CPM have the ability under the CE Act to start selling back their free carbon units to the Clean Energy Regulator (Regulator) and the Regulator is required to buy them.

This raises the prospect of windfall profits for liable entities (and a budget hole for the Government) once the legislation is actually repealed. This is particularly the case if the repeal will still operate retrospectively and take effect from 1 July 2014.

Impacts of further delays on carbon pricing strategies

Any further delay in repeal beyond next week would also create additional complexity for a number of sectors which have had to carefully factor in the carbon price to their pricing strategies and contractual arrangements.

For example, some liable entities in the waste sector have already decided to exclude the carbon component from their pricing from 1 July 2014 on the assumption that the repeal legislation will be passed in the current July sitting period of Parliament. If consideration of the Main Repeal Bill was adjourned until the next sitting period in late August, these liable entities may need to reassess whether this approach remains viable. They may consider that it is still an appropriate strategy given the Government's intention for the Main Repeal Bill to operate retrospectively to 1 July 2014.

There are also potential implications for the electricity supply sector. For example, many energy retailers implement their hedging positions through over the counter (OTC) derivatives that are based upon the AFMA Australian Carbon Benchmark Addendum (Addendum). The Addendum adjusts the price payable for electricity by adding a prescribed cost of carbon. The carbon cost is calculated by multiplying the carbon intensity index for the National Electricity Market by the Carbon Reference Price (CRP).

A committee of AFMA decided in June that the CRP will be zero from 1 July if the Main Repeal Bill is passed by 18 July 2014 (i.e. by the end of the current sitting period). Therefore, if the repeal does not happen next week, it is expected that a CRP of $25.40 will apply to any contract settlements that have not yet occurred for at least the period between 1 July and the date the repeal is passed by the Senate.

Preparing for repeal

Businesses, particularly those which are liable entities under the CPM should by now, have considered what action they will need to take when the repeal takes effect. However, the wider business community will also need to give consideration to any contractual implications which will arise from the repeal – the most obvious one being the triggering of a "change in law" provision and any pricing adjustments which may result.

In considering any "change in law" arrangements, it will also be important to have regard to a longer term horizon, both for existing contracts and new ones. This is particularly the case given the somewhat unknown quantity of the "safeguard mechanism" proposed as part of the Government's Direct Action plan. It is unlikely that further clarity around the nature of any compliance regime and the form of any compliance mechanisms will be provided until early next year, so relevant provisions will need to be as broad as possible in the short term.

However, the main implication arising from the repeal will be how the repeal is factored into pricing decisions. This issue has been causing great difficulties for both the waste and energy sectors, heightened by the spectre of the new powers that will be given to the Australian Competition and Consumer Commission (ACCC).

As well as the new powers which will come into effect once the Repeal Bill is passed 'Pricing out carbon', the ACCC has received increased funding to directly investigate carbon pricing decisions. One round of information has already been collected by the ACCC (the results of which can be found here) and another round of information gathering is currently underway. It is apparent that the latest set of questions is specifically directed at understanding what component of current prices relates to carbon, which is presumably designed to allow the ACCC to monitor whether this component is removed once the repeal takes effect.

What is not currently as clear is what action companies will need to take in relation to the carbon price component that has been collected in the intervening period prior to the Main Repeal Bill being passed. This issue is compounded for landfills who have been collecting funds to cover their future emissions liability, given that if the repeal takes place that liability will no longer exist.

PUP's amendments

The PUP's proposed amendments to the Repeal Bill are aimed at expanding the ACCC's powers further. The latest version of the PUP's amendments on the Australian Parliament website (sheet 7511 revised 2) provides the following summary of the amendments:

A entity may be required to explain and substantiate:

1. how the carbon tax repeal has affected, or is affecting, the entity's regulated supply input costs; and
2. how reductions in the entity's regulated supply input costs that are directly or indirectly attributable to the carbon tax repeal are reflected in the prices charged by the entity for regulated supplies.

A entity that sells electricity or natural gas to customers must:

1. give a carbon tax removal substantiation statement to the Commission; and
2. include in the statement the entity's estimate, on an average annual percentage price basis, or an average annual dollar price basis, of the entity's cost savings that have been, are, or will be, attributable to the carbon tax repeal and that have been, are being, or will be, passed on to customers during the financial year that began on 1 July 2014; and
3. provide information with the statement that substantiates such an estimate; and
4. communicate to customers a statement that identifies, on an average annual percentage price basis, or an average annual dollar price basis, the estimated cost savings to customers that are for the financial year that began on 1 July 2014.

Of note, as currently drafted the proposed amendments will only capture entities that supply regulated goods (namely, electricity, natural gas, synthetic greenhouse gas and SGG equipment).

Implications for the Emissions Reduction Fund

The Government tabled the legislation which will implement its Emissions Reduction Fund (ERF) on 18 June 2014 [hyperlink to legal update Emissions Reduction Fund legislation tabled]. The Carbon Farming Initiative Amendment Bill (CFI Amendment Bill) passed the House of Representatives on 25 June 2014, but there is continuing uncertainty about when the Government will attempt to pass the legislation through the Senate.

The events of yesterday only serve to increase the likelihood that the Government will focus on securing its passage of the Main Repeal Bill before turning its attention to the ERF in the Senate.

As has been widely reported, the passage of the CFI Amendment Bill is far from certain given recent statements by the PUP criticising the ERF as an effective alternative policy and advocating for amendments to be made to the Climate Change Authority legislation to establish the framework for an emissions trading scheme (ETS). While the PUP's proposed amendments have not yet been made public, it seems likely that the amendments will draw heavily upon the existing ETS within the CPM (which would commence on 1 July 2015 if the carbon price repeal was not on the agenda).

Footnotes

¹This is on the basis of counting the failed attempt by the Coalition senators on 9 July 2014 to bring the legislation to a vote as the second attempt.

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