Chapter 13
Legal aspects
13.1 This chapter examines the legal issues that were raised in the course of
the inquiry.
Contractual impediments to carbon cost pass-through
13.2 A number of stakeholders raised issues in relation to contractual
impediments to carbon cost pass-through.
13.3 The Australian Pipeline Industry Association (APIA) expressed concern
over the lack of a mechanism to enable carbon cost pass-through in respect of
existing contracts.[1]
APIA submitted that such a mechanism was necessary because many of its members
were parties to long-term contracts that did not make provision for the
structural changes, and hence increased costs to its members, arising from the
introduction of the CPRS.[2]
13.4 APIA observed that many of its members would be liable entities under the
CPRS as they produced CO2-e emissions over the threshold of 25 000
tonnes annually. This was due to the amount of natural gas used to transport
gas through extensive networks of pipelines by means of compression.[3]
13.5 Alternatives to this method of gas transportation were, in APIA's view, capital intensive and not necessarily an economic alternative to purchase of
permits under the proposed CPRS.[4]
13.6 The APIA submission outlined the impediments to passing through carbon
costs:
Many long-term
contracts, and some recent contracts, in the gas transmission industry predate
the fundamental policy shift reflected in the CPRS. Whilst the wording of these
contracts in relation to change of law clauses or pass through of tax changes
depends upon the particular contracts, many do not allow for costs associated
with carbon constraints to be passed through to customers. These contracts can
extend up to 15 or 20 years, which means affected gas transmission companies
will bear this cost, with no compensation, for many years to come.[5]
13.7 In submissions on the government's policy papers, and to the committee, APIA proposed that the draft legislation be amended to include provisions requiring that 'the
CPRS...be treated as a tax for the purpose of allocating costs under contractual
obligations'.[6]
13.8 Santos Limited (SL) also raised the issue of carbon cost pass-through,
in relation to its existing long-term contracts of supply of gas such as
methane.[7]
Like APIA, Santos defined this issue as essentially a contractual problem. Mr Gregg Rowley, Group Executive, Clean Energy, advised:
Those long-term contracts often go back years in terms of
when they were signed. The idea of an ETS, or carbon trading system, was not
agreed on at that stage, so, unfortunately, in not all but a number of those
long-term contracts, the wording is not right to allow the passing of those
carbon costs through the system.[8]
13.9 The Santos submission proposes the following solution to remedy this
perceived oversight in the design of the CPRS:
Santos strongly believes that a statutory pass-through
provision, acting for a transitional period, needs to be inserted in the CPRS
Bill to reinforce the key design of the CPRS that the costs of the scheme are
passed through to the end users. To provide certainty for business on this matter
the scope of the statutory pass-through provision should apply specifically to
contracts where the:
-
issue of carbon cost pass-through was not explicitly and
effectively dealt with in the contract
-
contract was entered into before 3rd June 2007
-
contract is for a supply that has an associated carbon cost
and occurs after the commencement of the CPRS; and
-
contract is non-reviewable for carbon costs.[9]
13.10 Appearing before the committee, Santos disagreed with the response
provided by the government in the White Paper, which rejected this approach on
the grounds of constitutional issues, difficulty in assessing respective
liabilities between parties to a contract and the potential for such
pass-through clauses to act as disincentives for emissions abatement.[10]
13.11 The Australian Coal Australian Association (ACA) submission highlighted
carbon cost pass-through as an issue for coal mines supplying thermal coal for
the domestic market, again due to long-term contracts inadequately drafted to
deal with the issue of carbon cost pass-through. ACA recommended that the coal
industry therefore be allowed access to EITE assistance. This issue is
addressed in Chapter 6.
13.12 Griffin Energy (GE), a group with interests in the WA electricity
generation and supply industry, was also concerned about contractual impediments
to carbon cost pass through.
Committee comment
13.13 The committee observes that the issues raised in submissions and
hearings on this issue have been identified and considered in detail in the
consultations on the Green Paper and White Paper. The government declined to
take the approaches recommended by stakeholders on the basis that renegotiation
of contracts or new market entrants was a more likely and reliable means by
which defective contracts could be remedied. In contrast, the approaches
suggested could be complex, ineffective and carry a real risk of: exposing the
government to claims for just terms compensation by virtue of section 51 (xxx1)
of the Constitution.
13.14 The committee heard no evidence to convince it that the government's previously
expressed position should be reconsidered.
13.15 The committee notes also that equity issues arise where it is proposed
to intervene in contracts negotiated in recent years, which either failed to
consider the potential for a carbon price or that were technically defective in
creating terms to deal with the possibility. The committee considers it very
likely that a significant number of the contracts in question failed to
anticipate the introduction of emissions trading, and hence a carbon price, at
a time when this was at the very least a reasonable prospect. It would be
inappropriate for the government to intervene in order to make good any such
failure.
13.16 Finally, the committee notes that the government has undertaken to
monitor the progress of commercial contract negotiation and formation now that
stakeholders are aware of the scheme design and intent with regard to carbon
cost pass through. The CPRS White Paper states:
Based on current information, the Government will take no
action with respect to contractual impediments other than as discussed in
Chapter 7 in relation to the ability of firms to transfer obligations under
certain circumstances. In 2009 the Government will continue to monitor the
nature of contractual issues, including the scope for, and progress of,
commercial negotiations, once stakeholders have had an opportunity to assess
the exposure draft of the legislation.
The legislation will not contain any provisions designed to
override contracts to allow for pass-through of carbon costs.[11]
Regulation-making under the CPRS
13.17 A number of witnesses were concerned about the scheme's reliance on
regulations. Mr Ralph Hillman, Executive Director, Australian Coal Association
(ACA), advised:
The ACA...[is concerned that the] legislation does not address
the principal policy elements of the proposed CPRS, leaving most of the
important policy objectives and instruments to the explanatory memorandum and
regulation.[12]
13.18 The Australian Petroleum Production and Exploration Association (APPEA)
shared this concern over the potential scope of the regulations, and expressed
support for a discrete inquiry into the issue.[13]
13.19 More particularly, Ms Aileen Murrell, Assistant Director, Chamber of
Minerals and Energy of Western Australia, submitted:
...key sections of the draft legislation, such as part 8
relating to the Emissions-Intensive Trade-Exposed Assistance Program, contained
little detail, leaving a substantial amount to be set out in the regulations
not planned for release until June 2009.[14]
13.20 Mr Rowley, representing Santos, also raised this issue in relation to
EITE assistance, cap limits and scheme coverage. Mr Rowley noted the importance
of 'due time, consideration and consultation' in the formulation of the
regulations.[15]
13.21 In response to the criticisms outlined, Mr Barry Sterland, Acting Deputy
Secretary, Department of Climate Change (DCC) provided a comprehensive
assurance of the range of consultations to be undertaken in formulating the
CPRS regulations:
There is consultation, as I said, on the detail of the
emissions-intensive trade-exposed. There will be consultation on some elements
of the auction legislative instrument early and that consultation will be
ongoing through the year. There will be a number of tranches of regulation
later in the year, but by and large they are fulfilling and translating the
policy that has been clearly enunciated in the white paper. The normal
technical interchange that happens in any legislative program will happen.
There will be consultation. There will exposure drafts, by and large, of things
of interest. We will take submissions or feedback, and that will be
incorporated in the regulations that are made. Ultimately, there is obviously
potential for scrutiny in the parliament. So there are a significant amount of
regulations to be made, but they are not surprising in their area, they have
been well canvassed to date and there will be ongoing consultation on all
elements of them.[16]
13.22 Responding to the concerns about the reliance on regulations, Mr Sterland observed that the White Paper and exposure draft of the Bill provided sufficient
information and guidance on the likely detail of regulations:
The policy in the white paper is very clear, for example,
about the way in which emissions-intensive trade-exposed industries are going
to be treated. The regulations will implement that, so there is a very
extensive process underway to translate that policy through to the regulations.
But it is about translating the policy into the regulations, not changing it or
bringing in new considerations. There are a substantial amount of regulations,
to be sure, and they are outlined quite transparently in both the exposure
draft and the white paper itself, which makes very clear the areas where
regulations will be important: scheme caps, EITS and a whole range of
determinations.[17]
Committee comment
13.23 The Committee notes that the commentary on the exposure draft of the Bill provides a direct justification for relying on regulations to define critical elements of
the EITE assistance program:
The technical aspects of precisely defining
emissions-intensive trade-exposed activities and relevant production units, and
the need for flexibility to include new activities, make the program
appropriate to locate within regulations rather than the bill itself.[18]
13.24 More generally, the committee acknowledges that the Bill requires the making of numerous regulations across all parts of the proposed legislative
scheme; elements of the scheme will also be specified in the National
Greenhouse and Energy Reporting Regulations 2008. The areas of the CPRS
which are to be the subject of regulations include, for example, EITE
assistance, national targets and scheme caps and gateways, thresholds for
ascertaining liability of entities, values for calculating greenhouse gas
emissions from certain processes, accounting rules and estimation methodology
for greenhouse gas removals in relation to reforestation, and additions or
changes to classes already specified in the CPRS legislation (such as types of
'eligible international emissions unit').
13.25 However, the committee received no convincing evidence that the extent
of regulation making is inappropriate to the administrative or regulatory
requirements of the scheme. Indeed, the committee notes that extensive
regulations are made under other Commonwealth legislation, such as that dealing
with environment protection and biodiversity conservation.
13.26 In terms of consultation and the final scope and substance of the
regulations, it is relevant to note that the Commonwealth Legislative
Instruments Act 2003 ensures that in Australia there is a comprehensive
regime for the proper making and management of Commonwealth legislative
instruments. The objects of this Act include:
-
encouraging rule-makers
to undertake appropriate consultation before making legislative instruments;
-
encouraging high standards in the drafting of legislative
instruments to promote their legal effectiveness, their clarity and their
intelligibility to anticipated users;
-
improving public access to legislative instruments;
-
establishing improved mechanisms for parliamentary scrutiny of
legislative instruments; and
-
establishing mechanisms to ensure that legislative instruments
are periodically reviewed and, if they no longer have a continuing purpose,
repealed.[19]
13.27 The committee received evidence indicating that the development of the
regulations is proceeding in accordance with legislative requirements and best
practice, particularly with regard to consultation,[20]
as indicated by the evidence of the DCC.
13.28 In the committee's view, the CPRS appropriately sets out both mandatory
and discretionary elements that must or may be dealt with by the regulations. The
regulations are not to be prescriptive of substantive aspects or general
principles of the CPRS, but are appropriately limited to technical matters as
well as issues of administration and detail, some of which may be subject to
regular or even frequent change. Given the relatively limited experience of
emissions trading both in Australia and throughout the world, the committee
notes that there is a strong justification for the CPRS to have the scope and
flexibility to change in response to changes in our understanding of regulatory
best practice or relevant science. Further, regulations enable the executive to
more easily adjust the scheme in the interests of supporting the development of
an effective global response to climate change, which is a central object of
the CPRS legislation.[21]
13.29 Notwithstanding the need for flexibility, the making of regulations under
the CPRS is adequately constrained by legislative requirements or mandatory
considerations contained in the CPRS legislation. This should serve to provide further
certainty in relation to the making of regulations.
Senator Annette Hurley
Chair
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