A compliance cobweb shadows Abbott's repeal

Retrospective carbon repeal is set to cause headaches among liable stakeholders, such as refund mayhem, contract confusion and competition questions.

As had been foreshadowed, the carbon tax repeal bills released by the government yesterday propose to abolish the carbon price with effect from July 1 next year.

In practice, this means that only two years of the Carbon Pricing Mechanism will have taken place. However, the key issue of ‘retrospectivity’, which has been front and centre for liable entities and other interested stakeholders in their recent consideration of the implications of the repeal, does not appear to have been dealt with in any detail in the Consultation Paper which accompanied the exposure draft legislation.

Instead, the consultation paper merely states: The government will not extend the carbon tax beyond 2013-14, even if the parliament does not pass the carbon tax repeal bills until after July 1, 2014.  

The effect of this statement is that the repeal legislation, if passed after July 1, will be retrospective: that is, it will remove the carbon price liability of liable entities (or the equivalent carbon price imposed on other sectors) retrospectively. But the fact is that in the interim the Clean Energy Act 2011 (the bill which introduced the CPM) and the other supporting pieces of legislation will remain in place until the repeal legislation is passed.

Our own analysis, and that of many other commentators, is that the repeal legislation is unlikely to be passed until after the Senate changes its composition on July 1 next year. The one caveat to this view is if Labor were to change its position and support the Coalition with its repeal agenda. However, there is no indication (at least at this stage) that this is likely, particularly given the new Labor leader Bill Shorten's recent comments:

"On something as important as putting a price on carbon pollution, I stated during the leadership campaign I believe it is important to maintain a price on carbon pollution.”

So the issue becomes – if the Coalition cannot secure passage of the repeal legislation prior to July 1, 2014 and the clean energy legislation remains in place for a period of time after this date, what do liable entities do in this intervening period? It is our view that they must continue to comply with the legislation which remains on foot and this logically requires that they must continue to recover costs sufficient to cover their carbon price liability. 

This is particularly the case given that they are not likely to know with certainty if, when or even in what final form the repeal will take effect. To do otherwise, would potentially expose them to the risk that if the Coalition were ultimately not able to achieve the passing of the repeal legislation during the 2014-15 compliance year, they would have an unfunded liability.

The next issue is what happens when the repeal does take effect? One would expect that those customers or consumers who have paid the carbon price since July 1, 2014 would be asking for a refund. And this then raises a range of issues such as ensuring full transparency about the carbon price component that has been charged, considering whether the liable entity should be holding the carbon monies in escrow and determining who should receive the benefit of any interest earned on that money.

Not only are these issues likely to require renegotiation of the commercial terms between the parties (unless they were considered and included in the relevant carbon cost pass through clause when the CPM was introduced) but all of these issues become even more complicated as the cost works its way through the supply chain.

Nowhere is this perhaps better evidenced than in the waste sector. In this scenario, the landfill will pass on the carbon price to the waste collection company, who will in turn pass it on to the waste producers. It is not uncommon for a collection company to have thousands or even hundreds of thousands of commercial customers, not all of whom will have formal contracts in place. Or consider the situation where you take your trailer of waste to your local landfill and have the carbon price included in the tipping fee. Can you return to the landfill after the repeal legislation has been enacted and ask for a refund of the carbon price you paid? The complexity of the administration of any refund scenario is likely to cause many liable entities and others in the supply chain great angst.

In the electricity sector, there is also the complicating factor that most electricity retailers hedge their wholesale power prices through forward contracts. Some of these forward contracts for the 2014-15 year will have included a carbon price component, and it may not be possible to renegotiate these contracts to reduce the price to a pre-carbon figure. Thus, retailers will either be faced with absorbing that price component into their retail prices, or charging prices which encompass the carbon price component and potentially risk being targeted for review by the Australian Competition and Consumer Commission.

The repeal legislation proposes to introduce new provisions into the Competition and Consumer Act 2010 which will give the ACCC the power to monitor prices to assess whether the carbon price repeal has had an effect on prices of goods supplied by liable entities or whether a company has engaged in price exploitation. The concept of price exploitation will apply primarily to the gas and electricity sectors and will involve consideration of whether the price charged for supply is unreasonably high, taking into account the carbon tax repeal and other matters such as the supplier’s costs and market conditions. A finding of price exploitation by the ACCC could lead to penalties of up to $1.1 million for a company or $220,000 for an individual.

It is obviously very early days in terms of how the repeal legislation will ultimately play out, both in terms of the politics and the practical implications. However, there is no doubt that further clarity will be needed in connection with the complex issue of retrospectivity if, as anticipated, the repeal legislation does not pass before July 1 next year.

Elisa de Wit is partner at Norton Rose Fulbright.