Legal change: Dealing with Direct Action

Overlooked in the debate over the shift from carbon pricing to the Abbott government’s Direct Action policy is the changed legal underpinning for emissions reduction activity by companies.

Putting to one side the relative policy merits of each approach that has been the focus of public debate – this shift brings with it other fundamental changes which have not yet been properly examined both in where abatement occurs and under what conditions. With the release of a Green Paper on Direct Action in the coming weeks, it is critical that the detail and implication of these fundamental changes is scrutinised.

Although some legislation will be required imposing penalties on some polluters, the government’s preference is to implement Direct Action primarily through government contracting. As a result, under Direct Action, the obligation to abate will arise from contracts between companies (the seller of abatement) and the government (the buyer of the abatement).

In contrast, under carbon pricing, companies’ obligations to reduce emissions arise primarily from legislation – the Clean Energy Act.

It is now well known that the change involves a shift from companies paying government based on how much they emit to a new approach in which taxpayers pay companies to emit less.

The shift to a government contracting model naturally requires a different approach by companies and their advisers that until now have been focused on structuring legal and business arrangements for a market-based scheme. The change means that parties looking to reduce emissions will need to carefully consider the upfront costs. And, like any government contracting, there will need to be careful consideration of the respective risk allocation before proceeding.

The upside of the new approach for abatement is that it can provide greater certainty to companies and their financiers, who better understand and accept the contracting model. In contrast, uncertainty over the future market price of carbon in emissions trading can be a disincentive to investment.

Another upside is that while the carbon pricing scheme is confined to certain parts of the economy and companies emitting over 25,000 tonnes of CO2 annually, the opportunity for contracting for abatement under Direct Action is much broader. One of the sectors that is well suited to the Direct Action model is the property sector where energy efficiency projects such as the retrofitting of existing commercial buildings and embedded generation from co- and tri-generation could deliver up to an additional 47 million tonnes of CO2 emission reduction at low cost.

Further, while the focus of carbon pricing has been on the biggest emitters – power stations – the government may be less inclined to buy abatement from that sector under Direct Action. The Renewable Energy Target and increasing energy efficiency are already reducing emissions from electricity generation. Buying more abatement from the sector might be unnecessary, expensive, technically challenging and even result in higher wholesale power prices.

However, the downside in the Direct Action approach is that the tender and contracting process is much more time and resource intensive in the initial stages.

*This is part one of a two-part article on the legal underpinnings of Direct Action. For part two, Direct Action's unknowns, click here.

Marcus Priest is a lawyer at Sparke Helmore.