What is the Carbon Pricing Mechanism?

The Carbon Pricing Mechanism (CPM) is a mechanism by which businesses pay a charge for each tonne of carbon pollution they emit each year.  The following industries will be covered by the CPM:

  • Stationary energy
  • Industrial processes
  • Fugitive emissions (but excluding those from decommissioned coal mines); and
  • Emissions from non-legacy waste (waste deposited after the scheme starts)

Affected businesses will pay the charge by purchasing a carbon unit (permit) for each tonne of carbon pollution emitted and surrender these to the government either yearly, or half-yearly if they emit greater than 35,000 tonnes.

The CPM will be divided into two stages.  From 1 July 2012, there will be a fixed price stage, whereby businesses will pay a fixed charge per tonne of carbon emissions.

From 1 July 2015, the mechanism will shift to effectively change to a market based system, whereby carbon units are tradable on an emissions market and the price of a carbon unit is “floating”. The floating system is called a ‘cap and trade’ emissions trading scheme, and a minimum floor and maximum ceiling will be set for the price of a carbon unit.

How does the first (fixed) stage of the CPM work?

The first stage starts on 1 July 2012 and ends on 30 June 2015.  During the first stage of the CPM, affected businesses will be charged a fixed price per tonne of carbon emissions.  The initial price will be $23 per tonne of carbon, increasing by 2.5% in real terms per year, over the next two years. As such, the fixed price for a carbon unit has been set at:

 Year commencing  Price 
 1 July 2012  $23.00 per carbon unit
 1 July 2013  $24.15 per carbon unit
 1 July 2014  $25.40 per carbon unit

The fixed carbon price will be imposed by the Clean Energy Regulator
issuing carbon units (ie permits to emit a tonne of carbon pollution)
for a fixed charge to affected businesses. These carbon units issued
during the fixed stage will have a “vintage” year allocated to each
unit, which prevents the banking of carbon units to later periods.

What emissions are caught by the CPM?

The CPM will cover 4 of the 6 Kyoto greenhouse gases. These have been identified as:

  1. carbon dioxide
  2. methane
  3. nitrous oxide
  4. perfluorocarbon

These are also covered by the introduction of the National Green
Energy Reporting Act 2007, which was effective from 1 July 2008.

Will I be subject to the Carbon Price Mechanism?

The government has continually announced that only the “top 500
Australian polluters” will be liable for a price on carbon under the
CPM.  If you are not one of these, then you will not need to pay a
charge for carbon under the CPM.

I am not one of the top 500 polluters.  How will my business be impacted?

Although the scheme will only require approximately 500 of the
country’s biggest emitters to purchase and surrender carbon units for
their greenhouse gas emissions, many other businesses are likely to be
impacted in several ways.

Most businesses are likely to experience the indirect effects of
increased prices on many production inputs and general business
expenses, as suppliers subject to the CPM are likely to pass on their
carbon price burden to their customers, in the form of increased prices.

In conjunction with the scheme, there will also be changes to the
Fuel Tax Credit system. The effect of these changes is to reduce the
Fuel Tax Credit available and apply an “effective carbon price” on the
use of certain fuels.  As these changes are not confined to the same top
500 polluters, they will directly impact many more Australian
businesses from various industries that are currently eligible for fuel
tax credits. This is explained further below.

The degree to which any particular business experiences increases in
its cost structure will depend on a number of factors, in particular,
the amount of energy it expends in its operations, its exposure to
transportation costs and the proportion of its domestic inputs and
production compared to its imports.

Is it a tax?

Although the CPM has a similar effect to levying a tax on carbon
emissions during its initial fixed stage, it is not technically a tax.

Each carbon unit is a separate asset issued by the Clean Energy
Regulator and paid for by emitters.  A carbon unit is considered to be
an item of personal property and as such it is not a tax.

During the second stage of the CPM, these units are able to be traded on the market with other businesses.

The cost of acquiring the carbon units will be deductible to
business; however the timing of the deduction will be similar to trading
stock in that the amount of the deduction will be limited to the
proportion of the carbon units surrendered/traded.

Taxpayers will be assessable on revenue account on amounts they are
entitled to receive on ceasing to hold a unit.  Free carbon units
granted to certain emissions intensive industries which are not required
to be surrendered can be sold back to the Regulator or traded, at which
time that income will be assessable.

 

Thanks to Grant Thornton for this summary