Government assistance for emission-intensive, trade-exposed industries

By Simon Bowden, Clayton Utz

The Government recently released further details of assistance to emissions-intensive, trade-exposed (EITE) industries under the proposed Carbon Pollution Reduction Scheme and the increased Renewable Energy Target.
The release of draft regulations for EITE assistance is an indication of the Government's commitment to implementing the Carbon Pollution Reduction Scheme (CPRS), despite the bills for the scheme having twice been rejected by the Senate. The increased Renewable Energy Target (RET) was passed by Parliament in August 2009, including provisions for EITE assistance, but details of that assistance are only now being released for comment.

What are EITE industries?
The draft regulations expand the number of EITE activities from a list released earlier in 2009. Activities proposed to receive assistance are: glass production; paper and cardboard manufacturing; methanol production; carbon black production; white titanium dioxide pigment production; silicon production; zinc smelting; integrated production of lead and zinc; aluminium smelting; alumina refining; high-purity ethanol production; magnesia production; newsprint production; dry pulp manufacturing; LNG production (to be incorporated into the regulations at a later date).
Further criteria are specified in the draft regulations that will need to be met by participants in EITE industries in order to qualify for assistance.

What assistance is offered to EITE industries under the CPRS?
Under the CPRS generally, liable entities will be required to surrender a number of Australian emissions units (or other eligible units) each year. The units each represent a tonne of greenhouse gas emissions and liable entities will need to surrender the number of units equal to the number of tonnes of emissions.
Eligible participants in EITE industries will be entitled to receive free Australian emissions units under the CPRS. Those units can then be used to satisfy the participants' own obligations under the CPRS or can be traded with other CPRS-liable entities or intermediaries.
The amount of assistance available to participants in a particular industry will depend on whether the industry is considered to be highly emissions-intensive or moderately emissions-intensive. Highly emissions-intensive industries will receive assistance at the rate of 94.5 per cent of their anticipated CPRS obligations and moderately emissions-intensive industries will receive assistance at the rate of 66 per cent of their anticipated CPRS obligations. The Government previously incorporated a "global recession buffer" into the assistance program which was to operate for five years from the start of the CPRS but this buffer has now been permanently included in the calculation of assistance.
The amount of assistance will reduce by 1.3 per cent each year to encourage industries to become less emissions-intensive over time.
The amount of assistance will be calculated by reference to an EITE industry participant's direct CPRS obligations based on their anticipated level of production in a particular year. Where actual production differs from the anticipated production, there will be a true-up mechanism adjusting the following year's assistance. There will also be assistance for certain indirect costs such as the increased price of electricity under the CPRS. Some large electricity users with long-term electricity supply contracts will be required to demonstrate that they in fact bear a CPRS cost in order to qualify for this part of the assistance.
The new draft regulations also make specific provision for new entrants into an EITE industry and for significant expansions (of more than 20 per cent) of existing facilities over the course of the program.

How are applications for assistance made under the CPRS?
. generally only the person with the direct CPRS liability in respect of the relevant EITE activity will be entitled to make an application for assistance under the CPRS;
. applications will be required to be made by 31 October each year (which deadline may be extended to 31 December) for assistance for the financial year in which the application is made;
. applications will need to be made to the Australian Climate Change Regulatory Authority once this is established (the enabling legislation was rejected by the Senate with the other CPRS bills); and
. information demonstrating that the applicant is the appropriate person for receiving assistance, that the defined EITE activity is being carried out and the level of production in the previous financial year for the activity will need to be included in the application.

Where to from here?
EITE assistance programs under both the CPRS and RET are currently only in draft form. Given the current uncertainty about enactment of the CPRS, it is not know when, or if, the regulations establishing the CPRS program will be made.
It is anticipated that the RET assistance program will be established even if the CPRS is not enacted but there is no guarantee that the scope and structure of the assistance will not change as a result of consultation on the draft regulations. Although it is currently proposed that applications can be made until October 31st, 2010, entities carrying on EITE activities should start to consider the information they will be required to provide to the Office of the Renewable Energy Regulator to make applications for RET assistance.
EITEs and electricity retailers will need to consider their current contractual arrangements for passing on RET-related costs and how these may need to be amended to deal with the partial exemptions that may be granted and how the parties may deal with the risk of the amount of exemption being changed during a year.