After many years, 2 Prime Ministers and 3 opposition leaders to name a few, the Federal Parliament passed carbon price legislation yesterday. The price will apply from 1 July 2012 at $23/t Carbon Dioxide equivalent in the first year.
Many will be unhappy about this, but our focus must now turn to what do we do about it. We can’t ‘wait and see’ anymore.
The Opposition has committed to ‘roll back’ the carbon price if it wins government in the future. However, a roll back would be very difficult and appears unlikely, or at least not for some time (meaning we must still prepare for the carbon price).
So there are 2 key questions:
- What does it mean for the mining industry?
- What should the mining industry do about it?
What does it mean for the mining industry?
A carbon price will increase the cost of activities that directly or indirectly (ie through their inputs) emit greenhouse gas emissions. For mining the key carbon costs will attach to gas, coal, diesel and electricity use. Coal mines will also face direct costs for their direct methane emissions.
Whether carbon costs are directly paid to government by the mining company or its suppliers will depend on where the emissions arise and who has operational control of them.
Notably, the default position for liquid fuels is they will not be subject to the carbon price regime (with an obligation to obtain and surrender permits). Instead some liquid fuels, including off-road mining and power generation fuel, will face an equivalent carbon price through the fuel tax/rebate system. Mining diesel use will have a reduced diesel fuel rebate, initially at 6.21c/L in 2012/2013. Large fuel users will have the opportunity to ‘opt in’ to the carbon price regime and then need to obtain and surrender permits instead of paying through the fuel tax system. The ‘opt in’ regime is yet to be finalised, but this opportunity is expected to be available for users of fuel that produce more than 25,000t CO2e pa (about 9.1mL of diesel).
This generally means mining companies will pay for their fuel use, any power generation they undertake and coal methane emissions. Suppliers will most likely have any other direct liability. Those suppliers will in turn look to pass their costs through to the mining company.
The end result is the mining company will pay for their carbon footprints, directly or indirectly. Therefore the mining company’s commercial exposure is best calculated on the basis of its total emissions profile.
Some compensation is being made available for ‘emissions-intensive, trade-exposed’ industries. However, it appears to be of limited availability for the mining industry. It will give some compensation to some minerals refining. Gassy coal miners will be able to access separate compensation.
What should the mining industry do about it?
Key steps include:
- Review and design contracts: It is important to review and design your contractual arrangements to best manage carbon costs. This is generally achieved where all parties accept appropriate pass through. You should always consider where emissions (and therefore costs and risks) are likely to arise and how they can be best managed.
- Offsets: Carbon offsets may be one key way to manage carbon costs. The ‘Carbon Farming Initiative’ voluntary scheme will present positive emissions reduction opportunities.
- Disclosure: Be careful what statements you are making publicly and in your financial documents.
- Approvals: If you are going through an approval process, any carbon offset proposals or negotiations should be revisited.
- Compensation: Review what compensation may be available.
- Opt in?: Large fuel users should consider whether to opt in to the carbon price regime or not. Main reasons to do so are to more effectively manage the carbon price exposure, including through the use of offsets.