1. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Carbon tax – are you ready? Gid Meltzer, Partner Hospital Engineers Australia 24 August 2012

2. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Outline of presentation Legislation and CEF Plan Sector by sector impact Determining the impact on your business Direct and indirect costs Carbon management plan –cost pass through –revenue generating activities –assistance packages

3. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Clean Energy Plan Commenced on 1 July 2012 Seeks to secure a clean energy future through 4 main activities: –a price on carbon in the economy –development of renewable energy capacity –support for increased energy efficiency –improving the condition of the Australian landscape

4. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Emissions per capita

5. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. What is the rationale? What is the policy objective? How is it intended to work? How is success determined? The pass-through of costs is fundamental to the effectiveness of the government’s policy rationale, which is focused on bringing about behavioural change in consumers like you…

6. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. By now, all businesses should have… Identified their exposure –direct liability? –indirect liability? –which costs will increase? Implemented a carbon management plan –how will we cope with increased costs? –can we pass them on? –are there any new revenue streams available to us?

7. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Key principles under the CEF Plan Carbon price Emissions target reduction Liable entities Allocation and surrender of permits Purchasing permits to meet carbon obligations Greenhouses gases Excluded sectors NGER Act

8. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Carbon price Fixed price period starts 1 July 2012 first 3 years(FY 12-13, FY 13-14, FY 14-15) $23/tonne in 2012-13 $24.15/tonne in 2013-14 $25.40/tonne in 2014-15 government to sell permits Flexible pricing period from 1 July 2015 price of carbon set by market permits to be capped

9. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Emissions target reduction Government has committed to reduce greenhouse gas emissions* by: 5% by 2020 20% by 2050 *based on 2000 levels

10. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Liable entities 500 of Australia’s largest polluters Obliged to buy and surrender carbon permits Facility liability –emit < 25,000 tonnes of CO2 equivalent emissions –entity with operational control generally liable Covered sectors –stationary energy, waste, rail, domestic aviation, shipping, industrial processes, fugitive emissions –heavy on-road vehicles from July 2014

11. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Allocation and surrender of permits One permit = one tonne of greenhouse gas emissions Climate Change Authority –responsible for setting forward reduction targets –caps announced 5 years in advance Emissions charge –1.3 x fixed price (fixed price period) –2 x average price (flexible price period)

12. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Purchasing permits to meet carbon obligations Fixed price period –liable entities will need to purchase permits to meet their emissions liability –cannot be traded or banked Flexible price period –government to issue permits –can be banked indefinitely Transitional assistance package –permits may be allocated –cannot be banked

13. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Covered greenhouses gases Carbon dioxide Methane Nitrous oxide Perfluorocarbon

14. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Excluded sectors Transport –household transport –light on-road vehicles –off-road use by agriculture, forestry and fishing industries –gaseous fuels –ethanol, biodiesel and renewable diesel Agriculture Land

15. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Relationship with NGER Act provides emissions data reporting obligations based on emissions data registered corporations to report controlling corporation generally the liable entity

16. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Tax treatment Accounting treatment similar to current trading stock rules cost of permits generally deductible but will be deferred revenue from sale of permits assessable exceptions to the above no GST Compensation government to increase tax free threshold increased family tax benefits other benefits/concessions

17. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Determining the impact on your business Other entities Direct costs Indirect costs Cost of acquiring carbon units Capital itemsGas Transport fuels Admin and compliance Electricity Goods and services Liable entities The big polluters How carbon intensive is your supply chain?

18. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Sector by sector impact Agriculture Excluded sector Will benefit from the – Carbon Farming Initiative Transport Outside the carbon tax mechanism but will be affected FTCs to be reduced Heavy on-road vehicles from 1 July 2014 Domestic aviation, domestic shipping, rail transport and non-transport use of fuels also affected

19. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Sector by sector impact (cont.) Tourism Domestic tourism industry already struggling Transport operators likely to increase their costs Cost of travel likely to increase May reduce tourist numbers Exporters Indirect price increase Competitive disadvantage to overseas competitors

20. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Sector by sector impact (cont.) Mining Direct impact Costs to increase significantly Profits to decline IT Large indirect impact Extremely electricity dependent Electricity costs will rise Input costs for many IT companies will be similarly increased Consumers will pay more

21. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Sector by sector impact (cont.) Financial services may benefit more people likely to seek advice Property commercial buildings – energy efficiency ratings residential buildings – increased cost of inputs Manufacturing likely to be hit hard increased cost of inputs some assistance to be provided Retail cost pass through to consumers

22. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Can’t I just increase my prices and pass my costs on? Costs cannot be automatically passed on to consumers.

23. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Types of contracts that might be affected: Electricity supply agreements Gas supply agreements Construction agreements Mining agreements Fuel supply agreements Transport agreements

24. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Existing contracts Do your existing contracts allocate carbon costs? Businesses may seek to rely on: Price review clauses MAC clauses Carbon price clauses Change in tax clauses Change in law clauses

25. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. New contracts Essential to consider carbon cost pass through Clauses should be carefully drafted to ensure they cover all costs Businesses should consider: –the materiality of their carbon costs –what costs they intend to pass on –how they calculate these costs –coverage of the relevant carbon scheme (there are many under the legislation)

26. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Example clause ‘If the seller incurs Carbon Costs, imposed as a result of a Carbon Scheme, the seller may include those costs in invoices to the buyer and the buyer must pay for these costs.’ Carbon Costs: any direct and indirect costs imposed as a result of any Carbon Scheme Carbon Scheme: includes but is not limited to all Acts and Regulations which form part of the Clean Energy Legislative Package and any other associated legislation which has been implemented to assist with the government’s ‘Securing a Clean Energy Future Plan’

27. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Role of the ACCC Responsible for investigating and monitoring impacts of carbon prices Positive duty to safeguard against price exploitation Offenders could be faced with: –substantiation notices –infringement notices –civil or criminal penalties What is price exploitation?

28. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Directors New legal duties in addition to general director’s duties Directors must ensure that companies: –understand liability under the carbon pricing scheme –have appropriate measures in place to cope with any increases in costs –introduce or consider measures to reduce carbon emissions –educate staff about compliance with the scheme –are aware of obligations to report and make disclosures about the scheme

29. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Listed companies Listed Rule 3.1: ‘a listed company must immediately disclose to the ASX any information that is expected to have a material effect on the price of its securities…’ PRICES PROFIT MARGINS SHARE PRICE

30. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. What to do now? Carbon management plan –increased costs what is our exposure? indirect costs? cost pass through? –new revenue streams –reducing costs reducing use of carbon intensive inputs energy efficient practices

31. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Legal assistance Consider seeking advice on: –potential carbon exposure –existing contracts – cost pass through –drafting new contracts – effective clauses –how to reduce costs –intellectual property issues –government funding –greenhouse gas reporting –director’s duties –disclosure obligations

32. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Questions?

33. Copyright © 2011 Cornwall Stodart Lawyers Enhancing Success ®. All rights reserved. Carbon tax – are you ready? For more information, please contact: Gid Meltzer, Partner t: +61 3 9608 2118 e: g.meltzer@cornwalls.com.aug.meltzer@cornwalls.com.au