PLC Global Finance update for March 2011: Australia

Practical Law UK Articles 8-505-3386 (Approx. 3 pages)

PLC Global Finance update for March 2011: Australia

by Minter Ellison

Australian government announces proposed carbon tax framework

Leigh De Jong and Stephen Clugston

On 24 February 2011, the Australian government announced a two-stage plan to implement its proposed carbon pricing mechanism. The framework includes a fixed price carbon tax phase (fixed price phase) followed by a cap-and-trade emissions trading phase (cap-and-trade phase).

Key features of the framework include:

A commencement date of 1 July 2012 (if approved and implemented by parliament).
An initial fixed price (not yet determined) which is scheduled to operate for a period of three to five years, with an option to extend for a longer period.
A transition period to ensure a smooth transition from the fixed price phase to the cap-and-trade phase.
Coverage of the six greenhouse gases under the Kyoto Protocol to the United Nations Framework Convention on Climate Change (1997) and a broad coverage of sectors of the Australian economy (excluding sectors covered by the government's proposed Carbon Farming Initiative – a carbon offsets scheme to be established by the Australian government to provide, among other things, new economic opportunities for farmers and landowners) including:
- the stationary energy sector;
- the transport sector;
- the industrial processes sector;
- the fugitive emissions (other than from decommissioned coal mines);
- emissions from non-legacy waste.
Linking with international markets during the cap-and-trade phase to enable the use of international units for compliance with the scheme domestically.

The government's decision on whether to exercise its option to extend the fixed price phase can made be at least 12 months before the end of the phase, based on some of the following factors:

The state of international carbon markets (including availability, integrity, and price of international units).
Developments in carbon pricing in key economies.
Australia's position with regard to its internationally agreed targets.
The impact on the Australian economy and the competitiveness of Australian industry.
Implications on 'green' investments locally.

As the framework only outlines the 'broad architecture' of the national carbon pricing mechanism, there is still a lack of detail on specific mechanical factors such as (amongst others):

The starting price under the fixed price and relevant formulations relating to annual rate increases in the context of the government's carbon reduction commitments.
Assistance mechanisms for emissions-intensive trade-exposed businesses.
The impact on, and government support for, households (particularly low and middle income) to meet the rising cost of energy.
Support and incentives for green technology innovation.
Criteria for the use of international emissions units.

Once details of the framework are released, businesses (as well as financiers and investors considering target businesses) with material emissions volumes should be sensitive to the potential impact of carbon pricing on business operating costs as well possible commercial arrangements to mitigate such costs (such as 'pass through' or 'offset' mechanisms).

Covered bonds in Australia

Caroline Cole and John Elias

Australian banks, building societies and credit unions will be allowed to issue covered bonds as part of the federal government's banking reform package announced in December 2010. The package is aimed at increasing competition in the banking sector. The Treasurer indicated that the government will release draft amendments to the Banking Act 1959 during the first sitting of Parliament in 2011. These amendments have not yet been released.

The announcement, which was welcomed by the Australian financial markets, followed a long campaign to permit the issue of covered bonds by Australian authorised deposit taking institutions (ADIs). The Australian Prudential Regulatory Authority (APRA) had consistently refused to allow banks to issue covered bonds, as they believed it was inconsistent with the deposit holder protection regime enshrined in the Banking Act.

Covered bonds, which are commonly issued in off-shore markets (particularly in Europe) and more recently in New Zealand, provide a direct claim on the issuing bank together with recourse to a segregated pool of assets. Investors are attracted by the high credit quality of covered bonds and the fact that they have a claim against the issuer and there is a segregated pool of assets over which they hold security. It is anticipated that covered bonds will provide an alternative and cheaper form of funding than issuing RMBS or using straight corporate debt. It is expected this will expand the investor base and increase demand for Australian fixed income securities.

It is proposed that a cap will be placed on their use for individual institutions - the reform package refers to a cap of "five percent of an issuer's total Australian assets", however, this cap has not yet been confirmed. The cap is intended to minimise any impact on the assets protecting deposit holders. ADIs will be keen to see flexibility regarding the level of the cap and an acknowledgement that one size does not fit all ADIs.

Aggregated funding structures which will permit credit unions, building societies and regional banks to access the covered bond market are also a key topic of discussion.

It is expected that short form changes to the Banking Act will be enacted followed by more detailed subordinate legislation and/or APRA prudential standards. We will keep you posted as this significant change in the Australian Banking sector progresses.

PLC Global Finance update for March 2011: Australia | Practical Law