Environmental Risk Management Update - September 2008

Contents

• The New Carbon Police Are Here – Now, How To Avoid Them
  The disclosure of a company's carbon footprint is no longer the realm of corporate conscience or social responsibility and has been mandated by new laws imposing harsh penalties and new "carbon police" to enforce compliance.
• The New Carbon Compliance Headache For Companies
  Corporate groups are currently grappling with a new headache in the burgeoning Australian regulatory landscape of climate change and carbon compliance – determining who has "ownership" of greenhouse gas emissions for the purposes of disclosure.

The New Carbon Police Are Here – Now, How To Avoid Them

The disclosure of a company's carbon footprint is no longer the realm of corporate conscience or social responsibility and has been mandated by new laws imposing harsh penalties and new "carbon police" to enforce compliance.

For those who remain unsure about the Government's intent to regulate the approach of the business community to climate change, the National Greenhouse and Energy Reporting Act Scheme (NGER Scheme) provides a good indication that carbon compliance is here now and it's here to stay.

Perhaps because the NGER Scheme is confined to disclosure of emissions by corporate groups rather than abatement or reduction in emissions, it has been largely ignored by the nations' media and, we are quickly discovering, also by many corporate groups. However, the NGER Scheme is no toothless tiger and corporate groups need to be aware of the extent of their liabilities.

Rather than reproduce penalty sections, here is a guide to the possible, albeit worst case, scenarios that may apply in the event of non-compliance with the National Greenhouse and Energy Reporting Act 2007 (NGER Act) (e.g. not registering by 31 August 2008 or not reporting by 31 October 2009):

1. audit of your corporate group's activities (non-compliance with any external audit may result in an offence with a penalty of $110,000 along with $1,100 for each subsequent day that compliance is not achieved).
2. noting any non-compliance on a register which may be made publicly available (a new tool for the media to name and shame individual companies who fail to fully comply).
3. receipt of an infringement notice and the requirement to pay a fine (one-fifth of the fines a court may impose).
4. request for personal written undertaking that actions will be taken to rectify non-compliance and prevent it from occurring again.
5. investigation by the "carbon police" (see below) who will have the power to enter your premises, powers of search, inspection and seizure of documents and information, ability to record activities being undertaken and the power to interrogate members of staff.
6. court order to pay a civil penalty of up to $220,000 (along with $11,000 for each subsequent day that compliance is not achieved). This penalty may be imposed on individuals if they have contravened a civil penalty provision and criminal proceedings may be instigated as well.
7. personal liability of the Chief Executive Officer in situations where he or she has been reckless or negligent regarding compliance and cannot show that he or she took reasonable steps (including obtaining and acting upon advice from professional consultants such as lawyers and environmental and energy advisers) to ensure compliance.

Needless to say, the negative publicity and media coverage associated with any of the above scenarios (even the minor ones) may be particularly damaging to companies who value their green credentials or their reputation for corporate social responsibility. Indeed, even compliance with the NGER Scheme may prove a concern to many companies given that detailed information about their emissions and energy consumption will now be published in a public forum by the Greenhouse and Energy Data Officer (GEDO).

The Greenhouse and Energy Data Officer (GEDO)

The GEDO or the Greenhouse and Energy Data Officer is a new statutory authority which is responsible for the gargantuan task of ensuring compliance with the NGER Scheme across Australia.

Mr David Rossiter has been appointed as the inaugural GEDO as of 1 July 2008 and reports directly to the Department of Climate Change. Mr Rossiter's yet to be appointed authorised officers will make up the new "carbon police", being fully armed with all of the police-style powers described in the scenario above to monitor companies' compliance with the NGER Scheme.

Consequences for Australian companies

Aside from the civil and criminal liability issues for companies described above, the mandatory reporting obligations under NGERS will herald increased operational costs for companies to comply. The depth of the new regulatory regime and the amount of changes required to companies' standard business practices could easily be compared with the compliance revolution that occurred with the introduction of Occupational Health and Safety regulation.

Some companies will also have liabilities to purchase and surrender permits for the amount of emissions which they report under the NGER Scheme once the proposed Carbon Pollution Reduction Scheme (to read our previous update on this topic click here) has been introduced.

Companies involved in the Energy Efficiency Opportunities (EEO) program will be familiar with many of the requirements under the NGER Scheme although there are significant differences between the two schemes. The EEO has been amended recently (effective 1 July 2008) incorporating the more complex and detailed legal tests contained in the NGER Scheme.

What to do now?

Companies that consider they may meet the threshold tests under NGERS, should be collecting data relating to energy consumed, energy produced and greenhouse gas emissions from 1 July 2008 across company organisational structures and determining 'ownership' of those emissions for the purposes of publicly reporting them. Many corporate groups may not be aware that a failure to carry out this collection of data and record keeping in accordance with the strictures of the NGER Scheme from 1 July 2008 will attract a civil penalty of up to $110,000.

A business as usual approach is not an appropriate way to address the new obligations under the NGER Scheme and will most likely lead to contravention of civil penalty provisions. Ensuring that the carbon police do not come knocking in August 2009 requires corporate groups to take formal steps now to obtain legal advice and put in place internal processes and procedures to ensure compliance. Taking such measures will avoid personal civil and criminal penalties for CEOs by demonstrating that they have taken reasonable and appropriate steps to comply.

Our climate change practice group is currently advising clients on internal compliance regimes to operate across their subsidiaries and business units and providing contract drafting and project structuring solutions to maintain a commercial advantage in this new regulatory landscape.

The New Carbon Compliance Headache For Companies

Corporate groups are currently grappling with a new headache in the burgeoning Australian regulatory landscape of climate change and carbon compliance – determining who has "ownership" of greenhouse gas emissions for the purposes of disclosure.

A crucial part of the Government's policy approach for dealing with climate change and fundamental to the effective operation of any emissions trading scheme (to read our previous update on this topic click here) is being able to assign Australia's greenhouse gas emissions to an "owner".

This sounds simple in theory, however, in practice working out who must take ownership of emissions for the purpose of disclosure under the National Greenhouse and Energy Reporting Scheme (NGER Scheme) is already proving to be extremely problematic for many corporate groups.

In particular, if the operations of your corporate group involve contractors, subcontractors, tenants, landlords, property managers and operators, or your projects are structured using partnerships or joint ventures then determining who has responsibility for reporting those emissions under the new laws may be a difficult task.

Coverage of the NGER Scheme

Contrary to popular misconception, these laws apply not just to emissions intensive industries such as electricity generation, aluminium smelting and mining, but to those industries who are responsible for large greenhouse gas emissions upstream (i.e. as a result of their electricity use).

This may include property developers, construction companies, industrial and commercial transport companies, large investors, banks, project financiers and potentially even large firms in the service industry if their energy bills are large enough.

Presently the NGER Scheme is intended to cover up to 450 of the top emitters in Australia and by 2010 this is expected to grow in excess of 700.

Under the NGER Scheme, corporate groups who think they may become liable should already (from 1 July 2008) be collecting data on their greenhouse gas emissions, energy consumption and energy production so that they will be able to comply at the end of the reporting period in August 2009. Failure to do so in accordance with the strictures of the NGER Scheme may incur heavy personal and corporate penalties.

Many companies already engage in-house or external energy consultants for this purpose. However, before they can be confident that their data collection complies with the law (or for those borderline companies, that their activities do not meet the liability thresholds), companies should obtain legal advice in order to determine just which emissions they actually own.

Operational control

Many corporate groups are currently seeking to shift their risk and gain a commercial advantage by effectively delegating "operational control" in contracts and project documents. While it may be tempting for these companies to apply traditional concepts of ownership, management or control and to think simply in terms of assets or projects, these concepts are quite removed from the specific legal tests for "operational control" and "facilities" which have been introduced under the NGER Scheme.

The "operational control" test is that responsibility for reporting of emissions, consumption and production will fall on whichever entity has the authority to introduce and implement operational, health and safety and environmental policies over the relevant "facility".

This test appears quite simple on its face, but therein lies the problem – its brevity and generality can make it difficult to pin down in many situations which are common to certain industries. Careful consideration of a company's contract documents is necessary to ensure compliance.

Construction industry

In the construction industry, many principals have incorrectly assumed that the contractor will retain operational control because the latter is the principal contractor with clear OH&S responsibilities.

However, the National Greenhouse Energy and Reporting Act 2007 (NGER Act) sets out that where more than one entity satisfies the "operational control" test, then one has to consider who has the "greatest" authority. Importantly, the "greatest authority test" expressly excludes health and safety policies and focuses on who has the greatest authority to introduce and implement operational and environment policies only. The idea that contractors will automatically have "operational control" and therefore liability to report on emissions from the project is therefore misguided.

For property developers and other principals, delegation of operational control may still be achievable in future projects with careful drafting of contracts, however they will need to carefully consider their existing agreements for sites against the legal tests in the NGER Act and NGER Regulations.

Property industry

An example of the difficulties which are evident in even the most common business relationship is determining who has responsibility for energy consumption and emissions in a classic tenant and landlord situation in a commercial building.

The Policy Paper published by the Department of Climate Change, which foreshadowed the release of the Regulations, set out that responsibility for energy billing would be a proxy for "operational control" in the context of a commercial building. However, this was not carried through in the National Greenhouse Energy and Reporting Regulations 2008 (NGER Regulations) and currently, the only test to be applied is the broad test set out in the NGER Act.

Accordingly, to ascertain liability under the NGER Scheme it is necessary to look to the terms of any lease or any other contract which affects the operations of a building (such as a property management contract). This will assist in determining which entity has the authority to introduce and implement operational, health and safety and environmental policies. Considerations of metering and energy billing arrangements are of little consequence unless they impact upon the extent to which an entity has the authority to introduce and implement the relevant policies.

Where to now?

We can assist you in applying the legal tests across your corporate group's activities and in drafting new clauses for contracts that take the NGER Scheme into account. This may help secure a competitive advantage, protect against unnecessary compliance costs for data collection and reporting, and protect against any potential liabilities under a carbon tax or the proposed CPRS in the future. It will also protect your corporate group from the possibility of current and future exposure to naming and shaming of non-compliance on a national register, civil and criminal penalties for non-compliance, and personal liabilities for CEOs under the NGER Scheme.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.