About the carbon pricing mechanism

What is it?

The carbon pricing mechanism is an emissions trading scheme that puts a price on Australia's carbon pollution. It was introduced by the clean energy legislation and applies to Australia's biggest carbon emitters (called liable entities).

Under the mechanism, liable entities must pay a price for the carbon emissions they produce each year. This covers approximately 60 per cent of Australia's carbon emissions including from electricity generation, stationary energy, landfills, wastewater, industrial processes and fugitive emissions.

The carbon pricing mechanism covers a range of large business and industrial facilities. It does not directly cover the vast majority of Australian businesses, including smaller businesses, or households.

How does it work?

Liable entities must report annually on their emissions or potential emissions under the National Greenhouse and Energy Reporting Act 2007 (NGER Act).

At the end of each financial year, liable entities must surrender one carbon unit for every tonne of carbon dioxide equivalent (CO2-e)—that they have produced in that year. This creates economic incentives to reduce their pollution.

There are two stages to the carbon pricing mechanism:

  • Fixed price—The carbon price is fixed for the first three years. In 2012–13 it is $23 a tonne of carbon pollution, in 2013–14 it is $24.15 a tonne and in 2014–15 it is $25.40 a tonne. Liable entities can purchase units up to their emissions levels. Purchased units cannot be traded or banked. For more information, see fixed price 2012–15.
  • Flexible price—From 1 July 2015 the price will be set by the market. Most units will be auctioned by the Clean Energy Regulator—we begin auctioning units from the first half of 2014, in the lead up to the flexible price. The number of units the Government issues each year will be limited by a pollution cap set by regulations. For more information, see flexible price from 2015.

If a liable entity does not surrender any or enough units, it must pay a 'unit shortfall charge':

  • from 2012 to 2015, this charge is set at 130 per cent of the fixed price for the relevant fixed price year
  • from 2015 onwards, once the carbon pricing mechanism moves to the flexible price period, the unit shortfall charge will be up to 200 per cent of the benchmark average auction price for the relevant period.

The shortfall charge creates an incentive to surrender units under the mechanism rather than pay the higher shortfall charge.

The carbon pricing mechanism includes systems for assessing liability for emissions, meeting liability for emissions through payment and surrender processes for eligible emissions units, and relinquishing units (in certain circumstances units are returned to the Commonwealth without them being surrendered).

How is liability decided?

Entities are liable if they operate facilities that exceed the threshold for covered 'scope 1' emissions, or if they supply or use natural gas. The threshold for covered scope 1 emissions is 25 000 tonnes of carbon dioxide equivalent (CO2-e) per year. For more information, see what emissions types are in and out? From 1 July 2013, eligible applicants of the liquid fuel opt-in scheme will also be liable.

Information collected through national greenhouse and energy reporting provides the basis for assessing liability under the carbon pricing mechanism. For more information, see the National Greenhouse and Energy Reporting (NGER) scheme.

Was this page useful?