EXPLANATORY STATEMENT

Issued by the authority of the Minister for Climate Change, Industry and Innovation

Clean Energy Act 2011

Clean Energy (Auction of Carbon Units) Determination 2013

Purpose

Part 4, Division 4 of the Clean Energy Act 2011 (the Act) provides that some of the carbon units that can be surrendered in the flexible price period of the carbon pricing mechanism (that is, after 1 July 2015) will be issued by the Australian Government through an auction conducted by the Clean Energy Regulator.

The Clean Energy (Auction of Carbon Units) Determination 2013 (the Determination) establishes the policies, procedures and rules that apply to the auctioning of carbon units.

Background

The Act establishes the carbon pricing mechanism, which is a ‘cap and trade’ emissions trading scheme designed to reduce Australia’s greenhouse gas emissions and meet Australia’s international climate change commitments. Liable entities under the carbon pricing mechanism may meet their obligations by either surrendering eligible emissions units or paying a charge. Further information about the carbon pricing mechanism may be found in the Explanatory Memorandum to the Clean Energy Bill 2011 and the website of the Clean Energy Regulator (www.cleanenergyregulator.gov.au).

Liable entities may acquire units in a number of ways. The Government may allocate some carbon units to businesses under the Jobs and Competitiveness Program or as part of the Energy Security Fund, to help affected industries make the transition to a clean energy future. The remaining units will be sold by the Government through regularly scheduled auctions.

The Determination relates to the auction of units that may be used for compliance under Australia’s carbon pricing mechanism from 1 July 2015, when the mechanism automatically becomes an emissions trading scheme in which the price is determined by the market. Once auctioned, units may be traded.

The auction scheme has been designed to meet the policy objectives of promoting allocative efficiency and efficient price discovery. It is the Government’s intention to implement open and transparent auctions that provide a clear price signal and channel carbon units to their highest value use in the economy. This will allow emissions reductions to occur where they are cheapest. Auctioning will also provide an early indication of the market price of carbon units, ensure a strong signal to reduce carbon pollution and facilitate efficient price discovery. Auctions will also raise revenue that can be used to assist low- and middle-income households and businesses and invest in clean energy.

The Governor-General has made an amendment to the Corporations Regulations 2001 to establish auctions of carbon units under section 111 of the Act as financial markets for the purposes of the Corporations Act 2001.

The Determination will enable the Clean Energy Regulator to implement the necessary administrative arrangements so that it may start auctioning carbon units in accordance with the scheduled commencement of auctions in the first half of 2014.

Legislative basis

Section 99 of the Act provides that one of the permitted methods of issuing carbon units is as a result of an auction conducted by the Regulator.

Section 101 of the Act imposes limits on the issue of carbon units when no regulations are in place under section 14 of the Act to set a pollution cap for a vintage year.

Under subsection 113(1) of the Act the Minister may, by legislative instrument, make a determination that sets out the policies, procedures and rules that apply to auctions of carbon units.

Under subsection 113(2) of the Act, the determination may make requirements relating to one or more of the following (but is not limited to these): the type of auction, the timing of auctions, participation, proxy bidding, variation of bids, the total number of carbon units on offer, deposits and payment.

Under subsection 113(5) of the Act the determination may confer a power to make a decision of an administrative character on the Clean Energy Regulator.

Under subsection 113(6) of the Act the determination may empower the Clean Energy Regulator to disqualify a person from participating in auctions.

Under section 195 of the Act, the Clean Energy Regulator must publish the following information on its website for each auction of carbon units conducted:

• the date of the auction;
• the vintage year(s) of the carbon units auctioned; and
• a statement setting out for each vintage year, the per unit charge payable and the total number of carbon units issued.

Consultation

The Government has conducted extensive consultation on auctioning carbon units with stakeholders, including liable entities, representatives from the financial services sector and legal experts, in developing the Act and this Determination.

In the development of this Determination, the Government sought views on the auction design features through the release of a Departmental position paper and draft Determination. The Determination takes into account:

• submissions received by the Government and to Parliamentary Committees as part of the development and parliamentary consideration of the Carbon Pollution Reduction Scheme Bill 2009 and related bills and the Act and related Clean Energy legislation in 2011;
• submissions on the Position paper on the legislative instrument for auctioning carbon units in Australia’s carbon pricing mechanism that were received in February 2012;
• decisions about auction design features reflected in the fact sheet on Auctions for carbon units released in August 2012; and
• submissions on the Exposure Draft Clean Energy (Auction of Carbon Units) Determination 2013 that were received in April 2013.

The Department also retained Professor Peter Cramton, Professor of Economics at the University of Maryland, to provide expert advice on the development of the design of the auction system and the contents of the Determination.

Regulatory Impact

In September 2012, a Regulation Impact Statement was released as part of the process for developing the Auction Scheme. The Regulation Impact Statement Auctions for carbon units: auction schedule, frequency and collateral assesses options for auctioning carbon units from 2013-14.

Detailed description of the Determination

Details of the Determination are set out at Attachment A.

Statement of compatibility with human rights

A statement of compatibility with human rights for the purposes of Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is set out at Attachment B.

Attachment A

Details of the Determination

Section 1 – Name of Determination

Section 1 states that the name of the Determination is the Clean Energy (Auction of Carbon Units) Determination 2013.

Section 2 – Commencement

Section 2 provides that the Determination commences the day after it is registered on the Federal Register of Legislative Instruments.

Section 3 – Authority

The Determination is made by the Minister under subsection 113(1) of the Clean Energy Act 2011 (the Act).

Section 4 – Definitions

Section 4 sets out defined terms used in the Determination. In some cases, defined terms are defined by reference to other laws. The note sets out certain terms used in the Determination that are defined in section 5 of the Act.

‘Business days’ are business days in the Australian Capital Territory.

Section 5 – Meaning of current bid and related terms

Section 5 defines ‘current bid’, the ‘lowest-priced current bid’, the ‘highest‑priced current bid’ and ‘adjacent current bids’. These terms have been defined to distinguish specific types of bids because bidders may submit one or several price-quantity bids.

A ‘current bid’ is defined as a ‘bid’ (see section 22 for the definition of a bid) that has been manually entered into the auction system by a bidder, and has not been deleted or replaced by another bid. If a bidder puts in a bid for a different number of carbon units at that price, this bid becomes a new current bid.

A bidder can only have one current bid at a particular price point, though the bidder can have several bids (that is, different price-quantity offers). For example, a bidder may have a current bid for 1,000 carbon units at $10.30 and another current bid for 700 carbon units at $10.35.

The ‘lowest-priced current bid’ refers to the current bid that has the lowest price per carbon unit of all the bids entered by a bidder.

The ‘highest-priced current bid’ refers to the current bid that has the highest price per carbon unit of all the bids entered by a bidder.

‘Adjacent current bids’ are defined as bids where the bidder has not placed any other current bids between these two bids. Examples of adjacent current bids are:

• 1,000 carbon units at $10.20 and 900 carbon units at $10.21; or
• 1,000 carbon units at $10.20 and 900 carbon units at $10.30, with no other price-quantity bids at prices between $10.20 and $10.30. It should be noted that in this instance the bidder has bid for 900 units at all prices between $10.21 and $10.30 (these are referred to as ‘notional bids’ in sections 26-27 (see below)).

A bidder has ‘one current bid’ if it is both the lowest-priced current bid and the highest priced current bid and the bidder does not have adjacent current bids.

Section 6 – Number and timing of auctions

Section 6 sets out the number and timing of auctions for carbon units with the vintage year beginning on 1 July 2015 and all later vintages. A ‘vintage year’ is defined in section 5 of the Act as an ‘eligible financial year’ which is, in accordance with section 96 of the Act, the vintage year of the unit.

The Clean Energy Regulator (the Regulator) will conduct eight auctions of carbon units for each vintage year. Auctions will be scheduled as follows:

• one auction in each of the three years preceding the vintage year;
• four auctions during the vintage year; and
• one auction after the vintage year but before the final surrender date on 1 February following the vintage year.

The exception will be those auctions conducted for units of the 2015-16 vintage year. For these units, the Regulator will conduct two auctions in 2013-14, one auction in 2014-15, four auctions in 2015-16 and one auction between 1 July 2016 and 1 February 2017.

Auctions that are cancelled, either before they have commenced or during the auction (see sections 38 and 39 below), are deemed to have never taken place for the purpose of determining, under section 6, the number and timing of auctions that need to take place for each vintage. Therefore, if the Regulator cancels an auction it must re-schedule another auction within the time constraints outlined in section 6.

The Regulator may only hold additional auctions to sell unsold units in accordance with section 7 (see below).

Section 7 – Additional auction for unsold units

Section 7 provides that the Regulator can offer unsold units through an additional auction.

If the Regulator holds an auction, and the settlement price for the auction is the opening price, and not all units are issued at auction, the Regulator can offer the unsold units at a later auction at a time to be determined by the Regulator. This auction would be in addition to the eight auctions for units of each vintage year, outlined in section 6 (see above).

If an additional auction is held, the Regulator will publish the date of the auction, the vintage year of the carbon units to be offered, and the technical requirements of the auction on its website (www.cleanenergyregulator.gov.au) at least 15 business days before that auction is to be held.

Section 8 – Auction system

Section 8 provides that the Regulator must conduct auctions using an electronic system with bids submitted over a network (that is, the internet).

The Regulator may operate the electronic auction system, or it may arrange for the system to be operated on its behalf by a service provider.

Section 9 – Eligibility to bid in auction

Section 9 sets out the criteria for eligibility to bid in an auction.

A person is eligible to bid in an auction (an ‘eligible bidder’) if that person is:

• the holder of an account in the Australian National Registry of Emissions Units (ANREU);
• not disqualified from bidding in auctions under section 41 (see below);
• not an ‘excluded person’ under section 9(6), which includes officials of the Regulator, the service provider and, if it is a corporation, persons connected with it, the independent auction monitor and, if it is a corporation, persons connected with it and persons with suspended ANREU accounts under section 28D of the ANREU Act; and
• both the eligible bidder and the Regulator have approved an individual to use the auction system on behalf of the eligible bidder.

The individual accessing the auction system on behalf of the eligible bidder need not be an authorised representative for the eligible bidder’s ANREU account. This would allow, for example, a person employed by the eligible bidder to participate in the auction on the bidder’s behalf, but not transact units purchased at an auction on the eligible bidder’s ANREU account, which must be done by an authorised representative in accordance with the requirements of the ANREU Act and Regulations.

Decisions about who may access the auction system are a matter for the eligible bidder, subject to the Regulator’s approval under section 9(1)(e) and the requirements of sections 9(2) and 9(3), and the limitations imposed by sections 9(4), (5) and (6).

Under section 9(3), the Regulator has the power to determine the processes for approving a person to access the electronic auction system. For example, this could include requiring the person to complete an electronic enrolment form, undertake training relating to the manner in which the auction will be conducted, or other conditions that the Regulator considers appropriate to maintain the integrity of the auction.

Under section 9(5), a person approved by the Regulator to access the electronic auction system will have their approval revoked if the eligible bidder for which they are accessing the auction system notifies the Regulator, in writing, that their approval has been withdrawn.

Section 10 – Ascending clock auction to be used

Section 10(1) specifies that the auction will be an ascending clock auction with one or more ‘clock rounds’. Section 10(2) defines an ‘ascending clock auction’ for the purposes of the Determination.

During each clock round of an ascending clock auction the Regulator announces the round price for that clock round. The ‘round price’ is determined under section 21 (see below). Bidders then nominate the number of carbon units that each of them is prepared to purchase at prices specified by the bidder (see sections 22 and 23). If demand exceeds supply at the round price, then the Regulator raises the price in the next clock round and bidders have the opportunity to submit new bids.

This process continues until the clock round where the number of carbon units offered is equal to or greater than demand. Section 10(3) provides that this round is called the ‘final clock round’. That is, the auction will end when the number of carbon units on offer is more than the number of carbon units demanded.

Bidders then pay the highest price at which demand is greater than or equal to supply. The final price paid for each carbon unit to be issued at an auction will be the same for all successful bidders under this ascending clock auction system (see section 29 and 32).

Section 11 – Date of auction

Section 11 requires the Regulator to publish on its website (www.cleanenergyregulator.gov.au) the date of the auction and the vintage year of the carbon units on offer at that auction at least three months before the auction. For example, if the auction is scheduled to occur on 1 May, then the Regulator must publish the relevant details by 1 February. See Appendix 1 for a timeline of key auction events.

Section 12 – Technical requirements of auction

Section 12 requires the Regulator to publish on its website (www.cleanenergyregulator.gov.au) the technical requirements for participating in the auction at least two months before the auction. . For example, if the auction is scheduled to occur on 1 May, then the Regulator must publish the relevant details by 1 March.

The technical requirements for participating in an auction could include requirements related to internet access, internet browser compatibility or hardware needed to access the auction system.

Section 13 – Number of carbon units offered in auction

Section 13 specifies how many carbon units the Regulator will offer at each auction.

The Regulator will publish on its website the number of carbon units on offer at each auction at least 15 business days before that auction.

For auctions held during the financial year beginning 1 July 2013, section 10(2) provides that the specific number of units will be:

• 20 million carbon units in the first advance auction of carbon units with a      2015-2016 vintage;
• 20 million carbon units in the second advance auction of carbon units with a   2015-2016 vintage; and
• 20 million carbon units in the first advance auction of carbon units with a      2016-2017 vintage.

The number of carbon units specified in section 10(2) comply with the requirements of:

• section 101(1) of the Act, which provides that no more than 20 million units may be auctioned at least 12 months in advance of the start of a vintage year for which no regulations have been made setting a pollution cap under section 14 of the Act; and section 101(1B) of the Act, which provides that no more than 40 million units may be auctioned for the 2015-16 vintage year in the year commencing 1 July 2013, if there are no regulations that have been made setting a pollution cap under section 14 of the Act.

These auctions are scheduled to take place before the time at which the carbon pollution cap for the 2015-16 eligible financial year is likely to be set by the Government under section 14 of the Act. Given that any regulations setting the carbon pollution cap must be made before 31 May 2014, the numbers specified in section 10(2) cannot be used for the purposes of estimating a cap.

For determining the number of carbon units offered in later auctions, the Regulator:

• must comply with the requirements of section 102(1) of the Act concerning the total number of units that may be auctioned;
• must have regard to the number of carbon units of the same vintage that not been sold at the previous auction; and
• must have regard to the expressed preference in section 13(3)(c) of the desirability of evenly distributing carbon units with the same vintage across the eight auctions required under section 6.

Under section 102(1) of the Act, the Regulator must ensure that the sum of:

• the total number of units to be auctioned for a vintage year;
• the carbon units for that vintage year issued under the Jobs and Competiveness Program provided for in Part 7 of the Act; and
• the carbon units issued for that vintage year for coal fired electricity generation, as provided for in Part 8 of the Act,

is equal to the sum of:

• the carbon pollution cap for the relevant vintage year set under section 14 of the Act; and
• the number of units relinquished, either before the start of the vintage year or during it, in accordance with Part 11 of the Act.

Section 14 – Minimum number of carbon units that bidder may bid for in auction

Section 14 allows the Regulator, in specified circumstances, to set a minimum quantity of carbon units, of up to 1,000 carbon units, that a bidder may bid for during an auction. The Regulator may only do this in circumstances where it has reasonable grounds to believe that there are factors that exist which may compromise the integrity of the particular auction. This power does not extend to allowing the Regulator to set a minimum bid size for auctions generally.

If the Regulator does set a minimum number, it must do so, and publish the number on its website (www.cleanenergyregulator.gov.au), at least one month prior to the start of the auction. For example, if the auction is scheduled to occur on 1 May, then the Regulator must publish the relevant details by 1 April.

Section 15 – Auction start time

Section 15 requires the Regulator to publish on its website (www.cleanenergyregulator.gov.au) the start time of the auction and the time on the day before the auction from when advance bids can be made, at least 15 business days before the auction.

Section 16 – Deposit price for auction

Section 16 requires the Regulator to set a deposit price for the auction and publish it on its website (www.cleanenergyregulator.gov.au) at least 10 business days before the auction. The deposit price is set in accordance with section 19 (see below). The deposit price is used by each bidder to calculate the size of its deposit, which will determine the total number of units for which it may bid in the auction (see section 25 below).

Section 17 – Providing deposit

Section 17 specifies the form and timing of deposits that eligible bidders must provide to the Regulator prior to auction.

Prior to the auction, eligible bidders must provide a deposit to the Regulator in Australian dollars in the form of:

• cash;
• a guarantee from an Australian authorised deposit-taking institution (as defined under the Banking Act 1959);
• an irrevocable letter of credit from an Australian authorised deposit-taking institution; or
• a combination of these forms.

The eligible bidder must ensure that:

• cash deposits are received by the Regulator three business days before the auction;
• a bank guarantee or irrevocable letter of credit are received by the Regulator five business days before the auction.

To calculate the amount of deposit required, each eligible bidder must determine the total number of units for which it will bid at the deposit price. The deposit is then 10 per cent of this quantity multiplied by the deposit price. The deposit will determine the maximum number of units for which an eligible bidder can bid during the auction (see section 25 below).

Section 18 – Opening price for auction

Section 18 requires the Regulator to publish the opening price on its website (www.cleanenergyregulator.gov.au) on the day before the auction. The Regulator must publish the opening price prior to the time that advance bids can be made, as provided under section 15(b) (see above).

Section 19 – Method of setting deposit price and opening price

Section 19 sets out the method that the Regulator must use to set the deposit price and opening price for an auction.

Under sections 19(2) and (3), the Regulator must determine the deposit price and the opening price by referencing market prices for emissions units. The Regulator must use domestic market prices, if a liquid market price can be obtained; otherwise it must use international market prices. In either situation, the Regulator assesses market liquidity, having regard to the volume of trading in emission units; the timing of those trades; and the amount of open interest in emission units.

Section 19(4) provides that, if the Regulator uses a domestic market, the opening price will be 80 per cent of the market price. Section 19(5) provides that, if the Regulator uses an international market, the opening price will be 60 per cent of the market price. If the Regulator uses an international market, then the price would be converted to Australian dollars using the most recent exchange rate published by the Reserve Bank of Australia on the previous day.

Under section 19, the Regulator calculates the deposit price in exactly the same way as the opening price, but section 16 provides that it must set it at least 10 business days before the auction to provide time for eligible bidders to arrange their deposits. Section 18 provides that the Regulator sets the opening price on the day before the auction, in time for advance bids to be made.

The Regulator can set both the deposit price and the opening price by referencing spot prices or futures prices. If it uses future prices, it must then adjust the opening price and deposit price to reflect the time value of money, using the BBB-rated corporate bond rate, as published by the Reserve Bank of Australia from time to time. The Regulator will determine whether to use a spot price or a futures price based on the liquidity of the market. To address the potential for backwardation, the Regulator will choose the lowest of the spot or futures prices, assuming both prices can be obtained and are sufficiently liquid. In the context of carbon units, backwardation occurs when the price of a carbon unit for delivery in the future is trading below the price of a carbon unit for immediate delivery.

It is possible for the Regulator to determine the market price for carbon units with a particular vintage, by using the market price of carbon units with a different vintage. If it does this, then it adjusts the price downwards to reflect the time value of money, using the BBB-rated corporate bond rate, as published by the Reserve Bank of Australia. This is because the vintage of a carbon unit determines the first year in which it may be surrendered. For example, the spot price for carbon units with vintage 2015-16 may be used to determine the opening price for an advance auction of carbon units with vintage 2016-17. The spot price will be discounted to take into account that an advanced auctioned unit cannot be surrendered until its vintage year.

Section 20 – Schedule for clock rounds

Section 20 requires that, in conducting the auction, the Regulator must have several ‘clock rounds’, which must take place between 9am and 5pm on a business day. An auction may last longer than a day, but it is intended that auctions should be completed well within a single business day.

The Regulator determines the scheduling of clock rounds in its complete discretion, which includes determining the length of each clock round and the interval between when a clock round finishes and when the next one starts.

Section 21 – Round price

Section 21 defines the ‘round price’, which is the price increment for the purposes of bidding that increases for each clock round. The Regulator must announce the next round price at the end of each round. The round price for the first clock round is the opening price. For later clock rounds, the Regulator sets the round price and then advises eligible bidders of that round price.

The round price is important for three reasons:

• at the end of a clock round, the Regulator will lock in bids at prices less than or equal to the round price (see section 24 below).
• at the end of each clock round, the Regulator will notify each bidder of the aggregate demand (that is, total demand by all bidders) at the round price (see section 28 below); and
• the round price indicates the price at which a bidder must have a non-zero quantity bid in order to be able to bid in subsequent rounds.

Section 22 – Bidding

Section 22 defines a ‘bid’ as an offer, made by an eligible bidder through the auction system, to purchase a specified quantity of carbon units at a specified price, which must be in whole cents. Bids may be changed, subject to the requirements set out in sections 23, 24, 25, 26 and 27 (see below).

Section 22(3) also specifies that only one person, who has been approved under section 9(2) (see above),may use the auction system at a time to enter bids on behalf of an eligible bidder.

Section 23 – When bids may be made

Section 23 sets out the circumstances in which bids may be made. Specifically:

• bids may be submitted prior to the start of the auction, but only after the time when advance bids may be made that the Regulator publishes in accordance with section 15 (b) (see above);
• bids may be submitted during a clock round;
• bids submitted in the first clock round must be at a price that is greater than or equal to the opening price; and
• bids submitted in subsequent clock rounds must be at a price that is greater than the round price for the previous clock round.

Eligible bidders must make an advance bid or bid in the first clock round (that is, at the opening price) in order to participate in later clock rounds. If no bid is made in a clock round, then the eligible bidder will be taken not to be participating in the auction and the Regulator will not accept further bids from that bidder. If the auction continues, and the settlement price is higher than the last bid made by an eligible bidder at an earlier clock round, then that bidder will not receive any units as a result of the auction.

Eligible bidders can place bids at a series of prices higher than the round price. These prices only get ‘locked-in’ when the current clock round reaches that price and that round ends.

Bidders can place bids at prices other than the round price. However, bidders will need to place a bid of at least one unit (or the minimum number, if one has been set by the Regulator under section 14 (see above)) at the round price in order to continue bidding during subsequent clock rounds. After a clock round has ended, a bidder cannot increase the number of carbon units it bids for as the price per carbon unit increases (see section 25 below).

Section 24 – When bids may be deleted or replaced

Section 24 sets out the circumstances when eligible bidders may delete or replace bids in an auction.

The following constraints apply to bids:

• bids may be replaced or deleted prior to the start of the auction but after the time when advance bids may be made that is published by the Regulator under section 15 (b);
• bids may be replaced or deleted during the first clock round; and
• bids may be replaced or deleted in subsequent clock rounds, but any replacement bid must be at a price that is greater than the round price for the previous round.

The Regulator may delete a bid if it has received a request from a bidder and is satisfied that, due to technical difficulties, the bidder is unable to delete a bid.

Section 25 – Number of carbon units that may be bid for

Section 25 describes the number of carbon units that may be bid for.

An eligible bidder cannot increase the number of carbon units that it bids for as the price per carbon unit increases. For example, if a bidder bids for 100 units in the first clock round, it may only bid for 100 units or fewer in the next round. If it bids for 90 units in the next round, it cannot increase its bid above 90 units at a later round, even if this is within the maximum number of units for which the bidder may bid based on its deposit.

This rule is commonly referred to as the ‘activity rule’, and is designed to support an effective auction by ensuring the bids placed match bidders’ actual demand. If as a result of a new bid an existing current bid at a higher price per carbon unit no longer complies with the activity rule, then the existing current bid will be deleted.

There is no minimum number of carbon units for which an eligible bidder can bid, unless the Regulator has set a minimum number of units under section 14. The number of carbon units bid for cannot be negative. However, if the bidder puts in a bid of zero units or does not bid, then it cannot participate in the auction further and cannot place any further bids (see section 23 above).

If the Regulator sets a minimum bid size and an eligible bidder does not provide a sufficient deposit to meet this minimum bid size, then the bidder may not make a bid. As the minimum bid size must be set 1 month before the auction, bidders will have the opportunity to adjust their approach before providing a deposit.

An eligible bidder cannot bid for more carbon units than are offered at the auction.

The maximum number of carbon units bid for is constrained by the amount of the deposit the bidder provides (see section 17 above). There is a ‘price denominator’ that is the minimum of the deposit price for the auction and opening price for the auction (which are determined according to the method set out in section 19). The number of carbon units bid for cannot be more than the Deposit × 10 ÷ Price denominator.

For example, if the deposit price is $20 and opening price is $22 and a bidder pays a $200 deposit, the maximum number of carbon units for which it can bid is 100 ($200 × 10 ÷ $20). In this example the deposit price is used as the price denominator, as it is the lower of either the opening price or deposit price.

Section 26 – Notional bids

As the auction progresses, eligible bidders will explicitly state their demand at certain price points. Section 26 describes the rules for determining how many carbon units a bidder has bid for at prices that differ from the prices where the bidder has explicitly stated their demand.

These bids are ‘notional bids, while bids where the bidder has explicitly stated their demand are known as ‘current bids’ (see the relevant definitions in section 5).

Each time a bidder places a bid at a particular price (a current bid), notional bids are set at that quantity for all prices back to the price immediately above the bidder’s previous current bid.

For example, suppose that a bidder has two current bids: a bid for 100 units at $20.00; and a bid for 50 units at $20.05. According to section 26, the bidder will have notional bids for 50 units at $20.01, $20.02, $20.03 and $20.04.

Section 26 does not operate to determine the existence of notional bids at any prices higher than the bidder’s highest current bid.

Section 27 – Notional bids do not change if less than or equal to previous round price

Section 27 states that when a clock round is completed, the Regulator locks in notional bids that are at a price that is less than or equal to the round price and the bidder cannot then replace or delete these bids in subsequent clock rounds.

Section 28 – Notifying results of clock round

Section 28 provides that, at the end of each clock round, the Regulator must communicate to bidders the total demand at the round price, which is the aggregate demand of all bidders. At the end of the auction, the Regulator must notify each bidder that the auction has ended.

The Regulator must publish on its website (www.cleanenergyregulator.gov.au) the round price and the total number of carbon units that were bid for at the round price, for each clock round. While the Regulator may publish this information during the auction, the latest that the Regulator can publish the information is as soon as practicable after the final clock round.

Section 29 – Settlement price and margin price for auction

Section 29 defines the ‘settlement price’ and ‘margin price’.

The ‘settlement price’ is the price at which the auction clears, that is the price that all successful bidders pay for each carbon unit they are allocated.

Depending on the circumstances of the auction, the settlement price could be one of the following:

• the opening price, if the auction concludes in the first clock round. The auction concludes in the first clock round if the number of carbon units demanded at the opening price is less than the quantity of carbon units offered by the Regulator; or
• the price at which the demand for carbon units exactly matches the total number of units offered for sale at the auction; or
• the highest price for which the demand for carbon units exceeds the total number of units offered for sale at the auction.

The ‘margin price’ is defined as the settlement price plus one cent. The margin price is used for working out the allocation of units when the demand for carbon units exceeds supply at the settlement price, as determined in section 30 (see below).

Section 30 – Number of carbon units allocated to each bidder

Section 30 sets out the way in which the Regulator will allocate carbon units to successful bidders after the settlement price has been determined. Units are allocated on a proportional basis to closely match supply and demand subject to a uniform price.

The Regulator will allocate carbon units as follows after the final clock round:

• If the demand for carbon units equals or is less than supply at the settlement price, the Regulator will allocate to each bidder the number of units they bid for at the settlement price.
• If the demand for carbon units exceeds supply at the settlement price the Regulator will allocate to bidders carbon units based on the number of units for which they bid at the settlement price and the number of units for which they bid at the margin price.

Each eligible bidder will receive the number of units that it bid for at the margin price.

The Regulator will allocate to each bidder the remaining carbon units, that is, the difference between the total number of units offered at the auction and the number of units bid at the margin price, in proportion to:

• the difference between the number of units the bidder bid for at the settlement and margin prices; and
• the difference between the number for units all bidders bid for at the settlement and margin prices.

The formula for allocating carbon units to a bidder is as follows (rounded down to the nearest carbon unit):

where:

• BM is the number of units the bidder bid for at the margin price.
• BS is the number of units the bidder bid for at the settlement price.
• DM is the total number of units bid for at the margin price.
• DS is the total number of units bid for at the settlement price.
• U is the number of units offered at the auction.

For example, suppose that the Regulator auctions 100 carbon units. The settlement price is $21.30. At $21.30, Jess will buy 50 units, Luke will buy 40 carbon units and Joe will buy 15 carbon units. This results in an excess demand of 5 units (see table below).

At the margin price of $21.31 Jess will buy 50 units, Luke will buy 35 units and Joe will buy 5 units so that there is an excess supply of 10 units.

At the margin price there are 10 remaining carbon units that are not demanded. Each bidder receives what they demanded at the $21.31 price, and the remaining carbon units are allocated to each bidder in proportion to their excess demand at the settlement price ($21.30) rounded down to the nearest unit:

• Jess will receive the 50 carbon units that she bid for at both the margin and settlement prices;
• Luke will receive the 35 carbon units he bid for at the margin price plus 3 carbon units (out of an excess demand of 5 carbon units) and so receives 38 carbon units in total;

38 = 35 + (100-90) ×

• Joe will receive the 5 carbon units he bid for at the margin price plus 6 carbon units (out of an excess demand of 10 carbon units) and so receives 11 carbon units in total;

11 = 5 + (100-90) ×

• The Regulator will hold the one remaining unallocated carbon unit until the next auction.

Section 31 – Notice of results of auction

Section 31 provides that the Regulator will, as soon as practicable after the end of the auction, publish on its website (www.cleanenergyregulator.gov.au) the settlement price and the number of units allocated as a result of the auction.

Section 32 – Charge for issue of carbon units

Section 32 provides that successful eligible bidders must pay to the Regulator an amount equal to the number of units allocated multiplied by the settlement price. Any cash deposited by bidders is deducted by the Regulator from the total and put towards the bidder’s payment of the allocated carbon units (as required by section 35 below). Where a bidder has not provided a cash deposit then it will need to provide payment for the full amount (as required by section 36 below).

Section 33 – Notice to bidder

Section 33 provides that, as soon as practicable after the last clock round, the Regulator will inform bidders in writing of:

• the number of carbon units that each of them has been allocated;
• the settlement price;
• the total amount (charge payable) that each of them must pay to the Regulator; and
• the balance payable that each of them must pay to the Regulator. The balance payable is the total amount payable less any cash deposit.

Section 34 – Settlement day

Section 34 defines the ‘settlement day’. A bidder must pay the balance payable for units allocated at auction within three business days from the time that the Regulator notifies the bidder of the settlement price. The final day that the balance is payable is referred to as the ‘settlement day’.

The Regulator may delay settlement arrangements for all bidders, or a single bidder, for up to 10 days from when the bidders or bidder is notified of the settlement price. This may occur, for example, if there has been a system failure at the Regulator that inhibits its ability to process payments.

Section 35 – Issue of carbon units if sufficient cash deposit

Section 35 provides for the issuing of carbon units by the Regulator to successful eligible bidders and the potential refund of excess deposits.

Where the bidder’s deposit is equal to or exceeds the total amount to be paid to the Regulator, the Regulator will issue the bidder the number of carbon units that it has allocated to the bidder, refund any excess cash deposit and discharge any non-cash deposit.

Section 36 – Payment of balance of charge

Section 36 provides that a successful eligible bidder must pay to the Regulator any outstanding balance by the settlement day, upon which the bidder will be issued with the carbon units. Any non-cash deposit will be discharged.

If a bidder does not pay the outstanding balance by the settlement day, any cash-deposit or non-cash deposit will be forfeited to the Regulator. If a bidder does not pay the outstanding balance in full by the settlement day, the Regulator must not issue carbon units to the bidder. Under section 111(2) of the Act, the Regulator cannot issue carbon units unless the total charge payable that corresponds to the number of allocated units is paid in full. This means that partial payment will not result in a proportional amount of carbon units being issued to the bidder.

Section 37 – Regulator may give administrative directions relating to auctioning of carbon units

Section 37 provides that the Regulator may issue administrative directions in relation to an auction to an eligible bidder or to an individual who uses the auction system to make bids in an auction. A direction may be issued by the Regulator at any time.

Section 38 – Suspension or cancellation of auction

Section 38 provides that the Regulator can suspend or cancel an auction in certain circumstances.

Suspension or cancellation for an auction in progress

The Regulator may suspend or cancel an auction if it believes on reasonable grounds that the auction cannot, or is unlikely to, continue in a fair and orderly manner.

The Regulator may suspend or cancel the auction at any time during the auction. For the purposes of section 38, the auction is taken to be in progress until a notice to at least one bidder on the settlement price is issued by the Regulator in accordance with section 33 (see above).

Suspension or cancellation for an upcoming auction

The Regulator may cancel an upcoming auction at any time prior to its commencement if it is satisfied that the auction cannot be held in a fair and orderly manner.

The Regulator may cancel an upcoming auction if no eligible bidders have lodged a deposit in order to participate in the auction. However, the Regulator may not cancel an auction on this basis any more than three business days before the auction is scheduled to take place.

Fair and orderly manner

In considering whether the conduct of the auction is ‘fair and orderly’ for the purposes of sections 38(1) or (3), the Regulator can take into account a range of circumstances that include but are not limited to:

• a fault or malfunction of a relevant auction system or another system operated by the Regulator. This could include systems operated on behalf of the Regulator under a commercial arrangement (see section 8 above);
• a circumstance that compromises the integrity of the auction system;
• a failure or suspected failure to comply with this Determination or to follow an administrative direction given by the Regulator relating to the auctioning of carbon units;
• a breach or a suspected breach of relevant Commonwealth, state and territory laws (including the Corporations Act 2001, the Competition and Consumer Act 2010 (including the Australian Consumer Law), and the Criminal Code); and
• the occurrence, suspected occurrence, or possible future occurrence of conduct intended to compromise the integrity of the auction.

Section 39 – Actions after auction suspension

Section 39 provides that the Regulator can restart a suspended auction if, within a reasonable time, the Regulator is satisfied that the issue which led to it forming the view that the auction should be suspended is resolved. If the Regulator is not satisfied that the auction can continue in a fair and orderly manner, then it must cancel the auction.

Should the Regulator, having formed the view that the auction can continue in a fair and orderly manner, restart a suspended auction, then the Regulator may:

• despite the operation of section 21 (see above), concerning the setting of the round price, determine a round price for the first clock round after the suspension is lifted which is lower than the round price that was reached for one or more clock rounds prior to the suspension occurring;
• declare that a round price determined by the Regulator for a clock round that occurred before the suspension is taken not to have been determined; and
• delete a bid that was made by an eligible bidder prior to the suspension occurring.

Section 40 – Actions after auction cancellation

Section 40 outlines the actions the Regulator must undertake after cancelling an auction. If an auction is cancelled, the Regulator must either:

• reschedule the auction to occur within seven business days from the cancelled auction’s scheduled start date; or
• return all deposits to eligible bidders as soon as practicable, if the auction is not to be rescheduled within seven business days.

If the auction is not re-scheduled within seven business days, and deposits are returned, the Regulator must still re-schedule the auction in order to meet the requirements under section 6 (see above) regarding the number of auctions that must be held for each vintage. This is because, under section 6(4), cancelled auctions are considered to have never taken place for the purpose of determining the number of auctions that need to be held for each vintage. The timing of any such re-scheduled auction must meet the requirements of section 6 (2) and (3).

If the auction is rescheduled within seven business days, the Regulator must publish the time and date of the auction and when changes to deposits or new deposits are required for the rescheduled auction. The Regulator must publish this information as soon as practicable.

For an auction rescheduled within seven business days there will be no change to the deposit price that the Regulator announced for the original auction. However, the Regulator must announce a new opening price the day before the rescheduled auction, and in time for advanced bids. The Regulator may issue guidance on how it proposes that deposits held for the auction that was cancelled would be held without change, may be varied or withdrawn.

Section 41 – Disqualification from bidding in auctions

Section 41 provides that the Regulator may, if the Regulator believes on reasonable grounds that the person has engaged in misconduct in relation to the auctioning of carbon units, disqualify a person who engages in misconduct from participating in auctions for up to five years from the date on which the person is informed by the Regulator of the disqualification decision.

The purpose of the Regulator’s disqualification power is to provide the Regulator with a timely way in which to remove from participation in future auctions persons who the Regulator has reasonable grounds to believe have engaged in conduct which compromises the integrity of an auction. It relates to the conduct of auctions only, and not to other activities regulated by the Act, unless those activities are related to an auction. It should be noted that the Regulator’s power to disqualify is reviewable in accordance with Part 21 of the Act (see below), and subject to judicial review under the Administrative Decisions (Judicial Review) Act 1977.

Under section 41(2), the Regulator may consider, when determining whether there has been misconduct, whether there has been:

• a breach of a provision of this Determination;
• failure to follow a direction from the Regulator in relation to auctions;
• failure to pay for carbon units allocated at auction;
• a breach of relevant Commonwealth, state and territory laws (including the Corporations Act 2001, the Competition and Consumer Act 2010 (including the Australian Consumer Law), and the Criminal Code); and
• any other matters that would compromise the integrity of the auctioning of carbon units.

Sections 41(3) and (4) provide that the Regulator may, in addition to disqualifying a person, also disqualify a related person from participating in the auction if the second person is part of the same controlling corporation’s group as the first disqualified person. The maximum period of disqualification for the related person must be the same as that imposed on the first disqualified person.

Nothing in section 41 is intended to displace the operation of other laws or the powers of the Regulator under the Act or other Acts or other law enforcement agencies under applicable legislation.

The Regulator must publish on its website (www.cleanenergyregulator.gov.au) the name of disqualified bidders, any authorised representatives on the bidder’s registry accounts and the period for which a disqualification applies.

The disqualification of a participant is a reviewable decision under Part 21 of the Act. This means that a person, if that person is affected by an administrative decision of the Regulator, may apply to the Regulator within 28 days of being informed of the decision (or a longer period, if it is extended by the Regulator) for a reconsideration of the decision if that person is dissatisfied with the decision. In making such a request, the person must comply with the requirements set out in section 282 of the Act and otherwise determined by the Regulator.

The Regulator must reconsider the decision and has 90 days in which it must either affirm, vary or revoke the decision and provide written reasons within 28 days of its decision. If the Regulator does not make a decision on the reconsideration within 90 days, then the original decision is affirmed. A person may apply for a review of the Regulator’s decision to the Administrative Appeals Tribunal.

Section 42 – Obligation not to disclose bidding strategy

Section 42 requires that eligible bidders must not disclose their proposed or confirmed bids, their bidding strategy or any information or documentation that could allow others to infer a bidding strategy that could reasonably be expected to affect or be capable of affecting the outcome of an auction.

However, an eligible bidder can share this information with the:

• Regulator and any entity working on the Regulator’s behalf; or
• the Independent Auction Monitor; or
• a person accessing the electronic auction system on the bidder’s behalf; or
• other members of the bidder’s controlling corporation’s group; or
• persons providing finance or financial or legal advice to the bidder; or
• with a person to whom disclosure is required by another law.

If an eligible bidder breaches section 42, then the bidder has breached a provision of this Determination and the Regulator may have reasonable grounds disqualify the eligible bidder (see section 41 above). In addition, civil penalty provisions may apply under the Act.

Nothing in section 42 is intended to displace the operation of other laws or the powers of the Regulator under the Act or other Acts or other law enforcement agencies under applicable legislation.

Section 43 – Bidder must not cause auction to become unfair or disorderly etc.

Section 43 provides that eligible bidders have an obligation to ensure their conduct does not have an adverse impact on the fair and orderly operation of the auction and that bidders do not take advantage of a technical or operational failure or any other circumstance that could compromise the integrity of the auction.

If an eligible bidder breaches section 43, then the bidder has breached a provision of this determination and the Regulator may have reasonable grounds to disqualify the eligible bidder (see section 41 above). In addition, civil penalty provisions may apply under the Act.

Section 44 – Appointment of independent auction monitor

Section 44 requires the Regulator to engage an Independent Auction Monitor to ensure the efficient operation and ongoing integrity of the auction system. The Regulator must have confidence that the Monitor appointed has relevant skills and expertise to fulfill the role.

The Monitor will monitor each auction to identify possible misconduct and assess the efficiency of the auctioning process.

Section 45 – Independent auction monitor must report on each auction

Section 45 requires that the Independent Auction Monitor provide a report to the Regulator following the completion of an auction within three business days. The report must comment on the integrity of the auction, the compliance and conduct of bidders as well as other matters, such as the difference between the auction settlement price and the secondary market price. The Regulator may request, before or during an auction, that the Independent Auction Monitor include in the report information additional to that specifically listed.

The Independent Auction Monitor will also provide to the Regulator a report within three business days for publication. This public report must not identify individual bids or bidders, commercial-in-confidence information, nor may it include anything that the Regulator considers may compromise an inquiry or investigation into possible misconduct by participants in the auction. The public report must be published on the Regulator’s website as soon as practicable.

Section 46 – Regulator may request additional reports

Section 46 provides that the Regulator may request the Independent Auction Monitor to prepare additional reports on any matter related to the auction and specify the timing in which the report must be provided.

Section 47 – Independent auction monitor must inform Regulator of suspected misconduct

Section 47 states that the Independent Auction Monitor must report any identified non-compliance, auction misconduct or system malfunction to the Regulator as it is identified. This includes reporting any behavior that would mean the auction could not operate or continue to operate in a fair and orderly manner and could lead to the suspension or cancellation of an auction or the disqualification of an eligible bidder.

Section 48– Regulator must give independent auction monitor access to information

Section 48 requires the Regulator to provide the Independent Auction Monitor with access to all relevant information in relation to auctions and the auction process.

Appendix 1: Auction timeline

The following timeline provides timeframes for key actions by either the Regulator or potential bidders for carbon units through the auction as set out in the Determination.

Attachment B

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Clean Energy (Auction of Carbon Units) Determination 2013

This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview of the Legislative Instrument

The Clean Energy (Auction of Carbon Units) Determination 2013 prescribes matters relating to the auctioning of carbon units under the Clean Energy Act 2011 (Clean Energy Act). The Determination establishes the policies, procedures and rules for auctioning carbon units such as the auction format, how many carbon units should be auctioned, the timing of auctions and settlement arrangements. The Determination also sets outs a number of measures to ensure the integrity of the auction is maintained. The auction integrity provisions in the Determination will act in concert with other applicable provisions in Commonwealth, state or territory laws.

Human rights implications

The Legislative Instrument engages the right to privacy and reputation under Article 17 of the ICCPR, at least to the extent that it applies to the collection and publishing of personal information by the Clean Energy Regulator.  The treatment will not be arbitrary or unlawful.

The Instrument requires persons to provide personal information to the Regulator or a service provider who acts on behalf of the Regulator for the purpose of participating in the auctioning of carbon units.

Although, in some circumstances some of the contact details may already be publicly available, the contact details of these individuals will not be publicly disclosed. The individual’s information will be regulated and treated in accordance with the secrecy provisions set out in the Clean Energy Regulator Act 2011 and the Privacy Act 1988. 

The Instrument also requires the Regulator to publish on the Regulator’s website, the name of any person who has been disqualified from bidding in an auction and if the disqualified person has a Registry account − the name of any authorised representative for the Registry account (section 41).

It is possible for a person to apply for a review of the Regulator’s decision to disqualify a person from bidding in the auction with the consequence that the publication of a person’s name is also subject to review.

The Instrument engages the right to a fair hearing, Article 14 of the ICCPR.

The decision of the Regulator to disqualify a person from bidding in an auction is a reviewable decision for Part 21 of the Clean Energy Act. The person may apply to the Regulator in accordance with section 283 of the Clean Energy Act for reconsideration of that decision and if the Regulator then affirms or varies the decision, the person has a further right of review to the Administrative Appeals Tribunal (section 285 of the Clean Energy Act). 

The decision of the Regulator to disqualify a person is subject to the review provisions of the Clean Energy Act, including a further right to a merits review by the Administrative Appeals Tribunal. It is expected that the Administrative Appeals Tribunal would apply ordinary (judicial) standards to its consideration of the application for review, including by providing the relevant person an opportunity to be heard. The treatment is neither arbitrary nor unlawful. 

Conclusion

This Legislative Instrument is compatible with human rights because it does not engage those rights or, to the extent that it may limit human rights, those limits are reasonable, necessary and proportionate.

The Hon Greg Combet AM MP
Minister for Climate Change, Industry and Innovation