'Borrowing' is commonly denoted as the use of compliance instruments from future vintage years for current compliance.
Under the Australia emission trading program limited borrowing is introduced – i.e. there is limited capacity to surrender carbon units which are of the following vintage year. The purpose of limited borrowing is to allow liable entities to shift the timing of their emissions and abatement activities to reduce their costs. This construction is also intended to have the effect of smoothing the unit price over time.
Considering borrowing under the Australia cap-and-trade the fundamental distinction must be made between rules for flexible charge years and fixed charge years.
During the fixed charge years (i.e. financial years beginning on 1 July 2012, 1 July 2013 and 1 July 2014) borrowing is not allowed. Thus, in the fixed charge period, a carbon unit cannot be surrendered unless it has a vintage year of that financial year. Consequently, a liable entity cannot surrender a carbon unit of a later vintage to meet its obligations for a fixed charge year.
Special rule is envisioned for carbon units with a vintage year that is a fixed charge year that are issued free of charge under Parts 7 and 8 of the Clean Energy Act 2011 (relating respectively to Jobs and Competitiveness Program and coal-fired electricity generation), which can only be surrendered for the eligible financial year corresponding to their vintage year and, if not surrendered, will be cancelled at the end of 1 February of the next financial year.
In the flexible charge years (i.e. financial years later than fixed charge years as indicated above) carbon units of the current, later or the immediately preceding vintage years may be surrendered, but there is a limit on the number of ‘borrowed’ units (that is, units of the next vintage year) which can be used for surrender. The said limit consists in the rule that if surrendered carbon units representing more than 5 per cent of the emissions number are ‘borrowed’, then the excess number of units over the 5 per cent is not regarded as surrendered for the relevant financial year when calculating the unit shortfall and is instead treated as surrendered at the next surrender date. In addition, ‘borrowed’ units can only be surrendered within a specified period when the entity’s emissions number is known.