GREEN IT — THE LEGAL IMPERATIVE

KENT DAVEY PRINCIPAL

*This article is based on a recent presentation given by the author at the Australian Financial Review’s “Sustainable IT Conference”.

 INTRODUCTION

Commencing on 1 July 2008 it will be mandatory for companies to keep records of their greenhouse gas (“GHG”) emissions and energy consumption and production under the National Greenhouse and Energy Reporting Act 2007 (Cth) (“NGER Act”) where specified reporting thresholds are met.  The NGER Act is intended to provide the foundation for the establishment of an Australian emissions trading scheme (“Australian ETS”) to enable Australia to meet its commitments under the Kyoto Protocol.  It has been estimated by the Australian Computer Society that the use of information and communications technology by businesses generates 1.52% of Australia’s carbon dioxide emissions.

This article first provides an overview of the obligations imposed on companies under the NGER Act. Secondly, it provides details of the proposed Australian ETS. Thirdly, it considers the implications of the NGER Act and Australian ETS for the IT operational requirements and procurement strategies of organisations. Finally, it suggests practical compliance and risk mitigation steps for organisations to consider taking in relation to both the NGER Act and proposed Australian ETS.

NATIONAL GREENHOUSE AND ENERGY REPORTING ACT

The NGER Act is intended to establish a single national framework for reporting information relating to the production of GHG emissions and energy consumption and production which will underpin the introduction of an Australian ETS.  Under the NGER Act mandatory record keeping, registration and reporting requirements apply to corporate groups with operational control of facilities where a specified reporting threshold is met for GHG emissions or energy consumption or production.  Penalties of up to $220,000 and $11,000 per day may be imposed on companies and their chief executive officers where they fail to comply with their obligations under the NGER Act.

Under the NGER Act the controlling corporation for a corporate group is required to both register with, and report to, the Greenhouse and Energy Data Officer (“GEDO”) by 31 August and 31 October respectively following the trigger year for the corporate group.  The trigger year is the financial year in which a specified reporting threshold is met for GHG emissions or energy consumption or production.  It is estimated that up to 700 companies will be required to register and report under the NGER Act.

The application of many of the provisions contained in the NGER Act will depend upon regulations which are still to be made under the Act.  In February 2008 the new Commonwealth Department of Climate Change released the National Greenhouse and Energy Reporting System Regulations Policy Paper (“Regulations Policy Paper”)  which contains proposed approaches for the areas to be covered by the regulations which are to be made under the NGER Act.

CORPORATE GROUPS

In accordance with the NGER Act a corporate group consists of: (i) the controlling corporation which is at the top of the corporate hierarchy in Australia; (ii) all subsidiaries of the company; and (iii) any joint venture or partnership where the company of one of its subsidiaries has been nominated as the responsible entity for the purposes of reporting under the NGER Act.

FACILITIES

The NGER Act provides that a facility is an activity or series of activities that: (i) involve the production of GHG emissions or energy consumption or production; (ii) form a single undertaking or enterprise within one industry sector; and (iii) otherwise meet any requirements which are to be specified in the regulations.

The Regulations Policy Paper provides that the regulations will specify that an activity or series of activities will form part of a single undertaking or enterprise where the activity or activities: (i) consist of one principal productive activity which produces goods or services for delivery outside of the facility; and (ii) are situated at a single physical location.  The regulations will also contain some industry specific exceptions where it is not possible to attribute a single physical location to an activity or activities (e.g. transport, pipelines, transmission and distribution activities).

For example, a data centre operated by an IT supplier to provide its clients with server, application and/or network services will constitute a facility for the purposes of the NGER Act provided that it otherwise meets any requirements which are to be specified in the regulations.  The data centre would consume energy in the form of electricity, provide services to external clients and be located at a single physical location.

OPERATIONAL CONTROL

The NGER Act provides that a company has operation control of a facility if: (i) it has authority to introduce and implement operating policies, health and safety policies or environmental policies; and (ii) otherwise meets any requirements which are to be specified in the regulations.  If more than one company has such authority in relation to a facility then the company that has the greatest authority in relation to such matters will be taken to have operational control of the facility for the purposes of the NGER Act.

For example, where a contractor is responsible for operating and managing a data centre on behalf of the data centre owner then whether the owner or contractor has operational control of the data centre may well depend on the terms and conditions of the contract between the parties.  The contract may require the contractor to introduce and implement policies for the data centre determined by the data centre owner.  Alternatively, the contract may allow the contractor to determine any policies which it is necessary to introduce and implement for the data centre.

REPORTING THRESHOLDS

The NGER Act imposes mandatory record keeping and reporting obligations on the controlling corporation of a corporate group in relation to facilities under the corporate group’s operational control (including any facilities of a joint venture or partnership for which a member of the corporate group has been nominated as the responsible entity) where any of the following reporting thresholds are met (or exceeded) during a financial year.

Table:  Reporting Thresholds

If the facilities under the operational control of a corporate group meet any of the financial year reporting thresholds then the controlling corporation is required to keep records and report on the GHG emissions and energy consumption and production for all such facilities.  However, if only an individual facility under the operational control of a corporate group meets a reporting threshold for a single facility then the controlling corporation is only required to keep records and report on GHG emissions and energy consumption and production for each such facility.

For example, if the facilities under the operational control of a corporate group consume 400 TJ of energy then the controlling corporation of the corporate group will: (i) be required to ensure that records are kept of all GHG emissions and energy consumption and production by all such facilities from 1 July 2009; (ii) register with the GEDO by 31 August 2010; and (iii) report to the GEDO by 31 October 2010 on all such GHG emissions and energy consumption and production.

AUSTRALIAN EMISSIONS TRADING SCHEME

Under the Kyoto Protocol the Federal Government has committed to reducing Australia’s GHG emissions by 60% by the year 2050 (based on year 2000 emissions).  The Federal Government intends to establish an Australian ETS by 2010 to enable Australia to meet this commitment under the Kyoto Protocol.  Several government reports and papers have been released containing proposals for the design of an Australian ETS.

In March 2008 the Garnaut Climate Change Review released the Emissions Trading Scheme Discussion Paper which contained numerous proposals for the design of an Australian ETS.  The Discussion Paper proposed, amongst other things, that: (i) the Federal Government set the GHG emissions limit for Australia expressed as a trajectory of annual emissions targets over time; (ii) the Australian ETS initially apply to the stationary energy, industrial processes, fugitive emissions from fuels, transport and waste industry sectors; (iii) permits allowing organisations to produce GHG emissions be released according to the trajectory by auctions at regular intervals; and (iv) a financial penalty be imposed upon organisations which produce more GHG emissions than allowed based on the number of permits purchased by them at auctions.

IMPLICATIONS FOR INFORMATION TECHNOLOGY

The NGER Act and Australian ETS will have implications for both the IT operational requirements and procurement strategies of organisations.  Companies within corporate groups which meet any of the reporting thresholds specified in the NGER Act will need to use their existing IT systems or procure new IT systems for the purpose of recording GHG emissions and energy consumption and production by facilities under their operational control.  The Australian ETS will require organisations to focus on the objectives of: (i) reducing the energy consumption of operating their existing and new IT systems; (ii) reducing the energy consumption of, and GHG emissions associated with, upgrading, replacing and manufacturing their IT equipment; and (iii) using their IT systems to reduce the energy consumption and GHG emissions of facilities under their operational control.  In order to achieve these objectives organisations will need the ability to monitor the energy consumption of individual items of IT equipment.  These objectives will also result in increased demand by organisations for electronic transactions and automation programs.

COMPLIANCE AND RISK MITIGATION STEPS

There are several compliance and risk mitigation steps that organisations should consider taking in relation to both the NGER Act and the Australian ETS.

Firstly, organisations should consider developing a sustainable IT policy which: (i) provides a framework for setting, achieving and reviewing an organisation’s environmental objectives and targets; (ii) includes a commitment to continual improvement, prevention of pollution and compliance with applicable environmental laws and other requirements; and (iii) forms part of an organisation’s overarching environmental management system (see Environmental Management Systems AS/NZS 14001:2004).

Secondly, organisations should consider developing an environmental purchasing policy for the purchase of IT products and services which requires that: (i) IT product and service specifications include minimum environmental requirements where applicable; (ii) IT product and service purchase decisions take into account environmental factors; and (iii) IT supplier selection decisions take into account environmental criteria.

Thirdly, organisations should consider imposing appropriate environmental contractual obligations on their IT suppliers where applicable, for example: (i) IT product and service environmental warranties; (ii) re-use, upgrade and recycling obligations; (iii) electronic communication and record keeping requirements; and (iv) obligations requiring compliance with an organisation’s sustainable IT policy.

CONCLUSION

It is important that all organisations consider the impact that the NGER Act and Australian ETS will have on their operations and take appropriate compliance and risk mitigation steps as necessary.  The NGER Act and Australian ETS will have wide ranging implications for the IT operational requirements and IT procurement strategies of organisations.  As most IT systems and equipment have a lifecycle of at least two years any new IT systems or equipment which an organisation acquires from now on will in all likelihood still be in use when the Australian ETS commences in 2010.  If an organisation fails to take appropriate compliance and risk mitigation steps in relation to its operations then it risks incurring substantial penalties under the NGER Act and increased costs in complying with the Australian ETS.