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Australia's Carbon Tax and Timor-Leste

28 April 2012.  Updated 8 May 2012

Effective in July 2012, a new law in Australia will impose a carbon tax of A$23 per ton of carbon dioxide (CO2) emissions from several hundred companies which emit greenhouse gases in Australia. On 26 April, Australian newspapers explored how this would affect Timor-Leste, and Radio Australia followed up with a report (below).

Article 4.3 of Annex G of the 2002 Timor Sea Treaty prohibits Australia from applying the tax inside the Joint Petroleum Development Area (JPDA) without Timor-Leste's permission. However, if Australia collects the tax from the Darwin LNG plant which liquefies natural gas which is piped from Bayu-Undan, Timor-Leste could lose significant revenue.

The natural gas extracted from Bayu-Undan contains about 6% carbon dioxide, which ConocoPhillips and its partners vent into the atmosphere in Darwin as part of the liquefying process. In countries which are more serious about preventing climate change, this greenhouse gas is re-injected into the ground. However, nearly ten times as much CO2 is generated from burning fuel to power the energy-intensive liquefaction process, and this would create the largest part of the tax obligation. Most of this additional operating cost for the LNG plant will probably be passed on as reduced payments to the Bayu-Undan upstream project in the JPDA. This could eventually come out of Government revenues, which are shared 90% for Timor-Leste and 10% for Australia. La'o Hamutuk estimates that Timor-Leste could lose about $50 million per year in revenues from Bayu-Undan gas, as much as the entire budget of the country's Ministry of Health.

On 4 May, Australian media (AAP, SMH) reported that Australia and Timor-Leste are discussing how the carbon tax will apply here, although Australia's Climate Change Minister said that there is plenty of time -- more than a year -- to resolved this question. The tax remains controversial in Australia, and might be repealed before or after next year's elections there. If it continues, it will become another factor in the protracted negotiations about how Greater Sunrise natural gas will be processed.

Transcript of Radio Australia broadcast "East Timor fears losing revenue from Australian carbon tax"

Connect Asia, 27 April 2012. Click to download a 1.3 MB podcast, ABC's streaming audio of part 1 or part 2, or ABCs written summary.
Links added by La'o Hamutuk.

The East Timorese government has raised concerns that it risks losing millions of dollars in revenue, as a result of Australia's carbon tax.

A price of 23 dollars per tonne of carbon dioxide emitted, which will be imposed on the 1st of July, might be applied to companies operating in the oil and gas fields in the Timor Sea, which are jointly shared by both countries.

The government in Dili says it's yet to receive formal details about the possibility of the additional costs from Canberra and that it would be unfair if the tax ended up eating into East Timor's revenue from the projects

Correspondent: Girish Sawlani
Speakers: Alfredo Pires, East Timorese State Secretary for Natural Resources; Greg Hunt, Australian Opposition's Spokesman for Climate Change

SAWLANI: The dispute over the maritime boundary between Australia and East Timor has been a thorn in relations between the two countries. At the centre of the dispute, are oil and gas reserves at the bottom of the Timor Sea worth billions of dollars. For the moment at least, tensions have been pacified by revenue sharing deals struck in 2002 and 2006. They range from a 90 to 10 ratio in favour of East Timor for gas fields such as Bayu-Undan to a 50:50 arrangement for revenue from the Greater Sunrise Field. But both countries are still at odds over the location of a natural gas processing plant in the Greater Sunrise field. East Timor wants the plant on its shores, while the Australian firm tasked with developing it, Woodside Petroleum is seeking an offshore platform.

Now a new dispute could be emerging, as a result of the Australian government's carbon tax, which will be implemented on the 1st of July. The new legislation imposes a 23 dollar per tonne of carbon tax on many of the country's high polluting industries, including the energy and resources sectors. And some of these companies are involved in the processing of natural gas and oil in the Timor Sea. Agreements between Canberra and Dili state that revenue will be split once costs are deducted. While the Australian government receives the revenue from the cost of the carbon tax, little is known about how East Timor will be affected.

Greg Hunt is the Australian Opposition's Climate Change spokesman. He says East Timor stands to lose millions of dollars in revenue.

HUNT: The carbon tax hits East Timor, one of the poorest countries in the world, through the Bayu-Undan field of the Timor Gap. The revenues are shared jointly. East Timor gets the majority, and the government has imposed the carbon tax on this field but it doesn't pay it itself because it simply shuffles money between one source of Australian revenue and another. East Timor, however, is likely to be hit for millions and millions of dollars of carbon tax each year, every year, for the life of the field. So one of the poorest countries in the world will be subsidising one of the wealthiest countries: Australia.

SAWLANI: In a statement, a spokeswoman for Australia Climate Change Minister, Greg Combet says the government in Canberra will consult with East Timor about any application of the carbon price within the Joint Petroleum Development Area and will ensure that any arrangements reflect Australia's obligations under international law.

Alfredo Pires is East Timor's State Secretary for Natural Resources. He says there's been no formal agreement between Dili and Canberra over the carbon tax.

PIRES: The latest legal advice that I've been getting from my technical people is that on any agreement, and these things need to be discussed. So if there is an agreement in black and white, I would like to see it. These are not small issues that you can decide unilaterally. It needs to go through it, there are big implications. Particularly, I understand that Australia needs to have an environmental piece of legislation, but you really need to consider before moving into areas that are not totally of the sovereignty of Australia.

SAWLANI: He says it would be unfair if East Timor faced additional costs as a result of the new tax.

PIRES: We will be very concerned about any additional costs that may have to be borne upon the country. But we need to look at the exact figures. But right now, as secretary of state and as part of the government, our main concerns is about the applicability of the legislation. Right now, we would like to keep things as it is till we have further discussions, for us to analyse and see if there's any benefit. You've got to bear in mind that these are two countries, neighbours that are very different in terms of economical development. And anything that bears any additional cost to this little country will be seen as unfair.

SAWLANI: Mr Pires says as a small nation, East Timor's contribution to global carbon emissions is insignificant, when compared to Australia.

PIRES: I don't think we've been responsible as a small country, new country. This environmental damage is mainly done by a lot of industrial places. So we'll consider very carefully whether we're going down the line of paying anything at all.

Correspondent: Liam Cochrane
Speakers: Charles Scheiner, researcher at Laío Hamutuk.

COCHRANE: For more on this, I spoke earlier to Charlie Scheiner, researcher at Laío Hamutuk, an organization that monitors development, including that of the Joint Petroleum Development Areas, or JPDA. I asked first how he thought Australiaís carbon tax might affect East Timor.

SCHEINER: We donít have all the details about how the carbon tax actually will be applied, but I think there are two areas where it could potentially have an impact. One is on the oil and gas fields in the JPDA that are currently in production, which is Bayu-Undan and Kitan, and possibly Sunrise in the future. That territory is not Australia, because Australia has not agreed to negotiate and settle maritime boundaries with Timor-Leste, with East Timor. The territory is in dispute, so there would be a legal issue about whether Australia could impose Australian taxes on that territory.

Thereís also a question of the gas from Bayu-Undan that is piped to Darwin, to the Wickham Point LNG plant, which also emits significant CO2, because itís part of the processing. More environmentally conscious oil companies re-inject that CO2 back into the ground, but in Darwin, ConocoPhillips and their partners just vent it into the atmosphere. A rough calculation says that tax would cost Timor-Leste in the order of $5 million U.S. dollars, a little less than $5 million Australian dollars, every year. That may not sound like very much to Australians, but in Timor-Leste thatís a lot of money. For example, itís larger than the entire budget of the National Hospital of this country. [see more accurate estimate above.]

The other issue, I guess, is the Sunrise controversy. Itís still not decided how the Sunrise field will be developed, and the tax issue could play a part in the negotiations around that.

To look at it a little bit more broadly, Timor-Leste is tremendously impacted by climate change. We have droughts, we have flooding, we have landslides, erosion, unpredictable weather. It affects fishing, it affects agriculture. And this country doesnít have the economic resilience or the technological resilience that a place like Australia does, and so those impacts are felt much harder. So it seems to me itís sort of a double irony. On the one hand, Australia does a tax instead of really obligating companies to deal with emissions that cause climate change, and on the other hand theyíre going to make Timor-Leste pay for it, in effect. I would hope that there can be a better way found to resolve that.

COCHRANE: The issue of fairness has been raised by East Timorese officials already, and of course there has been a historical dispute over the fairness of the way that Australia and East Timor share the natural resources under the oceans between them. How do you think this historical perception of fairness might influence the negotiations over the carbon tax?

SCHEINER: I think there are two aspects. One is rule of law. Thereís a treaty that Australia and Timor-Leste signed ten years ago this month called the Timor Sea Treaty, which says very unambiguously (in Annex G, Article 4.3 if anybody wants to look it up) that a contracting state, i.e. Australia, shall not impose a tax not covered by the provisions of the taxation code in respect to or applicable to petroleum projects in the Joint Development Area unless the other state agrees.

COCHRANE: So that means the Australian carbon tax could potentially be a deal-breaker.

SCHEINER: What it means is that Australia cannot impose the carbon tax on projects inside the JPDA unless Timor-Leste agrees, which means it becomes part of negotiations. Timor-Leste would say, as they have consistently said, that they donít accept Australian sovereignty over that area. Certainly, I find it difficult to think that Timor-Leste would agree to pay a carbon tax to Australia. If there was a negotiation worked out somehow, where Timor-Leste was compensated, or Australia recognized sovereignty or something, well, anything can happen in the negotiating room. But itís clear legally that it canít be done unilaterally.

COCHRANE: What about the timing of this? I mean, the carbon tax comes in in Australia in just over two months. Has this been left to the last minute?

SCHEINER: I donít know. I donít think itís Timor-Lesteís governmentís responsibility to follow all the details of Australian legislative processes. If Australia intends to tax facilities in the JPDA, they need to give some formal notice and have a discussion. And I understand from Timor-Leste government officials that this issue has come up in the Joint Commission that resolves disputes under the Timor Sea Treaty, but that they havenít reached any resolution yet.

I think what this example shows is the problems of not resolving the maritime boundary. As people probably donít remember, in March 2002, two months before Timor-Leste became independent, Australia withdrew from the international legal processes for resolving a maritime boundary. And in the 2006-7 treaty on CMATS, the Treaty on Certain Maritime Arrangements in the Timor Sea, Australia basically bullied Timor-Leste into saying that they would not raise the question of maritime boundaries in any court, in any negotiations, in any public way. Now there were a maritime boundary, if the two countries had agreed to a maritime boundary, then it would be clear what taxes apply, who has sovereignty over which area.


The Timor-Leste Institute for Development Monitoring and Analysis (Laío Hamutuk)
Institutu Timor-Leste ba Analiza no Monitor ba Dezenvolvimentu
Rua dos Martires da Patria, Bebora, Dili, Timor-Leste
P.O. Box 340, Dili, Timor-Leste
Tel: +670-3321040 or +670-77234330
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