CLIMATE SPECTATOR: Palmer's carbon challenge is doomed

Mining magnate Clive Palmer has threatened to challenge the carbon pricing scheme in court on the grounds that it is 'unconstitutional'. He is wrong and set up for failure.

Climate Spectator

Coal mining magnate Clive Palmer this month vowed to launch a High Court action challenging the Commonwealth’s carbon tax, then at a press conference he claimed the Australian Greens are being funded by the CIA to undermine the Australian mining industry.

Whether or not there is any objective basis on which to analyse the veracity of the latter claim is unclear, but there is plenty of law and fact on which one can analyse the constitutionality of the carbon pricing scheme, whether or not Palmer goes through with his challenge.

Let’s start with some basics:

– The Commonwealth has the power under the Constitution to make laws with respect to, among other things: "taxation” (defined by the High Court to mean a compulsory exaction of money by a public authority for public purposes, enforceable by law, that is not a payment for services rendered and is not a pecuniary penalty); "corporations”; and "external affairs” (which includes international affairs and relations). It is these three constitutional powers on which the Commonwealth has relied most heavily in drafting the carbon legislation;

– The Constitution also provides that any law imposing taxation must deal only with taxation, and that the Commonwealth cannot impose any tax on "property of any kind belonging to a state”;

– While many legislative provisions are supported by more than one constitutional head of power, any particular provision need only be supported of one head of power to be valid.

– In defending any challenge to the carbon scheme, the Commonwealth would need to demonstrate that all relevant provisions enjoy the support of at least one of those (or other) heads of power, and that any tax imposed under the scheme must be imposed under a separate piece of legislation and must not constitute a tax on state property.

The carbon legislation is complex. The primary act, running to a cool 364 pages, is the Clean Energy Act 2011, the principal objective of which is to reduce Australia’s greenhouse gas emissions in line with its international obligations and long-term emissions reduction target. Among many other things, the Clean Energy Act:

– Defines the circumstances in which a "person” (which includes non-natural persons, like corporations and statutory authorities) will be a "liable entity” for the purposes of the scheme;

– Outlines that a liable entity will have an annual "unit shortfall” equal to the difference between the volume of greenhouse gas emissions emitted by the entity in a year and the number of "emissions units” (each of which is equal to one tonne of carbon dioxide equivalent greenhouse gas) the person surrenders to the scheme regulator. The aim is that the unit shortfall number for each liable entity will equal zero for each year of the scheme’s operation – in other words, every liable entity will acquire and surrender the number of emissions units that equals the emissions for which they are responsible in each year;

– Sets a scheme-wide "carbon pollution cap", which limits the number of carbon units that may be issued;

– Provides for the issuance of carbon units in various ways. During the first three years of the scheme, in which the carbon price will be fixed, carbon units will be sold by the government regulator at the fixed price, while units with a vintage year of 2015-16 and beyond (the floating price phase) will be auctioned. The Clean Energy Act and associated regulations also provide for the issuance of a number of free carbon units to eligible "emissions intensive trade-exposed” industries and the most emissions-intensive coal fired power generators.*

But the scheme contains no obligation on liable entities to surrender enough emissions units to avoid a unit shortfall (the reason for this is discussed later). Since no "compulsory exaction of money” occurs in the levying of the fixed unit charge or the charge paid for the purchase of units at auction, these charges are unlikely to be considered "taxation”.

Rather, the unit charges, along with the other aspects of the Clean Energy Act described above, are more likely to derive their constitutional validity from the corporations power (insofar as they apply to corporations). The High Court has favoured a broad interpretation of the corporations power, giving the Commonwealth wide scope to regulate the affairs of corporations. There is no obvious reason why the power would not extend to regulating the production of greenhouse gases by corporations.

There is also a strong case that the scheme would be supported by the "external affairs” power. The strongest argument is that the scheme implements commitments made by Australia under international treaties. Although the first commitment period of the Kyoto Protocol (and therefore Australia’s emissions target under it) expires at the end of 2012 and may not be replaced, Australia has ongoing obligations under international law to reduce its greenhouse gas emissions and to implement emissions reduction policies and measures, including under article 4(2) of the UN Framework Convention on Climate Change.

Additional arguments, though not as strong as the treaty-based argument, could also be made based on previous applications of the external affairs power by the High Court, namely that the scheme, in reducing Australia's greenhouse gas emissions, regulates: matters that have an effect on matters or things external to Australia; matters that are capable of affecting Australia's relations with other countries; and matters of manifest "international concern”. These and other arguments concerning the external affairs power are likely to be particularly important in supporting the application of the scheme to non-corporations such as statutory authorities (for example, local councils that own landfill waste facilities).

None of the above aspects of the scheme impose any obligation on liable entities to avoid a "unit shortfall”. The incentive to do so, rather, arises from a separate piece of legislation – the Clean Energy (Unit Shortfall Charge: General) Act 2011 – which imposes an obligation to pay a charge (set at a rate significantly higher than the fixed price, or the average benchmark auction price, of carbon units, as applicable) in respect of every unit for which the entity has a unit shortfall under the primary legislation.

It is highly likely that the unit shortfall charge will be considered by the High Court to be "taxation” within the meaning of the Constitution: it is a compulsory exaction of money (a liable entity with a unit shortfall must pay the prescribed charge) by a public authority (the scheme regulator) for a public purpose (the revenue will go into the Commonwealth’s consolidated revenue for government purposes) that is not a payment for services (the charge is not referable to any rendering of services by the Commonwealth) and is not a pecuniary penalty. The charge is unlikely to be considered a "penalty for having a unit shortfall” since there is no obligation to avoid a unit shortfall under the primary act – instead it is a charge designed to incentivise the surrendering by liable entities of a number of emissions sufficient to equal their annual emissions for the purposes of the primary act.

This may seem a little tortuous, but legislation structured in materially the same way has been held by the High Court previously to constitute a valid law with respect to taxation. For example, the High Court has held that the compulsory superannuation guarantee shortfall charge under the Superannuation Guarantee Charge Act 1992 (Cth) – imposed on employers who do not pay their employees’ minimum superannuation contribution under the Superannuation Guarantee (Administration) Act 1992 (Cth) – is a tax (not a penalty), even though it was clearly designed to incentivise payment of the superannuation under the primary legislation.

If, as appears likely, the unit shortfall charge is taxation, the Clean Energy (Unit Shortfall Charge – General) Act 2011 will be a valid law with respect to taxation since it deals only with the imposition of that charge.

Finally, it is highly unlikely that the court would consider that the unit shortfall charge would impose a "tax on property of any kind belonging to a state” contrary to section 114 of the Constitution. The unit shortfall charge is a tax on the non-surrender of emissions units, not a tax on the ownership or holding of property. While the emissions in respect of which the units must be surrendered emanate from facilities which, in the case of state authorities, may be situated on state property, the connection between the tax and the property of the state in these circumstances is too remote to offend the prohibition in section 114.

Based on the body of constitutional jurisprudence that has been illustrated by the High Court over many decades, all key elements of the carbon scheme are likely to be constitutionally valid.

Of course, one cannot rule out the possibility that all current and previous members of the High Court have been installed and backed by the CIA for the specific purpose of developing Australian constitutional law along lines that would, eventually, support the implementation of a carbon tax with a view to undermining the Australian coal mining industry.

But if one wanted to undermine the Australian coal mining industry, a suitably equipped foreign power might aim a little higher than supporting what is, ultimately, an extremely modest impost on a small proportion of greenhouse gas emissions associated with coal mining. The carbon price is low, particularly gassy coalmines will receive some government compensation and, in relation to exported coal, only the emissions from the mining process, such as methane released from underground mines, is subject to the carbon tax. Emissions embodied in the exported coal itself, which account for a far greater amount of the environmental damage caused by coal, are not covered by the scheme.

Instead of threatening legal challenges of dubious merit, Clive Palmer should be counting his lucky stars that his companies operate in one of the most coal-friendly countries in the world.

* Subject to various limitations, liable entities can also surrender units generated through the Commonwealth’s Carbon Farming Initiative and, in the floating price phase of the scheme, eligible units from international schemes such as the UN’s Clean Development Mechanism.

Fergus Green is a climate change lawyer and policy analyst. The views and legal opinions expressed here are his own.