ETS dreamers should abandon Direct Action hope

A close examination of the legislation and the amendments to the Direct Action bill sponsored by Nick Xenophon indicates the promise of a future emissions trading scheme is a rather fragile one.

Every now and then you come across something called legislative drafting by wishful thinking.

That is, legislation which reflects the hopes and aspirations of politicians about what should happen without any guarantee that it will in fact occur. This is to be contrasted with laws which prescribe clear rules and penalties for their non-observance.

Since the passage of the Carbon Farming Initiative Amendment Bill 2014 (CFI Amendment Bill) through the Senate the other week, there has been much comment that it provides a basis for a future emissions trading scheme (here and here). This is because in establishing a new Emissions Reduction Fund it provides the framework for a new “Safeguard Mechanism”.

However, a closer examination of the legislation and the amendments to the Bill sponsored by Independent Senator Nick Xenophon indicates that the promise of a future emissions trading scheme is a rather fragile one.

As nearly every economist recognises, the Safeguard Mechanism is crucial to ensure that public funds spent on paying companies to reduce their emissions through the ERF are not wasted because companies not receiving that funding offset any reductions by increasing their emissions. Under the Safeguard Mechanism companies that emit more than their emissions ‘baseline’ in any one year will be penalised. The amendments seek to do this by requiring companies that exceed their baseline to surrender to the government “prescribed carbon credit units” to offset excess emissions. Such provisions may be “revenue neutral” to government but there is no question that they are penalties nonetheless as companies will be required to buy those permits from others in order to “make good” their excess emissions. Interestingly, despite the government’s reluctance to allow the use of overseas carbon permits, there is provision for a carbon unit issued outside Australia to be prescribed by regulations as “prescribed carbon unit” at a later date, thus enabling companies to buy their ‘make-good’ units offshore.

However, while some may wish that such an emissions trading scheme may eventuate there is no guarantee it will.

In summary, what Part 3H of the CFI Amendment Bill does create new regulation and rule making powers for the Environment Minister to create emission baselines for companies and penalties if they exceed them. With the commencement date of the Safeguard Mechanism set by the amendments as July 1, 2016 – one year later than suggested in the ERF White Paper – these rules and regulations are meant to be created before October 1, 2015.

But given the government’s aversion to any form of emissions trading scheme and reluctance to tax companies’ emissions, there is a big question mark over whether these baselines and penalties will actually be set. No baselines, no penalties, then no emissions trading scheme.

As a result, the amendments seek to require the Environment Minister to exercise his powers under the Act to make these regulations and rules. However, the chances that this obligation can ever be legally enforced is less than zero.

Section 22XF(4) requires that the Minister “take all reasonable steps” to ensure that regulations setting the prescribed number of penalty units are in force on and after the safeguard commencement day. Similarly, the Minister must take “all reasonable steps” to ensure that the safeguard rules for setting baselines are made before October 1, 2015.

Now the concept of “reasonable steps” may be something that can be gauged in a commercial context. But how is it to be gauged in a government setting? Is it proposed a court peer into the Cabinet room to determine how hard the Environment Minister advocated for these regulations or whether his Cabinet colleagues rolled him?

In reality, there is little prospect a court would make an order requiring a minister to exercise these powers. Then there is the small problem of who would have the standing to bring such a legal action.

A similar problem arises in relation to the requirement in the amendments that in setting penalties the Minister must have regard to “the principle that a responsible emitter must not be allowed to benefit from non-compliance, having regard to the financial advantage the responsible emitter could be reasonably expected to derive from an excess emissions situation”. It is one thing to “have regard to the principle” but it is another to actually implement it. A minister could well “have regard” to such a principle but decide that of more importance is the principle that government should not penalise economic growth.

The reality is that these amendments reflect a political compromise to enable this legislation to pass parliament between a government reluctant to do anything which smells of emissions trading and the cross-bench of the Senate seeking to improve it. No doubt there were also similar compromises within government.

This is not to say that there were not some small improvements made by the cross-bench to the ERF legislation. The amendments give the Emissions Reductions Assurance Committee powers to suspend and veto methods by which companies propose to generate carbon credits. In response to concerns that five-year contracts offered under ERF were too short, there is also a new rule-making power allowing the Minister to specify contract terms of up to seven years and for a longer duration for certain projects in the land sector. However, once again this rule making power only requires that the Minister “have regard” to the principle that a longer duration of a carbon abatement contract may be appropriate.

Unfortunately, as has all too often been the case in this area of emission reduction, long-term certainty is not something that is easily achieved.

Marcus Priest is a lawyer at Sparke Helmore.