The provision of free permits would clearly offend the principle of environmental responsibility for the benefit of short-term economic gain.
The overwhelming allure of finding a cost-effective approach to solving the critical global environmental problem of climate change led to the adoption of market mechanisms under the international Kyoto Protocol. The Commonwealth Government, in turn, has elected to harness the legal innovation of the tradeable emissions unit, within a capped carbon trading system, to reduce our national emissions and avoid dangerous climate change.
Such an approach promises to send a price signal to the market, which will influence emitting behaviours and reduce our emissions in a cost-effective manner.
However, if the proposed Carbon Pollution Reduction Scheme is to successfully achieve cost-effective emissions reductions then it is critical that the carbon market is supported by an appropriate legal framework.
First and foremost, the legal regime must include the adoption of an appropriate global emissions reduction trajectory with national targets for Australia. The Government has stated that it is committed to avoiding dangerous climate change.
Accordingly, these targets should align with current scientific recommendations for action. In this respect, economic concerns should not take centre stage. The Government has stated that it has a medium term national target of 5-15 per cent below 2000 emissions levels by 2020 with a long-term target of 60 per cent reductions by 2050. However, these are nationwide targets and specific caps for the covered sectors of the scheme are still to be determined.
Another essential legal component is the creation of the tradeable emission instruments to be placed within the capped market. Such permits are purely artificial constructs and are entirely dependent on the legislation for their form and substance. Consequently, the provision of sufficient legislative detail as to the rights and duties associated with these permits should be at the forefront of the Government's concerns.
Despite this, the current debate is focused not on the crucial legal nuances of the proposed scheme but rather, on the possible adverse economic impacts on our domestic economy and industries. While this is a legitimate dialogue, it has focused attention on the short-term economic impacts while distracting from the imperative of creating a workable carbon market for the future.
One aspect of controversy is the Government's proposal to provide transitional assistance to certain industries through the issue of free permits. In considering this issue from a legal perspective, the question to be asked is “where should the burden fall in our society for the cost of climate change?” Or in other words, “who should be liable for the environmental cost of emissions?” There is a widely acknowledged principle of environmental regulation, known as the polluter pays principle, which asserts that it is the polluter who should be held financially responsible for the environmental harm from their activities. The provision of free permits would clearly offend the principle of environmental responsibility for the benefit of short-term economic gain.
A clear and compelling price signal is also an essential component of any optimal carbon market system. To achieve emission reductions, the market must send a strong signal to the users of goods and services which will encourage changes in their emitting behaviours. The Government has determined that certain industries will be constrained in their ability to pass on the price of permits to their consumers and that transitional assistance is therefore warranted. However from a design perspective, the provision of any concessions, to any industries, will interfere with the transmission of a compelling price signal.
A related issue concerns the price to be placed on the purchase of carbon permits. The Government has elected to place a price cap on the early operation of the scheme in order to protect industry from any abrupt increases in the cost of permits. Ideally, the market would move to a point where the cost of permits reflects the real cost of emitting greenhouse gases.
However, the true economic cost of climate change, as a result of cumulative global atmospheric emissions, is enormous. Consequently, it is not practical to contemplate that, in the real world, the full cost of emissions would be imposed. Nevertheless, the regime must be designed to ensure that the price is of such a magnitude that it will make low carbon alternatives more financially attractive to consumers.
To those lawyers maintaining a watching brief on these emerging laws, it is obvious that there are many critical legal issues still to be resolved if we are to create an optimal market system for Australia. But there is also a much bigger issue to be addressed.
We must ask ourselves whether a carbon market alone is sufficient to avoid dangerous climate change and to achieve the significant and abrupt emission reductions which this necessitates. The Government intends for the scheme to be the primary measure to address climate change but clearly additional legal measures are required.
There are no proposals to address the distribution of liability for the now inevitable harm which will be caused by the impacts of climate change. There is also a critical need to reform our planning schemes to promote greater community adaptation and resilience to the impacts of climate change, notably, from the increased threats of bushfires, cyclones, flooding and drought.