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“Kerrigan Clause” may be no bar to Abbott’s pledge

20 October 2011

An Abbott government may well be able to repeal the carbon tax without paying compensation to the holders of carbon units. Fergus Green explains how


His day in court: Darryl Kerrigan (Michael Caton) and his legal team in The Castle.

His day in court: Darryl Kerrigan (Michael Caton) and his legal team in The Castle.

“TELL ’em to get stuffed.” That’s what Darryl Kerrigan – the central character in 1997 comedy hit The Castle – had to say when the federal government sought to compulsorily acquire his beloved home to make way for an expansion of Melbourne Airport. Now that Tony Abbott is pledging to repeal the carbon price legislation without compensating the holders of carbon units if he forms government at the next election, the Labor government, the Greens and even big business are channelling Darryl in response. As a matter of policy, the Abbott pledge is staggeringly reckless, but the law may well be on his side.

Carbon units are the tradeable instruments that the big emitters who will be liable under the scheme must acquire and surrender to the government each year to cover their emissions liability. The units, which are established and allocated under the carbon scheme legislation, will be sold, auctioned and gifted to market participants in varying amounts for this purpose; they will be the “currency” of the carbon market.

Some argue that if an Abbott-led government were to take away carbon units that had already been issued by repealing the scheme down the track then the government would be forced to pay millions, if not billions, of dollars in compensation to the owners of those units. This argument assumes that section 51(xxxi) of the Constitution – which gives the federal parliament the power to make laws “with respect to the acquisition of property on just terms” (that is, to compulsorily acquire property so long as fair compensation is paid) – would apply to the repealing legislation. But cancelling a carbon unit held by BHP is not necessarily the legal equivalent of stripping Darryl Kerrigan of his house and land.

The current political debate over the compensation issue has focused on three issues. Does a carbon unit constitute a form of “property”? Does the answer to that question differ for units applicable to the fixed-price phase of the scheme compared with those relevant to the floating-price phase? And has Labor sneakily predetermined this question by explicitly designating carbon units to be “personal property” in the legislation? The common assumption is that if a unit is property, then repealing the legislation will necessitate the payment of compensation.

But this misses the point. Carbon units will undoubtedly qualify as “property” within the wide definition ascribed to that term by the High Court for the purpose of section 51(xxxi), whether or not they are described as being so in the legislation: a carbon unit is a clearly defined, valuable statutory instrument that can be possessed, controlled, transferred, assigned and mortgaged by its owner.

Moreover, little turns on the distinction between the first, fixed-price phase of the scheme and the second, floating-price phase of the scheme. The government will be auctioning floating price phase units during the first phase of the scheme to facilitate hedging – which is particularly important in the electricity market – and the establishment of a forward carbon price curve. The earliest an Abbott government would be able to pass repealing legislation would probably be mid-late in 2014, when many more companies will be investing in forward units in readiness for the floating price phase, and quite possibly as late as the second half of 2015, when the scheme will be in full-fledged emissions trading mode. In other words, there will be plenty of valuable floating price phase units in the system whenever Abbott tries to repeal it – before or after 1 July 2015 – for which market players will want compensation if they are extinguished (that’s why Abbott’s been telling them not to buy forward units).

The real question is whether the extinguishment or cancellation of carbon units resulting from the repeal of the legislation would amount to an acquisition of that property by the Commonwealth. And this is where the legal waters get murky.

For a Commonwealth law to effect an acquisition of property requiring the payment of compensation, the Commonwealth (or another person) must obtain a corresponding benefit, in the form of an acquisition of a proprietary interest, resulting from the extinguishment or impairment of the relevant property rights. As Justice Mason explained in the Tasmanian Dam Case, “it is not enough that legislation adversely affects or terminates a pre-existing right that an owner enjoys in relation to his property; there must be an acquisition whereby the Commonwealth or another acquires an interest in property, however slight or insubstantial it may be.”

So long as Abbott’s repealing legislation does not provide for any allocated carbon units to be relinquished or transferred to the Commonwealth (in practice, into the registry account of the regulator), arguably no proprietary benefit would ever accrue to the Commonwealth or any other person. For example, if the legislation were simply to provide for the repeal of the Clean Energy Act and associated legislation, or were to specify that all allocated carbon units are cancelled or extinguished, it is difficult to see what proprietary benefit the Commonwealth would acquire. (If, on the other hand, the units were first to be compulsorily transferred/relinquished to the Commonwealth before being cancelled, then the Commonwealth would arguably obtain a proprietary benefit for the period before the units are cancelled, amounting to an acquisition.)

The 2009 High Court case of ICM Agriculture Pty Ltd v The Commonwealth is instructive. That case concerned whether compensation under section 51(xxxi) was payable in respect of the cancellation of statutory water licences for the extraction of bore water. That the licences in question were a form of property was not doubted; the case turned on whether their extinguishment amounted to an “acquisition” of property by the Commonwealth (in other words, whether the Commonwealth obtained a proprietary benefit). A six-to-one majority of the High Court held that it did not: because the state already enjoyed the right to the use, flow and control of all water in the aquifer, extinguishing the licences did not give it any larger right than it already had; no underlying property interest of the state was enhanced.

The conclusion reached by the court in ICM Agriculture differed from that in an earlier case, Newcrest Mining (WA) Limited v Commonwealth, in which the High Court held that Commonwealth legislation that partially extinguished the rights of a mining company to mine minerals under a mining lease did constitute an acquisition. In the Newcrest Case, the court reasoned that the Commonwealth received a proprietary benefit because the minerals that could no longer be mined by the company reverted to Commonwealth ownership, augmenting the Commonwealth’s “radical title” (its underlying ownership interest in all land over which it has sovereignty).

The different outcome in the ICM Case highlights the difficulty of identifying a proprietary benefit, and hence demonstrating an acquisition, where the proprietary rights being extinguished: (a) are purely statutory in nature; and (b) do not pertain to an identifiable underlying proprietary interest of the Commonwealth (or another person) such that their extinguishment does not enhance or otherwise benefit that underlying Commonwealth proprietary interest.

On the basis of the reasoning in ICM, holders of cancelled carbon units would face an uphill battle trying to argue that the Commonwealth acquired a proprietary benefit from the cancellation. Carbon units are pure “creatures of statute” and they arguably do not pertain to any underlying property interest of the Commonwealth that could be enhanced by their cancellation. A carbon unit entails no ownership of, control over or right of access to any underlying “atmospheric resource” or volume of greenhouse gas, let alone any such resource owned by the Commonwealth. A carbon unit is not, contrary to popular perception, a “right to emit” one tonne of carbon dioxide equivalent; rather it is a form of property that derives its value solely from its statutory purpose as a compliance instrument under the carbon scheme legislation.

For the High Court to find an acquisition in the case of carbon units would require it to depart substantially from its recent decision in the ICM Case. Given that ICM was decided six-to-one by the seven current members of the court, that result seems unlikely. Even Justice Heydon, who dissented in the ICM Case, would have a tough time justifying compensation in the case of extinguished carbon units.

It is little wonder, then, that Wayne Swan and Greg Combet have been dodging repeated direct questions from journalists about whether a repeal of the scheme would require compensation (perhaps they’ve received some legal advice along the lines of the above).

But the legal conclusion on compensation may not imply the gloomy outlook that supporters of the carbon scheme fear. The improbability of compensation may well compel affected businesses to put more political pressure on Abbott not to repeal it. Now that the scheme is a fait accompli, businesses have already changed their tune somewhat to emphasise the importance of stability and certainty in the scheme – a move that presents political opportunities for Labor and the Greens. In this sense, a lack of compensation may reduce the likelihood of its being repealed at all.

Whatever happens, a repeal of the carbon scheme unaccompanied by compensation would undoubtedly be the subject of a constitutional challenge that would end up in the High Court. At the very least, the legal battle would help retard the flight of Abbott’s climate policy wrecking ball, along with the other Constitutional and political barriers that would stand in the way of a repeal.

It may not be worthy of a feature-length movie, but watching Tony Abbott try to dismantle the carbon scheme would make riveting viewing. •

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Arnold Strauss Collection