Without a strong legal foundation, any carbon pricing scheme we come up with will be on shaky ground. And right now, the signs aren’t promising.
While we don’t yet have a firm idea of what will be incorporated in the carbon price, we can look at what the scheme will need to succeed.
The cap: setting a limit
Before we can design a scheme, we need to place a regulatory restriction on business-as-usual emissions. This restriction will reflect the emission reduction goals adopted by the federal government in the short, mid and long term.
These goals should be set in accordance with international agreements. They should be based on the advice of the IPCC and other advisors.
These goals will affect the limit placed on the number of carbon credits released to the carbon trading market; that is, the market cap.
The credit: are we on top of the legal implications?
The legal innovation of the tradeable carbon credit, within a capped carbon trading system, promises to be a cost-effective way to reduce greenhouse gas emissions.
But the effectiveness of the proposed Australian trading scheme could be seriously undermined without important legal reforms.
We need to support the creation of tradeable carbon credits and ensure that they are appropriately valued in the market.
To be worthwhile, credits must be recognised and protected as “property” by the legal system in which they’re held. One of the many legal concerns with the proposed carbon pricing framework is that we haven’t made the reforms that will ensure this happens.
This means the critical processes for ownership and treatment of the credits will fall to the property law principles in the states and territories. These vary significantly across the jurisdictions.
These issues are magnified when we consider that the government is intending to allow international trade in these legal instruments.
The price: making polluters pay
The scheme must also create a duty to surrender permits for all emissions by liable entities within a given period.
It is this obligation to “pay a price” for carbon that is intended to send a price signal to the community. This price signal should influence our emitting behaviours and ultimately reduce emissions.
The principles of environmental law tell us that the polluter should be the one held responsible for the environmental and social cost of emitting pollution and causing harm. The use of economic instruments to reduce pollution must therefore impose a “cost” on polluters.
Without it, business as usual emissions will continue and the legal instrument will fail to address climate change.
Providing businesses with free credits or providing an unlimited supply of low cost credits to the market will undermine the price signal. This means emissions are unlikely to be significantly affected.
The offsets: carbon farming not necessarily the answer
The Australian government must design its domestic scheme to be consistent with the rules set under the Kyoto Protocol to the UNFCCC for the recognition and treatment of offsets.
Biological sequestration activities (that is, activities where carbon is absorbed via trees, vegetation and soils) are particularly problematic, given that the sequestration is temporary and will fluctuate over time.
The Federal Government has previously proposed to allow reforestation projects to opt-in to the pricing scheme as liable entities. Permanent credits would be issued for net sequestration and the land owner would be liable for any net losses in carbon stocks across a 100 year period.
There are similar approaches proposed in the Commonwealth’s Carbon Farming Initiative.
There is a raft of legal issues to be resolved in these schemes including identifying appropriate methodologies for baseline setting, monitoring and verification of abatement.
There is also the critical problem of creating permanent carbon credits for a temporary emission reduction in direct conflict with the rules established under the Kyoto Protocol.
The international linkages: get in step
Finally, when we discuss the carbon tax and carbon trading options for Australia we should remember that an efficient carbon trading system requires a large number of players and volume of trades.
For this to occur, we need to link with the Kyoto Protocol trading system and with other existing domestic and regional carbon trading markets.
However, we can only do this if we design the Australian carbon pricing scheme in a manner compatible with the legal features of those other trading schemes.
In short, this is an area where it does not pay for the Australian government to be too clever, or too creative, in establishing a very different creature of trading system.
And yet, this appears to be exactly what the government is attempting to do with its new carbon pricing scheme.
The legal details for the carbon pricing scheme are still to be announced but current indicators point to an innovative new scheme with a raft of unresolved legal issues to be addressed.