Would carbon permits be property rights?

Sinclair Davidson at Catallaxy has a post musing about whether carbon emissions trading permits would be regarded as property rights which would entitle the holder to compensation if abolished by a future federal government. The obvious context is the fact that Tony Abbott has promised that the Coalition would “roll back” Labor’s carbon pricing regime if elected. Apparently there’s been a debate about it in the AFR (to which I don’t subscribe).

Frankly, I think any such debate is misconceived at least to the extent that some (e.g. Labor’s Assistant Climate Change Minister Mark Dreyfus QC) seem to be suggesting that Abbott could not abolish carbon pricing without running the risk of incurring a large compensation bill to emitters whose permits were cancelled. My understanding of Labor’s proposal is that a tradeable carbon permits regime would not commence until at least 2015. The regime to commence next year as an interim measure is simply a carbon tax levied at a fixed price per tonne on particular emitters. It isn’t transferable nor does it set any specific limit on permitted emissions. The designated emitters simply pay the fixed price for whatever they emit. On no sensible view could that be regarded as a property right. It would be like suggesting that one’s income tax liability was a property right!

The carbon permits regime to be introduced in 2015 may well be a different matter, but if Abbott wins the next election (which currently looks long odds-on) it will never see the light of day. As far as I know the legislation to be introduced this year will not itself create the tradeable permits regime. In that situation I don’t see any constitutional impediments to Abbott abolishing Labor’s scheme following a 2013 election win.

Nevertheless, the question of whether carbon permits would be property for constitutional purposes is quite an interesting one in a purely abstract sense. I copy a relevant extract from my constitutional law study guide over the fold, followed by my tentative view about the constitutional status of carbon permits.

Purely statutory interests may be distinguishable from property rights and therefore not attract a constitutional requirement for payment of just terms compensation

Important cases on this issue include Health Insurance Commission v Peverill (1994) 179 CLR 226; Bienke v Minister for Primary Industries and Energy (1996) 63 FCR 567; Commonwealth of Australia v WMC Resources Ltd (1998) 152 ALR 1; Georgiadis v Australian and Overseas Telecommunications Corp (1994) 179 CLR 297. Also see Santos Ltd v Chaffey (2007) 231 CLR 651 (which dealt with entitlements under NT workers’ compensation legislation. The Northern Territory (Self-Government) Act contains a just terms guarantee effectively identical to s 51(xxxi) of the Commonwealth Constitution).

Mason CJ, Deane and Gaudron JJ explained the distinction between property rights and mere statutory entitlements in Peverill:

It is significant that the rights that have been terminated or diminished are statutory entitlements to receive payments from consolidated revenue which were not based on antecedent proprietary rights recognised by the general law. Rights of that kind are rights which, as a general rule, are inherently susceptible of variation. That is particularly so in the case of both the nature and quantum of welfare benefits, such as the provision of medicare benefits in respect of medical services.

Clearly government would become almost impossible if statutory entitlements once granted could never be cancelled or reduced without the Commonwealth incurring an obligation to compensate those whose entitlements were reduced or cancelled. However, the distinction between mere statutory rights and “property” rights is not without its conceptual problems. Almost all modern property rights are grounded in statute. Even property rights in land are grounded in Torrens or Strata title-type legislation. Hence the above distinction between mere statutory entitlements and ones “based on antecedent proprietary rights recognised by the general law”. Proprietary interests in land predated their statutory enactment, and were previously creatures of the common law; hence they are proprietary.

However, an argument along those lines failed in Bienke v Minister for Primary Industries and Energy (1996) 63 FCR 567, where the Full Federal Court held that reduction in the catch entitlement of prawn fishermen in the Northern Prawn Fishery was not an acquisition of property, but a variation of entitlements that was inherent in the very nature of the rights as created (i.e. those rights were inherently defeasible):

Mr Bennett argued that the appellant’s right to reap a resource was “analogous” to a profit a prendre or to a cause of action. This submission was primarily directed to the question whether the fishing boat licence could be regarded as property for the purposes of s.51(xxxi). The argument might also be relevant to whether the licence was based on “antecedent proprietary rights recognised by the general law” and therefore not inherently susceptible of variation: Health Insurance Commission v Peverill, at 237. As Georgiadis shows, legislation extinguishing a cause of action against the Commonwealth arising under the general law can constitute an acquisition of property for the purposes of s.51(xxxi), in part because the cause of action is not inherently susceptible of variation. But a fishing boat licence granted under s.9(2) of the Fisheries Act does not vest in the holder a cause of action under the general law, nor does it create an interest based on antecedent rights recognised by the general law. …

Legislation which prohibits the public from exercising a common law right, so as to prevent uncontrolled exploitation of a resource, and confers statutory rights on licensees to exploit that resource to a limited extent, might be regarded in one sense as creating a right analogous to a profit a prendre: Harper, at 335. However, the right is not a common law right, but rather a new species of statutory entitlement, the nature and extent of which depends entirely on the terms of the legislation.

Probably, the critical determining feature between property rights and “mere statutory entitlements” lies not so much in whether they have pre-existing common law equivalents, but whether the legislation itself manifests a sufficient intention that the rights created are proprietary in nature. For example, is statutory right/entitlement just an annually renewable licence or is it granted in perpetuity? Is it cancellable at will or only for cause after a hearing? Can it be used as security for a loan? Is the entitlement transferable as of right?

Would carbon permits be “property” having regard to those principles? It’s impossible to say with any certainty. The question of whether entitlements created by statute are proprietary in nature can only be answered by detailed consideration of the exact bundles of rights, obligations and conditions the legislation creates, and carbon permits legislation does not yet exist. However, my educated guess is that they probably would be held not to be proprietary in nature. They will certainly be tradeable, and that’s a key element of property rights. However, either the number of permits to which a holder will be entitled, or the amount of CO2 each permit will allow to be emitted, will vary from year to year and be progressively reduced over time depending on what carbon reduction targets the government adopts from time to time and what international agreements they may enter. Permits or licences that are created purely by statute and whose attached rights may vary from year to year at the whim of the government do not look at all like property rights. They’re much more like the “inherently defeasible” fishing licence catch entitlements considered in Bienke and held not to be property.

Update – See especially Tim Macknay’s comment at #5 below and my response.

About Ken Parish

Ken Parish is a legal academic at Charles Darwin University, with research areas in public law (constitutional and administrative law) and teaching & learning theory and practice. He has been a legal academic for almost 12 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in he early 1990s.
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13 Responses to Would carbon permits be property rights?

  1. Pingback: Carbon permits and property rights at Catallaxy Files

  2. m Davies says:

    The same argument applies to water entitlements.The issue was raised in the High Court in ICM Agriculture:
    http://www.austlii.edu.au/au/cases/cth/HCA/2009/51.html
    but the Court determined that it was not necessary to determine that issue-see paras 74-80.The issue will arise again in relation to both the Murray and Murrumbidgee.

  3. David Wilkie says:

    “Frankly, I think any such debate is misconceived ”

    Well stop the press. Of course its misconceived. Because CO2 is good for the biosphere. If any of you even had the tiniest inclination to get your head around the science you’d be curious and you would ask questions. You are not curious. You are part of a ruling class or their sycophants, and you want to dominate your benefactors. Else why you push these total lies that you have no understanding of?

    Any angle to do with the scientific side of this problem I can explain it to you, but you lefty elites just are not even the least bit interested. You just lie and claim there is a consensus which you know totally and for a fact is a lie.

  4. Ken Parish says:

    Thanks for that Malcolm, ICM is certainly relevant here in that the basis on which it was decided is a further reason why any reduction or even abolition of carbon permit entitlements would be unlikely to attract a constitutional obligation to pay compensation to the permit holder.

    The question the Court concluded it did not need to decide in ICM was whether the applicant’s bore water licences were “property” at all. See [81]-[86]. The reason why it didn’t need to decide the question was that it concluded that the actions of the Commonwealth could not amount to an “acquisition” in any event. They may have amounted to a deprivation or extinguishment of an entitlement, but it couldn’t be an “acquisition” (which is what Constitution s 51(xxxi) requires) unless someone (not necessarily the Commonwealth) fairly directly acquires a quantifiable benefit flowing from the Commonwealth’s deprivation/extinguishment actions. In the case of bore licences no sufficiently directly acquired benefit could be identified.* Cancelling carbon permits would almost certainly equally not amount to an “acquisition” for exactly the same reason, irrespective of whether the permits were property.

    *Mind you, I must say I don’t find this logic all that compelling in relation to the ICM water rights. The Court if so minded could have concluded that the extinguishment gave the State of New South Wales the ability (if it so wished) to sell or allocate the water to someone else. In effect that’s what the majority found in Newcrest: cancelling its mining leases to create Kakadu National Park Stage 3 gave the Commonwealth the ability if it so desired to grant leases over the subject land to someone else (even though it had no intention of doing so). I don’t find the distinction drawn by French CJ, Gummow and Crennan JJ at [85] a convincing one (that “the property of the Commonwealth had been enhanced because it was no longer liable to suffer the extraction of minerals from its land in exercise of the rights conferred by the mining tenements held by Newcrest”). True it is that no Commonwealth property is enhanced in ICM, but the principles in other cases make clear that the benefit flowing from the extinguishment of the property need not flow to the Commonwealth itself but may enure to someone else. In ICM the State of NSW undoubtedly acquired the ability to sell or grant to someone else the water resources saved by cancellation of the bore licences. Their Honours acknowledge that fact, but then explain it away by asserting: “They have at best the prospect of increasing or obtaining allocations under the new system applying to the LLGS.” But how does that dispose of the issue? The NSW government’s ability to re-allocate the water arises directly from the bore licence extinguishment scheme of which the Commonwealth’s action was a part (I’m ignoring the Pye v Renshaw “decoupling” issue for present purposes). The fact that NSW gave effect to its newly acquired ability to reallocate water resources by means of a new scheme does not logically negate the conclusion that it acquired a quantifiable benefit in the first place directly from the extinguishment scheme of which the Commonwealth was a part.

    BTW I’m not expecting that most readers will have the faintest idea what I’m talking about here. ICM is a horrendously complex case, which is why I avoided mentioning it in the primary post.

  5. Tim Macknay says:

    The question of whether entitlements created by statute are proprietary in nature can only be answered by detailed consideration of the exact bundles of rights, obligations and conditions the legislation creates, and carbon permits legislation does not yet exist. However, my educated guess is that they probably would be held not to be proprietary in nature.

    Ken, the exposure draft of the legislation has been released and is available here.

    It does pose something of a condundrum, because it expressly creates carbon units as a form of transferable personal property (s 103 of the draft Clean Energy Bill 2011), but it then proceeds to provide that, during the fixed price period, units issued will be automatically surrendered, which effectively nullifies their transferability during that phase of the scheme. In a sense it’s the opposite to the example of Bienke v Minister for Primary Industries and Energy, because the statute says that the units are property but restricts their transferability and effectively only allows them to be owned instantaneously during the fixed price period, which takes away their property-like characteristics.

  6. Bfa says:

    Isn’t it necessary to distinguish between the allocated units and those that arise from carbon farming initiatives?

    As opposed to the carbon units distributed by government, the CFA provisions allow for companies to create carbon permits by reducing or storing carbon. I undersand that such permits have value under the carbon tax scheme, the future ETS, on the voluntary and international markets.

    While I doubt the Commonwealth would be on the line for ‘acquisition’ of property if the ETS was repealed, aren’t these carbon units property rights?

  7. Ken Parish says:

    Many thanks for that Tim. I wasn’t aware that an exposure draft had been published. That no doubt explains Dreyfus’s assertions. I was wondering why a manifestly competent lawyer would make such a claim.

    That’s quite a cunning gambit to make it harder for Abbott to “roll back” the scheme. Transferable property rights that can’t be transferred. Hmm. At first blush the fact that the legislation would evince an express intention to create property rights should override the fact that otherwise on an analysis of the rights it actually creates it isn’t property at all.

    However, thinking it through a little further, what would be the quantum of just terms compensation for cancellation of such effectively non-transferable “rights”? Especially when the result of Abbott’s cancellation of these valueless rights would be restoration of the subject emitters’ capacity to do something without charge that they would under the Gillard scheme be required to pay for by virtue of ownership of the “right”. It looks like it’s only superficially cunning, and dodgy as hell. Deeming a tax liability to be a “right”!!!! If Abbott’s as good a populist persuader as he seems, he should have an awful lot of fun with this.

    Moreover, expressly labelling it a “property right” would also not overcome the fact that merely cancelling it would not amount to an “acquisition” and therefore not trigger an obligation to pay compensation.

    The bottom line is that I still don’t think there would be an effective constitutional impediment to Abbott rolling back the carbon price regime. Still, the exposure draft provisions make it a more immediately interesting legal question.

  8. Tim Macknay says:

    Ken, I tend to agree.

  9. Patrick says:

    I’m sure, push come to shove, Abbott could sweet-talk or strong-arm all those emitters blessed with these property rights into voluntarily foregoing them. He might (in fact almost certainly will if you count campaign contributions and sympathetic advertising) even convince them to pay him to take those lovely property rights off their hands.

    Also I suspect that Heydon Gummow Crennan and Hayne, at least, will be quite tempted to reject the legislative attempt to call something property when it isn’t – quite often someone’s deference ends at the point of insulting their intelligence ;)

  10. Pedro says:

    I wonder then what you think the position would be if trading had started? Perhaps the answer is that any roll back simply makes the permits pointless. If a buy a liquor licence do I get compensation if the law is changed to make unlicensed liquor sales lawful?

  11. murph the surf. says:

    Anyone able to answer the question posed by Bfa?
    Permits are on one side of this equation and the development of carbon storage farming (or forestry aimed at the same goal) might be less than enthusiastically embraced if there is a near certainty the carbon units revert to zero value once the political situation changes.
    Normal costs incurred during the process of creating the stored carbon would be considered normal costs but the added value of the carbon units might be a cause for compensation?

  12. Pedro says:

    Murf, to be clear, are you asking whether compensation should be paid to people who invest in assets that are rendered worthless by a change in the law relating to the emission of CO2? I think that leads to the famous floodgates argument.

  13. Tim Macknay says:

    bfa @6 and murph @11, the carbon farming initiative carbon credits are explicitly stated to be transferable property in the relevant legislation (the Carbon Credits (Carbon Farming Initiative) Bill 2011. Those credits are created under different legislation from the carbon tax/ets, so would not be abolished by a repeal of the latter. As I read it, The draft Clean Energy Bill 2011 allows for a limited integration of carbon farming initiative credits into the ETS scheme, i.e. liable entities can surrender up to 5% of their credit quota as carbon farming credits, rather than carbon units. So a repeal of the Clean Energy legislation might affect the value of carbon farming initiative credits, although potentially not by much, but it wouldn’t result in their abolition.

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