Thorny constitutional problems with the carbon tax?

Yesterday’s gathering of angry redneck opponents of the Gillard carbon tax on the lawns of Parliament House scored the sort of blanket MSM coverage its organisers wanted.  Actual political significance appears to have little connection with electronic media decisions on what stories to feature.  Colour and movement are all that’s needed, as demonstrated by Tony Abbott’s almost daily visits to assorted factories whose owners profess deep concern at the imagined threat to their business posed by a carbon tax which will add about 1% to prices overall, for which most Australians will receive compensation anyway, and whose modest cost impact the business owner can readily pass on to his already compensated customers.

However, amidst this mindless media coverage of meaningless colour and movement, there are much more important questions from a constitutional viewpoint.  Will the carbon pricing regime, particularly the post-2015 emissions trading scheme, be held valid by the High Court?  This rather vital question arises from the constitutional issue of whether the 2012-2015 fixed price “carbon units” amount to the imposition of a tax within the meaning of the Commonwealth Constitution.  The drafters of the Clean Energy Legislative Package are clearly generally aware of the issue, because they included the following subsections in section 100 of the central Clean Energy Bill 2011:

(10) If a carbon unit is issued to a person in accordance with this section, the person is liable to pay a charge for the issue of the unit.
(11) Subsection (10) has effect only so far as it is not a law imposing taxation within the meaning of section 55 of the Constitution.

Section 55 in turn relevantly reads:

Laws imposing taxation shall deal only with the imposition of taxation, and any provision therein dealing with any other matter shall be of no effect.

Now it needs to be understood that the word “charge” in subsection (10) does not refer to the fixed price of the carbon units themselves ($23 per unit/tonne of emissions in 2012-13) but rather to an associated administrative charge for issue of the units,  which is to be imposed by separate legislation, namely the Clean Energy (Unit Issue Charge—General) Act 2011.

However, as I and numerous others have argued previously, there’s a more than plausible argument that the actual fixed price for the 2012-2015 fixed price carbon units regime (i.e. the $23 etc per unit/tonne of emissions) does amount to the imposition of a tax within the meaning of s 55,whereas the post-2015 tradeable carbon units don’t amount to a tax at all.  The fixed price carbon units are merely the indicia of a compulsory government impost (i.e. a tax) whereas the post-2015 carbon units are tradeable instruments purchased at government auction or on the open market at variable prices determined by the market (albeit instruments that affected emitters have no choice but to buy). And if the fixed price units are a tax but the post-2015 tradeable units are not, then s 55 is clearly breached because the legislative regimes creating both types of carbon units are contained within the same piece of legislation, namely the Clean Energy Bill 2011. The result would appear to be that, while the fixed price carbon tax regime would be valid and enforceable, the entire post-2015 emissions trading scheme would be invalid.

In one sense that wouldn’t be a complete disaster because it would be a relatively easy legislative drafting task to separate the pre- and post-2015 regimes into two separate pieces of legislation and re-enact them if the High Court holds that s 55 has been breached (assuming Gillard can still cobble together a Reps majority in the wake of such a fiasco).  But I can’t help wondering why they aren’t simply doing that in the first place given that the drafters are clearly aware at least in general terms that s 55 poses a potential danger? A conspiracy theorist might speculate that Climate Change Minister Greg Combet, arguably the prime candidate for ALP leadership if Gillard falls, has planted a constitutional time-bomb set to detonate when the High Court hands down a decision on the inevitable constitutional challenge just before the next election, reinforcing existing perceptions of an inept government and driving the last nail into a moribund Gillard’s coffin (assuming it’s metaphorically viable to drive a nail into a coffin using a time-bomb).  However that seems an unlikely scenario in the real world, because Combet as the responsible Minister would be primarily blamed for the fiasco.  Can anyone else come up with a plausible explanation?  I suppose the obvious one is carelessness and insufficient attention to crucial detail.

Endnote – There are vaguely plausible arguments that the fixed price carbon units regime is not a tax for constitutional purposes.  The classic constitutional definition of a tax was propounded in Matthews v The Chicory Marketing Board (Victoria) (1938) 60 CLR 263: “a compulsory exaction of money by a public authority for public purposes, enforceable by law, and not a payment for services rendered”.  The fixed price carbon units clearly satisfy each element of the Matthews definition, and it isn’t immediately evident that the Commonwealth will provide any services in exchange for the impost.  However the Commonwealth will presumably argue that the fixed price units regime is an inextricably interwoven initial transitional element of an overall carbon emissions reduction scheme (namely an emissions trading scheme) that isn’t a tax.  That argument might conceivably succeed, although the problem with it is that at least in a functional/machinery sense the fixed price units regime is entirely separate from and independent of the post-2015 tradeable units regime (although some fixed price units will continue to be issued after 2015 to create an emissions capping regime).

Alternatively the Commonwealth might argue that the post-2015 tradeable carbon units also satisfy the Matthews test and are therefore also a tax.  That would mean s 55 would not be a problem, because the Commonwealth would not be “tacking” tax and non-tax measures into the same piece of legislation.  However, a tax where the tax rate is determined by the price the taxpayer bids at auction for the instrument imposing the taxation is a very strange sort of tax indeed.

The Commonwealth might also seek to argue that the fixed price carbon units represent a licence to emit atmospheric carbon, and that the unit price is the licence fee.  However, even accepting that it’s a licence doesn’t preclude the possibility that it’s also a tax.  As Mason J observed in the Pipelines Case in 1983:

There are many illustrations, notably in England, of fees charged for licences to carry on an occupation which have been regarded as an excise (W. Harrison Moore, The Constitution of the Commonwealth of Australia, 2nd ed. (1910), p. 515). This is because the fee was not merely a fee for the privilege of carrying on a business or activity; it was also a tax upon goods. Where the fee for a licence to sell a commodity is a lump sum that is small or relatively small in amount it is easier to conclude that it is a fee for a privilege or that, if it be a tax, it is not a tax on the commodity. Where, however, though the fee is expressed to be for a licence to produce or manufacture, the terms and practical operation of the law show that it is exacted in virtue of the quantity or value of units produced or manufactured, it is a tax upon goods. (at p634)

All very interesting for academic constitutional lawyers.  But why not avoid the whole problem in the first place by separating the two regimes into separate Acts?

 

About Ken Parish

Ken Parish is a legal academic, with research areas in public law (constitutional and administrative law), civil procedure and teaching & learning theory and practice. He has been a legal academic for almost 20 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 the early 1990s.
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Alexander
Alexander
10 years ago

Perhaps for fear that the one could be passed and the other rejected, and this would be politically difficult for Gillard to deal with. For instance, at least some Greens don’t really want a trading scheme, but only a tax, and given the opportunity might vote that aspect down.

Also, the Coalition and those parts of the media opposed to Gillard, the Labor Party, or a carbon price, might use the passage of one half before the other as the basis for a fear campaign.

john walker
john walker
10 years ago

Ken regarding ‘licensing’ do you know the 1991 Blank tapes majority ruling was based on section 55?

Patrick
Patrick
10 years ago

I agree with you that I actually can’t see any way to bend the Australian Constitutional fabric far enough to argue that a mandatory imposition calculated with reference to an objective assessment of the taxpayer’s activity, is not a tax. The High Court would have to be collectively on some pomo drug which very few senior Australian judges seem ever to have taken to buy the ‘inextricably interwoven’ point, I can more readily see them buying the ‘the whole point of s 55 is that taxes not be passed in an inextricably interwoven manner’ (as is I believe the position in the debates).

I have a feeling that Alexander is on the right track.

john walker
john walker
10 years ago

A question: is this new legislation part of the Tax Act? The problem with the blank tapes levy was that it was too tax-like to be part of the Copyright Act. If it had been part of the tax act, it probably may have been acceptable – as best as I understand it.

Patrick
Patrick
10 years ago

Even in tax there is a bit of a fudge where the Act imposing tax is separate to the Act setting the rate of tax, etc…. try finding the part where it actually tells you what rate of tax to pay :)

john walker
john walker
10 years ago

:)

Ken Parish
Ken Parish
10 years ago

Patrick

There was previously a line of cases, especially Re Dymond, which held that provisions which were merely incidental to imposition of tax (e.g. penalty, machinery and enforcement provisions) should be regarded as infringing s 55. That’s why the practice developed of having a Tax Act which simply proclaimed the tax, rates and who they were applicable to (including exemptions etc) and a separate machinery/administration Act dealing with all the incidental stuff.

However the Re Dymond line of cases was effectively overruled in Permanent Trustee Australia Limited v Commissioner of State Revenue in 2004. Thus machinery provisions can be validly included in the primary taxing legislation. Section 55 will only be infringed where the challenged provisions CAN’T be said to be genuinely incidental to imposition of the tax. If the emissions trading scheme is not a tax but the fixed price regime is, I think there’s a pretty strong argument that the former can’t be said to be incidental to the latter. They’re separate regimes.

Alexander
Alexander
10 years ago

John Walker, the problem with the carbon tax/trading scheme nexus is that one is probably a tax, and the other is probably not one. So regardless of whether they’re in one act, or the carbon tax is effected by amending the “Tax Act”, as long there is a single bill going through both houses, it would appear to breach section 55.

By the way it seems to be going, Abbott will sometime soon be saying, “Even the High Court agrees: This a Great Big New Tax On Everything”.

Either the Labor Party thinks it has better odds of their being less fallout by going that route than by going the split route, or they want this bill to fail, by being ruled invalid by the High Court. It might be that caucus are now so strongly opposed to the carbon price, but know of no way to back down but by doing it in a way that the High Court will rule unconstitutional. They might feel it is inevitable now that they will be the opposition from 2013, but by having a reason “out of their hands” they might get back in quicker.

I seriously doubt anyone in their right mind could ever think that course of action a good one. But if this article is even remotely true I can’t understand what the calculations are. Even my proposed explanation @1 seems to be a better outcome for the Labor Party than Abbott bleating “Even the High Court agrees”.

Ken Parish
Ken Parish
10 years ago

Thanks Alexander. I agree with pretty well everything you say. I simply don’t understand why they’re currently proceeding with a model that includes both the fixed price units regime and the emissions trading regime in the same Act, given the evident and easily avoidable constitutional risk. It just doesn’t make sense to me. I’m wondering whether there’s some fundamental aspect of this very complex legislative package that I’m missing and that would explain it. I’m rather hoping that some relevant experts like Tim Macknay might pop in and subject my analysis to scrutiny. I might even email george Williams and solicit a comment/analysis. I had been expecting to see the two aspects dealt with in separate Bills when Tim drew our attention to the fact that the exposure drafts were publicly available, and was astounded to find they were all together in a single Bill. I’m posting this in part in an attempt to find out. There must surely be a 50% chance that I’m missing something that a true expert would regard as really obvious, because there’s no evident reason why the government would take such a seemingly serious risk of constitutional invalidity when it would seem to be so easily avoided.

Pappinbarra Fox
Pappinbarra Fox
10 years ago

Maybe Labour had to link the 2 because of the way the Greens negotiated the GW issue. And let the chips fall where they may.

Ken Parish
Ken Parish
10 years ago

PF

Yes that’s in many respects Alexander’s guess as well at #1. But even if Gillard had to promise to link the carbon tax and emissions trading scheme inextricably together as the price of Greens support, I can’t see why Labor would now be sanguine about the prospect that that promise may result in the High Court making a finding of invalidity at the worst possible time i.e. shortly before an election that they seem to be at short odds to lose anyway. there must be a better way of honouring that promise.

Moreover, I have not detected in the Greens such an implacable opposition to an emissions trading scheme (as opposed to a straight carbon tax) that they would happily run a needless risk of losing the lot. And that would effectively be the result of a successful High Court challenge. The fixed price regime is defined in such a way that it stops in 2015, so if putting the two aspects together results in the ETS aspect being invalid, then all the Greens end up with (assuming a Coalition win in 2013) is a modest carbon tax for the next 3 years and then nothing. It makes no sense. That’s why I think I might be missing something quite critical, I just don’t know what it is.

Patrick
Patrick
10 years ago

Sabotage by parliamentary counsel? I have no idea who that is now but they are typically very well-versed in Constitutional law. Or maybe drafting was conducted primarily in the departments and they just didn’t know?
Since it does not seem likely to be sheer stupidity I would normally apply cui bono. But if you try to apply cui bono here you quickly get to where Ken is which is that you must be missing a piece of the puzzle.

Patrick
Patrick
10 years ago

Maybe as Alexander says it really does reflect just how precarious the vote actually is … it isn’t like they have a massive majority! They might be worried, not about a green, but a labor member.
I think that is the only sufficiently simple explanation to be credible on available facts.

Calyptorhynchus
Calyptorhynchus
10 years ago

Another explanation might be that the drafters at AG’s know this stuff better than you.

Alexander
Alexander
10 years ago

Calyptorhynchus, I think that option has been continuously acknowledged by all parties in this thread.

john walker
john walker
10 years ago

alexander as I understand it, the problem with the blank tapes levy was that it was effectively hypothecated . Do you think the same could really be said of the trading scheme??

Tim Macknay
Tim Macknay
10 years ago

Ken, I don’t entirely agree with you on how the scheme is structured. The charge referred to in s100(10) is the $23/tonne carbon price, and, as I read it, subsection 100(11) is intended to make the clause severable in the event that the fixed price is found to be a tax for the purposes of s55 of the constitution. Sections 111(3) and (4) are intended to perform a similar function with respect to the auction prices paid during the tradeable phase of the scheme. See the definition of “charge” in s5, and subsection 100(12), which states that the amount of the charge in s100(10) is determined by the table in s100(1) (which provides for a gradfually increasing price from $23 in 2012 up to $25.40 in 2015).

It seems the drafters have tried to build multiple redundancy into the scheme to cover a range of possible interpretations of the nature of the carbon price, by seeking to make the various clauses severable. The Clean Energy (Issue Unit Charge – General) Bill 2011 is intended to meet the requirements of s55 in the event that either or both the fixed and variable charges are found to be a tax, and the Clean Energy (Charges – Excise) Bill 2011 is intended to meet the requirements of the second clause of s55 in the event that either or both the charges are found to be an excise. Sections 100 and 111 in the main Bill are intended to provide for the charges in the event that they are not regarded as a tax or excise, but are severable otherwise.

The Commonwealth states its own position in the commentary paper on the charges bills. It appears to be of the view that the fixed price might be an excise, but is not any other kind of tax.

It seems to me that the way the scheme is structured does meet the requirements of s55 as, to the extent that the charges are regarded as a tax or excise, they are imposed in a separate piece of legislation as required by that section. The only thing that gave me pause was the requirement in the second clause of s55 that a law imposing taxation shall deal with “one subject of taxation only”, given that each of the charge bills deals with both the fixed charge and the variable charge. However, I surmise that the Commonwealth’s position is that both types of charge are a charge on the issue of a carbon unit, which is “one subject of taxation” for the purposes of s55. This appears to be a defensible view to me. However, my expertise is in environmental law, rather than tax law.

john walker
john walker
10 years ago

“isn’t immediately evident that the Commonwealth will provide any services in exchange for the impost”

I assume there will be some sort of ‘trading exchange’ (is that right?)
who will pay for the service of running the exchange ?

Tim Macknay
Tim Macknay
10 years ago

john walker, the legislative package includes a Bill to establish a statutory authority called the “Clean Energy Regulator”, which will be responsible for issuing carbon units and maintaining the registry of carbon units, effectively acting as a carbon unit ‘bank’. The legislative package doesn’t seem to make any specific provision to set up an exchange for the onsale of carbon units. However, the package includes consequential amendments that deem carbon units to be financial products for the purposes the Corporations Act and the ASIC Act. Presumably the intent is to allow the market to trade in carbon units in the same manner it trades in other financial products.

Nicholas Gruen
Admin
10 years ago

Amazing.

It certainly creates the impression of someone driving a nail into a coffin using a time-bomb. That could be their next trick.

Tim Macknay
Tim Macknay
10 years ago

As I understand it, the scheme is intended to operate as follows.

If the fixed price charge is a tax (but not an excise), but the variable price charge is not a tax, then:

s100(10) of the Clean Energy Bill is inoperative, by virtue of s100(11). s111(3) will validly apply as the variable charge is not a tax. The fixed price charge is imposed as a tax by s8(5) of the Clean Energy (Charges – General) Bill, which is a taxation statute compliant with s55. s8(1) of that Bill, which would otherwise impose the variable charge as a tax, is inoperative by virtue of s8(4). So the fixed charge is imposed by the (Charges – General) Bill, which is a separate taxing statute, and the variable charge is created by the main Bill. The Clean Energy (Charge – Excise) Bill is inoperative, by virtue of ss 8(4) and (8).

If the fixed price charge is taken to be an excise, but the variable charge is not a tax, the above applies, but with the fixed charge being imposed as an excise by the Clean Energy (Charge – Excise) Bill, which is a separate taxing statute compliant with s55. The Clean Energy (Charges – General) Bill is inoperative, by virtue of ss 8(4) and (8).

If both the fixed and varuiable charges are taken to be tax/excise, then ss 100(10) and 111(3) are both inoperative, by virtue of ss 100(11) and 111(4), respectively. The charges are imposed as a tax/excise under ss 8(1) and (5) of the relevant charge bill (the other one being inoperative, as described above). Despite the two different types of charge, the charge bill is compliant with s55 because the charge for the issue of a carbon unit is “one subject of taxation” for the purposes of that section.

If neither fixed charge nor variable charge are tax or excise, then both charge bills are inoperative under their respective ss 8(4) and (8), and both charges are validly imposed under ss 100(10) and 111(3) of the main bill, respectively.

Tim Macknay
Tim Macknay
10 years ago

Oops. Missed an emphasis tag somewhere in there.

john walker
john walker
10 years ago

Tim
thanks

‘carbon units’ will they be like other economic trading ‘titles’ : with each unit having a unique identifier title ?

Nicholas Gruen
Admin
10 years ago

Yes, they will need to be individually identifiable – like banknotes – in order to be tracked and traded.

john walker
john walker
10 years ago

Can somebody remind me … Why did the government opt for this ‘hybrid’ approach to implementation of carbon trading in the first place?
Surely going strait to a trading scheme – without passing ‘tax’- could have attracted no worse grief than the path that has been taken on the politics board game?

Nicholas Gruen
10 years ago

John, when you’re establishing a market there’s a role for a ‘market maker’ because at the outset there’s a lot of uncertainty as to price. The Govt knows that it wants the price somewhere about where it has set it, but doesn’t know the volume that will produce it. Moreover if it sets a volume the price will take a while to stabilise with uncertainty being high (deterring investment) and creating large windfall gains and losses for early investors. As the government is the architect of the system and therefore what it does affects the risks faced by the traders, and since it also happens to be the strongest bearer of risk there is (on account of its size, representativeness and its access to coercive powers of taxation it makes sense for the government to be the market maker early in the scheme from whence it can ‘float’ into market pricing over time.

It’s not unlike a share float at which there’s an underwriter and an underwritten price.

john walker
john walker
10 years ago

Was an initial ‘tax’ also the starting condition of the previous carbon trading scheme, the one voted down by the greens ?

Nicholas Gruen
10 years ago

IIRC yes, for one, not three years.

Rococo Liberal
Rococo Liberal
10 years ago

I am a practising tax lawyer with just on 25 yeas experience.And I agree with Tim Macknay’s analysis here.

I would add that if either of the fixed of the variable charges is a tax, then one would think they would be excises as they are imposed on the manufacture of goods (ie.e gases). This interpretaton is strengthened by the fact that carbon units wil be treated akin to trading stock for income tax purposes.

Interestingly the units are being made GST-Free.

Patrick
Patrick
10 years ago

RL, it is GST-free so that it doesn’t reduce input tax credit entitlements but is not itself subject to GST (no derivatives are) – seems a logical position.

And I really don’t think it is a tax on the manufacture of carbon, since no-one actually manufactures carbon. It is determined completely independently (this is the whole point of it) of any measurement of actual production or manufacture.

Happily all this should be basically academic since they should never have time to pass it let alone ‘Abbott-proof’ it.

Ken Parish
Ken Parish
10 years ago

Patrick

It may well be a tax on the goods produced (e.g. steel, aluminium etc) measured indirectly by reference to the CO2 emitted in connection with the manufacturing process. Hence RL’s reference ton excise (also covered in the legsilative package).

I don’t think it’s going to be a matter of “Abbott-proofing” the package, because I don’t think that’s possible. As we discussed in a previous post, it’s very unlikely that this package will in any meaningful sene give rise to a just terms compensation liabiloty that would deter Abbiott from legislating to repeal the package. The only questions are:

(a) whether he’ll in fact bother once in government (he could potentially adopt the standard new government lie and discover a previously unsuspected “black hole” which justifies postponing some promised measures for a while; and

(b) if Labor and the Greens block the repeal legislation in the Senate, whether Abbott will choose to rush to a double dissolution election on the issue.

BTW I should record my thanks to Tim Macknay for his detailed study of this very complex legislative package and setting us (especially me) straight on how the pieces all fit together. As Tim ably explained, both the fixed price carbon units and the post-2015 ETS units are imposed by the central Clean Energy Act 2011 ONLY if they’re found NOT to be taxes. If either of them IS a tax then it’s instead imposed by either the Clean Energy (Unit Issue Charge—General) Act 2011 or the
Clean Energy (Charges—Excise) Act 2011. Both these latter Acts will only impose the tax/excise and do nothing else, so that Constitution s 55 is not infringed (even on the old pre-2004 Re Dymond line of cases). It’s ridiculously and in my view unnecessarily complex but, I agree with Tim, does not pose any constitutional issues (at least concerning s 55).

Tim Macknay
Tim Macknay
10 years ago

Ken, you’re welcome!

john walker
john walker
9 years ago

Could anybody tell me where the historical germ of section 55 came from? Am told that there is nothing evenly roughly equivalent in the US constitution and it seems unlikely in the UK.