The Nature of Environmental Risk in Australia

01 October 2007

In Australia, land use planning legislation and pollution control legislation impose a wide range of criminal and civil liability.

John Taberner, Freehills

Traditional Civil and Criminal Liability

Under Australian pollution control legislation, the typical liability imposed is criminal; the liability is “strict” (it attaches regardless of intention and there are no practical defences); it attaches to mere “control” of land; and, if a corporation commits an offence under the legislation, those in control of the corporation (including, but not limited to, its directors and managers) are deemed to have committed the same offence. 

Equally significantly, Australian land use planning legislation and pollution control legislation impose a wide civil liability. The administrative and judicial authorities under the legislation have wide prospective and retrospective civil powers concerning (for example) contaminated land. The cost of complying with these civil orders can be substantial. Importantly, they can be directed to an existing person in respect of their past ownership of land. 

 

Reporting Liability

An important and growing area of liability is that of corporations to report on environmental and other matters. Certain corporations are subject to the following forms of mandatory disclosure: • disclosure in directors’ reports pursuant to section 299(1)(f) of the Corporations Act 2001; 

  • disclosure in directors’ reports pursuant to section 299A of the Corporations Act 2001; 
  • disclosure required by part 7.9 of the Corporations Act 2001; 
  • disclosure required by the National Pollutant Inventory (NPI); 
  • disclosure required of large energy users under the Energy Efficiency Opportunities Act 2006; and 
  • reporting pursuant to conditions of environmental licences.

In addition, a corporation that signs up to a programme such as the Australian Greenhouse Challenge (membership of which is effectively obligatory for some corporations) may be required to make disclosures as a condition of participation. 

Other forms of what can be considered to be mandatory reporting are those that can arise under fair-trading legislation, both at commonwealth and state levels, in the course of commercial transactions.

 

Allocation of Risk

General 

In Australia, management of environmental risk is now considered by a wide variety of stakeholders as material to the financial position of corporations. However, there is no standard form of environmental indemnity or warranty in Australia, and no standard approach to the allocation of liability in any particular type of transaction. 

One (but not the only) reason for this state of affairs is that Australia is a federation in which responsibility for most aspects of the environment and land-use regulation generally is in the hands of the constituent states. 

Another reason is the wide variety of circumstances, including market circumstances, in which environmental issues arise and the wide range of those issues. They include: 

  • the existence of, or the lack of a need for, approvals under the federal environmental legislation relating to matters of ‘national environmental significance’; 
  • the pollution legislation and contaminated land legislation of the various states and territories; 
  • the various regimes for the protection of indigenous and non-indigenous heritage; 
  • legislation relating to ozone, radiation, hazardous wastes and dangerous goods; 
  • legislation relating to the protection of threatened species, native vegetation and biodioversity; 
  • claims in tort concerning pollution or contamination; 
  • existing agreements with owners or occupiers of land or statutory authorities relating to pollution or contamination; and 
  • in appropriate cases, the existence of valid approvals for development on a site (or the lack of a need for such approvals) and the risk of third-party actions in this regard. 

The absence of a standard approach to the allocation of environmental liability can be particularly problematic. 

One scenario is that environmental liability is apportioned as at the date of completion of a deal, such that the outgoing owner (or asset controller) accepts responsibility for environmental liabilities that arose before the date of completion, and the incoming owner (or asset controller) accepts responsibility for environmental liabilities arising from that date. Depending on the deal concerned, such environmental indemnities may be limited or unlimited in time or amount or both. Again depending on the deal, that apportionment may be made by reference to existing documents or the deal may foreshadow the commissioning by either party (or by both) of a report (to be completed between execution and completion) that is to serve as prima facie evidence as regards the environmental state of the land concerned. 

Some, but not all, state and territory legislation contemplates the availability of ‘site audit statements’ by site auditors accredited by a relevant regulatory authority, which can serve as the basis for determining the suitability of land for use for particular purposes and the remediation and monitoring that may be required to bring the land into, or keep the land in, that state. The future production of a site audit statement attesting to the land’s suitability can be made a pre-condition for the completion of a transaction or the basis for the allocation of risk, or both. 

In a competitive tender, it is not unknown for a bidding company to submit alternative bids that balance allocation of environmental liability and price in different ways using a combination of the approaches outlined above. 

In general, environmental insurance is either not available or not affordable in Australia. As a matter of public policy in Australian law, it is not possible to insure against criminal liability, although there is an (as yet untested) argument that insurance can be effected to reimburse the amount of a criminal fine or penalty. Such insurance, however, is not generally offered. Insurance against civil environment liability is both possible and available but generally very expensive and usually rounded by extensive contractual limitations. 

In short, the allocation of liability in any particular type of transaction can be highly problematic. 

 

Greenhouse Risk 

Adding to these difficulties are climate change issues, which have recently emerged as significant mainstream political issues in Australia. It is now clear that change, possibly major change, in legislative policy is imminent. 

There are seven key indicators of this. 

Federal government 

The most significant is the prime minister’s announcement in November 2006 that the federal government would establish a joint government–business task force to examine the form that “an emissions trading system…in Australia… might take”. 

The announcement does not represent a change in the federal government’s position regarding the Kyoto Protocol, namely: that Australia’s ratification of the protocol will damage the comparative advantage that Australia enjoys as a result of its abundance of fossil fuels and the importance of that abundance to Australia’s export and general performance. However, the announcement marks a very significant shift in discussion, away from the Protocol towards active consideration of whether Australia should have a regulated market for trading in carbon. 

In consequence of the announcement, the Prime Ministerial Task Group on Emissions Trading (ET Task Force) was formally established on 10 December 2006. On 7 February 2007, it released an “issues paper” on emissions trading. The ET Task Force reported to the prime minister by 31 May 2007. It recommended the establishment of a national emissions trading scheme by 2012. This recommendation was accepted in the government’s climate change policy announced in July 2007. 

 

Business 

This reflects recent shifts in business attitudes. In April 2006, the Australian Business Roundtable on Climate Change released a report entitled ‘The Business Case for Early Action’. The Roundtable supported the introduction of a national market-based carbon pricing mechanism. In November 2006, the Business Council of Australia (BCA) abandoned its previous ambivalent attitude to emissions trading and (while maintaining its opposition to Australia’s ratifying the Kyoto Protocol) called for the ultimate creation of a “global market for emissions” with, as a first step, the development of a trading market within the Asia-Pacific Partnership on Clean Development and Climate (AP6). On 7 February 2007, the BCA released its discussion paper on emissions trading and, in April 2007, its ‘Strategic Framework for Emissions Reduction’. A key part of the ‘Strategic Framework’ is the call for a national “cap-and-trade” scheme that can be linked to existing and emerging trading markets in other countries. The ‘Strategic Framework’ also calls for “other strategies” (specifically energy-efficient technologies) to supplement the trading scheme. 

 

State and Territory Governments 

The state and territory governments have also been active. To varying degrees, they have all pursued since 1997 initiatives aimed at abating, offsetting or sequestering GHG emissions within their own jurisdictions. More significant still are their joint efforts during that time. In August 2006, the National Emissions Trading Taskforce (NETT), a working group of senior officials reporting to the premiers and chief ministers of all Australian states and territories, released a discussion paper setting out a possible design for a national emissions trading scheme that would commence as early as 2010. On 9 February 2007, the state and territory premiers and chief ministers announced that they had signed a “declaration on climate change”. They stated their “expectation that the Prime Minister [will] make a commitment to the introduction of a national emissions trading scheme”. 

 

Federal opposition 

The position of the opposition Australian Labor Party has also firmed. As at May 2007, the Party’s policy on climate change included the commitments to: 

  • cutting Australia’s GHG emissions by 60 per cent by 2050; 
  • ratifying the Kyoto Protocol; 
  • setting up a national emissions trading scheme; 
  • substantially increasing the Federal Mandatory Renewable Energy Target; and 
  • commissioning an Australia-specific equivalent of the UK-based Stern Report to investigate the impact of climate changes on the Australian economy and employment; among other commitments.

Council of Australian Governments (COAG) 

Greenhouse issues are now also firmly on the agenda of COAG. At its 19th meeting in Canberra on 13 April 2007, COAG agreed to, among things, the establishment of a mandatory national greenhouse gas emissions and energy reporting system, with the detailed design to be settled after the report of the ET Task Force at the end of May 2007. Consequently, on 15 August 2007, the National Greenhouse and Energy Reporting Bill 2007 (Cth) was introduced into the Federal House of Representatives and received its second reading speech. The Bill aims to “provide a framework for the reporting and dissemination of information related to greenhouse gas emissions, greenhouse gas projects, energy consumption and energy production of corporations”. Among other things, the Bill would require corporations that emit prescribed levels of greenhouse gases, or that produce or consume prescribed amounts of energy, to apply for registration with the National Greenhouse and Energy Register (“the NGE Register”) and to record specified (and publicly available) information in the NGE Register. 

Courts and Regulatory Authorities 

Courts and regulatory authorities have also been active in bringing climate change issues to the forefront, for example by decisions denying development approval for projects that do not propose adequate offsets for GHG emissions, or by ordering the re-execution of approvals processes that did not adequately assess the impact of such emissions. 

In Australia, climate change-related litigation has so far been fairly limited in extent, and has largely been confined to the context of planning approval. The most important cases so far have been: 

  • the Isaac Plains and Sonoma Coal Mines case, a decision of the Federal Court under the Environment Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act); 
  • the Anvil Hill case, a decision of the NSW Land and Environment Court under the Environmental Planning and Assessment Act 1979 (NSW) (EPA Act); 
  • the Taralga case, a decision of the NSW Land and Environment Court under the EPA Act; 
  • the Xstrata case, a decision of the Queensland Land and Resources Tribunal under the Mineral Resources Act 1989 (Qld) and the Environmental Protection Act 1994 (Qld); 
  • the Carlton United Brewery case, a decision of the NSW Land and Environment Court under the EPA Act. 

The courts in these cases have yet to develop a consistent jurisprudence as to the impacts of particular developments and activities on the global phenomenon of climate change. 

Emergent trading 

Finally, while these developments have been occurring, some Australian companies have been involved in domestic and international trading involving carbon, and this has fuelled speculation about such a market. Clearly, some companies have been engaging in ‘soft’ trading, using instruments that have a status less than that of legal enforceability. 

 

Future

The significance of these developments for Australia cannot be underestimated. Unlike in the US (where shareholder initiative is the principal driver), in Australia section 299A of the Corporations Act, which came into force on 1 July 2004, requires listed public companies to include in the annual report of directors to shareholders information that shareholders would reasonably require to make an informed assessment of, among other things, the financial position of the company and the company’s business strategies and prospects for future financial years. Clearly this must include matters of environmental (and social) significance that could impact a company’s future financial prospects. These matters would include the direct effects of climate change on the company’s activities and markets, and also the indirect effects of climate change through governments’ actual and reasonably likely responses to it. As the evidence of the physical effects of climate change mounts and government action on climate change becomes an enhanced possibility, there is a stronger argument that shareholders would reasonably require such information to consider their company’s prospects. Accordingly, the view that section 299A of the Corporations Act requires companies’ annual reports to include the likely impact of climate change on their business is gaining momentum. This extra reporting requirement will affect a wide range of sectors directly because their operations are or are likely to be subject to climate change-related regulation or the opening up of climate change-related opportunities such as emissions trading markets. These sectors include energy generation and retail, transport, construction, waste management and agriculture. 

More generally, these considerations are clearly relevant to a public company’s ability to discharge its obligations pursuant the federal continuous disclosure regime given legislative force by the Corporations Act 2001 (Cth). Specifically, the operation of Australian Stock Exchange listing rule 3.1 and section 674(2) of the Corporations Act broadly require a listed public company to make market disclosure of information that would have a material effect on the price of the company’s shares. It is likely that in many circumstances, matters concerning the direct effects of climate change on the company’s financial position, and the indirect effects of any proposed regulation of climate change conduct, will fall to be disclosed pursuant to the continuous disclosure regime. A failure to disclose such information could properly form the basis for claims based on misleading and deceptive conduct pursuant to section 52 of the Trade Practices Act 1974 (with equivalent proscriptive provisions in other legislative regimes regulating corporate conduct, eg, the Australian Securities and Investments Commission Act 2001 (Cth)). 

In recent years, there has been a growth in Australian class action proceedings commenced (pursuant to part IVA of the Federal Court of Australia Act) against companies and their directors for failure to comply with regulatory requirements imposed on corporate conduct. More frequently, litigation growth has been in the context of shareholder class action claims against companies for failure to disclose material information affecting the companies’ financial position and profitability. Analogous claims are conceivable in relation to companies which fail to disclose in corporate transactions material matters concerning the direct effects of climate change on the company’s financial position.