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19 Jan 2012

NSW Court of Appeal rejects implied limits in CO2 emissions case

by Brendan Bateman, Jacyleen Ong

Environment Protection Licence conditions will not be easily implied, and in any event must be consistent with the statutory licensing regime under which the licence was created.

Environment protection licence-holders now have more certainty about what their licence conditions are, after the NSW Court of Appeal has struck out a climate change action group's attempt to imply restrictions on coal consumption and limits on CO2 emissions in a power station's licence (Macquarie Generation v Hodgson [2011] NSWCA 424; Clayton Utz acted for Macquarie Generation in the proceedings).

Peter Gray and Naomi Hodgson, two members of the action group known as Rising Tide, claimed that the Environment Protection Licence (EPL) issued to the Bayswater Power Station's operator, Macquarie Generation, is subject to implied statutory restrictions that limit permissible CO2 emissions into the atmosphere and restrict coal consumption at the Power Station.

Despite the willingness of Land and Environment Court (LEC) to allow a full hearing on these claims, the NSW Court of Appeal dismissed the claims summarily without the need for a full hearing, unanimously holding that the imposition of such implied conditions or limitations was incompatible with the existing statutory regime for EPLs.

Background

The Protection of the Environment Operations Act 1997 (NSW) (POEO Act) provides a detailed regime for environment protection licensing, and requires Macquarie Generation, as the operator of a power station such as Bayswater, to hold an EPL for the operation of the power station. Macquarie Generation has an EPL for Bayswater. That EPL does not contain any express conditions on CO2 emissions or coal use, although it does have other express conditions for managing potential environmental impacts.

Mr Gray and Ms Hodgson contended that Macquarie Generation's EPL is subject to:

  • an implied condition or other implied statutory restriction that Macquarie Generation could only emit CO2 which would have "reasonable regard and care for the interests of other persons and/or the environment", and
  • an implied condition that limits coal consumption at Bayswater to 7 million tonnes per annum, on the basis of a statement in the original 1979 environmental impact statement (EIS) for the Power Station about the maximum amounts of coal projected to be used.

The LEC had previously accepted that Macquarie Generation had lawful authority to generate CO2 emissions under its EPL, but also that it was nevertheless reasonably arguable that this authority was subject to implied and/or common law conditions restricting those emissions.

Macquarie Generation sought leave to appeal the LEC's finding before the NSW Court of Appeal.

The test for implied conditions is analogous to contract law

In determining the existence of any implied conditions, the Court held that relevant test was that for the implication of conditions under contract law. Most relevantly, an implied condition could only exist if it was necessary, obvious, clear and consistent with the express terms of the EPL.

On application of this test, the Court found that, contrary to these requirements, the implied limitation on CO2 emissions would have made Macquarie Generation's EPL ineffective, and contradicted the original reason for granting it.

Instead, the Court concluded that the EPL actually contained an implied authorisation to emit CO2, as this was central to the effectiveness of the licence.

In addition, the Court reviewed the statutory regime under which Macquarie Generation's EPL had been granted, and noted that the regime included a right for Macquarie Generation to appeal to the LEC against conditions which were imposed in the EPL. The Court also then commented on the apparent "anomalous nature" of implying EPL conditions generally, as, had they existed, Macquarie Generation would not have been able to appeal against their imposition.

Environmental Impact Statements do not automatically impose EPA licence conditions

Mr Gray and Ms Hodgson also sought to imply a limit on permissible coal consumption by the Power Station, based upon a statement in the 1979 EIS prepared as part of the development application for construction of the Power Station, which stated that the Power Station would require "up to 7 million tonnes of coal per annum". That EIS was then referenced in the development consent for the Power Station.

However, the Court held that, while the POEO Act requires the EPA to take an EIS into consideration, it does not provide for the automatic incorporation of an EIS, or components of it, into an EPL.

Moreover, the Court firmly rejected the suggestion that a limitation on coal consumption, based on that single line about projected coal use in an large document such as the EIS, could be implied by a process of incorporation into the EPL, particularly where the EIS was prepared nearly 30 years before the EPL was granted and the Power Station's capacity had changed in the intervening period.

Where to from here?

The Court of Appeal's judgment has provided some important clarification for holders of EPLs. It is unlikely that the implication of significant conditions or limitations on authorised activities in an EPL will receive support in future unless, perhaps, they could have been logically anticipated as being implied in the EPL (for example, as part of obvious, clear and necessary government policy that is consistent with the licence in question).

It should however be noted that while this judgment sets a high bar for the implication of EPL conditions, it does not mean that licence holders will have carte blanche to act as they please within the confines of express conditions of their licence. As pointed out by the Court, the application of the contract test for implied conditions also applies to implied authorisations. In other words, licence-holders will only have authority to conduct operations that are either expressly or impliedly necessary for the effectiveness of the licence. Common sense principles should prevail.

Please note: As at 16 January 2012, the Court of Appeal's decision may still be appealed to the High Court.


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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.