Victoria's climate change act has faced its first major legal test in the state's highest court with environmentalists pushing to overturn licensing conditions of coal-fired power stations.

Victoria introduced climate change legislation in 2017 that required all government decision-makers to have regard for climate change.

The following year the state's environmental watchdog launched a review of the operating conditions of the three brown-coal-fired power stations in the Latrobe Valley — Loy Yang A, Loy Yang B, and Yallourn.

The review took three years and concluded in March 2021 after considering hundreds of submissions and conducting consultations.

The review was part of the Environmental Protection Authority's (EPA) routine program of reviewing licences to ensure the power stations were keeping up with the latest science and community expectations.

It prompted the EPA to set limits on emissions of fine and coarse particulate matter and mercury, as well as strengthening wastewater and landfill limits.

But it stopped short of imposing limits on how much greenhouse gases the stations could emit. 

Environmental advocates criticised the decision at the time and now, 18 months later, they have had their time in court with a three-day hearing concluding last week.

'No consideration' of climate change

When the 2017 climate change act came into force, Energy and Environment Minister Lily D'Ambrosio said the legislation would govern action on climate change. 

"Our climate change act is one of ambition and action, putting us on track to achieve net zero emissions by 2050," she said.

The court challenge is a judicial review, brought by Environment Victoria and includes Latrobe Valley power station operators AGL, Energy Australia, and Alinta Energy.

A key piece of the legislation being challenged in the Supreme Court is that "decision-makers must have regard for climate change". 

Environment Victoria's lawyers argue the EPA did not regard the power stations' contributions to climate change because it chose not to limit greenhouse gas emissions. 

Representing Environment Victoria, Ron Merkel QC argued on four grounds that the EPA had failed to do its job properly.

"The authority [EPA] acting through its delegate [the reviewer] failed to give proper, genuine, and realistic consideration to mandatory relevant considerations," he told the court. 

But lawyers representing the power stations argued there was no mandatory consideration under the legislation because the authority had started the review itself, and it was not requested by one of the power stations or a government minister. 

They also argued relevant legislation outside of the climate change act ordered decision-makers "should" consider climate change, rather than "must". 

"We respectfully submit that the plaintiff has over-reached," the lawyer representing Loy Yang power station, Dr Matthew Collins, told the court. 

They argued even if a mandatory consideration were established, the EPA had grappled with the implications of climate change when they determined air quality limits would, in effect, also cap greenhouse emissions.

The EPA review's author wrote in the review: "The reduced emission limits imposed by this review will effectively cap greenhouse gas emissions".

Court to decide orders

Environment Victoria wants the court to order the EPA to re-do its review of the licensing conditions, this time with "appropriate consideration" of the 2017 climate change act. 

Lawyers for the power stations argued it would be inappropriate for the court to order the EPA to conduct the review with a particular outcome — emissions reduction limits — in mind. 

Justice James Gorton is expected to deliver a decision in the coming weeks.