NSW councils could face fines of more than $1 million or jail terms for not meeting carbon tax liabilities unless they ignore a NSW ministerial order banning them from buying carbon credits.
A stand-off between the federal and state governments over the NSW government ban means councillors face severe penalties for not paying the carbon tax liability.
Under the Clean Energy Act, liable entities that deliberately avoided paying the tax can be jailed for 10 years.
But the state government is refusing to allow councils to buy carbon credits, claiming it would breach a 2010 ministerial order enacted in response to the GFC to protect councils from the derivatives market.
The Daily Telegraph has confirmed legal advice from the Division of Local Government, which raised the problem after deciding carbon credits should be treated as derivatives - tradeable financial instruments such as futures and options - rather than as normal securities.
Its advice was that councils would be in breach of the ministerial order if they purchased carbon credits to meet their tax obligations. NSW local government minister Don Page said he was seeking legal advice on the threat of fines for councils.